Colony Bankcorp, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. The unaudited consolidated statements cover Colony Bankcorp and its wholly owned bank subsidiary. Colony provides retail, commercial and mortgage banking services primarily in Georgia. Interim results are not necessarily indicative of full-year results.
Financial performance and position
Dollar amounts are in millions unless stated otherwise.
| Metric | Q1 2013 / Mar. 31, 2013 | Comparable period / prior date |
|---|---|---|
| Net interest income | $9.05 | $8.88 in Q1 2012 |
| Net interest margin | 3.45% | 3.23% in Q1 2012 |
| Provision for loan losses | $1.50 | $1.94 in Q1 2012 |
| Noninterest income | $2.21 | $1.81 in Q1 2012 |
| Noninterest expense | $8.39 | $7.98 in Q1 2012 |
| Net income | $0.94 | $0.54 in Q1 2012 |
| Net income available to common shareholders; diluted EPS | $0.57; $0.07 per share | $0.19; $0.02 per share in Q1 2012 |
| Total assets | $1,118.9 | $1,139.4 at Dec. 31, 2012 |
| Total loans | $736.8 | $747.1 at Dec. 31, 2012 |
| Total deposits | $953.6 | $979.7 at Dec. 31, 2012 |
| Cash and cash equivalents | $29.6 | $49.2 at Dec. 31, 2012 |
| Allowance for loan losses | $12.93; 1.76% of loans | $12.74; 1.70% at Dec. 31, 2012 |
| Other real estate owned (OREO) | $18.77 | $15.94 at Dec. 31, 2012 |
| Borrowings | $40.0 other borrowed money; $24.23 subordinated debentures | $35.0 and $24.23, respectively, at Dec. 31, 2012 |
| Stockholders’ equity | $95.4 | $95.8 at Dec. 31, 2012 |
Cash flow: Operating activities provided $5.30 million; investing activities used $3.86 million; financing activities used $21.11 million. Cash and cash equivalents decreased $19.67 million during the quarter. Financing outflows primarily reflected deposit declines, partly offset by $5.0 million of additional borrowing.
Liquidity and capital: The company reported a 77.3% loans-to-deposits ratio. It had $130.48 million of remaining FHLB borrowing capacity, $43 million of federal funds lines with none drawn, and a $50 million repurchase-agreement line, subject to the lender’s conditions. Consolidated total risk-based capital was 16.86%, Tier 1 risk-based capital 15.60%, and Tier 1 leverage 10.18%. The bank’s MOU requires at least 10% total risk-based capital and 8% Tier 1 capital to average assets; reported bank ratios were 16.87% and 10.18%, respectively.
Material changes and management commentary
- Common earnings increased to $567,000 from $189,000. Management attributed the improvement mainly to $162,000 higher net interest income, $396,000 higher noninterest income and a $442,000 lower loan-loss provision, partly offset by $409,000 higher noninterest expense and $195,000 higher income taxes.
- Net interest margin rose 22 basis points year over year. Management cited repricing lower-cost deposits and borrowings; average earning assets fell $51.41 million, while average loans rose $28.18 million. Management expected further margin improvement in 2013 and anticipated then-current Federal Reserve rates would persist.
- Noninterest income growth included higher deposit service charges and premiums on sales of guaranteed loans. Securities sales produced an $8,000 loss, versus $137,000 of gains in Q1 2012. Salaries and benefits rose $349,000, which management attributed mainly to compliance-related staffing and merit increases.
- Nonperforming assets were $39.58 million, down from $46.16 million at year-end and $60.72 million a year earlier. Nonaccrual loans fell to $20.44 million from $29.85 million at year-end. However, OREO increased during the quarter, including $5.28 million of additions, and the company recorded a $500,000 OREO loss provision.
- Real estate secured approximately 87% of loans. Management said it continued to identify new problem loans, though at a slower pace, and considered the allowance adequate. It cited improving substandard assets and expected continued improvement, while acknowledging that estimates depend on collateral values and economic conditions.
Outlook, risks and unusual items
- The bank remains subject to a regulatory memorandum of understanding requiring corrective action on credit risk, classified assets, commercial real estate concentration, earnings and capital; regulator approval is required before the bank pays dividends to the parent. Regulatory restrictions also bar common dividends without Federal Reserve approval.
- Common dividends have been suspended since 2009. Preferred-stock dividends and trust-preferred interest payments were suspended in 2012. Preferred dividends continue to accrue; arrears, including related accrued interest, were $1.98 million at quarter-end. Accrued but unpaid trust-preferred interest was $682,000. The preferred stock carries a 9% rate after its initial five-year period. Treasury sold the preferred shares to new investors in January 2013; the Treasury still held a warrant for 500,000 common shares, and the company had expressed an intention to repurchase it without an agreed price.
- Key risks include real estate and geographic loan concentrations, local economic conditions, collateral valuation uncertainty, changing interest rates, deposit outflows, regulatory restrictions, and litigation or other contingencies. Management noted that collateral-dependent loan and OREO valuations use significant judgment and Level 3 inputs.
- Off-balance-sheet commitments included $69.64 million of loan commitments and $1.00 million of letters of credit. Management stated that commitment totals do not necessarily represent future cash requirements. It reported ordinary-course legal proceedings but did not expect them to have a material adverse effect.
- No specific earnings or full-year financial guidance was provided. The company cautioned that first-quarter results may not predict the full year. Its interim statements were unaudited.
Investor verification priorities
- Track MOU compliance, required capital cushions, and any changes to regulatory restrictions or approval requirements.
- Verify whether nonperforming loans and classified assets continue to improve, and monitor OREO additions, valuations, sales and related losses.
- Assess the adequacy of the loan-loss allowance, including the effect of the quarter’s change in review threshold and rolling loss-history period.
- Monitor deposit trends, cash balances, borrowing use and availability, and the ability to maintain liquidity if funding conditions change.
- Confirm the status and terms of preferred-dividend arrears, deferred trust-preferred interest, and the Treasury warrant repurchase.