Colony Bankcorp, Inc.

Hello and welcome to today's Colony Bank FreeQ 2022 earnings conference call. My name is Jordan and I'll be coordinating your call today. If you'd like to register a question, please press star followed by one on your telephone keypad. I'm now going to hand over to Andy Borman, Chief Financial Officer to begin. Andy, please go ahead.

Thanks, Jordan. Good morning, everybody. Thanks for joining us this morning. I'm going to make a quick opening statement. of some disclosures to keep the lawyers happy. Certain statements we make on this call could be constituted as forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Current perspective investors are cautioned that any such forward-looking statements are not guarantees of future performance, but involve known and unknown risks and uncertainties Factors that could cause these differences include, but are not limited to, COVID pandemic, variations of the company's assets, businesses, cash flows, financial condition, prospects, and other results of operations. With that, Heath, I'll turn it over to you.

Thanks, Andy, and thanks, everyone, for being on the call today. We appreciate your continued interest in Colony. We're pleased to report an improvement in earnings in the third quarter compared to the second quarter. Particularly want to highlight the quality of our earnings as more of our earnings and earnings growth is coming from our traditional banking and recurring revenue businesses as compared to our transactional businesses. Our core banking business makes up about 93% of our earnings this quarter and about 90% of the earnings year to date. And that's up from about 75% in the previous two years. Loan growth this quarter, as you see, remains strong. Our loans increased over 9% from last quarter, so a 37-ish percent annualized growth rate. This is really the second consecutive quarter we've seen this accelerated loan growth, and our pipeline remains strong, and we expect to see this continued accelerated growth for the next quarter or so. Due to that accelerated growth, we provided $1.3 million for loan losses during the quarter, despite continued improvements in asset quality trends, but felt the need to make sure we provided to keep up with the loan growth. The loan growth continues to move the needle on our loan-to-deposit ratio, moving up from 62% last quarter to 66% this quarter, and that's up from 56% at the end of last year. So significant progress there. And that's something we've talked about a lot for a long time about is the key to achieving our profitability goals is to get that overtime up to more of the 80 to 90% range. That loan growth led to an improvement in both our margin, which went from 315 to 325, but even more importantly to an increase in the gross dollars of net interest income of 9% from last quarter. We were really pleased also to post deposit growth of 3% in the quarter in a pretty tough deposit environment. We've been working hard on the deposit side to ensure we're able to fund the loan growth and The really solid core customer base we have at Colonies allowed us to raise deposits both through selective specials, targeted customer acquisition strategies, just trying to do our best to target the increases versus increasing rates too much as a whole across our whole deposit base. Mortgage origination was slightly down from last quarter, but I still think a pretty strong level considering the rate environment that we're in. And so due to that, and also we still continue to see a shortage of inventory in our markets, especially Middle Georgia, Augusta, Savannah markets, which are big mortgage origination markets for us. And so, you know, given the higher rate environment, we're also seeing more portfolio and arm products being used. And then, of course, given the inventory shortage, we're doing more construction to perm. So this quarter, we only had sole loans of about 70% of what our production was. And so... That, of course, decreases our upfront income on our mortgage group, but I still think they're doing a really good job of originating throughout this tough interest rate environment. In our government-guaranteed business, what we call our SBSL, small business specialty lending, we were down a little bit over last quarter. We've got a good pipeline there and feel like we'll end the year strong in that front. You know, as we look at our earnings this quarter and the progress we're making, I'd like to point you to a slide we put in our investor deck, a slide 12, that is the path to high performance. And we've discussed that, you know, we expect to get up to a 120 ROA by the end of 2024. Um, this quarter we're 75 basis points. And what we wanted to do is kind of walk you through, you know, some of the things, um, that are, uh, drags on, on our, uh, on that ROA and, and also things where we think we have opportunities and where we're making progress. And, you know, one of the, of course, the big things is, uh, that we have a large provision expense because of the outsized loan growth. We certainly think it is wise to take advantage of the opportunity to grow loans, really quality loans in this environment. So we do that, but it causes us to increase our provision above normal levels as well. And so that's about 11 basis points that it's hitting our ROA versus a If we were more growing in the middle of our long-term range, if we were at about 10% long growth. Our new business lines and our startup markets that are not hitting the profitability levels that we expect in the long term, those are running us about $800,000 net expense per quarter. And so that's another... nine basis points. So just between those two items, and we're making progress on all of those. And so that's, you know, about 20 basis points right there between just those two items. You know, each five percentage points, we move our loan to deposit ratio. We're picking up, you know, we think, estimating on a fairly conservative basis, about nine basis points of ROA. So Um, you know, that's another place where we've made significant progress. If, if you'll recall, even back in our history, um, over the last few years, since I've been here at colony, you know, we had moved that ratio up from, uh, the sixties to the seventies, then the pandemic hit and that into the fifties. And now we're moving that back up, uh, into the mid sixties now and expect to continue to be able to move that up over time. Uh, And then, of course, another area in 2020 and 21, mortgage and SBA, which are a big important part of our business, added about 19 basis points to our ROA. And this year, it's only seven. This last quarter, it was only five. You know, those are our lines of business where we have great teams and doing a great job through this environment, but we think those are going to stabilize at a more normal level at some point as rates stabilize and the market stabilize. Between those things, we are very confident and have a clear path to get to where we want to be in profitability in the intermediate term. We're at a place to achieve the near-term loan growth that we want We have the team members on board that we can do that with the team we have today and aren't really basing any of that on our ability to go out and hire more bankers, although we certainly always are on the lookout for that and we'll look to add strategically where we can, but we can get the loan growth we need from the team that we have in the bank today. And so we're confident in making this happen and we're showing progress on that each quarter. Proud of the work the team's doing on that, especially given such a tough operating environment with the rapid change in rates. A few other things I want to highlight on the quarter. We did move $190 million of securities in the quarter to help to maturity as we monitor the potential negative impact to our AOCI happening because of the declining rate and the declining value of our securities in a rising rate environment. Our board declared a dividend that's at the rate we've been going this whole year of 10.75 cents. And then also just given the current equity market and the lack of interest and valuation that's going on in the equity market for banks in general. I think an emphasis we believe that's happening for us too on the tangible book value declines in securities and the confidence we have in how we execute our strategy. Our board made the decision to authorize a stock buyback plan of $12 million, which is about 5% of shares outstanding at the current market prices, which we think really creates a great opportunity at current pricing levels for long-term investment. So we were glad to see that support and think that we believe in where Colony sits today. So Those are all my prepared remarks, and at this time, I'll call on Jordan to open up the lines for questions, and we'd be happy to answer any questions that you guys have today.

