2023-07-07 10:30:00 ET
Summary
- Colony Bankcorp, Inc. is a small Georgia-focused regional bank with about $3B in assets on the balance sheet.
- The net interest margin will likely decrease just a little bit more but should stabilize soon.
- The bank targets a 1% ROA by year-end and 1.20% in the longer run. This should boost the EPS tremendously.
Introduction
It hasn’t been an easy first semester for most regional banks, but that also means that in certain cases opportunities may present themselves as the markets "punished" most regional banks after the collapse of the three banks in the past few months.
Colony Bankcorp, Inc. (CBAN) (hereafter "Colony") is a small regional bank in Georgia with a current market capitalization of just under $175M and a total of $3B in assets on the balance sheet. And although this regional bank will face the same issues as most of its peers (a contracting net interest margin as the rent hikes are happening faster than anticipated), I think there’s a lot to like here.
While the net interest margin will remain under pressure, Colony reports decent profits
In the first quarter of this year, Colony reported a total interest income of $28.4M , an increase of approximately 40% compared to the first quarter of last year. Meanwhile, the interest expenses more than seven-folded and came in at $7.8M.
This doesn’t necessarily have to be a major issue, as the net interest income still increased by approximately 7% to $20.6M and as the net interest margin (shown above) remained relatively stable. Sure, a 15 bp QoQ decrease is never fun, but the bank made it clear it expects its full-year net interest margin to remain in the high-2% range or low 3% range. That’s encouraging, as it means the worst of the contraction already appears to be behind us.
Of course, running a bank consists of more than just keeping an eye on the net interest margin and the net interest income. The Georgia-based bank also reported a $7.7M non-interest income and a $21.2M non-interest expense for a total of $13.5M in net non-interest expenses. Combine this with the $0.9M loan loss provision and the $20.6M net interest income, and the pretax income was just $6.2M.
The net income was $5.04M, which works out to $0.29 per share. As the bank currently pays a $0.11 quarterly dividend, the dividend is obviously fully covered with a payout ratio of less than 40%. Meanwhile the dividend yield currently exceeds 4.5% due to the bank’s relatively low share price.
The loan book looks pretty robust
Despite the strong results, Colony’s share price remains below $10, which represents an earnings multiple of just 8 based on the Q1 EPS. Meanwhile, the book value per share is $13.58 and even the tangible book value was approximately $10.49/share (defined as equity minus goodwill and other intangible assets), which means the stock is trading at a discount of 10% to the TBV.
Perhaps the market has its reservations on the balance sheet, but Colony Bankcorp has a CET1 capital ratio of approximately 11% and the capital ratio has remained pretty stable, as Colony retains about 60% of its net income.
Colony Bankcorp Investor Relations
Additionally, the bank has excellent access to liquidity. As of the end of Q1, Colony had about $82M in cash and cash equivalents, $435M in securities available for sale and $464M in securities held to maturity. This means that about $981M of the assets (in excess of 30%) are held in what should be very liquid assets. As the total amount of deposits is just $2.52B, almost 40% of the deposits are held in cash and liquid securities.
Also important, the unrealized losses on the securities held to maturity is "just" $45M. So even if the bank would have to liquidate all securities right away, it would still generate in excess of $850M in net proceeds. This means liquidity shouldn’t really be an issue. And as you can see below, the total access to liquidity is approximately $1.3B.
Colony Bankcorp Investor Relations
I also wanted to have a closer look at the loan book. And perhaps the market is mainly worried about the sizeable exposure (about 70%) to commercial real estate. As you can see below, almost $1.25B of the loan book is classified as commercial real estate.
That being said, of the $1.8B in loans, $1.79B is current. As you can see below, only $7.2M of the loans are classified as non-accruing while an additional $4.8M of the loans are past due.
Fortunately Colony Bankcorp is pretty strict when it comes to issuing new loans and the average LTV ratio of the non owner occupied commercial real estate was less than 52% as of the end of the first quarter. And that non-owner occupied CRE accounted for in excess of $500M of the total loan book. This essentially means the $500M in non-owner occupied CRE is backed by $1B in real estate (of course, it will be debatable what the current market value is of the CRE).
Colony Bankcorp Investor Relations
In any case, Colony’s exposure to office loans remains limited to $186M, with an average LTV in the mid-50s as well.
Investment thesis
While I will obviously have to keep an eye on the bank’s loan book and the total amount of loans past due and non-accruing loans, Colony Bankcorp, Inc. has very clear objectives. One of the most interesting elements is its push to have a return on assets of 1% by the end of this year. With $3B in assets, this would imply an annualized net income of $30M or $1.70 per share. Additionally, its longer term objectives are to generate a ROA of 1.20%.
This would indicate that as the total asset base expands to, say, $3.5B (on the back of the customer base growth), the anticipated net income would come in closer to $2.30-2.40/share. And considering the bank is currently trading at a discount to its tangible book value and at a single digit earnings multiple, it is a bet I am willing to take. I will be looking to initiate a long position in Colony Bankcorp in the next few weeks.
For further details see:
Colony Bankcorp: Trading At 8x Earnings, 0.9x TBV Despite Aggressive Growth Targets