COLONY BANKCORP: form 10-K) | MarketScreener
Management’s discussion and analysis of the financial position and operating results
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Item 6. - Selected Financial Data" and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and, assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under "Cautionary Note Regarding Forward-Looking Statements," "Risk Factors," and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected in the forward looking statements. We assume no obligation to update any of these forward-looking statements.
(collectively referred to as the Company), a wide range of products and services in the Central, South and Coast regions
December 10, 2020, the Company announced the strategic realignment of its branch network. As part of the realignment, select Colony Bankbranches will be consolidated, resulting in the closure of five branches, or a total of 18% of the Bank's branch network. The branches to be closed consist of one branch located in each of the Columbus, Douglas, Fitzgerald, Savannahand Valdostamarkets, by April 30, 2021. After the closures, Colony will continue to operate one branch location in each of the aforementioned markets except for the Savannahmarket, where Colony will operate two branch locations. On December 30, 2020, the Company completed the sale of its Thomastonbranch to SouthCrest Financial Group. Inc. The transaction resulted in the transfer of approximately $3 millionin fully performing loans and approximately $40 millionin deposits, with a deposit premium of 3%. The Company paid dividends to its shareholders throughout 2020 and 2019 on a quarterly basis. In 2020, we had a quarterly dividend of $0.10per common stock and in 2019, we had a quarterly dividend of $0.075per common stock.
GAAP reconciliation and management’s explanation of non-GAAP financial measures
Our accounting and reporting policies conform to generally accepted accounting principles (GAAP) in
the United Statesand prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the fully-taxable equivalent measures: tax-equivalent net interest income, tax-equivalent net interest margin and tax-equivalent net interest spread, which include the effects of taxable-equivalent adjustments using a federal income tax rate of 21% to increase tax-exempt interest income to a tax-equivalent basis. Tax-equivalent adjustments are reported in Notes 1 and 2 to the Average Balances with Average Yields and Rates table under Rate/Volume Analysis. Tangible common book value per common share and adjusted earnings per diluted share are also non-GAAP measures used in the Selected Financial Data section. Management believes that non-GAAP financial measures provide additional useful information that allows investors to evaluate the ongoing performance of the company and provide meaningful comparisons to its peers. Management believes these non-GAAP financial measures also enhance investors' ability to compare period-to-period financial results and allow investors and company management to view our operating results excluding the impact of items that are not reflective of the underlying operating performance. Tax-equivalent net interest income, net interest margin and net interest spread. Net interest income on a tax-equivalent basis is a non-GAAP measure that adjusts for the tax-favored status of net interest income from loans and investments. We believe this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin on a tax-equivalent basis is net interest income on a tax-equivalent basis divided by average interest-earning assets on a tax-equivalent basis. The most directly comparable financial measure calculated 35 -------------------------------------------------------------------------------- in accordance with GAAP is our net interest margin. Net interest spread on a tax-equivalent basis is the difference in the average yield on average interest-earning assets on a tax equivalent basis and the average rate paid on average interest-bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread. Tangible common book value per share, adjusted earning per diluted shares. Tangible common book value per share is a non-GAAP measure that excludes the effect of goodwill and other intangibles from book value per common share. The most directly comparable financial measure calculated in accordance with GAAP is our book value per common share. Adjusted earnings per diluted share excludes acquisition-related expenses, gain on the sale of the Thomastonbranch, a building writedown, and the income tax benefits related to such items from earnings per diluted share. The most directly comparable financial measure calculated in accordance with GAAP is our earnings per diluted share.
These non-GAAP financial measures should not be viewed as alternatives to GAAP financial statements, and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently.
A reconciliation of these performance measures to the GAAP performance measures is included in the tables below.
Reconciliation of non-GAAP performance measures
Years Ended December 31, 2020 2019 (dollars in thousands, except per share data) Operating noninterest expense reconciliation Operating net income reconciliation Net income (GAAP)
$ 11,815 $ 10,211Acquisition-related expenses 862 2,733 Gain on sale of Thomaston branch (1,026) - Writedown of Building 582 - Income tax benefit of expenses (88) (574) Operating net income $ 12,145 $ 12,370Weighted average diluted shares 9,498,783 9,129,705 Adjusted earnings per diluted share
Reconciliation of tangible book value per common share Book value per common share (GAAP)
$ 15.21 $ 13.74Effect of goodwill and other intangibles (1.95) (2.06) Tangible book value per common share 13.26 11.68 COVID-19 Pandemic During March 2020, the World Health Organizationdeclared 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 the Federal Reservehave taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law on March 27, 2020as a $2 trillionlegislative package. The goal of the CARES Act was 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 included 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. 36 -------------------------------------------------------------------------------- In response to the COVID-19 pandemic, the Company has prioritized the health and safety of its employees and customers, and continues to take protective measures during the ongoing COVID-19 pandemic, 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. Meanwhile, the Company remains focused on improving shareholder value, managing credit exposure, challenging expenses, enhancing the customer experience and supporting the communities it serves. We have implemented loan programs to allow customers who 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 of December 31, 2020, we had one commercial customer with outstanding loan balances totaling $1.9 millionwho had active payment deferrals. One loan totaling $1.9 millionwas in the hotel industry, which is one of the industries heavily impacted by the COVID-19 pandemic. In addition, we have been participating in the Paycheck Protection Program created under the CARES Act and implemented by the SBA to help provide loans to our business customers in need. As of December 31, 2020, the Company closed or approved with the SBA 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 ("PPPLF") to fund these PPP loans. Loan fees collected related to these loans was approximately $2.8 million. In accordance with U.S.generally accepted accounting principles (GAAP), these fees will be deferred and recognized over the life of the loans. As of February 28, 2021, the SBA had granted forgiveness for PPP loans totaling $58.5 million. The Economic Aid Act, signed into law on December 27, 2020, authorized an additional $284.5 billionin new PPP funding and extends the authority of lenders to make PPP loans through March 31, 2021. We are participating in this new round of PPP loan funding by offering first and second draw loans. As of February 28, 2021, the Company had approved and funded 410 PPP loans totaling $30.4 millionunder this new round of PPP loan funding. Despite improvements in certain economic indicators, significant constraints to commerce remain in place, and significant uncertainty remains over the timing of an effective and widely available coronavirus vaccine and the timing and scope of additional government stimulus packages. The duration and extent of the downturn and speed of the related recovery on our business, customers, and the economy as a whole remains uncertain.
The following discussion and analysis present the more significant factors affecting the Company's financial condition as of
December 31, 2020and 2019 and results of operations for each of the two year-periods ended December 31, 2020. 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 21% federal tax rate for 2020 and 2019 and, thus making tax-exempt yields comparable to taxable asset yields.
Dollar amounts in the tables are shown in thousands, except for per share amounts.
