Colony Bankcorp, Inc. — 2016 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The interim financial statements are unaudited; the comparative December 31, 2015 balance sheet is audited. Amounts below are in millions unless otherwise stated.
Business context and financial performance
Colony Bankcorp is a Georgia bank holding company serving consumers and small- to medium-size businesses through Colony Bank. Net interest income is its primary revenue source.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $9.56 | $9.50 | $28.54 | $27.95 |
| Provision for loan losses | $0.35 | $0.25 | $1.06 | $0.74 |
| Noninterest income | $2.64 | $2.23 | $7.16 | $6.80 |
| Noninterest expense | $8.65 | $8.34 | $25.24 | $24.94 |
| Net income | $2.26 | $2.20 | $6.49 | $6.27 |
| Net income available to common shareholders | $1.88 | $1.61 | $5.30 | $4.41 |
| Diluted EPS | $0.22 | $0.19 | $0.62 | $0.52 |
For the nine months, taxable-equivalent net interest income rose 2.25% to $28.67 million. Net interest margin was 3.52%, versus 3.48%; net interest spread was 3.40%, versus 3.37%. Return on average assets was 0.61% (0.51% prior year), and return on average total equity was 7.03% (5.77%). The filing does not provide a clear quarterly net interest margin value in the presented text.
Financial position, cash flow and liquidity
- At September 30, total assets were $1,152.8 million, down from $1,174.1 million at December 31, 2015. Gross loans increased 2.3% to $776.1 million; deposits declined to $978.6 million from $1,011.6 million.
- Cash and cash equivalents were $17.8 million, compared with $22.3 million at year-end. For the nine months, operating cash flow was $9.6 million, investing cash flow was $17.8 million, financing cash flow was negative $31.9 million, and cash decreased $4.5 million.
- Borrowed money totaled $70.2 million, including $46.0 million of FHLB advances and $24.2 million of subordinated debentures. FHLB advances increased from $40.0 million at year-end. The company reported $240.3 million of remaining FHLB capacity, subject to qualifying collateral, and $43.5 million of unused federal funds lines.
- The loans-to-deposits ratio rose to 79.3% from 75.0% at year-end. Available-for-sale securities were $286.1 million; $117.7 million of securities were pledged. Deposits included $43.2 million of CDARS reciprocal deposits and $21.0 million of internet CDs.
- Stockholders’ equity was $100.7 million versus $95.5 million at year-end. Consolidated regulatory ratios were 16.95% total capital to risk-weighted assets, 15.79% Tier 1 risk-based capital, 11.01% common equity Tier 1, and 10.85% Tier 1 leverage. Management said the company met applicable capital adequacy requirements.
Material changes versus comparable periods
- Common-shareholder earnings increased 17.1% in Q3 and 20.0% for the first nine months; diluted EPS rose to $0.22 and $0.62, respectively.
- Higher noninterest income supported results: nine-month securities gains were $0.385 million versus $0.012 million, and mortgage fee income rose to $0.507 million from $0.385 million. Other income declined, partly because prior-year tax credits and life-insurance benefits did not recur.
- Provision expense increased 43.3% year over year for the nine months. The company expanded its allowance methodology’s historical loss period from eight to 16 quarters; management said the transition would be completed in Q1 2017 and had increased the allowance by $0.986 million through September 30.
- Noninterest expense increased 1.2% for the nine months, principally reflecting higher salaries and benefits, partly offset by lower occupancy and other costs.
- Loans grew $17.5 million from year-end, including growth in farmland lending; deposits fell $33.0 million. Cash and cash equivalents also declined, while FHLB borrowings increased by $6.0 million.
Outlook, risks and unusual items
- Management’s stated 2016 priorities were to improve earnings, reduce problem assets and redeem TARP preferred stock. It anticipated net interest margin remaining relatively flat for 2016; the filing provides no specific earnings or revenue guidance.
- The company reported redeeming $3.661 million of preferred stock in August 2016, leaving $14.360 million outstanding. Management’s initiative targeted approximately $8.7 million of redemptions during 2016, expected to reduce annual preferred dividends by $0.783 million. No common dividends were paid; common dividends have been suspended since 2009.
- Branch efficiency plans include closures and new or renovated facilities. Management expected minimal first-year effects and an accretive effect thereafter. A new Tifton facility was completed, Savannah construction was underway, and a Statesboro loan production office was renovated. A branch project was estimated at $1.2 million, with completion expected in early 2017; the filing separately reports approximately $0.2 million of material capital expenditure commitments remaining at September 30.
- Credit concentration is a key risk: approximately 85% of loans were secured by real estate, with geographic exposure in the company’s Georgia markets. Management noted real estate values had stabilized but warned adverse local economic or property-market conditions could harm results and collateral recovery.
- Nonperforming assets were $23.8 million, or 3.03% of loans and foreclosed assets, up 2.34% from year-end. Nonaccrual loans were $14.0 million; other real estate owned was $9.8 million. The allowance was $9.2 million, or 1.19% of loans, and equaled 65.8% of nonperforming loans.
- Off-balance-sheet loan commitments were $74.9 million and letters of credit $1.5 million. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Forward-looking results remain subject to economic, credit, interest-rate, regulatory, market and execution risks.
Important facts for investors to verify
- Whether loan quality, nonperforming assets and collateral values improve, particularly in the real-estate-heavy portfolio, and whether the higher provision and revised allowance methodology remain adequate.
- Whether deposit trends and the higher loans-to-deposits ratio affect funding costs or liquidity, including reliance on brokered, internet and larger time deposits.
- Progress toward the 2016 preferred-stock redemption target, its effect on preferred dividends and capital, and the status of suspended common dividends.
- Whether branch closures and new facilities deliver the expected longer-term efficiency and earnings benefits, and whether total project costs align with commitments disclosed.
- Future net interest margin, loan growth, credit costs and capital ratios; management cautioned that nine-month results are not necessarily indicative of full-year results.