COLONY BANKCORP, INC. The purpose of this discussion and analysis is to focus on significant changes in the financial condition ofColony Bankcorp, Inc. and our wholly owned subsidiary,Colony Bank , fromDecember 31, 2019 throughJune 30, 2020 and on our results of operations for the three and six months endedJune 30, 2020 and 2019. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto in the Company's 2019 Form 10-K, and information presented elsewhere in this Quarterly Report on Form 10-Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1. Forward-looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "strive," "projection," "goal," "target," "outlook," "aim," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to the COVID-19 pandemic. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors discussed elsewhere in this quarterly report and the following: •business and economic conditions, particularly those affecting the financial services industry and our primary market areas; •the impact of the COVID-19 pandemic on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus onthe United States economy (including, without limitations, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers; •adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions related to the COVID-19 pandemic, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic, including, but not limited to, the PPP; •factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our borrowers and the success of various projects that we finance; •concentration of our loan portfolio in real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate; •credit and lending risks associated with our construction and development, commercial real estate, commercial and industrial and residential real estate loan portfolios; •our ability to attract sufficient loans that meet prudent credit standards, including in our construction and development, commercial and industrial and owner-occupied commercial real estate loan categories; •our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas; •changes in interest rate environment, including changes to the federal funds rate, and competition in our markets may result in increased funding costs or reduced earning assets yields, thus reducing our margins and net interest income; •our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses ("ALL");
44
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•the adequacy of our reserves (including ALL) and the appropriateness of our methodology for calculating such reserves; •our ability to successfully execute our business strategy to achieve profitable growth; •the concentration of our business within our geographic areas of operation inGeorgia and neighboring markets; •our focus on small and mid-sized businesses; •our ability to manage our growth; •our ability to increase our operating efficiency; •liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary; •failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations; •risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits; •inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic risk and reputational risk; •the makeup of our asset mix and investments; •external economic, political and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of theFederal Reserve , inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition; •continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are; •challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services; •restraints on the ability of the Bank to pay dividends to us, which could limit our liquidity; •increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; •a failure in the internal controls we have implemented to address the risks inherent to the business of banking; •inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance; •changes in our management personnel or our inability to retain motivate and hire qualified management personnel; •the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets; •our ability to identify and address cyber-security risks, fraud and systems errors; •disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems; •disruptions, security breaches, or other adverse events affecting the third-party vendorswho perform several of our critical processing functions; 45 -------------------------------------------------------------------------------- •an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies; •fraudulent and negligent acts by our clients, employees or vendors and our ability to identify and address such acts; •risks related to potential acquisitions; •the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; •compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations; •changes in the scope and cost ofFDIC insurance and other coverage; •changes in our accounting standards; •changes in tariffs and trade barriers; •changes in federal tax law or policy; and •other risks and factors identified in our 2019 Form 10-K and Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 ("1Q 2020 Form 10-Q"), including those identified under the heading "Risk Factors". The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this Quarterly Report on Form 10-Q. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. COVID-19 Pandemic DuringMarch 2020 , theWorld Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic in response to the rapidly growing outbreak of the virus. COVID-19 has significantly impacted local, national and global economies due to stay-at-home orders and social distancing guidelines, and has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.Congress , the President, and theFederal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law onMarch 27, 2020 as a$2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had and continue to have a material impact on our operations. In response to the COVID-19 pandemic, the Company has prioritized the health and safety of its teammates and customers, and has taken protective measures such as implementing remote work arrangements to the full extent possible and by adjusting banking center hours and operational measures to promote social distancing, and it will continue to do so throughout the duration of the pandemic. At the same time, the Company is closely monitoring the effects of the COVID-19 pandemic on our loan and deposit customers, and is assessing the risks in our loan portfolio and working with our customers to reduce the pandemic's impact on them while minimizing losses for the Company. In addition, the Company remains focused on improving shareholder value, managing credit exposure, challenging expenses, enhancing the customer experience and supporting the communities it serves. 