Results of operations
The Company's results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since market forces and economic conditions beyond the control of the Company determine interest rates, the ability to generate net interest income is dependent upon the Company's ability to obtain an adequate spread between the rate earned on interest-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 interest-earning assets. Net income available to common shareholders totaled
$11.8 million, or $1.24per diluted shares in 2020, compared to $10.2 million, or $1.12per diluted shares in 2019.
Net interest income
37 -------------------------------------------------------------------------------- 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 66.8% of total revenue during 2020 and 76.4% of total revenue during 2019.
The net interest margin is the equivalent taxable net interest income as a percentage of the average interest earning asset for the period. The level of interest rates and the volume and composition of interest-bearing assets and interest-bearing liabilities affect net interest income and the net interest margin.
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, was 3.25% and 4.75% as of
December 31, 2020and 2019, respectively. The Federal Reserve Boardsets general market rates of interest, including the deposit and loan rates offered by many financial institutions. During 2020, the prime interest rate decreased by 150 basis points. During 2019, the prime interest rate decreased overall by 50 basis points. The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of interest-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 Rate/Volume Analysis. 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 2019 to 2020 (a) (dollars in thousands) Volume Rate Total Interest income Loans, net of unearned fees $ 11,033 $ (5,695) $ 5,338Investment securities, taxable (937) (1,292) (2,229) Investment securities, exempt 494 (219) 275 Interest-bearing deposits 1,573 (2,191) (618) Total interest income 12,163 (9,397) 2,766 Interest expense Interest-Bearing Demand and Savings Deposits 980 (3,384) (2,404) Time Deposits (894) (1,152) (2,046) FHLB Advances (277) (26) (303) PPPLF - 205 205 Other Borrowings 197 (406) (209) Total interest expense 6 (4,763) (4,757) Net interest income $ 12,157 $ (4,634) $ 7,523(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. The Company maintains about 18.41% 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 non-maturing core deposits and short term certificates of deposit that mature within one year. During 2020, Federal Reserverates decreased 150 basis points. 38 --------------------------------------------------------------------------------
Taxable-equivalent net interest income for 2020 increased by
$7.5 millionor 15.7%, compared to 2019, due to an increase in loan fee income generated through PPP loan originations during 2020, which was approximately $2.8 million. The average volume of interest-earning assets during 2020 increased $257.4 millioncompared to 2019 while over the same period the net interest margin decreased 11 basis points to 3.50% from 3.61%. The change in the net interest margin in 2020 and 2019 was primarily driven by a higher level of low yielding assets offset by a decrease in the cost of funds, as well as downward pressure exerted from lower yielding PPP loans offset by lowering our borrowing costs during the year as well as lower interest on the level of deposits on our balance sheet. Growth in average earning assets during 2020 was primarily in loans and interest-bearing deposits in other banks related to the PPP loans originated and the acquisition of Home Builder Finance. The average volume of loans increased $195.9 millionin 2020 compared to 2019, which reflects both organic loan growth and growth in PPP loans. The increase in average volume for loans was funded primarily through an increase in Paycheck Protection Program Liquidity Facility and average customer deposits. The average yield on loans decreased 52 basis points in 2020 compared to 2019, due to lower yielding PPP loans originated and the reduction in prime rate of 150 points in 2020. The average volume of interest-bearing deposits increased $90.9 millionin 2020 compared to 2019. Average demand deposits increased $146.9 millionwhile average time deposits decreased $55.9 millionin 2020 compared to 2019.
Thus, the ratio of average interest-bearing deposits to total average deposits was 78.8% in 2020 and 82.6% in 2019. For 2020, this combination of deposits, combined with a general decline in interest rates , had the effect of (i) reducing the average cost of total deposits by 49 basis points in 2020 compared to 2019 and (ii) offsetting part of the impact of lower yields on interest-bearing assets on the Company’s net interest income.
The Company's net interest spread, which represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities, was stable at 3.37% and 3.39% in 2020 and 2019, respectively. 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 "Market Risk and Interest Rate Sensitivity" included elsewhere in this report. 39 --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS 2020 2019 Average Income/ Yields/ Average Income/ Yields/ (dollars in thousands) Balances Expense Rates Balances Expense Rates Assets Loans, net of unearned fees (1)
$ 1,092,009 $ 55,8025.11 % $ 896,098 $ 50,4645.63 % Investment securities, taxable 336,140 6,875 2.05 374,719 9,104
Investment securities, exempt (2) 17,070 331 1.94 1,737 56
Deposits in banks and short term investments 141,641 438 0.31 56,891 1,056 1.86 Total interest-earning assets 1,586,860 63,446 4.00 1,329,445 60,680 4.56 Total noninterest-earning assets 104,375 81,886 Total assets
$ 1,691,235 $ 1,411,331Liabilities and Stockholders' Equity Interest-bearing liabilities: Savings and interest-bearing demand deposits 787,030 1,870 0.24 % 640,180 4,274 0.67 % Time deposits 305,374 3,729 1.22 361,319 5,775 1.60 Total interest-bearing deposits $ 1,092,404 $ 5,5990.51 $ 1,001,499 $ 10,0491.00 FHLB advances 33,249 743 2.23 45,233 1,046 2.31 Paycheck Protection Program Liquidity Facility 90,768 205 0.23 - - - Other borrowings 38,527 1,333 3.46 34,159 1,542 4.51 Total interest-bearing liabilities 1,254,948 7,880 0.63 1,080,891 12,637
Noninterest-bearing demand deposits 294,008 208,320 Other liabilities 4,325 5,002 Stockholders' equity 137,954 117,118 Total liabilities and stockholders' equity
$ 1,691,235 $ 1,411,331Interest rate spread 3.37 % 3.39 % Net interest income $ 55,566 $ 48,043Net interest margin 3.50 % 3.61 % (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. Taxable-equivalent adjustments totaling $252,000and $182,000for the year ended December 31, 2020and 2019, respectively, are included in income and fees on loans. Accretion income of $763,000and $583,000for the year ended December 31, 2020and 2019 are also included in income and fees on loans. (2)Taxable-equivalent adjustments totaling $69,000and $11,000for the year ended December 31, 2020and 2019, respectively, are included in tax-exempt interest on investment securities. The adjustments are based on federal tax rate of 21% with appropriate reductions for the effect of disallowed interest expense incurred in carrying tax-exempt obligations.
