Colony Bankcorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. The interim financial statements are unaudited, except for the prior-year-end balance sheet. Dollar amounts below are in millions unless otherwise noted.
Business context and financial performance
Colony Bankcorp is a Georgia bank holding company whose wholly owned subsidiary provides retail and commercial banking services, primarily in central, south and coastal Georgia. Lending and investing are funded mainly through deposits.
- Net income: $3.19 million, up 50.6% from $2.12 million. Net income available to common shareholders rose 67.3% to $3.19 million from $1.91 million; diluted EPS was $0.37 versus $0.22. The comparison also reflects no preferred-stock dividends in 2018, versus $0.21 million in 2017.
- Interest income and margin: Net interest income was $10.13 million, up 7.1%. Tax-equivalent net interest margin improved to 3.55% from 3.35%; tax-equivalent net interest spread rose to 3.43% from 3.24%.
- Other income and expenses: Noninterest income was $2.43 million, up 1.4%; mortgage fee income declined 19.9%. Noninterest expense increased 1.5% to $8.54 million. Provision for loan losses fell to $26,000 from $335,000.
- Returns: Return on average assets was 1.06% versus 0.63%; return on average total equity was 14.18% versus 8.11%.
- Assets and funding: Total assets were $1.218 billion, down from $1.233 billion at year-end. Loans were $768.5 million, up 0.4%; deposits were $1.052 billion, down 1.5%. Cash and cash equivalents were $9.8 million, compared with $23.1 million at year-end.
- Cash flow: Net cash provided by operating activities was $5.05 million. Investing activities used $3.34 million and financing activities used $15.06 million, resulting in a $13.35 million decrease in cash and cash equivalents.
- Debt and liquidity: Borrowed money totaled $72.7 million, including $48.5 million of FHLB advances and $24.2 million of subordinated debentures. The Bank reported $259.2 million of remaining FHLB borrowing capacity, subject to eligible collateral, and $43.5 million of available federal funds lines, none drawn at quarter-end.
- Capital and dividends: Consolidated total risk-based capital was 15.88%, Tier 1 capital 14.97%, common equity Tier 1 12.11%, and Tier 1 leverage 10.14%. The company reported a $0.05-per-share common dividend for Q1 2018.
Material changes and credit quality
- Year-over-year earnings improved alongside higher net interest income and a lower loan-loss provision; expenses rose modestly. The company said it had no material changes in Q1 2018.
- Nonperforming assets were $10.34 million, down from $11.76 million at year-end and $17.15 million a year earlier. Nonperforming loans were 0.84% of loans, compared with 0.98% at year-end and 1.48% a year earlier.
- The allowance for loan losses was $7.47 million, or 0.97% of loans, versus $7.51 million and 0.98% at year-end. Net charge-offs were $67,000; the allowance covered 115.73% of nonperforming loans.
- Real-estate-secured loans represented approximately 87% of the loan portfolio. Management noted that borrower repayment capacity and foreclosed-property values remain exposed to conditions in real-estate markets.
- Available-for-sale securities fell to $341.6 million from $354.2 million at year-end. Gross unrealized losses were $12.4 million, compared with $8.5 million; management attributed losses primarily to higher market interest rates and said it did not consider them other-than-temporary. The resulting after-tax securities-related decline in accumulated other comprehensive income contributed to comprehensive income of only $64,000 despite $3.19 million in net income.
Outlook, risks and contingencies
- Management’s 2018 priorities include improving earnings, reducing problem assets, maintaining strong capital, exploring product and market expansion, and growing core noninterest income. The company purchased property in Statesboro for a future office and extended management retention agreements.
- Management anticipated two additional Federal Reserve rate increases in 2018 and expected net interest margin to remain relatively flat. Its 12-month simulation projected net interest income declines of 0.32% and 1.24% under +100 and +200 basis-point scenarios, respectively, and a 1.47% decline under -100 basis points. Outcomes depend on deposit repricing and other assumptions.
- Interest-rate sensitivity remains a key risk. The company’s economic-value-of-equity model projected a 9.03% decline under an immediate 100-basis-point rate decrease, just within its stated 10% negative limit; the filing notes the result depends on assumptions including deposit duration and repricing.
- Off-balance-sheet commitments included $113.3 million of loan commitments and $1.6 million of letters of credit. These contractual amounts do not necessarily represent expected funding needs.
- Management said pending legal proceedings were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors. Management stated that disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter.
- Adoption of the revenue-recognition and financial-instrument standards noted in the filing had no material impact. The company was evaluating the forthcoming lease standard and CECL credit-loss standard.
Important facts for investors to verify
- Whether the reduced provision remains appropriate given real-estate loan concentration, changes in risk grades and collateral values.
- Trends in deposits, cash balances, wholesale funding, and the availability and collateral requirements of borrowing facilities.
- Whether net interest margin and earnings meet management’s expectations as rates and deposit costs change.
- The size and duration of securities unrealized losses, and their potential effect on equity if securities are sold or losses worsen.
- Progress in reducing nonperforming assets and the cost and timing of planned market or product expansion.
- The eventual financial and operational effects of CECL and lease-accounting adoption.