46 -------------------------------------------------------------------------------- We have implemented loan programs to allow customerswho are experiencing hardships from the COVID-19 pandemic to defer loan principal and interest payments for up to 90 days.The Small Business Administration (SBA) has also guaranteed the principal and interest payments of all our SBA loan customers for six months. As ofJune 30, 2020 , we had 170 commercial customers with outstanding loan balances totaling$113.3 million who have been approved for payment deferrals. Of these non-SBA payment deferrals, 19 loans totaling$47.3 million were in the hotel industry, 18 loans totaling$17.0 million were in the retail industry, and 60 loans in the 1-4 family investment properties, which are some of the industries heavily impacted by the COVID-19 pandemic. In addition, we have been participating in the SBA Paycheck Protection Program ("PPP") under CARES Act to help provide loans to our business customers in need. As ofJune 30, 2020 , the Company has closed with the SBA approximately 1,630 PPP loans for an aggregate amount of funds in excess of$137.8 million . We have used our current cash balances and available liquidity from the Paycheck Protection Program Liquidity Facility to fund these PPP loans. Loan fees collected related to these loans is approximately$5.5 million . In accordance withU.S. generally accepted accounting principles (GAAP), these fees will be deferred and recognized over the life of the loans. Overview The following discussion and analysis presents the more significant factors affecting the Company's financial condition asJune 30, 2020 andDecember 31, 2019 , and results of operations for each of the three and six months periods endedJune 30, 2020 and 2019. 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.. AtJune 30, 2020 , the Company had total consolidated assets of$1.8 billion , total loans of$1.1 billion , total deposits of$1.4 billion , and shareholders' equity of$138.6 million . The Company reported net income of$2.2 million , or$0.23 per diluted share, for the second quarter of 2020, compared to net income of$2.1 million , or$0.23 per diluted share, for the second quarter of 2019. The Company reported net income of$3.8 million , or$0.40 per diluted share, for the six months endedJune 30, 2020 compared to net income of$4.9 million , or$0.56 per diluted share, for the six months endedJune 30, 2019 . The decline in net income was driven by a significant increase in provision for loan losses and a reduction in the federal funds rate due to the impact of COVID-19. Net interest income increased to$13.5 million for the second quarter of 2020, compared to$11.8 million for the second quarter of 2019, due to higher loan volume during the second quarter from PPP loans and loan fees generated through PPP loan originations. The net interest margin decreased to 3.41% for the three months endedJune 30, 2020 from 3.61% for the same period in 2019. The reason for the decrease in net interest margin is primarily due to an increase in volume of loan production at lower rates from the PPP loans, which was partially offset by lower borrowing and deposit rates. Net interest income increased to$26.2 million for the six months endedJune 30, 2020 , compared to$22.2 million for the same period in 2019, due to higher loan volume during the second quarter from PPP loans and loan fees generated through PPP loan originations. The net interest margin remained stable at 3.51% for the six months endedJune 30, 2020 and 2019. The provision for loan losses was$2.2 million for the second quarter of 2020, compared to$179,000 for the second quarter of 2019. Net charge-offs for the second quarter of 2020 were$295,000 compared to net recoveries of$21,000 for the same period in 2019. The provision for loan losses was$4.2 million for the six months endedJune 30, 2020 , compared to$310,000 for the six months endedJune 30, 2019 . Net charge-offs for the six months endedJune 30, 2020 were$730,000 compared to$798,000 for the same period in 2019. As ofJune 30, 2020 , Colony's allowance for loan losses was$10.3 million , or 0.92% of total loans, compared to$6.9 million , or 0.71% of total loans, atDecember 31, 2019 . AtJune 30, 2020 andDecember 31, 2019 , nonperforming assets were$13.2 million and$10.5 million , or 0.75% and 0.69% of total assets, respectively. While asset quality remains stable period over period, social and economic disruption in response to the COVID-19 pandemic continued to result in business closures and job losses during the second quarter of 2020. As such, additional qualitative measures were incorporated as part of theJune 30, 2020 allowance for loan losses calculation which was the primary cause for the increase to the provision for loan losses during the second quarter of 2020 compared to the same period in 2019. Noninterest income of$4.8 million for the second quarter of 2020 was up$843,000 , or 21.1%, from the second quarter of 2019. Noninterest income of$9.4 million for the six months endedJune 30, 2020 was up$3.1 million , or 48.5%, from the six months endedJune 30, 2019 . The increase in both periods was primarily due to increases in mortgage loan fees. For the second quarter of 2020, noninterest expenses of$13.4 million increased$361,000 from the same period in 2019. Noninterest expense for the six months endedJune 30, 2020 of$26.8 million , increased$4.7 million , or 21.4% from$22.0 million during the same period in 2019. Increases in noninterest expense are in part due to the growth experienced by Colony and changes to organizational structure that are associated with that growth offset by the decrease in acquisitions expenses in 47 -------------------------------------------------------------------------------- the second quarter. Those expenses that were the primary contributors to the increase year over year include salaries and employee benefits and other noninterest expenses. See "Table 6 - Noninterest expense" for more detail and discussion on the two primary drivers to the increase in noninterest expense. Critical Accounting Policies Our accounting and reporting policies are in accordance with accounting principles generally accepted inthe United States ("GAAP") and conform to general practices within the banking industry. There have been no significant changes to the Significant Accounting Policies as described in Note 1 of the Notes to Consolidated Financial Statements for the year endedDecember 31, 2019 , which are included in the Company's 2019 10-K. 48 -------------------------------------------------------------------------------- Non-GAAP Reconciliation and Explanation Management uses non-GAAP financial measures in its analysis of the Company's performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company's performance, and if not provided would be requested by the investor community. The Company believes the non-GAAP measures enhance investors' understanding of the Company's business and performance. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. The measures entitled operating net income, adjusted earnings per diluted share and tangible common book value per share are not measures recognized underU.S. generally accepted accounting principles (GAAP) and therefore are considered non-GAAP financial measures. The most comparable GAAP measures are net income, earnings per diluted share, and common book value per share, respectively. These disclosures should not be considered an alternative to GAAP. To the extent applicable, reconciliation of these non-GAAP measures are the most directly comparable measures as reported in accordance with GAAP are included in the table below. Table 1 - Non-GAAP Performance Measures Reconciliation (dollars in thousands, except per share data) 2020 2019 Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter Non-GAAP Measures Operating net income reconciliation Net income (GAAP)$2,214 $1,603 $2,756 $2,518