Allowance 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
$6.6 millionin 2020 compared to $1.1 millionin 2019. See the section captioned "Allowance for Loan Losses" elsewhere in this discussion for further analysis of the provision for loan losses. The increase in provision for loan losses for the year ended December 31, 2020compared to the same periods in 2019 is largely due to the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic. Net charge-offs for the year ended December 31, 2020were $1.3 millioncompared to $1.5 millionfor the same period in 2019. As of December 31, 2020, Colony's allowance for loan losses was $12.1 million, or 1.14% of total loans, compared to $6.9 million, or 0.71% of total loans, at December 31, 2019. At December 31, 2020and 2019, nonperforming assets were $10.1 millionand $11.1 million, or 0.58% and 0.74% 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 year ended 2020. 40 --------------------------------------------------------------------------------
The components of non-interest income were as follows:
$ % (dollars in thousands) 2020 2019 Variance Variance Service charges on deposit accounts
$ 5,293 $ 5,593 $ (300)(5.36) % Mortgage fee income 9,149 3,199 5,950 186.00 Gain on sale of SBA loans 1,600 - 1,600 100.00 Gain on sale of securities 926 97 829 854.64 Gain on sale of assets 1,082 - 1,082 100.00 Interchange fees 4,988 3,768 1,220 32.38 BOLI income 743 536 207 38.62 Other 463 811 (348) (42.94) Total $ 24,244 $ 14,004 $ 10,24073.12 % Noninterest income increased $10.2 million, or 73.12% from 2019. The Company saw considerable increases in mortgage fee income, gain on sale of SBA loans, and interchange fees, off-set with a slight decrease in service charges on deposit accounts. The slight decrease in service charges on deposit accounts was partially attributable to a decrease in overdraft and service charge income as a result of continued lower customer spending due to the COVID-19 pandemic. The increase in mortgage fee income is primarily attributed to the opening of a new mortgage location in LaGrangeand the acquisition of the PFB Mortgage division of Planters 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 year ended December 31, 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 year ended December 31, 2020in response to the COVID-19 pandemic. The increase of $1.2 millionin interchange fees was a result of the perks program the Company offered from Discover®. The increase from gain on sale of SBA loans grew as the Bank was fully operational in this line of business in 2020. Noninterest Expense
The components of non-interest expenditure were as follows:
(dollars in thousands) 2020 2019 Variance
Salaries and Benefits
30.22 % Occupancy and equipment 5,311 4,850 461 9.51 Acquisition related expenses 862 2,733 (1,871) (68.46) Information technology 5,746 4,353 1,393 32.00 Professional Fees 2,250 2,191 59 2.69 Advertising and public relations 2,111 1,991 120 6.03 Communications 835 1,083 (248) (22.90) Writedown of building 582 - 582 100.00 FHLB prepayment penalty 925 - 925 100.00 Other 5,538 4,717 821 17.41 Total
$ 58,301 $ 48,136 $ 10,16521.12 % Increases in salaries and employee benefits, information technology expenses, the writedown of the Thomastonbranch and FHLB prepayment penalties accounted for the majority of the increase in noninterest expense, offset by a decrease in acquisition-related expenses. The increase in salaries and employee benefits of $7.9 millionin 2020 was primarily attributable to merit pay increases and a complete year of salaries from the two acquisitions completed in May 2019of LBC Bancshares, Incand PFB Mortgage. Information technology expenses increased $1.4 millionas the Company continues to invest in the Company's technology infrastructures. Other expense increased due to increases in FDICinsurance due to credits used in 2019, 41 --------------------------------------------------------------------------------
and loan expenses related to PPP lending activities. In order to improve the cost of funds and the company’s bottom line, the company repaid two higher rate FHLB advances in 2020, which were offset by securities gains recognized in 2020.
Sources and uses of funds
The following table illustrates, over the years presented, the composition of the company’s sources of funding and the assets in which these funds are invested as a percentage of the company’s average total assets for the period indicated. Total average assets
(dollars in thousands) 2020 2019 Sources of Funds: Noninterest-bearing deposits
$ 294,00817.38 % $ 208,32014.76 % Interest-bearing deposits 1,092,404 64.59 % 1,001,499 70.96 FHLB advances 33,249 1.97 % 45,233 3.20 PPPLF 90,768 5.37 % - - Other borrowings 38,527 2.28 % 34,159 2.42 Other noninterest-bearing liabilities 4,325 0.26 % 5,002 0.35 Equity capital 137,954 8.15 % 117,118 8.31 Total $ 1,691,235100.00 % $ 1,411,331100.00 % Uses of Funds: Loans held for sale and loans $ 1,092,00964.57 % $ 896,09863.49 % Investment securities 353,210 20.88 % 376,456 26.67 Deposits in banks and short term investments 141,641 8.38 % 56,891 4.03 Other noninterest-bearing assets 104,375 6.17 % 81,886 5.81 Total $ 1,691,235100.00 % $ 1,411,331100.00 %
Deposits remain the main source of funding for the company. During comparable periods, interest-bearing deposits continue to be the most important component in the composition of the Company’s deposits. Average interest-bearing deposits totaled 78.8% in 2020, compared to 82.6% of total average deposits in 2019.
The Company primarily invests funds in loans and securities. Loans continue to be the most important component of the company’s invested asset mix.
The following table shows the composition of the Company’s loan portfolio as of
December 31, December 31, December 31, December 31, December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Construction, land & land development
$ 121,093 $ 96,097
Other commercial real estate
520,391 540,239 435,961 418,669 415,768 Total commercial real estate 641,484 636,336 496,271 472,431 457,936 Residential real estate 183,021 194,796 187,592 193,924 195,486 Commercial , financial, & agricultural 213,380 114,360 74,166 64,523 64,074 Consumer & other 21,618 23,322 23,497 33,911 36,426 Total loans, net of unearned fees 1,059,503 968,814 781,526 764,789 753,922 Allowance for loan losses (12,127) (6,863) (7,277) (7,508) (8,923) Loans, net
$ 1,047,376 $ 961,951 $ 774,249 $ 757,281 $ 744,99942
Maturity and repricing opportunity
The following table presents total loans as of
December 31, 2020according to maturity distribution and/or repricing opportunity on adjustable rate loans. After one year After three One year through three years through Over five (dollars in thousands) or less years five years years Total Construction, land & land development $ 73,097 $ 28,243
Other commercial real estate
105,467 122,680 76,370 215,874 520,391 Total commercial real estate 178,564 150,923 79,404 232,593 641,484 Residential real estate 29,779 40,645 24,607 87,990 183,021 Commercial, financial, & agricultural 34,917 122,525 22,169 33,769 213,380 Consumer & other 4,660 8,668 6,214 2,076 21,618 Total loans, net of unearned fees 247,920 322,761 132,394 356,428 1,059,503 Overview. Loans totaled
$1.1 billionat December 31, 2020, up 9.4% from $968.8 millionat December 31, 2019. The majority of the Company's loan portfolio is comprised of the real estate loans. Commercial and residential real estate which is primarily 1-4 family residential properties, nonfarm nonresidential properties and real estate construction loans made up 77.8% and 85.8% of total loans at December 31, 2020and December 31, 2019, respectively. Commercial, financial, & agriculture represents another 20.1% of the population of the loans at December 31, 2020up from 11.8% of the population at December 31, 2019. The reason for the increase is primarily due to the PPP loan production during 2020, which was $101.1 millionin gross PPP loans at December 31, 2020. The PPP loans are included in our commercial, financial and agricultural loans. Loan origination/risk management. In accordance with the Company's decentralized banking model, loan decisions are made at the local bank level. The Company utilizes both an Executive Loan Committee and a Director Loan Committee to assist lenders with the decision making and underwriting process of larger loan requests. Due to the diverse economic markets served by the Company, evaluation and underwriting criterion may vary slightly by market. Overall, loans are extended after a review of the borrower's repayment ability, collateral adequacy, and overall credit worthiness. Commercial purpose, commercial real estate, and agricultural loans are underwritten similarly to how other loans are underwritten throughout the Company. The properties securing the Company's commercial real estate portfolio are diverse in terms of type and geographic location. In addition, the Company restricts total loans to $10 millionper borrower, subject to exception and approval by the Director Loan Committee. This diversity helps reduce the Company's exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans monthly based on collateral, geography, and risk grade criteria. The Company also utilizes information provided by third-party agencies to provide additional insight and guidance about economic conditions and trends affecting the markets it serves. The Company extends loans to builders and developers that are secured by non-owner occupied properties. In such cases, the Company reviews the overall economic conditions and trends for each market to determine the desirability of loans to be extended for residential construction and development. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim mini-perm loan commitment from the Company until permanent financing is obtained. In some cases, loans are extended for residential loan construction for speculative purposes and are based on the perceived present and future demand for housing in a particular market served by the Company. These loans are monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and trends, the demand for the properties, and the availability of long-term financing. The Company originates consumer loans at the bank level. Due to the diverse economic markets served by the Company, underwriting criterion may vary slightly by market. The Company is committed to serving the borrowing needs of all markets served and, in some cases, adjusts certain evaluation methods to meet the overall credit demographics of each market. Consumer loans represent relatively small loan amounts that are spread across many individual borrowers to help minimize risk. Additionally, consumer trends and outlook reports are reviewed by management on a regular basis.
