Colony Bankcorp, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Colony Bankcorp is a Georgia bank holding company whose wholly owned bank provides retail, commercial and mortgage banking services primarily in central, south and coastal Georgia. This unaudited filing covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are against December 31, 2014. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $9.50 | $9.74 | $27.95 | $28.46 |
| Provision for loan losses | $0.25 | $0.50 | $0.74 | $1.31 |
| Noninterest income | $2.23 | $2.41 | $6.80 | $6.72 |
| Noninterest expense | $8.34 | $8.53 | $24.94 | $25.69 |
| Net income | $2.20 | $2.08 | $6.27 | $5.55 |
| Net income available to common shareholders | $1.61 | $1.38 | $4.41 | $3.53 |
| Diluted EPS | $0.19 | $0.16* | $0.52 | $0.42 |
Margins and returns. Nine-month net interest margin was 3.48%, down from 3.60%; net interest spread was 3.37%, versus 3.49%. Return on average assets was 0.51% for the nine months (0.42% prior year), and return on average common equity was 5.77% (5.02%). Q3 return on average assets was 0.57%, versus 0.49%.
Balance sheet and credit. Total assets were $1,127.3 at September 30, down from $1,146.9 at year-end. Gross loans rose 2.4% to $764.2; deposits declined 2.2% to $958.0. The allowance for loan losses was $8.4, or 1.10% of loans, compared with $8.8, or 1.18%, at year-end. Nonperforming assets were $24.6 (2.18% of assets), down from $28.7 (2.51%) at year-end; nonaccrual loans were $13.6 and other real estate owned was $11.0.
Cash flow, debt and liquidity. Nine-month operating cash flow was $10.8; investing activities used $10.3 and financing activities used $28.0. Cash and cash equivalents fell $27.5 to $17.1. Borrowings included $40.0 of other borrowed money and $24.2 of subordinated debentures. The company reported $130.6 of remaining FHLB borrowing availability, a $43.5 federal funds line, and a $50.0 repurchase-agreement line; none of the federal funds line was outstanding. The loan-to-deposit ratio was 79.8%, versus 76.2% at year-end.
Capital. Consolidated total risk-based capital was 17.01%, Tier 1 risk-based capital 15.96%, common equity Tier 1 10.09%, and Tier 1 leverage 11.14%. Management stated the company met applicable capital requirements. Shareholders’ equity was $101.1. Common dividends remained suspended; preferred dividends continued.
Material changes versus comparable periods
- Nine-month net income increased 12.9% and common earnings increased 24.9%, helped by lower loan-loss provision and lower noninterest expense. Q3 net income rose 5.7% year over year.
- Net interest income declined 1.8% for the nine months as lower asset yields more than offset earning-asset growth and reduced deposit costs. Management attributed the decline primarily to rate effects.
- Noninterest expense fell 2.9% for the nine months, largely reflecting a $0.95 reduction in foreclosed-property costs. Deposit service charges declined, including lower NSF fees.
- Loan growth was concentrated in commercial real estate and farmland; agricultural loans also increased. Real estate-secured loans represented approximately 86% of the portfolio.
- In August 2015, following regulatory approval, the company redeemed $4.83 of preferred stock. Accumulated other comprehensive loss improved to $2.38 from $4.85, mainly reflecting available-for-sale securities valuation changes.
Outlook, risks and unusual items
- Management expected net interest margin to remain relatively flat for 2015 and cited a potential Federal Reserve rate increase in 2016; the filing provides no quantitative earnings guidance.
- Key risks include regional economic conditions, interest-rate changes, credit losses and real-estate collateral values. Management highlighted geographic and real estate lending concentrations, and sensitivity of foreclosed-property and impaired-loan valuations to market conditions.
- Management changed the allowance methodology’s loan segmentation in Q2 2015 to bank call-report categories. It said the change increased the calculated reserve requirement by approximately $1.62 at June 30, 2015, with no additional provision or balance-sheet adjustment required.
- Other real estate owned increased to $11.0 from $10.4 at year-end despite property sales; additions were $6.29 and sales were $5.33 during the nine months. Management reported no TDRs that subsequently defaulted in the 2015 periods presented.
- The company signed a contract for a new branch facility estimated at $1.2, with completion expected in late spring 2016. Loan commitments were $69.3 and letters of credit $1.6. Management said pending ordinary-course legal proceedings were not expected to have a material adverse effect.
- Preferred stock carries a cumulative 9% annual dividend. The company reinstated preferred dividends in November 2014 after a prior suspension and paid $1.85 in preferred dividends during the first nine months of 2015.
Important facts for investors to verify
- EPS discrepancy: the income statement reports Q3 2014 diluted EPS of $0.16, while MD&A narrative states $0.18; verify the correct comparable figure.
- Track whether net interest margin stabilizes and whether loan growth can offset pressure from lower asset yields and deposit funding costs.
- Review trends in nonperforming loans, foreclosed assets, real-estate concentrations and allowance adequacy, including the effects of management’s valuation assumptions.
- Assess liquidity and funding mix as cash declined, deposits fell from year-end, and the loan-to-deposit ratio increased; confirm continued access to contingent borrowing sources.
- Monitor preferred-stock redemption, cumulative dividend obligations and the continuing suspension of common dividends; also assess the branch project’s cost and execution.
*The filing’s financial statements show Q3 2014 diluted EPS of $0.16; the MD&A narrative gives $0.18. Interim financial statements are unaudited, and management cautions that nine-month results are not necessarily indicative of full-year results.