Acquisition-related expenses 220 287 335 861
1,928
Income tax benefit of acquisition-related expenses (46) (60) (70) (181) (404) Operating net income$2,388 $1,830 $3,021 $3,198 $3,625 Weighted average diluted shares 9,498,783 9,498,783 9,494,859 9,494,771
9,089,461
Adjusted earnings per diluted share$0.25 $0.19 $0.32 $0.34
Tangible common book value per share reconciliation Common book value per share (GAAP)$14.59 $14.35 $13.74 $13.65
Effect of goodwill and other intangibles (1.96) (2.06) (2.06) (2.04)
(2.07)
Tangible common book value per share 12.63 12.29 11.68 11.61 11.25
49-------------------------------------------------------------------------------- Results of Operations We reported net income and diluted earnings per share of$2.2 million and$0.23 , respectively, for the second quarter of 2020. This compared to net income and diluted earnings per share of$2.1 million and$0.23 , respectively, for the same period in 2019. We reported operating net income of$2.4 million for the second quarter 2020, compared to$3.6 million for the same period in 2019. For the second quarter of 2020 operating net income excludes acquisition-related expenses, which net of tax, totaled$174,000 . For the second quarter of 2019, operating net income excludes acquisition-related expenses, which net of tax, totaled$1.6 million . Table 2 - Selected Financial Information (dollars in thousands, except per share data) 2020 2019 Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter EARNINGS SUMMARY Net interest income$13,541 $12,704 $12,992 $12,648
Provision for loan losses 2,200 1,956 581 214 179 Non-interest income 4,843 4,434 4,412 4,039 4,000 Non-interest expense 13,375 13,251 13,496 13,358 13,014 Income taxes 595 328 571 597 531 Net income$2,214 $1,603 $2,756 $2,518 $2,101 PERFORMANCE MEASURES Per common share: Common shares outstanding 9,498,783 9,498,783 9,498,783 9,498,783
9,498,937
Weighted average basic shares 9,498,783 9,498,783 9,494,859 9,494,771
9,089,461
Weighted average diluted shares 9,498,783 9,498,783 9,494,859 9,494,771
9,089,461
Earnings per basic share$0.23 $0.17 $0.29 $0.27
Earnings per diluted share 0.23 0.17 0.29 0.27 0.23 Adjusted earnings per diluted share(b) 0.25 0.19 0.32 0.34 0.40 Cash dividends declared per share 0.10 0.10 0.08 0.08 0.08 Book value per common share 14.59 14.35 13.74 13.65
13.32
Tangible book value per common share (b) 12.63 12.29 11.68 11.61 11.25 Performance ratios: Net interest margin (a) 3.41% 3.63% 3.72% 3.64%
3.61%
Return on average assets 0.52 0.42 0.73 0.67 0.60 Return on average total equity 6.47 4.79 8.47 7.86 7.43 Average total equity to average assets 8.06 8.86 8.66 8.59 8.03 ASSET QUALITY Nonperforming loans (NPLs)$11,459 $10,130 $9,179 $9,572 $10,383 Other real estate 1,769 847 1,320 775 987 Repossessions 17 19 13 8 58 Total nonperforming assets (NPAs) 13,245 10,996 10,512 10,355 11,428 Classified loans 20,619 23,093 21,084 20,103 23,656 Criticized loans 52,200 46,600 51,182 42,765 42,336 Net loan charge-offs 295 435 317 403 (21) Allowance for loan losses to total loans 0.92% 0.85% 0.71% 0.69% 0.73% 50
-------------------------------------------------------------------------------- Allowance for loan losses to total NPLs 89.79 64.81 74.77 68.95 65.38 Allowance for loan losses to total NPAs 77.68 60.83 65.29 63.73 59.41 Net charge-offs to average loans 0.12 0.18 (annualized) 0.13 0.17 (0.01) NPLs to total loans 1.03 1.13 0.95 1.00 1.11 NPAs to total assets 0.75 0.91 0.69 0.70 0.76 NPAs to total loans and other real estate 1.19 1.39 1.08 1.08 1.18 AVERAGE BALANCES Total assets$1,702,902 $1,516,191 $1,503,521 $1,492,852 $1,409,265 Loans, net 1,094,299 974,614 961,756 942,356 866,841 Deposits 1,384,739 1,293,784 1,278,987 1,272,561 1,219,274 Total stockholders' equity 137,213 134,304 130,217 128,172 113,161
(a) Computed using fully taxable-equivalent net income. (b) Non-GAAP measure - see "Non-GAAP Reconciliation and Explanation" for more information and reconciliation to GAAP
Net Interest Income
Net interest income, which is the difference between interest earned on assets and the interest paid on deposits and borrowed funds, is the single largest component of total revenue. Management strives to optimize this income while balancing interest rate, credit and liquidity risks. The banking industry uses two key ratios to measure relative profitability of net interest income. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of noninterest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company's balance sheet and is defined as net interest income as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with noninterest-bearing deposits and shareholders' equity. Fully taxable equivalent net interest income for the second quarter of 2020 and 2019 was$13.5 million and 11.8 million, respectively. The net interest spread and net interest margin for the second quarter of 2020 of 3.27% and 3.41%, respectively, decreased eleven and 20 basis points, respectively from the second quarter of 2019. For the first six months of 2020 and 2019, fully taxable equivalent net interest income was$26.2 million and$22.2 million , respectively. The net interest spread and net interest margin for the first six months of 2020 were 3.34% and 3.51%, respectively. While the net interest margin remained stable year over year, the net interest spread decreased six basis points during the first six months of 2020 compared to the same period in 2019. Despite the growth in our interest earnings assets, our net interest margin and net interest spread are impacted by the downward pressure exerted from lower yielding PPP loans offset by lowering our borrowing costs during the quarter as well as lower interest on the level of deposits on our balance sheets. The following tables indicate the relationship between interest income and interest expense and the average amounts of assets and liabilities for the periods indicated. As shown in the tables, both average assets and average liabilities for the three months endedJune 30, 2020 increased compared to the same period in 2019. The increase in average assets was primarily driven by the increase in average loans of$227.5 million , or 26.2%, from the second quarter in 2019, which reflects both organic loan growth, and growth in PPP loans. The increase in average loans was offset by a decrease in average taxable securities of$54.0 million . The increase in average assets for the three months endedJune 30, 2020 was funded primarily through an increase in Paycheck Protection Program Liquidity Facility and average customer deposits since the second quarter of 2019 of$147.9 million . On a tax equivalent basis, net interest income for the second quarters of 2020 and 2019 was$13.5 million and$11.8 million , respectively, which represents an increase of$1.7 million , or 14.5% from the same period in 2019. On a tax equivalent basis, net interest income for the six months endedJune 30, 2020 and 2019 was$26.2 million and$22.2 million , respectively, which represents an increase of$4.1 million , or 18.3% from the same period in 2019. The higher net interest income is a result of growth in average interest earning assets, which increased$280.2 million , or 21.3%, from$1.3 billion in the second quarter 2019 to$1.5 billion for the second quarter of 2020. The growth in interest earning assets was primarily a result of growth in the loan portfolio through lower-yielding PPP loans which also generated higher balances in our interest-bearing deposits with other banks, of which both offset the intentional shrinking of the investment portfolio. 51 -------------------------------------------------------------------------------- The yield on total interest-bearing liabilities decreased from 1.23% in the second quarter 2019 to 0.64% in the second quarter of 2020. Deposit costs decreased from 1.06% in the second quarter 2019 to 0.52% in the second quarter 2020. The decrease in deposit costs year over year is partially associated to market driven changes impacting our cost of funds attributable to falling interest rates throughout 2020 and 2019. In March of 2020, theFederal Reserve's Federal Open Market Committee ("FOMC") lowered interest rates twice for a total reduction of 150 basis points in response to the COVID-19 pandemic, which was the most aggressive action taken by theFOMC since the financial crisis in 2008. Table 3 - Average Balance Sheet and Net Interest Analysis
Three Months Ended
2020 2019
Average Income/ Yields/ Average Income/ Yields/
(dollars in thousands) Balances Expense Rates Balances Expense Rates
Assets
Interest-earning assets:
Loans, net of unearned income(1) $ 1,094,299 $ 13,699 5.02 % $ 866,841 $ 12,313 5.70 %
Investment securities, taxable 331,378 1,757 2.13 385,374 2,399 2.50
Investment securities,
tax-exempt(2) 8,959 37 1.66 2,228 17 3.06
Deposits in banks and short term
investments 159,902 48 0.12 59,894 369 2.47
Total interest-earning assets 1,594,538 15,541 3.91 1,314,337 15,098
4.61
Noninterest-earning assets$ 108,364 94,928 Total assets$ 1,702,902 $ 1,409,265 Liabilities and stockholders' equity Interest-bearing liabilities: Interest-earning demand and savings$ 766,692 $ 407 0.21 %$ 624,196 $ 1,136 0.73 % Other time 311,334 996 1.28 368,116 1,496 1.63 Total interest-bearing deposits 1,078,026 1,403 0.52 992,312 2,632
1.06
Federal Home Loan Bank advances 36,500 211 2.32 49,070 374 3.06 Paycheck Protection Program Liquidity Facility 99,124 87 0.35 - - - Other borrowings 38,694 299 3.10 24,229 267 4.42 Total other interest-bearing liabilities 174,318 597 1.37 73,299 641 3.51 Total interest-bearing liabilities 1,252,344 2,000 0.64 1,065,611 3,273
1.23
Noninterest-bearing liabilities: Demand deposits$ 306,713 $ 226,862 Other liabilities 6,632 3,631 Stockholders' equity 137,213 113,161 Total noninterest-bearing liabilities and stockholders' equity$ 450,558 $ 343,654 Total liabilities and stockholders' equity$ 1,702,902 $ 1,409,265 Interest rate spread 3.27 % 3.38 % Net interest income$ 13,541 $ 11,825 Net interest margin 3.41 % 3.61 % (1)The average balance of loans includes the average balance of nonaccrual loans. Income on such loans is recorded and recognized on the cash basis. Includes loans held for sale. (2)Taxable-equivalent adjustments totaling$6,000 and$9,000 for the three month periods endedJune 30, 2020 and 2019, respectively, are included in tax-exempt interest on investment securities. The adjustments are based on a federal tax rate of 21% with appropriate reductions for the effect of disallowed interest expense incurred in carrying tax-exempt obligations. 52 --------------------------------------------------------------------------------
Table 3 - Average Balance Sheet and Net Interest Analysis
Six Months Ended June 30,
2020 2019
Average Income/ Yields/ Average Income/ Yields/
(dollars in thousands) Balances Expense Rates Balances Expense Rates
Assets
Interest-earning assets:
Loans, net of unearned income (1) $ 1,037,242 $ 26,989 5.22 % $ 828,234 $ 22,783 5.52 %
Investment securities, taxable 335,836 3,746 2.24 376,161 4,596 2.45
Investment securities, tax-exempt(2) 4,941 42 1.70 2,103 28 2.67
Deposits in banks and short term
investments 122,885 332 0.54 61,429 704 2.30
Total interest-earning assets 1,500,904 31,109 4.16 1,267,927 28,111 4.45
Noninterest-earning assets $ 106,932 66,888
Total assets $ 1,607,836 $ 1,334,815
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-earning demand and savings $ 747,273 $ 1,342 0.36 % $ 596,212 $ 1,974 0.66 %
Other time 323,073 2,279 1.41 355,731 2,780 1.57
Total interest-bearing deposits 1,070,346 3,621 0.68 951,943 4,754 1.00
Federal Home Loan Bank advances 41,038 468 2.29 46,218 506 2.20
Paycheck Protection Program
Liquidity Facility 49,561 87 0.35 - - -
Other borrowings 38,745 688 3.56 24,229 669 5.54
Total other interest-bearing
liabilities 129,344 1,243 1.93 70,447 1,175 3.35
Total interest-bearing liabilities 1,199,690 4,864 0.81 1,022,390 5,929 1.16
Noninterest-bearing liabilities:
Demand deposits 266,163 204,012
Other liabilities 6,223 3,571
Stockholders' equity 135,760 104,842
Total noninterest-bearing
liabilities and stockholders' equity $ 408,146 $ 312,425
Total liabilities and stockholders'
equity $ 1,607,836 $ 1,334,815
Interest rate spread 3.34 % 3.28 %
Net interest income $ 26,245 $ 22,182
Net interest margin 3.51 % 3.51 %
(1)The average balance of loans includes the average balance of nonaccrual
loans. Income on such loans is recognized and recorded on the cash basis.
(2)Taxable-equivalent adjustments totaling $37,000 and $43,000 for six month
periods ended June 30, 2020 and 2019, respectively, are included in tax-exempt
interest on investment securities. The adjustments are based on a federal tax
rate of 21% with appropriate reductions for the effect of disallowed interest
expense incurred in carrying tax-exempt obligations.
The following table presents the effect of net interest income for changes in
the average outstanding volume amounts of interest-earning assets and
interest-bearing liabilities and the rates earned and paid on these assets and
liabilities from June 30, 2019 to June 30, 2020 .
