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CBAN > SEC Filings for CBAN > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for COLONY BANKCORP INC

Form 10-Q for COLONY BANKCORP INC


4-Nov-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act), not withstanding that such statements are not specifically identified. In addition, certain statements may be contained in the Company's future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Colony Bankcorp, Inc. or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "targeted," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

Local and regional economic conditions and the impact they may have on the Company and its customers and the Company's assessment of that impact.

Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board.

Inflation, interest rate, market and monetary fluctuations.

Political instability.

Acts of war or terrorism.

The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

Changes in consumer spending, borrowings and savings habits.

Technological changes.

Acquisitions and integration of acquired businesses.

The ability to increase market share and control expenses.

The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiary must comply.

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters.

Changes in the Company's organization, compensation and benefit plans.

The costs and effects of litigation and of unexpected or adverse outcomes in such litigation.


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Greater than expected costs or difficulties related to the integration of new lines of business.

The Company's success at managing the risks involved in the foregoing items.

Restrictions or conditions imposed by our regulators on our operations.

Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

The following discussion sets forth management's discussion and analysis of our consolidated financial condition as of September 30, 2013, and the consolidated results of operations for the nine months ended September 30, 2013. This discussion should be read in conjunction with the Company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2013. Readers should also carefully review all other disclosures we file from time to time with the SEC.

The Company

Colony Bankcorp, Inc. (Colony) is a bank holding company headquartered in Fitzgerald, Georgia that provides, through its wholly owned subsidiary (collectively referred to as the Company), a broad array of products and services throughout 18 Georgia markets. The Company offers commercial, consumer and mortgage banking services.

Application of Critical Accounting Policies and Accounting Estimates

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The Company's financial position and results of operations are affected by management's application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's financial position and/or results of operations. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results of operations, and they require management to make estimates that are difficult, subjective or complete.

Allowance for Loan Losses - The allowance for loan losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for loan losses quarterly based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, collateral values, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for loans is based on reviews of individual credit relationships and historical loss experience. The allowance for losses relating to impaired loans is based on the loan's observable market price, the discounted cash flows using the loan's effective interest rate, or the value of collateral for collateral dependent loans.

Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger nonhomogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogeneous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of risk associated with the commercial and consumer levels and the estimated impact of the current economic environment.

Overview

The following discussion and analysis presents the more significant factors affecting the Company's financial condition as of September 30, 2013 and 2012, and results of operations for each of the three and nine months in the periods ended September 30, 2013 and 2012. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements, notes thereto and other financial information appearing elsewhere in this report.


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Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 34 percent federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.

Dollar amounts in tables are stated in thousands, except for per share amounts.

Results of Operations

The Company's results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since market forces and economic conditions beyond the control of the Company determine interest rates, the ability to generate net interest income is dependent upon the Company's ability to obtain an adequate spread between the rate earned on earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets.
Net income available to shareholders totaled $701 thousand, or $0.08 diluted per common share, in three months ended September 30, 2013 compared to net income available to shareholders of $411 thousand, or $0.05 diluted per common share, in three months ended September 30, 2012. Net income available to shareholders totaled $1.88 million, or $0.22 diluted per common share, in nine months ended September 30, 2013 compared to net income available to shareholders of $1.00 million, or $0.12 diluted per common share, in nine months ended September 30, 2012.

Selected income statement data, returns on average assets and average equity and dividends per share for the comparable periods were as follows:

                                       Three Months Ended            Nine Months Ended
                                          September 30                  September 30
                                       2013           2012           2013          2012

Taxable-equivalent net interest     $    9,536      $   9,257     $   28,117     $  27,300
income
Taxable-equivalent adjustment               42             35            122           103

Net interest income                      9,494          9,222         27,995        27,197
Provision for loan losses                1,500          1,742          4,200         5,627
Noninterest income                       2,109          2,903          6,359         7,091
Noninterest expense                      8,488          9,247         25,619        25,635

Income before income taxes          $    1,615      $   1,136          4,535         3,026
Income Taxes                               535            364          1,532           953

Net income                          $    1,080      $     772     $    3,003     $   2,073

Preferred stock dividends                  379            361          1,124         1,070

Net income available to common      $      701      $     411     $    1,879     $   1,003
shareholders

Net income available to common
shareholders:
Basic                               $     0.08      $    0.05     $     0.22     $    0.12
Diluted                             $     0.08      $    0.05     $     0.22     $    0.12
Return on average assets                  0.25 %         0.15 %         0.22 %        0.12 %
Return on average common equity           3.09 %         1.69 %         2.67 %        1.38 %

Net income from operations for three months ended September 30, 2013 increased $308 thousand, or 39.90 percent, compared to the same period in 2012. The increase was primarily the result of an increase of $272 thousand in net interest income, a decrease of $242 thousand in provision for loan losses and a decrease of $759 thousand in noninterest expense. This was offset by a decrease of $794 thousand in noninterest income and an increase of $171 thousand in income taxes.