The company uses an independent third party company to review loans and validate the credit risk program on an ongoing quarterly basis. The results of these reviews are presented to management and to the audit committee. The loan review
The process complements and reinforces the risk identification and assessment decisions made by lenders and credit staff, as well as company policies and procedures.
Commercial, financial and agricultural. Commercial and agricultural loans at
December 31, 2020increased 86.6% to $213.4 millionfrom December 31, 2019at $114.4 million. This increase was primarily attributable to the PPP loans which was $101.1 millionat December 31, 2020. The Company's commercial and agricultural loans are a diverse group of loans to small, medium and large businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment. While some short-term loans may be made on an unsecured basis, most are secured by the assets being financed with collateral margins that are consistent with the Company's loan policy guidelines.
Construction, land and land development. Construction, land and land use loans increased by
Other commercial real estate. Other commercial real estate loans decreased by
$19.8 million, or 3.7%, at December 31, 2020to $520.4 millionfrom $540.2 millionat December 31, 2019. This decrease was primarily attributable due to payoffs and amortization of the portfolio. Residential Real Estate Loans. Residential real estate loans decreased by $11.8 million, or 6.1%, at December 31, 2020to $183.0 millionfrom $194.8 millionat December 31, 2019. This decrease was primarily attributable to payoffs and amortization of the portfolio. Residential real estate loans consist of revolving, open-end and closed-end loans as well as those secured by closed-end first and junior liens. Consumer and other. Consumer and other loans include loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit. Consumer and other loans at December 31, 2020decreased 7.3% to $21.6 millionfrom $23.3 millionat December 31, 2019.This decrease was primarily attributable to payoffs and amortization of the portfolio. Industry concentrations. As of December 31, 2020and December 31, 2019, there were no concentrations of loans within any single industry in excess of 10% of total loans, as segregated by Standard Industrial Classification code ("SIC code"). The SIC code is a federally designed standard industrial numbering system used by the Company to categorize loans by the borrower's type of business. The Company has established industry-specific guidelines with respect to maximum loans permitted for each industry with which the Company does business. Collateral concentrations. Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions. The Company has a concentration in real estate loans as well as a geographic concentration that could pose an adverse credit risk, particularly with the current economic downturn in the real estate market. At December 31, 2020, approximately 77.8% of the Company's loan portfolio was concentrated in loans secured by real estate. A substantial portion of borrowers' ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector. In addition, a large portion of the Company's foreclosed assets are also located in these same geographic markets, making the recovery of the carrying amount of foreclosed assets susceptible to changes in market conditions. Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis. In recent years, we have seen real estate values stabilizing in our markets. The stabilization of rates has resulted in a decrease in the number of loans being classified as impaired over the past several years. Large credit relationships. The Company is currently in eighteen counties in central, south and coastal Georgiaand includes metropolitan markets in Dougherty, Lowndes, Houston, Chathamand Muscogeecounties. As a result, the Company originates and maintains large credit relationships with several commercial customers in the ordinary course of business. The Company considers large credit relationships to be those with commitments equal to or in excess of $5.0 millionprior to any portion being sold. Large relationships also include loan participations purchased if the credit relationship with the agent is equal to or in excess of $5.0 million. In addition to the Company's normal policies and procedures related to the origination of large credits, the Company's Executive Loan Committeeand Director Loan Committeemust approve all new and renewed credit facilities which are part of large credit relationships. At December 31, 2020,our largest 20 relationships consisted of loans and loan commitments, where the committed balance was $169.5 millionwith $120.8 millionoutstanding. At December 31, 2019,our largest 20 relationships had a committed balance of $174.8 millionwith $156.2 millionoutstanding. 44 -------------------------------------------------------------------------------- Maturities and sensitivities of loans to changes in interest rates. The following table presents the maturity distribution of the Company's loans at December 31, 2020. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index such as the prime rate. After Five Due in One After One, After Three, Years, but Year or but within but within within Fifteen After Fifteen
(dollars in thousands) Less Three Years Five Years Years Years Total Loans with fixed interest rates
$ 188,659 $ 305,720 $ 124,946 $ 230,287 $ 14,885 $ 864,497Loans with floating interest rates 59,098 17,040 7,448 75,659 35,761 195,006 Total $ 247,757 $ 322,760 $ 132,394 $ 305,946 $ 50,646 $ 1,059,503The Company may renew loans at maturity when requested by a customer whose financial strength appears to support such renewal or when such renewal appears to be in the Company's best interest. In such instances, the Company generally requires payment of accrued interest and may adjust the rate of interest, require a principal reduction or modify other terms of the loan at the time of renewal.