53
--------------------------------------------------------------------------------Table 4 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis
Six
Months Ended
Compared to Six
Months Ended
Due to Changes in
(dollars in thousands) Volume Rate Total
Interest-earning assets:
Loans, net of unearned fees $ 11,530 $ (7,324) $ 4,206
Investment securities, taxable (988) 138 (850)
Investment securities, tax-exempt 76 (62) 14
Deposits in banks and short term investments 1,412 (1,784) (372)
Total interest-earning assets (FTE) 12,030 (9,032) 2,998
Interest-bearing liabilities:
Interest-Bearing Demand and Savings Deposits 1,003 (1,635) (632)
Time Deposits (512) 11 (501)
Federal Home Loan Bank Advances (114) 76 (38)
Paycheck Protection Program Liquidity Facility - 87 87
Other Borrowed Money 804 (785) 19
Total interest-bearing liabilities 1,181 (2,246) (1,065)
Increase in net interest income (FTE) $ 10,849 Provision for Loan Losses The provision for loan losses is based on management's evaluation of probable, inherent losses in the loan portfolio and unfunded commitments and the corresponding analysis of the allowance for loan losses at quarter-end. Provision for loan losses for the three and six months endedJune 30, 2020 were$2.2 million and$4.2 million , respectively, compared to$179,000 and$310,000 for the same periods in 2019, respectively. For the three months endedJune 30, 2020 , net loan charge-offs as an annualized percentage of outstanding loans were 0.12% compared to (0.01)% for the same period in 2019. The amount of provision expense recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, sufficient to cover probable, inherent loan losses in the loan portfolio. The increase in provision for loan losses in the three and six months endedJune 30, 2020 compared to the same periods in 2019 is largely due to the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic. See the section captioned "Loans and Allowance for Loan Losses" elsewhere in this discussion for further analysis of the provision for loan losses. Noninterest Income The following table represents the major components of noninterest income for the periods indicated. Table 5 - Noninterest Income (dollars in thousands) Three months ended June 30, Change Six months ended June 30, Change 2020 2019 Amount Percent 2020 2019 Amount Percent Service charges on deposits 886$ 1,070 $ (184) (17.2) %$ 2,190 $ 2,034 $ 156 7.7 % Other service charges, commissions and fees 1,522 1,110 412 37.1 2,785 2,010 775 38.6 Mortgage fee income 1,827 544 1,283 235.8 3,089 687 2,402 349.6 Gain on sale of SBA loans 46 - 46 100.0 256 - 256 100.0 Securities gains - 65 (65) (100.0) 293 65 228 350.8 Other noninterest income 562 1,211 (649) (53.6) 791 1,538 (747) (48.6) Total noninterest income$ 4,843 $ 4,000 $ 843 21.08 %$ 9,404 $ 6,334 $ 3,070 48.47 % 54
-------------------------------------------------------------------------------- During the second quarter of 2020, noninterest income increased$843,000 compared to the same period in 2019, and for the six months endedJune 30, 2020 , non-interest income increased$3.1 million when compared to the same period in 2019. The reason for this increase is primarily due to increases in mortgage loan fee income and gains on the sale of SBA loans, both of which are new and fully operational lines of business when compared to the same periods in 2019. Service charges on deposit accounts. For the three months endedJune 30, 2020 , service charges decreased$184,000 , or 17.2%, compared to the same period in 2019. The decrease in service charges on deposits is primarily attributed to a$225,000 decrease in overdraft and service charge income during the quarter as a result of lower customer spending due to the COVID-19 pandemic, partially offset by an increase in wire transfer fees. For the six months endedJune 30, 2020 compared to the same period in 2019, service charges on deposits increased$156,000 or 7.7%. The increase is primarily attributable to an increase of$381,000 in overdraft and wire transfer fees, offset by a decrease in service charge income. Other service charges, commissions and fees. Other service charges, commissions and fees are comprised of various consumer deposit and other product services fees. Other service charges, commissions and fees increased$412,000 , or 37.1%, for the three months endedJune 30, 2020 , and$775,000 , or 38.6%, for the six months endedJune 30, 2020 compared to the same periods in 2019. The increase in these fees was driven by increases in interchange fees and SBA loan fees year over year. Mortgage Fee Income. For the three and six months endedJune 30, 2020 , mortgage fee income was$1.8 million , an increase of$1.3 million , or 235.8%, and$3.1 million , an increase of$2.4 million , or 349.6%, compared to the same periods in 2019, respectively. The increase in mortgage fee income is primarily attributed to the opening of a new mortgage location inLaGrange and the acquisition of the PFB Mortgage division ofPlanters First Bank , both of which occurred in the first half of 2019. As such, these divisions were fully operational in 2020, increasing the volume of mortgage loans. Furthermore, during the three and six months endedJune 30, 2020 , there was an increase in the demand for mortgage rate locks and mortgage closings due to a historically low interest rate environment. The decrease in mortgage rates was partially attributable to the 150 basis point decrease in the national federal funds rate during the during the six months endedJune 30, 2020 in response to the COVID-19 pandemic. 55 -------------------------------------------------------------------------------- Noninterest Expense The following table represents the major components of noninterest expense for the periods indicated. Table 6 - Noninterest Expense (dollars in thousands) Three months endedJune 30 , Change Six months endedJune 30 , Change 2020 2019 Amount Percent 2020 2019 Amount Percent Salaries and employee benefits$ 7,729 $ 6,292 $ 1,437 22.8 %$ 15,227 $ 11,663 $ 3,564 30.6 % Occupancy and equipment 1,316 1,144 172 15.0 2,634 2,169 465 21.4 Acquisition-related expenses 220 1,928 (1,708) (88.6) 287 1,961 (1,674) (85.4) Other noninterest expense 4,110 3,650 460 12.6 8,605 6,247 2,358 37.7 Total noninterest expense$ 13,375 $ 13,014 $ 361 2.8 %$ 26,753 $ 22,040 $ 4,713 21.4 % Noninterest expense for the second quarter of 2020 totaled$13.4 million , up$361,000 , or 2.8%, from the same period in 2019. Noninterest expense for the six months endedJune 30, 2020 was$26.8 million , up$4.7 million , or 21.4% from the same period in 2019. Increases in salaries and employee benefits and other noninterest expense account for the majority of the increase in noninterest expense, offset by a decrease in acquisition-related expenses. Salaries and Employee Benefits. Salaries and employee benefits for the three and six months endedJune 30, 2020 increased$1.4 million , or 22.8%, and$3.6 million , or 30.6%, respectively, compared to the same periods in 2019. The increase in 2020 is primarily attributable to a full six months of salaries and benefits related to the addition of several key employees during the second half of 2019 as part of the strategic changes that are being made to enhance the Company's profitability in the future. Other. Other noninterest expense for the three and six months endedJune 30, 2020 increased$460,000 , or 12.6%, and$2.4 million , or 37.7%, respectively, compared to the same periods in 2019. AtJune 30, 2020 , insurance expense increased$438,000 and$874,000 for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. The increase in insurance costs is directly related to increased premiums paid by the Company associated with a new commercial captive insurance policy. The company also saw increases in ATM network expenses and amortization expense of intangibles for the three and six months endedJune 30, 2020 compared to the same periods in 2019. Income Tax Expense Income tax expense for the three months endedJune 30, 2020 and 2019 was$595,000 and$531,000 , respectively. Income tax expense for the six months endedJune 30, 2020 and 2019 was$923,000 and$1.2 million , respectively. The Company's effective tax rates were 21% for the three and six months endedJune 30, 2020 and 2019. Balance Sheet Review Total assets atJune 30, 2020 andDecember 31, 2019 were$1.8 billion and$1.5 billion , respectively. 56
