Colony Bankcorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance sheet comparisons are to December 31, 2018. The interim financial statements are unaudited. Colony Bank serves consumers and small- to medium-size businesses primarily in central, south and coastal Georgia.
Financial performance and condition
- Income: Net interest income was $10.36 million, up 2.3% year over year. Noninterest income was $2.33 million, down 4.1%. Together, these revenue components totaled $12.69 million, versus $12.56 million in Q1 2018.
- Profit: Net income was $2.84 million, down 11.1% from $3.19 million. Diluted EPS was $0.34 versus $0.37; the quarterly dividend increased to $0.075 per share from $0.05.
- Margins: GAAP net interest margin declined to 3.44% from 3.54%; tax-equivalent margin was 3.46% versus 3.55%. Net interest spread fell to 3.23% from 3.42% on a GAAP basis.
- Drivers and expenses: Interest income rose $1.20 million, but interest expense rose $975,000, including a $922,000 increase in deposit interest expense. Provision for loan losses increased to $131,000 from $26,000. Noninterest expense rose 5.7% to $9.03 million, with salaries and benefits up 9.2%.
- Cash flow: Operating activities provided $5.18 million; investing activities used $25.84 million, principally reflecting a $25.28 million increase in interest-bearing deposits at other banks; financing activities provided $20.92 million. Cash and cash equivalents ended at $10.64 million.
- Balance sheet and liquidity: Total assets were $1.279 billion, deposits $1.112 billion, loans $779.99 million and stockholders’ equity $101.07 million. Loans were 70.16% of deposits. Other borrowed money was $39.0 million and subordinated debentures $24.23 million. The Bank reported $273.45 million in remaining FHLB borrowing capacity, subject to collateral requirements, plus $43.5 million in unused federal funds lines.
- Capital: Consolidated total risk-based capital was 16.09%, Tier 1 risk-based capital 15.31%, common equity Tier 1 12.52%, and Tier 1 leverage 10.18%. Management said the Company met applicable capital requirements.
Changes versus comparable periods
- Net income, diluted EPS, return on average assets (0.90% versus 1.06%) and return on average equity (11.76% versus 14.18%) declined year over year, despite modest growth in net interest income.
- Higher loan and investment yields were more than offset in part by higher funding costs: the average cost of total deposits increased 32 basis points, and the tax-equivalent net interest margin decreased 9 basis points.
- At quarter-end versus December 31, 2018, deposits increased $26.55 million, while gross loans decreased $2.04 million. Nonperforming assets fell to $9.18 million from $11.32 million.
- Net charge-offs were $819,000, compared with $67,000 in Q1 2018; annualized net charge-offs were 0.42% of average loans versus 0.04%. The allowance for loan losses declined to $6.59 million, or 0.84% of loans, from $7.28 million, or 0.93%.
Outlook, transactions and risks
- Management said its focus was deposit growth and solid loan growth, and it was exploring new products, services and market expansion. It expected no additional Federal Reserve rate increases in 2019 and noted that competition could pressure margins. No earnings or revenue guidance was provided; management cautioned that quarterly results are not necessarily indicative of full-year results.
- After quarter-end, on May 1, 2019, the Company completed its acquisition of LBC Bancshares and Calumet Bank. LBC had $207.3 million in assets, $131.9 million in loans and $184.9 million in deposits at March 31. Consideration included 1,054,029 Colony shares valued at $18.7 million and $15.3 million cash; purchase accounting remained under evaluation. The Company also completed its purchase of PFB Mortgage for approximately $833,000.
- To help fund the LBC acquisition, the Company entered into a $10 million five-year term loan at 4.70% and drew $5.3 million on a separate $10 million variable-rate revolving facility.
- Other expansion plans included a full-service Statesboro office expected to open in May 2019 and a planned future branch on a vacant Albany lot acquired in 2018. The prior Albany branch acquisition contributed $71,000 in revenue and a $75,000 net loss in Q1 2019.
- Credit risk is concentrated geographically and in real estate: approximately 87% of loans were secured by real estate. Management cited sensitivity to local economic and real-estate conditions, borrower repayment capacity, interest rates, deposit competition, and estimates of loan-loss reserves and collateral values. Securities available for sale had $7.28 million of gross unrealized losses, which management attributed largely to market-rate increases and did not consider other-than-temporary.
- Off-balance-sheet commitments to extend credit were $120.68 million and letters of credit were $1.52 million. Management said pending legal proceedings were not expected to have a material adverse effect. The Company reported no material change in risk factors or market risk and stated disclosure controls were effective.
Important facts for investors to verify
- Whether deposit-cost increases and competitive pressure continue to weigh on net interest margin and earnings.
- Credit performance, especially net charge-offs, nonperforming loans, reserve coverage and the real-estate-heavy portfolio.
- Integration costs, purchase-accounting adjustments, funding costs and realized benefits from the LBC and PFB Mortgage acquisitions.
- Deposit mix and reliance on CDARS and other wholesale funding, alongside liquidity capacity and pledged collateral.
- Capital and share-count effects following the issuance of 1,054,029 shares for LBC; the filing reports 9,498,937 shares outstanding as of May 8, 2019.