Potential nonperforming assets and problematic loans
Asset quality remained somewhat stable during the year
December 31, 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"). Pursuant to the provisions of the CARES Act, 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 of December 31, 2020. Nonaccrual loans totaled $9.1 millionat December 31, 2020, a decrease of $699,000, or 7.1%, from $9.8 millionat December 31, 2019. There were no loans contractually past due 90 days or more and still accruing for either period presented. At December 31, 2020, OREO totaled $1.0 million, a decrease of $314,000, or 23.8%, compared with $1.3 millionat December 31, 2019. The change in OREO is a combination of sales of assets during 2020 offset by asset additions. At the end of the year ended December 31 2020, total nonperforming assets as a percent of total assets decreased to 0.58% compared with 0.74% at December 31, 2019. At December 31, 2020, 5.2% of the Company's loan portfolio, or $62.7 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. 45 --------------------------------------------------------------------------------
Year-end nonperforming assets and delinquent loans were as follows:
(dollars in thousands) 2020 2019 2018 2017 2016 Loans accounted for on nonaccrual
$ 9,128 $ 9,827 $ 9,482 $ 7,503 $ 12,350Loans accruing past due 90 days or more - - - - - Other real estate foreclosed 1,006 1,320 1,841 4,256 6,439 Total nonperforming assets $ 10,134 $ 11,147
Nonperforming loans by segment Construction, land & land development
$ 197 $ 128 $ 883 $ 2,630 $ 3,376Commercial real estate 4,613 3,772 5,874 4,635 9,982 Residential real estate 2,958 3,728 3,299 3,309 4,375 Commercial, financial & agricultural 1,065 2,061 1,267 1,185 1,056 Consumer & other 295 138 - - - Total nonperforming loans $ 9,128 $ 9,827
Nonperforming assets as a percentage of: Total loans and other real estate foreclosed assets 0.96 % 1.15 % 1.44 % 1.53 % 2.47 % Total assets 0.58 % 0.74 % 0.90 % 0.95 % 1.55 % Nonperforming loans as a percentage of: Total loans 0.86 % 1.01 % 1.21 % 0.98 % 1.64 % Supplemental data: Trouble debt restructured loans in compliance with modified terms (1)
$ 12,320 $ 12,337 $ 14,128 $ 18,363 $ 17,992Trouble debt restructured loans Past due 30-89 days (1) 273 - 864 131 319 Accruing past due loans: 30-89 days past due (1) $ 3,092 $ 2,615 $ 8,234 $ 4,558 $ 4,46990 or more days past due - - - - - Total accruing past due loans $ 3,092 $ 2,615
Allowance for loan losses
$ 12,127 $ 6,863 $ 7,277 $ 7,508 $ 8,923Allowance for loan losses as a percentage of: Total loans 1.14 % 0.71 % 0.93 % 0.98 % 1.18 % Nonperforming loans 132.85 69.84 76.74 100.06 72.25 (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 of December 31, 2020.
Nonperforming assets include uncriminated loans, loans 90 days or more past due, foreclosed real estate, and uncriminated securities. Non-performing assets at
46 -------------------------------------------------------------------------------- Generally, loans are placed on nonaccrual 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 nonaccrual status whether or not the loan is 90 days or more past due. For consumer loans, collectability and loss are generally determined before the loan reaches 90 days past due. Accordingly, losses on consumer loans are recorded at the time they are determined. Consumer loans that are 90 days or more past due are generally either in liquidation/payment status or bankruptcy awaiting confirmation of a plan. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts 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. 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. At
December 31, 2020, TDRs totaled $12.6 million, a slight increase from $12.3 millionreported December 31, 2019. At December 31, 2020and 2019, all TDRs were performing according to their modified terms and were therefore not considered to be nonperforming assets. In March 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 borrowers who were current prior to any relief, are not to be considered TDRs. As of December 31, 2020, the Company had approximately $1.9 millionin 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 included in this Annual Report for more information regarding accounting treatment of loan modifications as a response to the COVID-19 pandemic. Troubled debt restructured loans are loans on which, due to deterioration in the borrower's financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven. Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties.
Allowance for loan losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The allowance for loan losses includes allowance allocations calculated in accordance with current
U.S.accounting standards. The level of the allowance reflects management's continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company's control, including the performance of the Company's loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The Company's allowance for loan losses consists of specific valuation allowances established for probable losses on specific loans and historical valuation allowances for other loans with similar risk characteristics. The allowances established for probable losses on specific loans are the result of management's quarterly review of substandard loans with an outstanding balance of $250,000or more. This review process usually involves regional credit officers along with local lending officers reviewing the loans for impairment. Specific valuation allowances are determined after considering the borrower's financial condition, collateral deficiencies, and economic conditions affecting the borrower's industry, among other things. In the case of collateral dependent loans, collateral shortfall is most often based upon local market real estate value estimates. This review process is performed at the subsidiary bank level and is reviewed at the parent Company level. Once the loan becomes impaired, it is removed from the pool of loans covered by the general reserve and reviewed individually for exposure as described above. In cases where the individual review reveals no exposure, no reserve is recorded for that loan, 47 -------------------------------------------------------------------------------- either through an individual reserve or through a general reserve. If, however, the individual review of the loan does indicate some exposure, management often charges off this exposure, rather than recording a specific reserve. In these instances, a loan which becomes nonperforming could actually reduce the allowance for loan losses. Those loans deemed uncollectible are transferred to our problem loan department for workout, foreclosure and/or liquidation. The problem loan department obtains a current appraisal on the property in order to record the fair market value (less selling expenses) when the property is foreclosed on and moved into other real estate. The allowances established for the remainder of the loan portfolio are based on historical loss factors, adjusted for certain qualitative factors, which are applied to groups of loans with similar risk characteristics. Loans are segregated into fifteen separate groups based on call codes. Most of the Company's charge-offs during the past two years have been real estate dependent loans. The historical loss ratios applied to these groups of loans are updated quarterly based on actual charge-off experience. The historical loss ratios are further adjusted by qualitative factors. Management evaluates the adequacy of the allowance for each of these components on a quarterly basis. Peer comparisons, industry comparisons, and regulatory guidelines are also used in the determination of the general valuation allowance. Loans identified as losses by management, internal loan review, and/or bank examiners are charged off. Additional information about the Company's allowance for loan losses is provided in the Notes to the Consolidated Financial Statements for Allowance for Loan Losses. The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. The allocation of the allowance to each category is subjective and is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category. December 31, December 31, December 31, December 31, December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Reserve %(1) Reserve %(1) Reserve %(1)
Reserve %(1) Reserve %(1) Construction, land & land development
$ 1,01311.4 % $ 2159.9 % $ 1317.7 % $ 1,2167.0 % $ 7116.5 % Commercial real estate 6,880 49.1 %
3,908 55.8 % 5,251 55.8 % 4,654 54.7 % 4,763 53.8 % Residential real estate 2,278 17.3 % 980 20.1 % 1,181 24.0 % 968 25.4 % 1,990 26.0 % Commercial , financial, & agricultural 1,713 20.1 % 1,657 11.8 % 618 9.5 % 633 8.4 % 1,058 8.8 % Consumer & other 243 2.1 % 103 2.4 % 96 3.0 % 37 4.4 % 82 4.9 %
$ 12,127100.0 % $ 6,863100.0 % $ 7,277100.0 % $ 7,508100.0 % $ 8,604100.0 %
(1) The percentage represents the loan balance in each category expressed as a percentage of the total end of period loans.
The following table provides an analysis of the Company’s experience with loan losses for the periods indicated.