-------------------------------------------------------------------------------- Loans and Allowance for Loan Losses AtJune 30, 2020 , gross loans outstanding (excluding loans held for sale) were$1.1 billion , an increase of$145.2 million , or 15.0%, compared with$968.8 million atDecember 31, 2019 . The reason for the increase is primarily due to the growth in PPP loan production during the second quarter 2020, which totaled$137.8 million in gross PPP loans atJune 30, 2020 . The PPP loans are included in our commercial and industrial loans. AtJune 30, 2020 , approximately 58.3% of our loans are secured by commercial real estate. The following table presents a summary of the loan portfolio. Table 7 - Loans Outstanding (dollars in thousands) June 30, 2020 December 31, 2019 Construction, land and land development$ 131,797 $ 96,097 Other commercial real estate 518,141 540,239 Total commercial real estate 649,938 636,336 Residential real estate 188,339 194,796 Commercial, financial, & agricultural 250,915 114,360 Consumer and other 24,785 23,322 Total loans$ 1,113,977 $ 968,814 As a percentage of total loans: Construction, land and land development 11.8 % 9.9 % Other commercial real estate 46.5 % 55.8 % Total commercial real estate 58.3 % 65.7 % Residential real estate 16.9 % 20.1 % Commercial, financial & agricultural 22.6 % 11.8 % Consumer and other 2.2 % 2.4 % Total loans 100 % 100 % The Company's risk mitigation processes include an independent loan review designed to evaluate the credit risk in the loan portfolio and to ensure credit grade accuracy. The analysis serves as a tool to assist management in assessing the overall credit quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as "substandard" are loans which are inadequately protected by the current credit worthiness and paying capacity of the borrower and/or the collateral pledged. These assets exhibit well-defined weaknesses or are showing signs there is a distinct possibility the Company will sustain some loss if the deficiencies are not corrected. These weaknesses may be characterized by past due performance, operating losses and/or questionable collateral values. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans but have an increased risk of loss. Loans classified as "loss" are those loans which are considered uncollectable and are in the process of being charged off. The Company regularly monitors the composition of the loan portfolio as part of its evaluation over the adequacy of the allowance for loan losses. The Company focuses on the following loan categories: (1) construction, land and land development; (2) commercial, financial and agricultural; (3) commercial and farmland real estate; (4) residential real estate; and (5) consumer. The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The provision for loan losses is based on management's evaluation of the size and composition of the loan portfolio, the level of non-performing and past-due loans, historical trends of charged off loans and recoveries, prevailing economic conditions and other factors management deems appropriate. The Company's management has established an allowance for loan losses which it believes is adequate for the probable incurred losses in the loan portfolio. Based on a credit evaluation of the loan portfolio, management presents a quarterly review of the allowance for loan losses to the Company's Board of Directors, which primarily focuses on risk by evaluating individual loans in certain risk categories. These categories have also been established by management and take the form of loan grades. By grading the loan portfolio in this manner the Company's 57 -------------------------------------------------------------------------------- management is able to effectively evaluate the portfolio by risk, which management believes is the most effective way to analyze the loan portfolio and thus analyze the adequacy of the allowance for loan losses. The allowance for loan losses is established by examining (1) the large classified loans, nonaccrual loans and loans considered impaired and evaluating them individually to determine the specific reserve allocation and (2) the remainder of the loan portfolio to allocate a portion of the allowance based on past loss experience and the economic conditions for the particular loan category. The Company also considers other factors such as changes in lending policies and procedures; changes in national, regional and/or local economic and business conditions; changes in the nature and volume of the loan portfolio; changes in the experience, ability and depth of either the market president or lending staff; changes in the volume and severity of past-due and classified loans; changes in the quality of the loan review system; and other factors management deems appropriate. The allowance for loan losses was$10.3 million atJune 30, 2020 compared to$6.8 million atDecember 31, 2019 , an increase of$3.4 million , or 50.0%. While asset quality remains stable period over period, social and economic disruption in response to the COVID-19 pandemic continue to result in businesses closures and job losses during the second quarter of 2020. As such, additional qualitative measures were incorporated as part of theJune 30, 2020 allowance for loan losses calculation which was the primary cause for the increase to the provision for loan losses during the six months endedJune 30, 2020 compared to the same period 2019. Additional information about the Company's allowance for loan losses is provided in Note 5 to our consolidated financial statements as ofJune 30, 2020 , included elsewhere in this Form 10-Q. The following table presents an analysis of the allowance for loan losses as of and for the six months endedJune 30, 2020 and 2019: Table 8 - Analysis of Allowance for Loan Loss (dollars in thousands) June 30, 2020 June 30, 2019 Reserve %* Reserve %* Construction, land and land development$ 759 11.8 %$ 12 9.9 % Other commercial real estate 5,711 46.5 % 4,430 55.8 % Residential real estate 1,631 16.9 % 845 20.1 % Commercial, financial, & agricultural 1,913 22.6 % 1,421 11.8 % Consumer and other 275 2.2 % 81 2.4 %$ 10,289 100 %$ 6,789 100 %
*Percentage represents the loan balance in each category expressed as a percentage of total end of period loans.
