Colony Bankcorp, Inc. — Q2 2016 Form 10-Q
Business context and period. Colony Bankcorp is a Georgia bank holding company serving consumers and businesses primarily in central, south and coastal Georgia. This unaudited filing covers the quarter and six months ended June 30, 2016; the December 31, 2015 balance sheet is audited. Interim results are not necessarily indicative of full-year results. Dollar figures below are in millions unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Interest income | $11.14 | $10.93 | $22.23 | $21.80 |
| Net interest income | $9.53 | $9.25 | $18.98 | $18.45 |
| Provision for loan losses | $0.35 | $0.13 | $0.71 | $0.49 |
| Net income | $2.17 | $2.19 | $4.23 | $4.07 |
| Net income available to common | $1.76 | $1.56 | $3.42 | $2.81 |
| Diluted EPS | $0.21 | $0.18 | $0.40 | $0.33 |
- For the first half, taxable-equivalent net interest income rose 3.1% to $19.07 million. Net interest margin improved to 3.50% from 3.44%; management expected it to remain relatively flat for 2016.
- First-half return on average assets was 0.59% versus 0.49%; return on average total equity was 6.87% versus 5.52%.
- Q2 net income was slightly lower year over year, while income available to common shareholders increased 13.3%, principally reflecting lower preferred dividends. First-half common earnings increased 21.7%.
Financial position, cash flow and liquidity
- At June 30, total assets were $1.147 billion, down from $1.174 billion at year-end 2015. Gross loans were $764.2 million, up 0.7%; deposits were $976.6 million, down $35.0 million. Cash and interest-bearing deposits at banks totaled $17.7 million.
- Stockholders’ equity was $103.5 million versus $95.5 million at year-end. Accumulated other comprehensive income moved from a $4.4 million loss to $0.2 million income, largely reflecting the increase in fair value of available-for-sale securities.
- First-half cash flows were $6.6 million provided by operations, $23.1 million provided by investing activities and $35.8 million used in financing; reported cash and cash equivalents decreased $6.1 million. The cash-flow presentation and balance-sheet cash classifications differ.
- Borrowings totaled $64.2 million, comprising $40.0 million of FHLB advances and $24.2 million of subordinated debentures, unchanged from year-end. FHLB advances mature from 2018 to 2023; the company reported $135.0 million of remaining FHLB availability, subject to eligible collateral. It also had $43.5 million of federal funds lines, none drawn.
- Loans to deposits were 78.3%, compared with 75.0% at year-end. The company reported $40.8 million of CDARS reciprocal deposits and $26.9 million of internet CDs. Management said available funding sources were adequate for anticipated liquidity needs.
- Regulatory capital ratios at June 30 included consolidated total risk-based capital of 17.32%, Tier 1 of 16.13%, common equity Tier 1 of 10.84% and Tier 1 leverage of 10.94%. Management stated the company met applicable capital adequacy requirements.
Material changes, credit quality and unusual items
- Net interest income improved, but first-half provision expense increased 44.2% to $0.71 million. The allowance for loan losses rose to $9.39 million, or 1.23% of loans, from $8.60 million and 1.13% at year-end. Management’s shift from an 8-quarter to a 16-quarter historical loss period added $0.67 million to the allowance as of June 30; the transition was expected to finish in Q1 2017.
- Nonperforming assets were $23.3 million, about flat versus year-end and below $26.2 million a year earlier. Nonaccrual loans declined to $13.1 million from $14.4 million at year-end; foreclosed real estate increased to $10.2 million from $8.8 million. Nonperforming assets were 2.03% of assets; the allowance covered 71.4% of nonperforming loans.
- Approximately 85% of loans were secured by real estate. Management cited geographic and property-market concentration risks, while noting that real estate values had stabilized and impaired loans had declined over several years. Past-due accruing loans totaled $5.6 million, down from $11.0 million at year-end.
- Available-for-sale securities were $307.9 million versus $296.1 million at year-end. The first half included $0.13 million in securities gains; comprehensive income was $8.82 million, reflecting $4.59 million of after-tax securities-related other comprehensive income.
- Deposits contracted during the first half, including a $35.8 million decline in interest-bearing deposits. Management said core local deposits remain the primary funding focus and monitors larger certificates and wholesale funding.
- No common dividends were declared. Preferred dividends were $0.81 million in the first half, versus $1.26 million a year earlier. Management identified redemption of approximately $8.7 million of TARP preferred stock during 2016 as an initiative, expected to reduce annual preferred dividends by $0.78 million; the filing does not establish that this planned redemption had occurred by June 30.
Outlook, plans and risks
- Management’s stated priorities were improving earnings, reducing problem assets and redeeming TARP preferred stock. It was also considering product and market expansion.
- The company completed a new Tifton facility, began a Savannah facility and renovated a Statesboro loan production office; branch closures and consolidation were intended to improve efficiency. Management expected the reconciliation project to have minimal near-term performance, liquidity and funding-cost effects, with an accretive effect thereafter.
- A new branch was estimated to cost $1.2 million, with construction expected to finish in early 2017. The filing also describes a $1.2 million capital commitment for branch construction.
- Key stated risks include local economic conditions, real-estate collateral values and concentration, loan-loss reserve estimates, interest-rate and funding competition, regulatory and legal changes, and execution of expansion and branch plans. Management’s forward-looking statements are subject to these and other risks.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Ordinary-course legal proceedings were disclosed; management did not expect them to have a material adverse effect.
Important facts for investors to verify
- Progress and final cost of the planned TARP preferred redemption, and whether it occurred after quarter-end.
- Allowance adequacy and credit trends, including the full effect of the 16-quarter loss methodology, nonaccruals, foreclosures and real-estate collateral valuations.
- Deposit outflows, reliance on CDARS and internet CDs, and liquidity available under borrowing facilities and collateral requirements.
- Execution, costs and expected returns from branch closures, new facilities and the Statesboro office.
- How securities valuation changes affect reported equity and whether net interest margin holds near management’s flat 2016 outlook.