Colony Bankcorp, Inc. — 2013 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Colony is a Georgia-based bank holding company whose wholly owned subsidiary provides commercial, consumer and mortgage banking services. Interim financial statements are unaudited; the balance sheet is compared with audited December 31, 2012 figures. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $9.494 | $9.222 | $27.995 | $27.197 |
| Provision for loan losses | $1.500 | $1.742 | $4.200 | $5.627 |
| Noninterest income | $2.109 | $2.903 | $6.359 | $7.091 |
| Noninterest expense | $8.488 | $9.247 | $25.619 | $25.635 |
| Net income | $1.080 | $0.772 | $3.003 | $2.073 |
| Net income available to common shareholders | $0.701 | $0.411 | $1.879 | $1.003 |
| Diluted earnings per common share | $0.08 | $0.05 | $0.22 | $0.12 |
- Margins and returns: Nine-month taxable-equivalent net interest margin was 3.59%, up from 3.39%; net interest spread was 3.47%, versus 3.24%. Nine-month return on average assets was 0.22% versus 0.12%; return on average equity was 2.67% versus 1.38%.
- Balance sheet at September 30: Total assets were $1.113 billion, down from $1.139 billion at year-end 2012. Loans were $748.0 million, nearly unchanged; deposits were $949.5 million, down from $979.7 million. Available-for-sale securities were $257.4 million, down from $268.3 million.
- Cash flows, nine months: Operating activities provided $15.260 million; investing activities used $1.724 million; financing activities used $25.223 million. Cash and cash equivalents fell $11.687 million to $37.559 million.
- Credit quality and reserves: Nonperforming assets were $40.6 million, or 5.32% of loans plus foreclosed assets, compared with $46.2 million and 6.05% at year-end 2012. Nonaccrual loans were $24.2 million versus $29.9 million. The allowance for loan losses was $12.951 million, 1.73% of loans and 53.59% of nonperforming loans.
- Debt and liquidity: Borrowed money totaled $64.2 million, including $40.0 million of FHLB advances and $24.2 million of subordinated debentures. The company reported $125.5 million of remaining FHLB availability, $43 million of federal funds lines and a $50 million repurchase line, subject to collateral and lender conditions. Loans-to-deposits were 78.8%.
- Capital: Consolidated total risk-based capital was 16.66%, Tier 1 risk-based capital 15.40%, and Tier 1 leverage 10.40%. Management said the company met applicable capital adequacy requirements.
Material changes versus comparable periods
- Net income available to common shareholders increased 70.6% in Q3 and 87.3% for the first nine months. Management attributed the nine-month improvement mainly to higher net interest income and a $1.427 million reduction in loan-loss provision, partly offset by lower noninterest income and higher taxes.
- Net interest income rose $0.272 million in Q3 and $0.798 million for nine months. Lower deposit and borrowing costs supported margin improvement, while earning-asset yields declined.
- Noninterest income fell 27.4% in Q3 and 10.3% for nine months, principally because securities gains were substantially lower than in 2012. Deposit service-charge income rose, which management attributed to a newly formalized overdraft privilege program.
- Noninterest expense was down $0.759 million in Q3 but essentially flat for nine months. Salary and benefit costs increased, partly reflecting added compliance staffing and merit increases; other expenses declined.
- Special-mention and substandard loans together declined to $67.98 million from $83.81 million at year-end 2012. Nonperforming assets also declined, although management said new problem loans continued to emerge, at a slower pace.
- Accumulated other comprehensive loss widened to $6.973 million from $0.150 million at year-end, primarily reflecting lower fair values of available-for-sale securities after market interest rates rose.
Outlook, commentary, risks and unusual items
- Management anticipated continued net interest margin improvement in 2013 from loan and deposit pricing and balance-sheet restructuring, and expected stabilization in the economy and real estate market to support further improvement in substandard assets and charge-offs. These are forward-looking statements, not guarantees.
- About 86% of loans were secured by real estate, leaving results and collateral recoveries exposed to regional economic and property-market conditions. Management identifies the allowance for loan losses, foreclosed-real-estate valuations and deferred tax assets as estimates particularly sensitive to judgment.
- Available-for-sale securities had $10.863 million of gross unrealized losses at September 30, chiefly attributed by management to higher market rates. Management said it did not intend, and did not expect to be required, to sell the securities before recovery; it recorded no OTTI for these securities. The filing separately identifies a trust-preferred asset-backed security with $367,000 book value and $235,000 unrealized loss.
- The Bank’s regulatory MOU was released effective October 4, 2013, after quarter-end. The Bank remained subject to higher capital targets under the MOU at September 30; regulators continued to require written consent before cash dividends could be paid.
- Common dividends have been suspended since 2009. Preferred-stock dividends and trust-preferred interest payments were suspended in February 2012; preferred dividends in arrears, including accrued interest, were $2.73 million, and accrued unpaid trust-preferred interest was $941,000. Common dividends declared per share were zero.
- Off-balance-sheet commitments included $65.794 million of loan commitments and $1.016 million of letters of credit. Management stated pending ordinary-course legal proceedings were not expected to have a material adverse effect. The filing reported no material change in internal control over financial reporting and said disclosure controls were effective.
- The filing cautions that nine-month results are not necessarily indicative of full-year results. Management did not provide a specific earnings or full-year financial forecast.
Important facts for investors to verify
- Whether the improvement in nonperforming loans, classified loans and charge-offs continues, and whether the $12.951 million allowance remains adequate given real-estate concentration and appraisal uncertainty.
- How the net interest margin responds to interest-rate changes, deposit repricing and competitive funding costs; the filing notes the securities portfolio’s sensitivity to rising rates.
- Deposit stability and funding concentration, including larger certificates of deposit, internet deposits, brokered/reciprocal deposits and availability of collateralized borrowing lines.
- The practical implications of the MOU release, remaining regulatory dividend-consent requirements and the Bank’s capital position against applicable requirements.
- The status and future cost of suspended preferred dividends and trust-preferred interest, including accumulated arrears, and any implications for common shareholders.
- Whether securities unrealized losses recover as expected and whether any impairment or forced-sale risk arises; also monitor foreclosed-property values and commitments that may be drawn.