58
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The following table presents a summary of allowance for loan loss for the three
and six months ended
Table 9 - Summary of Allowance for
Loan Loss
(dollars in thousands)
Three Months Ended Six Months Ended
June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Allowance for loan loss -
beginning balance $ 8,384 $ 6,589 $ 6,863 $ 7,277
Charge-offs:
Construction, land and land
development 4 - 4 29
Other commercial real estate - - 30 119
Residential real estate 16 18 80 647
Commercial, financial, &
agricultural - 28 68 125
Consumer and other 364 109 715 179
Total loans charged-off 384 155 897 1,099
Recoveries:
Construction, land and land
development 12 37 25 54
Other commercial real estate 21 7 26 41
Residential real estate 6 110 10 159
Commercial, financial, &
agricultural 19 11 20 17
Consumer and other 31 11 86 30
Total recoveries 89 176 167 301
Net charge-offs 295 (21) 730 798
Provision for loan loss 2,200 179 4,156 310
Allowance for loan loss - ending
balance $ 10,289 $
6,789
Net charge-offs to average loans (annualized) 0.14 % 0.30 % 0.17 % 0.19 % Allowance for loan losses to total loans 0.92 % 0.84 % 0.92 % 0.84 % Allowance to nonperforming loans 89.79 % 67.06 % 89.79 % 67.06 % Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio as ofJune 30, 2020 ; provided, however, that with the continuing impact of the COVID-19 pandemic during the first half of 2020 leading to significant market changes, high levels of unemployment and increasing degrees of uncertainty in theU.S. economy, the impact on collectability is not currently known, and it is possible that additional provisions for credit losses could be needed in future periods. 59 -------------------------------------------------------------------------------- Nonperforming Assets Asset quality remained stable during the first six months of 2020. The continuing effects of the COVID-19 pandemic will likely have an impact on our asset quality, but it is unknown to what extent at this point. Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more, repossessed personal property and other real estate owned ("OREO"). Loans granted payment deferrals related to the COVID-19 pandemic are not reported as past due or placed on nonaccrual status (provided the loans were not past due or on nonaccrual status prior to the deferral), and there were no loans under these terms deemed past due or nonaccrual as ofJune 30, 2020 . Nonaccrual loans totaled$11.5 million atJune 30, 2020 , an increase of$2.3 million , or 24.8%, from$9.2 million atDecember 31, 2019 . There were no loans contractually past due 90 days or more and still accruing for either period presented. AtJune 30, 2020 , OREO totaled$1.8 million , an increase of$449,000 , or 34.0%, compared with$1.3 million atDecember 31, 2019 . The increase in OREO was due to the addition of several additional OREO properties during the second quarter 2020. At the end of the second quarter 2020, total nonperforming assets as a percent of total assets increased to 0.75% compared with 0.69% atDecember 31, 2019 . The increase in nonperforming assets was primarily a result of increases in our loan portfolio and the current impaired economic operating environment. AtJune 30, 2020 , 6.1% of the Company's loan portfolio, or$67.7 million , is in the hotel sector which we expect to be the most sensitive to the COVID-19 pandemic. While our entire loan portfolio is being continuously assessed, enhanced monitoring for these sectors is ongoing. We are continuously working with these customers to evaluate how the current economic conditions are impacting, and will continue to impact, their business operations. Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to a customer whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days or more past due. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent loan payments made on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Classification of a loan as nonaccrual does not preclude the ultimate collection of loan principal or interest. Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell, at the time of foreclosure is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of the fair value, less estimated costs to sell, or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Nonperforming assets atJune 30, 2020 andDecember 31, 2019 were as follows: 60 -------------------------------------------------------------------------------- Table 10 - Nonperforming Assets(1) (dollars in thousands) June 30, 2020 December 31, 2019 Nonaccrual loans$ 11,459 $ 9,179 Loans past due 90 days and accruing - - Other real estate owned 1,769 1,320 Repossessed assets 17 13 Total nonperforming assets$ 13,245 $ 10,512 Nonaccrual loans by loan segment Construction, land and land development $ 187 $ 32 Commercial real estate 5,645 3,738 Residential real estate 3,549 3,643 Commercial, financial & agriculture 1,875 1,628 Consumer & other 203 138 Total nonaccrual loans$ 11,459 $ 9,179 NPAs as a percentage of total loans and OREO 1.19 % 1.08 % NPAs as a percentages of total assets 0.75 % 0.69 % Nonaccrual loans as a percentage of total loans 1.03 %
0.95 %
(1) Loans granted payment deferrals related to the COVID-19 pandemic are not reported as past due or placed on nonaccrual status (provided the loans were not past due or on nonaccrual status prior to the deferral), there were no loans under these terms deemed past due or nonaccrual as ofJune 30, 2020 . The restructuring of a loan is considered a "troubled debt restructuring ("TDR")" if both (i) the borrower is experiencing financial difficulties and (ii) the Company has granted the borrower a concession that we would not consider otherwise. AtJune 30, 2020 , TDRs totaled$12.2 million , essentially unchanged from$12.3 million reportedDecember 31, 2019 . AtJune 30, 2020 andDecember 31, 2019 , all TDRs were performing according to their modified terms and were therefore not considered to be nonperforming assets. InMarch 2020 , regulatory agencies issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the COVID-19 pandemic. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowerswho were current prior to any relief, are not to be considered TDRs. As ofJune 30, 2020 , the Company had approximately$113.2 million in loans still under their modified terms. The Company's modification program included payment deferrals, interest only, and other forms of modifications. See Notes 1 and 4 to of our consolidated financial statements as ofJune 30, 2020 , included elsewhere in this Form 10-Q, for more information regarding accounting treatment of loan modifications as a response to the COVID-19 pandemic 61 --------------------------------------------------------------------------------
Deposits
Deposits at
June 30, 2020 December 31, 2019
Noninterest-bearing deposits $ 328,850 $ 232,635
Interest-bearing deposits 685,669 624,658
Savings 105,593 88,970
Time, $250,000 and over 41,214 55,677
Other time 260,432 291,802
Total deposits 1,421,758 $ 1,293,742
Total deposits were $1.4 billion and $1.3 billion at June 30, 2020 and December
31, 2019 , respectively. As of June 30, 2020 , 23.1% of total deposits were
comprised of noninterest-bearing accounts and 76.9% comprised of
interest-bearing deposit accounts, compared to 18.0% and 82.0% as of December
31, 2019 , respectively. The growth in our deposits is due primarily to the
combination of government stimulus programs, the deferral of the tax payment
deadline, PPP loan proceeds retained on deposits by corporate borrowers, and
customer expense and savings habits in response to the COVID-19 pandemic.
