Colony Bankcorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless stated otherwise, dollar amounts are in millions. The interim financial statements are unaudited. Colony Bankcorp is a Georgia bank holding company operating through Colony Bank, serving consumers and businesses primarily across Georgia.
Financial performance and position
- Q3 results: Net interest income was $10.1 million, up 2.7% from Q3 2017; provision for loan losses was $0.06 million versus none. Noninterest income was $2.4 million, down 0.8%, while noninterest expense rose 8.3% to $9.1 million. Net income was $2.7 million, up 2.8%; diluted EPS was $0.32 versus $0.30.
- Nine-month results: Net interest income increased 4.4% to $30.4 million. Net income rose 24.8% to $9.0 million and diluted EPS increased to $1.04 from $0.81. The company reported no preferred-stock dividends in 2018, compared with $0.21 million in the 2017 period; lower income-tax expense also contributed to higher earnings.
- Margins: GAAP net interest margin was 3.57% for Q3, compared with 3.49% a year earlier; for the first nine months it was 3.56%, versus 3.43%. Management attributed margin improvement to higher earning-asset yields, partly offset by higher deposit costs.
- Period-end balance sheet: Assets were $1.186 billion, down from $1.233 billion at year-end 2017. Loans were $779.4 million, up 1.9%; deposits were $1.011 billion, down $56.9 million. Stockholders’ equity was $89.0 million, compared with $90.3 million.
- Cash flow: Cash and cash equivalents fell $13.0 million during the first nine months to $10.1 million. Operating cash flow was $11.8 million; investing activities provided $25.5 million, while financing activities used $50.4 million, including net deposit outflows, dividends, warrant repurchase and net debt repayment.
- Debt and liquidity: Borrowed money totaled $82.7 million, including $58.5 million of FHLB advances and $24.2 million of subordinated debentures. The company reported $242.1 million of remaining FHLB availability, subject to collateral, and $43.5 million of unused federal-funds lines. Loans-to-deposits increased to 77.1% from 71.6% at year-end.
- Capital and dividends: Consolidated total risk-based capital was 15.88%, common equity Tier 1 was 12.19%, and the leverage ratio was 10.45%; management said regulatory capital requirements were met. Common dividends were $0.05 per share in each of the first three 2018 quarters.
Changes versus comparable periods
- Nine-month earnings improved despite only modest revenue growth: net interest income rose 4.4%, but noninterest income was nearly flat and noninterest expense increased 3.2%.
- Loan-loss provision declined to $0.13 million from $0.34 million, and net charge-offs fell to $0.48 million from $1.28 million.
- Nonperforming assets declined to $10.3 million from $11.8 million at year-end 2017 and $13.3 million a year earlier. Nonaccrual loans, however, rose to $8.1 million from $7.5 million at year-end.
- Available-for-sale securities declined to $318.0 million from $354.2 million at year-end. Their net-of-tax unrealized loss contributed to accumulated other comprehensive loss worsening to $12.3 million from $6.5 million; management said market-rate increases drove much of the securities depreciation and did not consider it other-than-temporary.
- Deposits contracted, while brokered CDARS deposits increased to $77.7 million from $46.3 million at year-end. The company repurchased its outstanding warrants for $3.2 million in June 2018.
Outlook, risks and unusual items
- Management said it was focused on improving earnings, growing deposits and loans, expanding core noninterest income, and considering product and market expansion. It expected net interest margin to remain relatively flat for 2018 and anticipated a further Federal Reserve rate increase.
- Interest-rate simulations projected next-12-month net interest income increases of 1.19% and 1.97% under +100 and +200 basis-point scenarios, respectively, and a 2.06% decline under -100 basis points. Results depend on assumptions, including deposit repricing and customer migration.
- Credit concentration is a key risk: approximately 87% of loans were secured by real estate, and management identified dependence on local real-estate and regional economic conditions. Nonperforming assets were 1.32% of loans plus foreclosed assets; the allowance was 0.92% of loans and 87.93% of nonperforming loans.
- On October 22, 2018, the Bank completed its Albany branch purchase from Planters First Bank, adding approximately $20.7 million in loans and $12.0 million in deposits, and purchased a vacant lot for $0.725 million for a planned branch.
- Hurricane Michael affected several markets on October 10, 2018. Branch damage was described as minimal; the Bank was assessing customer impacts, including loan collectability.
- The CEO retired and T. Heath Fountain became CEO in 2018. Management also cited increased staffing and merit costs, higher data-processing costs following an outsourcing transition, and lower mortgage fee income.
- Off-balance-sheet commitments included $100.5 million of loan commitments and $1.4 million of letters of credit; amounts may not be fully drawn. Management said pending legal proceedings were not expected to materially affect financial condition. No material change in disclosed risk factors was reported.
- Management identified the allowance for loan losses and valuation of foreclosed real estate as significant estimates. The company was assessing the future impact of CECL and lease-accounting standards. No formal numeric earnings guidance was provided.
Important facts for investors to verify
- Whether deposit outflows continue and how the company funds loan growth, including its use of CDARS, listing-service deposits and FHLB advances.
- Whether rising deposit costs, operating expenses and margin trends affect earnings and management’s flat-margin expectation.
- Credit quality trends in the real-estate-heavy loan portfolio, including nonaccrual loans, impaired credits, the allowance and collateral valuations.
- The eventual customer-credit impact of Hurricane Michael and the integration and economics of the completed Albany branch acquisition.
- The assumptions underlying interest-rate sensitivity estimates and the potential effect of further rate changes on net interest income and economic value of equity.