48 -------------------------------------------------------------------------------- (dollars in thousands) 2020 2019 2018 2017 2016 Allowance for loan losses at beginning of year
$ 6,863 $ 7,277 $ 7,508 $ 8,923 $ 8,604Charge-offs Construction, land & land development 4 29 - 52 25 Commercial real estate 226 119 257 1,027 1,112 Residential real estate 206 758 162 1,048 362 Commercial , financial, & agricultural 242 403 247 458 324 Consumer & other 1,103 784 299 330 265 Total charge-offs $ 1,781 $ 2,093 $ 965 $ 2,915 $ 2,088Recoveries Construction, land & land development 45 82 155 266 814 Commercial real estate 153 218 52 544 351 Residential real estate 142 174 91 82 50 Commercial , financial, & agricultural 43 36 161 141 71 Consumer & other 104 65 74 77 59 Total recoveries 487 575 533 1,110 1,345 Net charge-offs 1,294 1,518 432 1,805 743 Provision for loans losses 6,558 1,104 201 390 1,062 Allowance for loan losses at end of year $ 12,127 $ 6,863
Ratio of net charge-offs to average loans 0.12 % 0.11 % 0.04 % 0.15 % 0.06 % The allowance for loan losses increased from
$6.9 million, or 0.71% of total loans at December 31, 2019to $12.1 million, or 1.14% of total loans at December 31, 2020. Excluding outstanding PPP loans of $101.1 millionas of December 31, 2020, the allowance for loan losses as a percentage of total loans was 1.27%. The allowance for loan losses allocated 0.10% of the balance to our PPP loan portfolio at December 31, 2020. The provision for loan losses reflects loan quality trends, including the level of net charge-offs or recoveries, among other factors. Social and economic disruption in response to the COVID-19 pandemic continue to result in businesses closures and job losses during the year ended 2020. Net charge-off's improved by $224,000from $1.5 millionin 2019 to $1.3 millionin 2020, but management believes there continues to be a weakness in certain sectors. As such, additional qualitative measures were incorporated as part of the December 31, 2020allowance for loan losses calculation for the economic uncertainties caused by the COVID-19 pandemic, which was the primary cause for the increase to the provision for loan losses during the year ended December 31, 2020compared to the same period 2019. Additional reserves were also allocated to the non-owner occupied commercial real estate pools due to economic impacts in the retail and hospitality sectors. Other changes to the allowance of loan losses were a result of new internal procedures for impairment analysis which appropriately reflect loss potential within the individually tested loans. This change resulted in an increase of $503,000in required reserves. Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio as of December 31, 2020. The continuing impact of the COVID-19 pandemic during 2020 leading to significant market changes, high levels of unemployment and increasing degrees of uncertainty in the U.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. Investment Portfolio
The following table shows the book value of investment securities held by the company at
(dollars in thousands) 2020 2019 2018 U.S. treasury securities
$ 245$ - $ - U.S agency 1,004 - -
State, departmental and municipal titles 62,388 5,115
3,989 Corporate debt securities 4,250 2,806 2,872 Mortgage-backed securities 312,927 339,411 346,205 Total debt securities
$ 380,814 $ 347,332 $ 353,066The following table represents expected maturities and weighted-average yields of investment securities held by the Company as of December 31, 2020(mortgage-backed securities are based on the average life at the projected speed, while State and Political Subdivisions reflect anticipated calls being exercised). After 1 Year But After 5 Years But Within 1 Year Within 5 Years Within 10 Years After 10 Years (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield U. S. Treasury securities $ 2451.70 % $ - - % $ - - % $ - - % U.S. Agency - - - - 1,004 0.75 - - State, county and municipal securities 141 2.11 1,968 1.58 15,246 1.49 45,033 1.88 Corporate debt securities - - 2,001 4.04 2,249 5.56 - - Mortgage-backed securities - - 7,555 3.08 92,368 2.05 213,004 1.59 Total debt securities $ 3861.85 % $ 11,5242.99 % $ 110,8672.03 % $ 258,0371.64 % Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. The Company has 100% of its portfolio classified as available for sale. At December 31, 2020, there were no holdings of any one issuer, other than the U.S.government and its agencies, in an amount greater than 10% of the Company's stockholders' equity.
The average return on the securities portfolio was 2.04% in 2020 and 2.43% in 2019. The decrease in the average return from 2020 to 2019 was mainly due to the purchase of new lower yielding securities.
The following table shows the average outstanding amount and the average rate paid on deposits by the Company for the years 2020, 2019 and 2018.
2020 2019 2018 Average Average Average Average Average Average (dollars in thousands) Amount Rate Amount Rate Amount Rate Noninterest-bearing demand deposits
$ 294,008- $ 208,320- $ 173,442- Interest-bearing demand and savings deposits 787,030 0.24 % 640,180 0.67 % 534,887 0.52 % Time deposits 305,374 1.22 % 361,319 1.60 % 326,243 1.01 % Total deposits $ 1,386,4120.40 % $ 1,209,8190.83 % $ 1,034,5720.59 %
The following table shows the maturities of the Company’s term deposits at
Time Time Deposits Deposits
$250,000Less than (dollars in thousands) or Greater $250,000Total Months to Maturity 3 or less $ 4,886 $ 43,677 $ 48,563Over 3 through 6 11,069 40,642 51,711 Over 6 through 12 8,731 72,603 81,334 Over 12 Months 10,219 69,787 80,006 $ 34,905 $ 226,709 $ 261,614Average deposits increased $176.6 millionin 2020 compared to 2019. The increase in 2020 included $146.9 millionor 22.9% in interest-bearing demand and savings deposits while, at the same time noninterest bearing deposits increased $85.7 million, or 41.1% and time deposits decreased $55.9 million, or 15.5%. 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. The Company supplements deposit sources with brokered deposits. As of December 31, 2020, the Company had $1.1 million, or 0.1% of total deposits, in brokered certificates of deposit attracted by external third parties. Additional information is provided in the Notes to Consolidated Financial Statements for Deposits.
Off-balance sheet arrangements and contractual obligations
In the ordinary course of business, our Bank has granted commitments to extend credit to approved customers. Generally, these commitments to extend credit have been granted on a temporary basis for seasonal or inventory requirements or for construction period financing and have been approved within the Bank's credit guidelines. Our Bank has also granted commitments to approved customers for financial standby letters of credit. These commitments are recorded in the financial statements when funds are disbursed or the financial instruments become payable. The Bank uses the same credit policies for these off-balance-sheet commitments as it does for financial instruments that are recorded in the consolidated financial statements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The following table summarizes the commitments and contractual obligations in progress at
(dollars in thousands) Payments Due by Period Less Than 1 More Than 5 Total Year 1 - 3 Years 3 - 5 Years Years Contractual Obligations: Borrowings
$167,081 $5,313 $109,789 $12,750 $39,229Operating lease liabilities $517143 202 90 82 Time Deposits $261,614181,609 70,793 8,650 562 429,212 187,065 180,784 21,490 39,873 Other Commitments: Loan commitments 198,029 148,957 21,512 2,415 25,145 Standby letters of credit 3,634 3,351 283 - - 201,663 152,308 21,795 2,415 25,145 Total Contractual Obligations and Other Commitments $ 630,875 $ 339,373 $ 202,579 $ 23,905 $ 65,01851
-------------------------------------------------------------------------------- In the ordinary course of business, the Company has entered into off-balance sheet financial instruments which are not reflected in the consolidated financial statements. These instruments include commitments to extend credit, standby letters of credit, performance letters of credit, guarantees and liability for assets held in trust. Such financial instruments are recorded in the financial statements when funds are disbursed or the instruments become payable. The Company uses the same credit policies for these off-balance sheet financial instruments as they do for instruments that are recorded in the consolidated financial statements. Loan Commitments. The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Company's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Loan commitments outstanding at
December 31, 2020are included in the preceding table. Standby Letters of Credit. Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. The Company's policies generally require that standby letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. Standby letters of credit outstanding at December 31, 2020are included in the preceding table.
