Colony Bankcorp, Inc. — Q1 2016 Form 10-Q
Business and period: Georgia-based bank holding company providing retail, commercial and mortgage banking primarily in central, south and coastal Georgia. This unaudited report covers the three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015.
Financial performance and condition
- Earnings: Net interest income was $9.456 million, up 2.8% year over year; provision for loan losses was $354,000. Net income was $2.061 million versus $1.883 million, while income available to common shareholders rose 32.2% to $1.656 million. Diluted EPS was $0.20 versus $0.15.
- Revenue and expenses: Noninterest income was $2.172 million versus $2.212 million; noninterest expense declined 0.6% to $8.235 million. Pretax income increased 9.9% to $3.039 million. The filing reports a 3.47% net interest margin versus 3.43% and a 3.36% net interest spread versus 3.33%.
- Returns: Return on average assets was 0.57% versus 0.44%; return on average total equity was 6.75% versus 4.98%.
- Cash flow: Operating activities provided $4.663 million; investing activities provided $1.066 million; financing activities used $11.916 million. Cash and cash equivalents, as defined in the cash-flow statement, decreased $6.187 million to $16.070 million.
- Balance sheet and funding: Total assets were $1.168 billion, down from $1.174 billion at year-end. Loans were $754.261 million, down 0.6%; deposits were $1.000 billion, down 1.1%. Borrowings totaled $64.229 million, including $40.000 million of FHLB advances and $24.229 million of subordinated debentures. Stockholders’ equity was $100.543 million, up from $95.457 million.
- Credit quality: Nonperforming assets were $21.727 million, down from $23.255 million at year-end and $26.766 million a year earlier. Nonperforming assets were 1.86% of total assets; nonperforming loans were 1.61% of loans. The allowance for loan losses was $9.549 million, or 1.27% of loans, compared with $8.604 million, or 1.13%, at year-end.
- Capital and liquidity: Consolidated regulatory ratios were 17.13% total risk-based capital, 15.92% Tier 1 risk-based capital, 10.63% common equity Tier 1 and 10.70% Tier 1 leverage. Management said the company met applicable capital requirements. It reported $135.822 million of remaining FHLB borrowing capacity, subject to eligible collateral, and $43.5 million of unused federal funds lines.
Changes versus comparable periods
- Common-shareholder earnings and diluted EPS improved, supported by higher net interest income and lower loan-loss provision and noninterest expense; preferred dividends also declined to $405,000 from $630,000.
- Average earning assets increased $19.42 million year over year. Average loan yield fell 10 basis points, while average investment-security yield rose 20 basis points; management attributed higher net interest income primarily to asset-volume growth.
- Loans declined modestly from year-end, with commercial construction down $4.137 million and farmland up $4.505 million. Special-mention loans decreased to $18.956 million from $26.143 million, while substandard loans increased to $36.826 million from $32.397 million.
- The allowance rose $945,000 during the quarter. Management lengthened the historical loss lookback from eight to 12 quarters, increasing the allowance calculation for call-code segments by $718,000.
- Unrealized securities gains improved accumulated other comprehensive loss to $1.003 million from $4.434 million at year-end. This affected reported equity but, per management, did not affect regulatory capital ratios.
Outlook, commentary and risks
- Management’s stated 2016 priorities were improving earnings, reducing problem assets and redeeming TARP-originated preferred stock; it was also considering product and market expansion. No quantified earnings or full-year guidance was provided. Management expected net interest margin to remain relatively flat in 2016.
- The company completed a new Tifton banking facility, closed two leased offices in that market and closed branches in Pitts and Chester to improve efficiency. Construction began on facilities in Statesboro and Savannah; a new branch was estimated to cost $1.2 million, with completion expected in late fall 2016.
- Credit risk is concentrated in real estate: approximately 87% of loans were secured by real estate. Management cited sensitivity to local economic conditions, collateral values and real-estate markets; collateral-based fair values rely significantly on judgment and unobservable inputs.
- Other risks identified include interest-rate and market fluctuations, deposit and funding pressures, regulatory and accounting changes, litigation, cybersecurity and technology risks, and execution or integration risks. The company used $42.637 million of CDARS reciprocal deposits and $26.9 million of internet CDs at quarter-end.
- There were $80.935 million of loan commitments and $1.454 million of letters of credit outstanding. Management said pending legal proceedings were not expected to have a material adverse effect. Common dividends remained suspended; preferred dividends continued. The interim financial statements were unaudited and management cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Reconcile the MD&A noninterest-income table, which reports $2.177 million total and $369,000 of “Other,” with the income statement, which reports $2.172 million total and $364,000 of “Other.”
- Track the trend in nonperforming assets, substandard loans and allowance coverage, particularly given the real-estate concentration and the revised loss-history methodology.
- Assess deposit stability and funding costs, including the use of brokered/CDARS and internet deposits, larger certificates of deposit, and available contingent borrowing capacity.
- Monitor the stated preferred-stock redemption objective, the remaining preferred-stock balance and dividends, branch construction spending, and any future common-dividend plans.
- Review subsequent filings for changes in net interest margin, credit conditions, capital ratios and management’s outlook; this quarter provides no quantified full-year forecast.