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Net income from operations for nine months ended September 30, 2013 increased $930 thousand, or 44.86 percent, compared to the same period in 2012. The increase was primarily the result of an increase of $798 thousand in net interest income, a decrease of $16 thousand in noninterest expense, and a decrease of $1.43 million in provision for loan losses. This was offset by a decrease of $732 thousand in noninterest income and an increase of $579 thousand in income taxes.

Details of the changes in the various components of net income are further discussed below.

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company's largest source of revenue, representing 81.49 percent of total revenue for nine months ended September 30, 2013 and 79.32 percent for the same period a year ago.

Net interest margin is the taxable-equivalent net interest income as a percentage of average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.

The Federal Reserve Board influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The Company's loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit is currently 3.25 percent and has been for the past three years. The federal funds rate moved similar to prime rate with interest rates currently at 0.25 percent and has been for the past three years. We anticipate the Federal Reserve maintaining its current interest rate policy in 2013, which should benefit Colony's net interest margin.

The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each. The Company's consolidated average balance sheets along with an analysis of taxable-equivalent net interest earnings are presented in the Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.


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Rate/Volume Analysis

The rate/volume analysis presented hereafter illustrates the change from
September 30, 2012 to September 30, 2013 for each component of the taxable
equivalent net interest income separated into the amount generated through
volume changes and the amount generated by changes in the yields/rates.

                                               Changes from September 30, 2012 to September 30,
                                                                     2013
($ in thousands)                                Volume               Rate                Total

Interest Income
Loans, Net-taxable                            $     1,123         $    (1,465 )       $      (342 )

Investment Securities
Taxable                                              (374 )            (1,382 )            (1,756 )
Tax-exempt                                            (26 )                 5                 (21 )
Total Investment Securities                          (400 )            (1,377 )            (1,777 )

Interest-Bearing Deposits in other Banks              (14 )                 1                 (13 )

Federal Funds Sold                                    (48 )                 3                 (45 )

Other Interest - Earning Assets                        (8 )                12                   4
Total Interest Income                                 653              (2,826 )            (2,173 )

Interest Expense
Interest-Bearing Demand and
Savings Deposits                                      126                 (84 )                42
Time Deposits                                      (1,068 )            (1,355 )            (2,423 )
Subordinated Debentures                               ---                 (32 )               (32 )
Other Borrowed Money                                 (226 )              (351 )              (577 )

Total Interest Expense                             (1,168 )            (1,822 )            (2,990 )
Net Interest Income                           $     1,821         $    (1,004 )       $       817

(1) Changes in net interest income for the periods, based on either changes in average balances or changes in average rates for interest-earning assets and interest-bearing liabilities, are shown on this table. During each year, there are numerous and simultaneous balance and rate changes; therefore, it is not possible to precisely allocate the changes between balances and rates. For the purpose of this table, changes that are not exclusively due to balance changes or rate changes have been attributed to rates.

Our financial performance is impacted by, among other factors, interest rate risk and credit risk. We do not utilize derivatives to mitigate our interest rate or credit risk, relying instead on an extensive loan review process and our allowance for loan losses.

Interest rate risk is the change in value due to changes in interest rates. The Company is exposed only to U.S. dollar interest rate changes and accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of its investment portfolio as held for trading. The Company does not engage in any hedging activity or utilize any derivatives. The Company has no exposure to foreign currency exchange rate risk, commodity price risk and other market risks. This risk is addressed by our Asset & Liability Management Committee ("ALCO") which includes senior management representatives. The ALCO monitors interest rate risk by analyzing the potential impact of alternative strategies or changes in balance sheet structure.


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Interest rates play a major part in the net interest income of financial institutions. The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. The timing of repriced assets and liabilities is Gap management and our Company has established its policy to maintain a Gap ratio in the one-year time horizon of 0.80 to 1.20.

Our exposure to interest rate risk is reviewed on a quarterly basis by our Board of Directors and the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net portfolio value in the event of assumed changes in interest rates, in order to reduce the exposure to interest rate fluctuations, we have implemented strategies to more closely match our balance sheet composition. We are generally focusing our investment activities on securities with terms or average lives in the 2-5 year range.

The Company maintains about 13 percent of its loan portfolio in adjustable rate loans that reprice with prime rate changes, while the bulk of its other loans mature within 3 years. The liabilities to fund assets are primarily in short term certificate of deposits that mature within one year. The net interest margin increased to 3.59 percent for nine months ended September 30, 2013 compared to 3.39 percent for the same period a year ago. We anticipate continued improvement in the net interest margin in 2013 as a result of our loan and deposit pricing guidance and balance sheet restructuring.