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. For more information, see "Item 1. Business - Supervision and Regulation - Regulation of the Company - Capital Requirements." At
December 31, 2020, shareholders' equity totaled $144.5 millioncompared to $130.5 millionat December 31, 2019. In addition to net income of $11.8 million, other significant changes in shareholders' equity during 2020 included $3.8 millionof dividends declared on common stock. The accumulated other comprehensive loss component of stockholders' equity totaled $6.8 millionat December 31, 2020compared to $362,000at December 31, 2019. This fluctuation was mostly related to the after-tax effect of changes in the fair value of securities available for sale. Under regulatory requirements, the unrealized gain or loss on securities available for sale does not increase or reduce regulatory capital and is not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure Tier 1 and total capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. Tier 1 capital consists of common stock and qualifying preferred stockholders' equity less goodwill and disallowed deferred tax assets. Tier 2 capital consists of certain convertible, subordinated and other qualifying debt and the allowance for loan losses up to 1.25% of risk-weighted assets. The Company has no Tier 2 capital other than the allowance for loan losses. Using the capital requirements presently in effect, the Tier 1 ratio as of December 31, 2020was 12.71% and total Tier 1 and 2 risk-based capital was 13.78%. Both of these measures compare favorably with the regulatory minimum of 6% for Tier 1 and 8% for total risk-based capital. The Company's common equity Tier 1 ratio as of December 31, 2020was 10.62%, which exceeds the regulatory minimum of 4.50%. The Company's Tier 1 leverage ratio as of December 31, 2020was 8.49%, which exceeds the required ratio standard of 4%. 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. 52 --------------------------------------------------------------------------------
For the year ended
representing 8.2% of the average assets for the year. This compares to the average capital of
For the past years
A cash dividend of
Although the company believes it has sufficient capital to withstand a prolonged economic recession caused by COVID-19, its reported and regulatory capital ratios could be adversely affected in future periods. Additional information is provided in the notes to the consolidated financial statements for preferred shares and warrants.
The Company, primarily through the actions of its subsidiary bank, engages in liquidity management to ensure adequate cash flow for deposit withdrawals, credit commitments and repayments of borrowed funds. Needs are met through loan repayments, net interest and fee income and the sale or maturity of existing assets. In addition, liquidity is continuously provided through the acquisition of new deposits, the renewal of maturing deposits and external borrowings. Cash and cash equivalents at
December 31, 2020and 2019 were $183.5 millionand $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 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. Management monitors deposit flow and evaluates alternate pricing structures to retain and grow deposits. To the extent needed to fund loan demand, traditional local deposit funding sources are supplemented by the use of FHLB borrowings, brokered deposits and other wholesale deposit sources outside the immediate market area. Internal policies have been updated to monitor the use of various core and non-core funding sources, and to balance ready access with risk and cost. Through various asset/liability management strategies, a balance is maintained among goals of liquidity, safety and earnings potential. Internal policies that are consistent with regulatory liquidity guidelines are monitored and enforced by the Bank. The investment portfolio provides a ready means to raise cash if liquidity needs arise. As of December 31, 2020, the available for sale bond portfolio totaled $380.8 million. At December 31, 2019, the available for sale bond portfolio totaled $347.3 million. Only marketable investment grade bonds are purchased. Although approximately half of the Bank's bond portfolio is encumbered as pledges to secure various public funds deposits, repurchase agreements, and for other purposes, management can restructure and free up investment securities for sale if required to meet liquidity needs. Management continually monitors the relationship of loans to deposits as it primarily determines the Company's liquidity posture. Colony had ratios of loans to deposits of 73.3% as of December 31, 2020and 74.9% as of December 31, 2019. Management employs alternative funding sources when deposit balances will not meet loan demands. The ratios of loans to all funding sources (excluding Subordinated Debentures) at December 31, 2020and December 31, 2019were 66.7% and 71.5%, respectively. Management continues to emphasize programs to generate local core deposits as our Company's primary funding sources. The stability of the Banks' core deposit base is an important factor in Colony's liquidity position. A heavy percentage of the deposit base is comprised of accounts of individuals and small businesses with comprehensive banking relationships and limited volatility. At December 31, 2020and December 31, 2019, the Bank had $34.9 millionand $55.7 million, respectively, in certificates of deposit of $250,000or more. These larger deposits represented 2.4% and 4.3% of total deposits as of December 31, 2020and 2019, respectively. Management seeks to monitor and control the use of these larger certificates, which tend to be more volatile in nature, to ensure an adequate supply of funds as needed. Relative interest costs to attract local core relationships are compared to market rates of interest on various external deposit sources to help minimize the Company's overall cost of funds.
The company supplemented the sources of deposits with negotiated deposits. From
53 -------------------------------------------------------------------------------- regarding these brokered deposits. Additionally, the Company uses external deposit listing services to obtain out-of-market certificates of deposit at competitive interest rates when funding is needed. The deposits obtained from listing services are often referred to as wholesale or internet CDs. As of
December 31, 2020, the Company had $100,000in internet certificates of deposit obtained through deposit listing services. To plan for contingent sources of funding not satisfied by both local and out-of-market deposit balances, Colony and its subsidiary have established multiple borrowing sources to augment their funds management. The Company has borrowing capacity through membership of the Federal Home Loan Bankprogram. The Bank has also established overnight borrowing for Federal Funds Purchased through various correspondent banks. Management believes the various funding sources discussed above are adequate to meet the Company's liquidity needs in the future without any material adverse impact on operating results. At December 31, 2020and 2019, we had $22.5 millionand $47.0 million, respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had $416.1 millionand $321.4 millionof additional borrowing availability with the FHLB at December 31, 2020and 2019, respectively. In addition, on April 20, 2020, the Company completed a Paycheck Protection Program Liquidity Facility credit arrangement with The Federal 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. An advance of $140.7 millionobtained through the PPPLF arrangement was used for funding PPP loans during the second quarter of 2020, subsequently, during the same month during the second quarter 2020, a repayment of $6.2 millionwas made upon the determination of a final number of PPP loans to be funded. As of December 31, 2020, the outstanding balance totaled $106.8 million, and the Company's PPP loans and related PPPLF funding had a weighted average life of approximately 1.35 years. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of balance sheet structure, the ability to liquidate assets, and the availability of alternative sources of funds. The Company seeks to ensure its funding needs are met by maintaining a level of liquid funds through asset/liability management. Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, securities available for sale and federal funds sold and securities purchased under resale agreements. Liability liquidity is provided by access to funding sources which include core deposits. Should the need arise, the Company also maintains relationships with the Federal Home Loan Bank, Federal Reserve Bank, two correspondent banks and repurchase agreement lines that can provide funds on short notice.
