Colony Bankcorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dollar figures are in millions unless otherwise noted. Colony is a Georgia bank holding company serving consumers and businesses primarily in central, south and coastal Georgia.
Financial performance and condition
- Q2 earnings: Net income was $2.10 million, or $0.23 per diluted share, down 31.5% from $3.07 million, or $0.36 per diluted share, in Q2 2018. For the first half, net income was $4.94 million, down 21.1% from $6.26 million; diluted EPS was $0.56 versus $0.72.
- Revenue and net interest: Q2 net interest income rose 16.3% to $11.83 million; first-half net interest income rose 9.3% to $22.18 million. Q2 noninterest income was $4.00 million, up 72.1%; first-half noninterest income was $6.33 million, up 33.1%.
- Margins: GAAP net interest margin was 3.56% for Q2, unchanged year over year, and 3.50% for the first half versus 3.55%. Tax-equivalent first-half margin was 3.52% versus 3.56%; the tax-equivalent net interest spread fell to 3.29% from 3.42%.
- Expenses and credit costs: Q2 noninterest expense increased 51.3% to $13.01 million, including $1.93 million of acquisition-related expenses. First-half provision for loan losses was $0.31 million versus $0.07 million; net charge-offs were $0.80 million versus $0.42 million.
- Balance sheet growth: Total assets were $1.507 billion at June 30, up from $1.252 billion at year-end 2018. Gross loans were $935.3 million versus $782.0 million, and deposits were $1.298 billion versus $1.085 billion. Growth primarily reflects the May 1 LBC Bancshares acquisition.
- Liquidity and funding: Cash and cash equivalents were $75.4 million. First-half operating cash flow was $3.4 million, investing cash flow was negative $19.7 million and financing cash flow was positive $31.5 million, resulting in a $15.3 million increase in cash. The loans-to-deposits ratio was 72.07%. The Bank reported $261.3 million of remaining FHLB availability, subject to qualifying collateral, plus $48 million in federal funds lines with no amounts outstanding.
- Debt and capital: Other borrowings were $55.1 million and subordinated debentures were $24.2 million. Consolidated regulatory capital ratios were 13.37% total risk-based, 12.70% Tier 1 risk-based, 10.41% common equity Tier 1 and 9.34% Tier 1 leverage. Management said the Company met applicable capital requirements.
- Credit quality: Nonperforming assets were $10.74 million, down from $11.32 million at year-end; nonperforming loans were 1.04% of loans. The allowance was $6.79 million, or 0.73% of loans, compared with 0.93% at year-end. Approximately 86% of the loan portfolio was secured by real estate.
Material changes and unusual items
- On May 1, Colony completed its acquisition of LBC Bancshares and Calumet Bank, issuing 1.054 million shares valued at $18.7 million and paying $15.3 million in cash. The preliminary purchase accounting recorded $15.39 million of goodwill, which is not tax deductible. Acquired loans were valued at $130.6 million and deposits at $189.9 million.
- Colony also acquired PFB Mortgage on May 1 for $0.83 million. Acquisition-related expenses included an approximately $1.08 million data-processing contract buyout. The acquired businesses’ reported results cover only the period since acquisition, limiting direct period-to-period comparability.
- Q2 noninterest income included an approximately $1.0 million gain from selling several other real estate owned properties in one relationship. This contributed to the increase in other income and is an unusual item.
- Common shares issued increased to 9.499 million from 8.445 million at year-end, partly due to the LBC stock consideration. The quarterly dividend increased to $0.075 per share from $0.05 in 2018.
- Accumulated other comprehensive income improved to $0.23 million from a loss of $8.19 million at year-end, primarily reflecting higher fair values of available-for-sale securities.
Outlook, risks and other matters
- Management described priorities of growing deposits and loans, expanding products and markets, and improving core noninterest income. It opened a Statesboro branch in May and announced a small-business specialty lending group in July to expand SBA and other government-guaranteed lending.
- Management expected no further Federal Reserve rate increases in 2019 and noted competitive conditions could pressure net interest margin. The filing provides no specific earnings or revenue guidance.
- Key disclosed risks include economic conditions in the Company’s Georgia markets, real-estate and geographic loan concentrations, interest-rate changes, acquisition integration and expense control, and changes in regulation or accounting standards. Management said the allowance for loan losses depends on estimates that may change as conditions evolve.
- Loan commitments were $146.5 million and letters of credit were $1.6 million at June 30. Management did not expect pending legal proceedings to materially affect financial position; the filing reports no material changes to previously disclosed risk factors.
- Colony Risk Management, a Nevada captive insurance subsidiary, began operations in July 2019. The Company was assessing the expected-credit-loss standard; the filing notes a July 2019 FASB delay for smaller reporting companies until fiscal years beginning after December 15, 2022.
Most important facts for investors to verify
- How much of reported earnings growth in revenue and assets is sustainable after the LBC and PFB Mortgage acquisitions, and what integration costs or synergies remain?
- Whether the approximately $1.0 million OREO gain and acquisition expenses materially distort recurring quarterly profitability.
- Trends in deposit funding costs, net interest margin and spread, particularly given the rise in average deposit costs and management’s comments on competition.
- Credit performance and reserve adequacy as net charge-offs increased, the allowance-to-loans ratio declined, and real-estate-secured loans represent about 86% of the portfolio.
- The final purchase-price allocation for LBC, the impact of share issuance on per-share results, and the terms and repayment capacity of acquisition-related borrowings.