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CBAN > SEC Filings for CBAN > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for COLONY BANKCORP INC



Annual Report

Item 7

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 Annual 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), notwithstanding 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.

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Item 7 (Continued)

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

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, including the terms of our Board Resolution.

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 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 central, south and coastal 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 and 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.

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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.

Other Real Estate Owned and Foreclosed Assets

Other real estate owned (OREO) or other foreclosed assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, the valuation allowance is adjusted through a charge to noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recognized in noninterest expense. Management obtains appraisals performed by certified, third-parties within one year of placing a property into OREO. The fair value of the property is then evaluated by management annually going forward, or more often if necessary. Annual evaluations may be performed by certified third parties, or internally by management comparing recent sales of similar properties within the Company's OREO portfolio.


The following discussion and analysis presents the more significant factors affecting the Company's financial condition as of December 31, 2013 and 2012, and results of operations for each of the years in the three-year period ended December 31, 2013. 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.

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.

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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 (loss) available to common shareholders totaled $3.12 million, or $0.37 per diluted common share in 2013, compared to $1.21 million, or $0.14 per diluted common share in 2012, compared to $1.13 million, or $0.13 per diluted common share in 2011.

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

                                                2013         2012         2011

Taxable-Equivalent Net Interest Income        $ 37,859     $ 36,417     $ 35,178
Taxable-Equivalent Adjustment                      170          144          191

Net Interest Income                             37,689       36,273       34,987
Provision for Loan Losses                        4,485        6,785        8,250
Noninterest Income                               8,377        9,733        9,951
Noninterest Expense                             34,617       35,379       33,051

Income Before Income Taxes                       6,964        3,842        3,637
Income Taxes                                     2,335        1,201        1,104

Net Income                                    $  4,629     $  2,641     $  2,533

Preferred Stock Dividends                        1,509        1,435        1,400

Net Income Available to Common Stockholders   $  3,120     $  1,206     $  1,133

Basic per Common Share:
Net Income                                    $   0.37     $   0.14     $   0.13
Diluted per Common Share:
Net Income                                    $   0.37     $   0.14     $   0.13
Return on Average Assets (1)                      0.28 %       0.11 %       0.09 %
Return on Average Equity (1)                      3.34 %       1.25 %       1.20 %

(1) Computed using net income available to common shareholders.

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Net income available to common shareholders for 2013 increased $1.91 million, or 158.71 percent, compared to 2012. The increase was primarily the result of an increase of $1.42 million in net interest income, a decrease of $2.3 million in provision for loan losses and a decrease of $762 thousand in noninterest expense. The impact of these items was partly offset by a decrease of $1.36 million in noninterest income and an increase of $1.13 million in income tax expense.

Net income available to common shareholders for 2012 increased $73 thousand, or 6.44 percent, compared to 2011. The increase was primarily the result of a $1.47 million decrease in provision for loan losses and an increase of $1.29 million in net interest income. The impact of these items was partly offset by a $218 thousand decrease in noninterest income, an increase of $2.33 million in noninterest expense and an increase of $97 thousand in income tax expense.

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 81.82 percent of total revenue during 2013 and 78.84 percent during 2012.

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 four years. The federal funds rate moved similar to prime rate with interest rates currently at 0.25 percent and has been for the past four years. We anticipate the Federal Reserve maintaining its current interest rate policy in 2014, which should result in Colony's net interest margin remaining stable.

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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Item 7 (Continued)

Rate/Volume Analysis

The rate/volume analysis presented hereafter illustrates the change from year to
year 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                              Changes From
                                  2012 to 2013 (a)                          2011 to 2012 (a)
                         Volume         Rate          Total        Volume         Rate          Total

Interest Income
Loans, Net-Taxable      $   1,327     $  (1,908 )   $    (581 )   $  (2,406 )   $    (133 )   $  (2,539 )

Investment Securities
Taxable                      (145 )      (1,263 )      (1,408 )        (377 )      (1,630 )      (2,007 )
Tax-Exempt                    (20 )           4           (16 )          (2 )         (14 )         (16 )
Total Investment             (165 )      (1,259 )      (1,424 )        (379 )      (1,644 )      (2,023 )

Deposits in Other
Banks                         (33 )          37             4            (4 )          34            30
Federal Funds Sold            (60 )           -           (60 )         (15 )          (1 )         (16 )
Other Interest -              (10 )          (6 )         (16 )         (12 )           9            (3 )
Earning Assets
Total Interest Income       1,059        (3,136 )      (2,077 )      (2,816 )      (1,735 )      (4,551 )

Interest Expense
Demand and Savings
Deposits                      141           (64 )          77           253          (227 )          26
Time Deposits                (892 )      (2,101 )      (2,993 )      (1,762 )      (2,477 )      (4,239 )

Total Interest               (751 )      (2,165 )      (2,916 )      (1,509 )      (2,704 )      (4,213 )
Expense On Deposits

Federal Funds
Purchased and
Repurchase Agreements        (136 )        (430 )        (566 )        (338 )           -          (338 )
Subordinated                    -           (37 )         (37 )           -            46            46
Other Debt                      -             -             -        (1,175 )        (110 )      (1,285 )

Total Interest               (887 )      (2,632 )      (3,519 )      (3,022 )      (2,768 )      (5,790 )
Net Interest Income     $   1,946     $    (504 )   $   1,442     $     206     $   1,033     $   1,239

(a) 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 credit risk, relying instead on an extensive loan review process and our allowance for loan losses.