As Colony is a bank holding company and does not conduct operations, its main sources of liquidity are upstream dividends from the subsidiary bank and borrowings from outside sources.
The liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company's liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented, would have a material adverse effect on the Company.
Impact of inflation and price trends
The Company's financial statements included herein have been prepared in accordance with accounting principles generally accepted in
the United States(GAAP). GAAP presently requires the Company to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Company is reflected in increased operating costs, though given recent economic conditions, the Company has not experienced any material effects of inflation during the last three fiscal years. In management's opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United Statesgovernment, its agencies and various other governmental regulatory authorities, among other things, as further discussed in the next section. 54 --------------------------------------------------------------------------------
Regulatory and economic policies
The Company's business and earnings are affected by general and local economic conditions and by the monetary and fiscal policies of
the United Statesgovernment, its agencies and various other governmental regulatory authorities, among other things. The Federal Reserve Boardregulates the supply of money in order to influence general economic conditions. Among the instruments of monetary policy available to the Federal Reserve Boardare (i) conducting open market operations in United Statesgovernment obligations, (ii) changing the discount rate on financial institution borrowings, (iii) imposing or changing reserve requirements against financial institution deposits, and (iv) restricting certain borrowings and imposing or changing reserve requirements against certain borrowings by financial institutions and their affiliates. These methods are used in varying degrees and combinations to affect directly the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the Federal Reserve Boardhave a material effect on the earnings of the Company. Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future; however, the Company cannot accurately predict the nature, timing or extent of any effect such policies may have on its future business and earnings.
Recently published accounting statements
See note 1 – Summary of significant accounting policies included in the notes to the consolidated financial statements.
Market risk and sensitivity to interest 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. 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 Risk Management Committee which includes senior management representatives. The Risk Management Committee 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 by our Risk Management Committee. 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 Financialto 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 3 ½ - 5 ½ year range. Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either reduced current market values or reduced current and potential net income. Colony's most significant market risk is interest rate risk. This risk arises primarily from Colony's extension of loans and acceptance of deposits. Managing interest rate risk is a primary goal of the asset liability management function. Colony attempts to achieve stability in net interest income while limiting volatility arising from changes in interest rates. Colony seeks to achieve this goal by balancing the maturity and repricing characteristics of assets and liabilities. Colony manages its exposure to fluctuations in interest rates through policies established by the Risk Management Committee and approved by the Board of Directors. The Risk Management Committee meets at least quarterly and has responsibility for developing asset liability management policies, reviewing the interest rate sensitivity of Colony, and developing and implementing strategies to improve balance sheet structure and interest rate risk positioning. 55 -------------------------------------------------------------------------------- Colony measures the sensitivity of net interest income to changes in market interest rates through the utilization of Asset/Liability simulation modeling. On at least a quarterly basis, the following twenty-four month time period is simulated to determine a baseline net interest income forecast and the sensitivity of this forecast to changes in interest rates. These simulations include all of Colony's earning assets and liabilities. Forecasted balance sheet changes, primarily reflecting loan and deposit growth and forecasts, are included in the periods modeled. Projected rates for loans and deposits are based on management's outlook and local market conditions. The magnitude and velocity of rate changes among the various asset and liability groups exhibit different characteristics for each possible interest rate scenario; additionally, customer loan and deposit preferences can vary in response to changing interest rates. Simulation modeling enables Colony to capture the expected effect of these differences. Assumptions utilized in the model are updated on an ongoing basis and are reviewed and approved by the Risk Management Committee of the Board of Directors. Colony has modeled its baseline net interest income forecast assuming a flat interest rate environment with the federal funds rate at the Federal Reserve'stargeted range of 0.25% and the prime rate of 3.25% at December 31, 2020. Colony has modeled the impact of a gradual increase in short-term rates of 100 and 200 basis points and a decline of 100 basis points to determine the sensitivity of net interest income for the next twelve months. As illustrated in the table below, the net interest income sensitivity model indicates that, compared with a net interest income forecast assuming stable rates, net interest income is projected to increase by 6.71% and 12.55% if interest rates increased by 100 and 200 basis points, respectively. Net interest income is projected to decline by 2.91% if interest rates decreased by 100 basis points. These changes were within Colony's policy limit of a maximum 15% negative change.
Twelve-month net interest income sensitivity
Estimated change in net interest
Change in Short-term Interest Rates (in basis points) 2020 2019 +200 12.55% 3.87% +100 6.71% 2.54% Flat -% -% -100 -2.91% -4.12% The measured interest rate sensitivity indicates an asset sensitive position over the next year, which could serve to improve net interest income in a rising interest rate environment. The actual realized change in net interest income would depend on several factors, some of which could serve to reduce or eliminate the asset sensitivity noted above. These factors include a higher than projected level of deposit customer migration to higher cost deposits, such as certificates of deposit, which would increase total interest expense and serve to reduce the realized level of asset sensitivity. Another factor which could impact the realized interest rate sensitivity in a rising rate environment is the repricing behavior of interest bearing non-maturity deposits. Assumptions for repricing are expressed as a beta relative to the change in the prime rate. For instance, a 25% beta would correspond to a deposit rate that would increase 0.25% for every 1% increase in the prime rate. Projected betas for interest bearing non-maturity deposit repricing are a key component of determining the Company's interest rate risk position. Should realized betas be higher than projected betas, the expected benefit from higher interest rates would be reduced. Colony is also subject to market risk in certain of its fee income business lines. Mortgage banking income is subject to market risk. Mortgage loan originations are sensitive to levels of mortgage interest rates and therefore, mortgage banking income could be negatively impacted during a period of rising interest rates. The extension of commitments to customers to fund mortgage loans also subjects Colony to market risk. This risk is primarily created by the time period between making the commitment and closing and delivering the loan. Colony seeks to minimize this exposure by utilizing various risk management tools, the primary of which are forward sales commitments and best efforts commitments. In addition to interest rate risk, the recent COVID-19 pandemic and the related stay-at-home and self-distancing mandates will likely expose us to additional market value risk. Protracted closures, furloughs and lay-offs have curtailed economic activity, and will likely continue to curtail economic activity and could result in lower fair values for collateral in our loan portfolio. 56 --------------------------------------------------------------------------------
Quantitative and qualitative information on market risk
The information required by this item can be found in item 7 under the heading Market risk and sensitivity to interest rates.
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