Taxable-equivalent net interest income for nine months ended September 30, 2013 increased $817 thousand, or 2.99 percent compared to the same period a year ago. The average volume of earning assets during nine months ended September 30, 2013 decreased $28.84 million compared to the same period a year ago while over the same period the net interest margin increased by 20 basis points from 3.39 percent to 3.59 percent. Decline in average earning assets during 2013 was primarily in interest bearing deposits, interest-bearing other assets, investments and federal funds sold. The increase in the net interest margin in 2013 is primarily the result of reducing and repricing higher cost time deposits and borrowed money.

The average volume of loans increased $25.76 million in nine months ended September 30, 2013 compared to the same period a year ago. The average yield on loans decreased 27 basis points in nine months ended September 30, 2013 compared to the same period a year ago. The average volume of investment securities decreased $21.10 million in nine months ended September 30, 2013 compared to the same year ago period, while the average yield on investment securities decreased 70 basis points for the same period comparison. The average volume of deposits decreased $24.79 million in nine months ended September 30, 2013 compared to the same period a year ago, with interest-bearing deposits decreasing $38.02 million in nine months ended September 30, 2013. Accordingly, the ratio of average interest-bearing deposits to total average deposits was 88.25 percent in nine months ended September 30, 2013 compared to 89.91 percent in the same period a year ago. This deposit mix, combined with a general decrease in market rates, had the effect of (i) decreasing the average cost of total deposits by 31 basis points in nine months ended September 30, 2013 compared to the same period a year ago and, (ii) mitigating a portion of the impact of decreasing yields on earning assets.

The Company's net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 3.47 percent in nine months ended September 30, 2013 compared to 3.24 percent in the same period a year ago. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Provision for Loan Losses

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses totaled $4.20 million in nine months ended September 30, 2013 compared to $5.63 million in the same period a year ago. See the section captioned "Allowance for Loan Losses" elsewhere in this discussion for further analysis of the provision for loan losses.


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Noninterest Income

The components of noninterest income were as follows:

                                        Three Months Ended          Nine Months Ended
                                           September 30                September 30
                                         2013          2012          2013         2012

Service Charges on Deposit Accounts   $    1,236      $   917     $    3,484     $ 2,527
Other Charges, Commissions and Fees          442          372          1,289       1,119
Other                                        314          324          1,211       1,082
Mortgage Fee Income                          117          103            377         296
Securities Gains (Losses)                     --        1,187             (2 )     2,067

Total                                 $    2,109      $ 2,903     $    6,359     $ 7,091

Total noninterest income for three months ended September 30, 2013 decreased $794 thousand, or 27.35 percent compared to the same period year ago. Total noninterest income for nine months ended September 30, 2013 decreased $732 thousand, or 10.32 percent compared to the same period year ago. The decrease in noninterest income was primarily in securities gains for both periods. Changes in these items and the other components of noninterest income are discussed in more detail below.

Service Charges on Deposit Accounts. Service charges on deposit accounts for three months ended September 30, 2013 increased $319 thousand, or 34.79 percent, compared to the same period a year ago. Service charges on deposit accounts for nine months ended September 30, 2013 increased $957 thousand, or 37.87 percent, compared to the same period a year ago. The increase for the three months and the nine months ended September 30, 2013 is attributable to the implementation of a formalized overdraft deposit privilege program this year.

Mortgage Fee Income. Mortgage fee income for three months ended September 30, 2013 increased $14 thousand, or 13.59 percent, compared to the same period year ago. Mortgage fee income for nine months ended September 30, 2013 increased $81 thousand, or 27.36 percent, compared to the same period year ago.

All Other Noninterest Income. Other charges, commissions and fees and other income for three months ended September 30, 2013 was $756 thousand compared to $696 thousand in the same year ago period, or an increase of 8.62 percent.
Other charges, commissions and fees and other income for nine months ended September 30, 2013 was $2.50 million compared to $2.20 million in the same year ago period, or an increase of 13.58 percent. Significant amounts impacting the comparable periods was primarily attributed to premiums on sale of guaranteed loans which increased to $352 thousand in 2013 compared to $306 thousand in 2012, or an increase of 15.03 percent. ATM and debit card fees increased $155 thousand in 2013 compared to 2012.

Securities Gains. The Company did not realize any gains from the sale of securities in three months ended September 30, 2013 compared to $1.19 million realized gains in the same year ago period. The Company realized losses in the amount of $2 thousand from the sale of securities in nine months ended September 30, 2013 compared to $2.10 million realized gains in the same year ago period.


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Noninterest Expense
. . .
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