Colony Bankcorp, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Colony Bankcorp is a Georgia-based bank holding company serving consumers and small- to medium-sized businesses, primarily in Georgia, with a loan production office in Alabama. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are in U.S. dollars unless noted.
Financial performance and condition
- Earnings: Q2 net income was $5.3 million, or $0.30 per diluted share, versus $3.4 million, or $0.19, a year earlier. First-half net income was $10.3 million, or $0.59 per diluted share, versus $8.7 million, or $0.52.
- Net interest income and margin: GAAP net interest income was $19.2 million in Q2, essentially unchanged year over year, and $39.8 million for the first half, up from $38.4 million. Tax-equivalent net interest margin fell to 2.77% from 3.15% in Q2 and to 2.92% from 3.15% for the first half, as funding costs rose faster than asset yields.
- Other revenue and expenses: Noninterest income fell 10.9% to $9.0 million in Q2 and 13.5% to $16.6 million for the first half, principally because mortgage fees and SBA loan-sale gains declined. Noninterest expense fell 12.4% to $21.4 million in Q2 and 8.0% to $42.6 million for the first half, reflecting lower staffing costs and technology, professional-fee, and other expenses. Q2 income tax expense was $1.2 million versus $234,000; the effective tax rate was 18.4% versus 6.4%.
- Cash flow: First-half operating cash flow was $6.7 million, investing cash use was $79.4 million, and financing cash provided was $146.9 million. Cash and cash equivalents increased $74.2 million to $154.8 million, primarily reflecting deposit growth and financing activity.
- Balance sheet and funding: Total assets were $3.10 billion, up from $2.94 billion at year-end. Loans were $1.84 billion, up 5.9%; deposits were $2.63 billion, up $136.2 million. Noninterest-bearing deposits declined to $541.1 million from $569.2 million. Borrowings totaled $218.4 million, including $155.0 million of FHLB advances and $63.4 million of other borrowings.
- Liquidity and capital: Management described liquidity as robust. Available additional FHLB borrowing capacity was $591.9 million; additional Federal Reserve discount-window capacity was $56.9 million and the Term Funding Program line was $100 million, both unused at quarter-end. The company reported a 11.12% CET1 ratio and a 14.86% total risk-based capital ratio and said the company and bank were well-capitalized.
- Credit quality: The loan allowance was $17.1 million, or 0.93% of loans, compared with $16.1 million and 0.93% at year-end. Nonaccrual loans were $11.1 million versus $5.7 million, and total nonperforming assets rose to $11.9 million, or 0.38% of assets, from $6.4 million, or 0.22%. The company attributed much of the increase to repurchases of government-guaranteed portions of nonperforming loans, which it said were not expected to incur losses. Net charge-offs were $200,000 for the first half.
- Securities and equity: Available-for-sale securities had $55.8 million of gross unrealized losses; held-to-maturity securities had $49.3 million. The HTM portfolio’s reported fair value was $404.7 million against $453.9 million amortized cost. Stockholders’ equity was $239.5 million, including accumulated other comprehensive loss of $62.9 million.
Material changes versus comparable periods
- Earnings rose despite lower noninterest income, mainly because expenses declined following a reduction in force and cost savings from a renewed core-processing contract.
- Higher market rates lifted interest income, but interest expense increased sharply: Q2 interest expense was $11.6 million versus $2.0 million a year earlier; first-half expense was $19.4 million versus $3.1 million.
- Loan growth and deposit growth increased balance-sheet scale. Brokered deposits increased to $112.4 million from $50.8 million at year-end.
- Uninsured deposits declined to 30.73% of Bank deposits from 34.85%; management’s adjusted uninsured measure was 18.41%, down from 21.01%.
- The company adopted CECL on January 1, 2023. Adoption reduced retained earnings by $1.2 million, net of tax, and established a $1.7 million allowance for unfunded commitments. The new expected-loss methodology makes reserves more sensitive to forecasts and portfolio assumptions.
Outlook, risks, and other notable items
The filing provides no quantified earnings, margin, or growth guidance. Management said it shifted its 2023 focus away from commercial real estate lending, was raising loan pricing and maintaining tighter credit standards, and was seeing loan pipelines decrease. Its CECL forecast assumed deteriorating economic conditions, higher unemployment, and increasing delinquencies over the next two years. Management also noted that inflation and higher rates could pressure borrowers and economic activity, while rate competition could continue to raise funding costs and reduce margins.
Key disclosed risks include the concentration of approximately 85% of loans in real-estate-secured lending; sensitivity to interest rates, deposit competition, liquidity and securities values; borrower stress and collateral deterioration; and dependence on Georgia and Alabama markets. The company entered two $25 million cash-flow hedges in June to manage rate variability on certain variable-rate liabilities. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The Board declared a $0.11-per-share dividend payable August 23, 2023. The company repurchased 41,481 shares in June at an average $9.78 per share. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit pricing, brokered funding, and borrowing costs continue to rise, and how that affects net interest margin and earnings.
- Whether nonaccrual loans and nonperforming assets continue to increase; examine the composition and performance of the repurchased guaranteed loans and the adequacy of CECL reserves.
- Exposure to commercial real estate and the potential effects of weaker property values, loan demand, and borrower conditions.
- The economic and liquidity implications of unrealized securities losses, the HTM portfolio’s fair-value discount, and collateral requirements for contingent funding capacity.
- Whether lower mortgage and SBA loan-sale income is offset by recurring revenue and sustainable expense reductions.