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Item 7 (Continued)

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. Interest rate 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 to the net portfolio of equity value and net interest income from potential changes to interest rates and considers the impact of alternative strategies or changes in balance sheet structure.

Interest rates play a major part in the net interest income of financial institutions. The repricing of interest earnings 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 .80 to 1.20.

Our exposure to interest rate risk is reviewed at least quarterly 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. The Company has engaged FTN Financial to run a quarterly asset/liability model for interest rate risk analysis. We are generally focusing our investment activities on securities with terms or average lives in the 2-5 year range.

The Company maintains about 14.7 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 certificates of deposit that mature within one year. This balance sheet composition allowed the Company to be relatively constant with its net interest margin until 2008. During 2007, interest rates decreased 100 basis points and this decrease by the Federal Reserve in 2007 followed by 400 basis point decrease in 2008 resulted in significant pressure in net interest margins. While the Federal Reserve rates have remained unchanged since 2008, we have seen the net interest margin increase to 3.61 percent for 2013, compared to 3.41 percent for 2012 and to 3.11 percent for 2011. Given the Federal Reserve's aggressive posture during 2008 that ended the year with a range of 0 - 0.25 percent federal funds target rate and remained the same for all of 2013, we have seen our net interest margin reach a low of 3.45 percent for first quarter 2013 to a high of 3.68 percent for fourth quarter 2013.

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Item 7 (Continued)

Taxable-equivalent net interest income for 2013 increased by $1.44 million, or 3.96 percent, compared to 2012 while taxable-equivalent net interest income for 2012 increased by $1.24 million, or 3.52 percent, compared to 2011. The average volume of earning assets during 2013 decreased $18.15 million compared to 2012 while over the same period the net interest margin increased to 3.61 from 3.41 percent. Improvement in the net interest margin in 2013 was primarily driven by reduction in the cost of funds and maintaining longer term investments. Similarly, the average volume of earning assets during 2012 decreased $66.19 million compared to 2011 while over the same period the net interest margin increased to 3.41 from 3.11 percent. The decline in average earning assets in 2013 affected each category of assets except loans, while the significant decrease was primarily in average investment securities. Reduction in average earning assets during 2012 and 2011 was primarily in loans and investment securities, even though each category declined. The increase in the net interest margin in 2012 was primarily the result of the reduction in the cost of funds and maintaining longer term investments.

The average volume of loans increased $22.76 million in 2013 compared to 2012, and decreased $41.20 million in 2012 compared to 2011. The average yield on loans decreased 26 basis points in 2013 compared to 2012 and decreased 1 basis point in 2012 compared to 2011. The average volume of deposits decreased $16.38 million while other borrowings decreased $3.41 million in 2013 compared to 2012. The average volume of other borrowings decreased $37.83 million in 2012 compared to 2011 while average deposits decreased $31.03 million in 2012 compared to 2011. Interest-bearing deposits made up 165.77 percent of the decrease in average deposits in 2013 and 125.76 percent of the decrease in average deposits in 2012. Accordingly, the ratio of average interest-bearing deposits to total average deposits was 88.2 percent in 2013, 89.5 percent in 2012 and 90.6 percent in 2011. This deposit mix, combined with a general decrease in interest rates, had the effect of (i) decreasing the average cost of total deposits by 29 basis points in 2013 compared to 2012 and decreasing the average cost of total deposits by 39 basis points in 2012 compared to 2011, and
(ii) mitigating a portion of the impact of decreasing yields on earning assets on the Company's net interest income.

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 3.50 percent in 2013 compared to 3.27 percent in 2012 and 2.93 percent in 2011. 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 Interest Rate Sensitivity 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 $4.49 million in 2013 compared to $6.79 million in 2012 and $8.25 million in 2011. 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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Part II (Continued)
Item 7 (Continued)

Noninterest Income

The components of noninterest income were as follows:

                                       2013        2012        2011

Service Charges on Deposit Accounts   $ 4,691     $ 3,573     $ 3,244
Other Charges, Commissions and Fees     1,725       1,515       1,312
Other                                   1,206       1,102       1,259
Mortgage Fee Income                       484         400         265
Securities Gains (Losses)                (364 )     2,837       2,924
Gain on Sale of SBA Loans                 635         306         947

                                      $ 8,377     $ 9,733     $ 9,951

Total noninterest income for 2013 decreased $1.36 million, or 13.93 percent, compared to 2012 while total noninterest income for 2012 decreased $218 thousand, or 2.19 percent, compared to 2011. The decrease in 2013 noninterest income compared to 2012 was primarily in securities gains while the decrease in . . .

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