Colony Bankcorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited financial results; dollar amounts below are in millions unless otherwise stated.
Business context and reporting period
Colony is a Georgia-based community bank holding company providing commercial, consumer, and mortgage banking services. Results include the acquired LBC Bancshares/Calumet Bank and PFB Mortgage businesses from May 1, 2019. LBC expanded the company into LaGrange and Columbus, Georgia, and PFB Mortgage added mortgage origination operations.
Financial performance and condition
- Revenue: Q3 net interest income plus noninterest income was $16.69 million, up 33% from $12.51 million a year earlier. For nine months, the comparable total was $45.20 million, up 20% from $37.56 million.
- Profit: Q3 net income was $2.52 million ($0.27 diluted EPS), down 7% from $2.70 million ($0.32). Nine-month net income was $7.46 million ($0.83 diluted EPS), down 17% from $8.95 million ($1.04 diluted EPS). Return on average assets was 0.67% for Q3 and 0.72% for nine months, versus 0.91% and 1.00% in 2018.
- Net interest and margins: Q3 GAAP net interest income was $12.65 million, up 25%; nine-month net interest income was $34.83 million, up 15%. GAAP net interest margin was 3.62% in Q3 versus 3.57%; nine-month margin was 3.54% versus 3.56%. Tax-equivalent nine-month margin was unchanged at 3.56%.
- Income and expenses: Nine-month noninterest income rose 45% to $10.37 million, including mortgage fees and a roughly $1.00 million gain from OREO sales. Noninterest expense rose 35% to $35.40 million, including $3.00 million in acquisition-related and deposit-intangible expense. Provision for loan losses increased to $524,000 from $131,000.
- Assets and funding: Total assets were $1.48 billion at September 30, up from $1.25 billion at year-end 2018. Loans were $958.72 million, up from $782.03 million; deposits were $1.25 billion, up from $1.09 billion. Stockholders’ equity was $129.65 million, versus $95.69 million.
- Cash flow: Nine-month operating cash flow was $1.03 million, compared with $11.84 million in 2018. Investing used $1.86 million and financing used $3.72 million; cash and cash equivalents declined $4.55 million to $55.61 million.
- Debt and liquidity: Subordinated debentures were $24.23 million and other borrowed money was $66.81 million, up from $44.00 million at year-end. The company reported $306.23 million of remaining FHLB borrowing capacity, subject to collateral, and $43.5 million in unused federal funds lines. Loans-to-deposits rose to 76.62% from 72.07%.
- Capital: Consolidated total risk-based capital was 13.16%, Tier 1 risk-based capital 12.54%, common equity Tier 1 10.31%, and Tier 1 leverage 8.98%. Management stated the company met applicable capital requirements.
Material changes versus comparable periods
- Growth in assets, loans, deposits, and net interest income was substantially influenced by the May 2019 LBC acquisition. The company issued 1.054 million shares valued at $18.7 million and paid $15.3 million cash; preliminary acquisition accounting recorded $15.39 million of nondeductible goodwill.
- Despite higher revenue, nine-month earnings fell as expenses and credit costs rose. The company cited acquisition-related costs, higher staffing and operating costs, and increased deposit costs.
- Nonperforming assets declined to $10.92 million from $11.32 million at December 2018; nonperforming loans were 1.06% of loans versus 1.21%. The allowance was $6.60 million, or 0.69% of loans, compared with $7.28 million, or 0.93%, at year-end.
- Unrealized gains on available-for-sale securities moved accumulated other comprehensive income from a loss of $8.19 million at year-end to income of $1.56 million. This change affected equity, not reported net income.
Outlook, commentary, and risks
- Management described priorities of growing deposits and loans, developing fee-generating products, expanding markets, and integrating acquisitions. It provided no specific financial forecast or quantified guidance.
- Management anticipated competitive pressure on net interest margin. It reported two prime-rate decreases during the first nine months of 2019 and expected at least one further decrease during 2019.
- Credit exposure is concentrated in real estate: approximately 85% of loans were secured by real estate. Management also cited geographic concentration and sensitivity to local economic conditions.
- Other stated risks include interest-rate and funding-cost changes, acquisition integration and costs, credit-loss estimates, regulatory and accounting changes, and litigation or adverse economic conditions. The allowance and collateral valuations rely on estimates and judgment.
- Off-balance-sheet loan commitments were $150.15 million and letters of credit $1.73 million. The filing also disclosed an $18 million FHLB letter of credit securing public-fund deposits.
- The company reported no material change to previously disclosed risk factors, no material adverse effect expected from pending legal proceedings, and effective disclosure controls. A $0.075-per-share dividend was declared after quarter-end for payment in November 2019.
Important facts for investors to verify
- Whether post-acquisition revenue and expense trends support earnings improvement after the reported integration and transaction costs; confirm the final purchase-price allocation for LBC.
- Whether deposit growth and funding costs remain favorable as interest rates and competition change, and how these affect net interest margin.
- Whether real-estate concentration, nonperforming loans, charge-offs, and the lower allowance-to-loans ratio remain consistent with underlying credit risk.
- How management plans to fund loan growth and manage borrowing, deposit, and liquidity needs, including the collateral conditions on available facilities.
- Whether mortgage banking, the new specialty lending group, and acquisition-related operations deliver sustainable returns rather than temporary or transaction-driven income.