Colony Bankcorp, Inc. — Q3 2017 Form 10-Q
Business context and period. Colony Bankcorp is a Georgia bank holding company whose subsidiary provides retail and commercial banking, primarily in central, south and coastal Georgia. This unaudited report covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016, unless noted.
Financial performance and position
- Q3 earnings: Net income was $2.62 million, up 16% from $2.26 million a year earlier. Net income available to common shareholders rose 39% to $2.62 million ($0.30 diluted EPS), from $1.88 million ($0.22). The increase also reflects the absence of preferred dividends following the preferred-stock redemption.
- Nine-month earnings: Net income was $7.17 million versus $6.49 million; net income available to common shareholders was $6.96 million versus $5.30 million. Diluted EPS was $0.81 versus $0.62.
- Revenue and margins: Q3 net interest income was $9.84 million, up 3%; nine-month net interest income was $29.12 million, up 2%. GAAP net interest margin was 3.49% for Q3 versus 3.54%, and 3.43% for nine months versus 3.50%. Nine-month noninterest income was $7.22 million, nearly unchanged; noninterest expense rose 1% to $25.41 million.
- Credit costs and asset quality: No loan-loss provision was recorded in Q3; the nine-month provision was $335,000, down from $1.06 million. The allowance for loan losses was $7.98 million, or 1.04% of loans, versus $8.92 million, or 1.18%, at year-end. Nonaccrual loans were $8.81 million and nonperforming assets were $13.33 million, down from $12.35 million and $18.79 million, respectively, at year-end. No loans were 90 days past due and still accruing.
- Balance sheet and liquidity: Total assets were $1.195 billion versus $1.210 billion at year-end. Loans were $770.05 million, up 2.1%; deposits were $1.020 billion, down 2.3%. Cash and cash equivalents fell to $31.60 million from $75.17 million. The company reported a 75.5% loans-to-deposits ratio, compared with 72.2% at year-end.
- Cash flow: For the first nine months, operating cash flow was $10.90 million, investing cash flow was $3.53 million, and financing cash flow was negative $24.40 million. Cash and cash equivalents declined $9.97 million to $18.85 million; this cash-flow statement measure differs from the broader balance-sheet cash and short-term investments measure.
- Borrowings and capital: Borrowed money totaled $80.23 million, including $24.23 million of subordinated debentures and $56.00 million of other borrowings, up from $70.23 million at year-end. Consolidated total risk-based capital was 15.75%, common equity Tier 1 was 11.84%, and Tier 1 leverage was 9.91%. Management said the company met applicable capital requirements; the bank also exceeded the stated “well capitalized” thresholds.
Material changes versus comparable periods
- Q3 net income improved despite lower noninterest income and a modestly lower net interest margin; the quarter had no loan-loss provision compared with $354,000 in Q3 2016.
- For nine months, net interest income increased, while provision expense decreased. Lower FDIC assessments, advertising and foreclosed-property costs helped offset higher salaries and certain technology, ATM and professional expenses.
- Nonperforming assets continued to decline, and other real estate owned fell to $4.52 million from $6.44 million at year-end.
- The company redeemed its remaining $9.36 million of Series A preferred stock on March 31, 2017. It resumed common dividends in Q1 2017 and declared $0.025 per share in each of the first three quarters.
Outlook, commentary and risks
- Management’s stated 2017 priorities include improving earnings, reducing problem assets, maintaining capital, expanding products and markets, and investing in a new loan platform. It said it was considering expansion and conducting due diligence on a Statesboro property.
- Management expected net interest margin to remain relatively flat for 2017 and anticipated another Federal Reserve rate increase that year; the filing does not provide numeric earnings guidance.
- Credit risk is concentrated: approximately 86% of loans were secured by real estate, and the company has geographic exposure to its Georgia markets. Management noted that real estate values had stabilized, but adverse local economic or property-market conditions could affect borrowers, collateral values and foreclosed assets.
- Other identified risks include interest-rate and funding competition, changing regulations and accounting standards, technology and execution risks, litigation, and the ability to manage growth and expenses. The company had $91.74 million of loan commitments and $1.57 million of letters of credit outstanding. Management did not expect pending legal proceedings to materially affect financial position.
- Liquidity sources include deposits, available-for-sale securities, FHLB advances and unused correspondent-bank and Federal Reserve borrowing facilities. Management considered available funding sources adequate. Financial statements were unaudited; management cautioned that nine-month results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the decline in allowance coverage and lower provision remain appropriate as loan growth and real-estate concentration evolve; review charge-offs, criticized loans and collateral assumptions.
- Whether lower nonperforming assets and foreclosed-property balances continue, and how much of the improvement reflects collections, sales or charge-offs.
- How deposit outflows, reduced cash balances, increased borrowings and the use of brokered or listing-service deposits affect funding costs and liquidity.
- Whether the expected flat margin, planned expansion and technology investment support earnings without materially increasing costs or risk.
- Confirm dividend sustainability, capital ratios and the potential dilution from the outstanding warrant to purchase up to 500,000 shares at $8.40 per share.