We had $2.0 million in brokered deposits at June 30, 2020 and December 31, 2019 .
We use brokered deposits, subject to certain limitations and requirements, as a
source of funding to support our asset growth and augment the deposits generated
from our branch network, which are our principal source of funding. Our level of
brokered deposits varies from time to time depending on competitive interest
rate conditions and other factors and tends to increase as a percentage of total
deposits when the brokered deposits are less costly than issuing internet
certificates of deposit or borrowing from the Federal Home Loan Bank .
Off-Balance Sheet Arrangements
The Company is a party to credit related financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit and commercial letters of credit. Such commitments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual amount
of these commitments. The Company follows the same credit policies in making
commitments as it does for on-balance sheet instruments. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, upon extension of credit, is based on
management's credit evaluation of the borrower. The type of collateral held
varies, but may include cash or cash equivalents, unimproved or improved real
estate, personal property or other acceptable collateral.
See Note 9 to our consolidated financial statements as of June 30, 2020 ,
included elsewhere in this Form 10-Q, for a table setting forth the financial
instruments that were outstanding whose contract amounts represent credit risk
and more information regarding our off-balance sheet arrangements as of June 30,
2020 and December 31, 2019 .
62--------------------------------------------------------------------------------
Liquidity
An important part of the Bank's liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis. The Bank's main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, FHLB advances and brokered deposits. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs. To plan for contingent sources of funding not satisfied by both local and out-of-market deposit balances, the Company and the Bank have established multiple borrowing sources to augment their funds management. The Company has borrowing capacity through membership of theFederal Home Loan Bank program. The Bank has also established overnight borrowing for Federal Funds purchased through various correspondent banks. Cash and cash equivalents atJune 30, 2020 andDecember 31, 2019 were$191.0 million and$104.1 million , respectively. The increase in cash and cash equivalents since year-end 2019 was largely attributable to the significant increase in deposits, influenced by government stimulus payments and pandemic stay-at-home orders, which reduced spending and increased liquidity of consumers and businesses in these uncertain times, and PPP loan proceeds retained on deposit by corporate borrowers, as well as our own liquidity actions in the first half of 2020. Management believes the various funding sources discussed above are adequate to meet the Company's liquidity needs in these unsettled times without any material adverse impact on our operating results. Liquidity management involves the matching of cash flow requirements of customers and the ability of the Company to manage those requirements. These requirements of customers include, but are not limited to, deposits being withdrawn or providing assurance to borrowers that sufficient funds are available to meet their credit needs. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance we have in short-term assets at any given time will adequately cover any reasonably anticipated need for funds. Additionally, we maintain relationships with correspondent banks, which could provide funds on short notice, if needed. We have also invested in FHLB stock for the purpose of establishing credit lines with the FHLB. AtJune 30, 2020 andDecember 31, 2019 , we had$36.5 million and$47.0 million , respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had$340.1 million and$321.4 million of additional borrowing availability with the FHLB atJune 30, 2020 andDecember 31, 2019 , respectively. In addition, onApril 20, 2020 , the Company completed a Paycheck Protection Program Liquidity Facility (PPPLF) credit arrangement with TheFederal Reserve Bank . This line of credit is secured by PPP loans and bears a fixed interest rate of 0.35% with a maturity date equal to the maturity date of the related PPP loans, with the PPP loans maturing either two or five years from the origination date of the PPP loans. The Company advanced$140.7 million that was used toward the funding of PPP loans. As ofJune 30, 2020 , the outstanding balance totaled$134.5 million , and the Company's PPP loans and related PPPLF funding had a weighted average life of approximately 2 years. The Company is a separate entity from the Bank, and as such it must provide for its own liquidity. The Company is responsible for the payment of dividends declared for its common shareholders and payment of interest and principal on any outstanding debt or trust preferred securities. These obligations are met through internal capital resources such as service fees and dividends from the Bank, which are limited by applicable laws and regulations. 63 -------------------------------------------------------------------------------- Capital Resources The Bank is required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution's exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution's ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution's overall capital adequacy. In addition, the Bank is participating in the PPP and the PPPLF to fund PPP Loans. In accordance with regulatory guidance, PPP loans pledged as collateral for PPPLF, and PPPLF advances, are excluded from leverage capital ratios. PPP loans will also carry a 0% risk-weight for risk-based capital rules. The table below summarizes the capital requirements applicable to the Bank in order to be considered "well-capitalized" from a regulatory perspective, as well as the Bank's capital ratios as ofJune 30, 2020 andDecember 31, 2019 . The Bank exceeded all regulatory capital requirements and was considered to be "well-capitalized" as ofJune 30, 2020 andDecember 31, 2019 . There have been no conditions or events sinceDecember 31, 2019 that management believes would change this classification. While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted in future periods. Table 12 - Capital Ratio Requirements Minimum Requirement Well-capitalized¹ Risk-based ratios: Common equity tier 1 capital (CET1) 4.5 % 6.5 % Tier 1 capital 6.0 8.0 Total capital 8.0 10.0 Leverage ratio 4.0 5.0 (1) The prompt corrective action provisions are only applicable at the bank level. Table 13 - Capital Ratios Company June 30, 2020 December 31, 2019 CET1 risk-based capital ratio 10.26 % 10.33 % Tier 1 risk-based capital ratio 12.39 12.52 Total risk-based capital ratio 13.32 13.17 Leverage ratio 9.23 8.92 Colony Bank CET1 risk-based capital ratio 12.99 % 13.54 % Tier 1 risk-based capital ratio 12.99 13.52 Total risk-based capital ratio 13.92 14.19 Leverage ratio 9.70 9.77 64
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