Colony Bankcorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016 unless noted. Colony Bankcorp is a Georgia bank holding company whose subsidiary provides retail and commercial banking services, primarily in central, south and coastal Georgia. Financial statements are unaudited except for the year-end comparative balance sheet. Amounts below are in millions unless otherwise stated.
Financial performance and position
- Earnings: Net income was $2.117 million, up 2.7% from $2.061 million in Q1 2016. Net income available to common shareholders rose 15.1% to $1.906 million, reflecting lower preferred dividends. Basic EPS was $0.23 versus $0.20; diluted EPS was $0.22 versus $0.20.
- Revenue and interest: Net interest income was $9.462 million, essentially flat year over year. Noninterest income increased 10.5% to $2.400 million; combined net interest income and noninterest income was $11.862 million. Deposit service charges, other fees and mortgage fees contributed to noninterest-income growth.
- Credit costs: Provision for loan losses declined to $0.335 million from $0.354 million. Net charge-offs were $0.394 million ($0.917 million charged off less $0.523 million recovered).
- Expenses and margins: Noninterest expense rose 2.1% to $8.408 million, including a 7.0% increase in salaries and benefits. Tax-equivalent net interest margin was 3.35%, down from 3.47%; net interest spread was 3.24%, down from 3.36%. Return on average assets was 0.63% versus 0.57%; return on average equity was 8.11% versus 6.75%.
- Assets and lending: Total assets were $1.209 billion, down modestly from $1.210 billion at year-end. Gross loans increased 0.8% to $760.3 million; net loans were $751.1 million. Approximately 87% of loans were secured by real estate.
- Deposits and liquidity: Deposits were $1.044 billion, broadly unchanged from year-end. Cash and cash equivalents were $22.1 million; interest-bearing deposits were $28.6 million. The loan-to-deposit ratio was 72.8%, versus 72.2% at year-end. Available-for-sale securities totaled $341.9 million. The company reported $256.2 million of remaining FHLB capacity, subject to collateral, and $43.5 million of unused federal funds lines.
- Debt and capital: Borrowed money totaled $75.2 million, comprising $51.0 million of other borrowings and $24.2 million of subordinated debentures. A $5.0 million short-term borrowing carried a 4.75% rate. Consolidated total risk-based capital was 15.39%, Tier 1 risk-based capital 14.28%, common equity Tier 1 11.34%, and Tier 1 leverage 9.47%. Stockholders’ equity fell to $85.9 million from $93.4 million, primarily reflecting redemption of $9.36 million of preferred stock; no preferred shares remained outstanding at quarter-end.
- Cash flow: Operating activities provided $5.1 million; investing activities used $6.8 million and financing activities used $5.0 million. Cash and cash equivalents declined $6.7 million during the quarter.
Material changes versus comparable periods
- Common earnings improved despite nearly flat net interest income; the reduction in preferred dividends materially increased earnings available to common shareholders.
- Tax-equivalent net interest margin declined 12 basis points year over year. Management attributed the pressure in part to lower loan yields; earning assets grew, particularly investment securities, while loan averages declined.
- Noninterest income grew 10.5%, including higher mortgage fees and debit-card-related fees. Noninterest expense grew more slowly, by 2.1%, with lower foreclosed-property costs and FDIC assessments partly offsetting higher compensation and technology-related costs.
- Nonperforming assets declined to $17.1 million from $18.8 million at year-end and $21.7 million a year earlier. Nonaccrual loans were $11.2 million, versus $12.4 million at year-end. The allowance was $8.9 million, or 1.17% of loans, compared with 1.18% at year-end.
- The company redeemed all remaining preferred stock and resumed common dividends, paying $0.025 per share in March 2017. The quarter-end common share count was 8,439,258.
Outlook, risks and notable items
- Management’s 2017 priorities include improving earnings, reducing problem assets, maintaining strong capital and developing core noninterest income. The company opened a third Savannah office in January 2017 and is considering product and market expansion. Management expects net interest margin to remain relatively flat in 2017 and anticipated two additional Federal Reserve rate increases during the year; no formal earnings guidance was provided.
- Credit exposure is concentrated in real estate and in the company’s Georgia markets. Management notes that borrowers’ repayment capacity and foreclosed-asset recoveries depend partly on real estate conditions. Commercial construction and speculative real estate lending may carry elevated risk.
- Management says the $7.544 million of gross unrealized losses on available-for-sale securities primarily reflects higher market interest rates and did not consider any decline other than temporary. The securities portfolio’s valuation and potential liquidity impact merit monitoring.
- The allowance methodology’s historical loss period was expanded from eight to 16 quarters; the transition was completed in Q1 2017 and increased the allowance by $0.575 million. Allowance estimates and collateral valuations are judgmental and sensitive to economic and property-market conditions.
- Off-balance-sheet loan commitments were $95.0 million, up from $71.4 million at year-end; letters of credit were $1.5 million. Management states these amounts do not necessarily represent future cash requirements. Various legal proceedings were pending, but management did not expect them to have a material adverse effect.
- Management reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. The filing also identifies interest rates, regional economic conditions, credit reserves, regulation, technology, litigation and execution of expansion plans as risks.
Important facts for investors to verify
- Whether net interest margin stabilizes as expected and how rate changes affect loan yields, deposit costs and securities values.
- Trends in real-estate-related credit quality, nonperforming assets, charge-offs, collateral values and the adequacy of the allowance, including the effect of the revised methodology.
- Progress in reducing problem assets and OREO, and whether loan-commitment growth results in funded loans or additional credit exposure.
- Capital and liquidity after the preferred-stock redemption, including continued access to borrowing facilities and the sustainability of reinstated common dividends.
- Whether fee-income growth, expense control, new technology and branch expansion support improved earnings without increasing operating or credit risk.