As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two, and please ensure you're unmuted when speaking. Our first question comes from Christopher Marinak of Janie Montgomery Scott. Christopher, please go ahead.

Hey, thanks. Good morning. I wanted to ask Andy and Heath about the loan growth we saw by market. It seems to be strength, not just in Atlanta, but in the other markets like middle Georgia, coastal Georgia, and now Birmingham. How should that play out the next couple of quarters? Just kind of curious on pipelines and kind of the split between the various markets today.

Yeah, so we too are pleased that we're seeing that across the footprint. Obviously, we think we have capacity across the footprint. Certainly, in the Birmingham market where it's newer, we're really just starting to gain momentum there in Birmingham and Huntsville. And so I think definitely because we're coming off a low base from a percentage number, you'll see some outsized growth there. But we expect to see growth across the footprint. We have strong pipelines across the footprint, and we think we're seeing opportunity to look at really good credits across the footprint, even as we continue just due to potential macro concerns to tighten up credit boxes, we still see strong growth. So I would expect to see it across the footprint. Um, you know, opportunities in the Atlanta area and Birmingham could potentially be a little bit stronger than some of the other areas, but we should see it pretty spread out.

Great. And over time, can Birmingham become as big as say middle Georgia or coastal Georgia? I know that's probably a couple of years away, Heath, but just curious if that is a possibility in that big picture.

Yeah, absolutely. We think that, uh, we think that's a great opportunity there. You know, we're really trying to focus on new markets where there's outsized share by the larger and big regional banks. And we think we compete very well against those. And you certainly have that in those markets over there. And we think there's a big opportunity for that to be one of our, you know, strong regional areas.

And Chris, I would just add to that, you know, the folks that we've hired over there have the type of capacity that our corporate bankers here in Atlanta have. So, you know, realistically four or five of those guys could produce a pretty significant portfolio over the next three years.

Great. And the last question, you know, Andy, the securities that were moved into HTM, was there any difference between those securities and the ones that remained and available for sale?

So, Chris, the way we attacked it is highly similar to what we've done the last couple of quarters where we've moved incrementally along this front. So we're trying to maintain maximum flexibility with the available for sale portfolio. So we still have available for sale bonds in just about every category we have, every sector that we're invested in, so that if rates turn around and go the other way, And, you know, for example, taxables get more expensive than tax frees or whatever the case may be. We have an opportunity to take advantage of that if and when we need to.

Great. Thanks for hosting us this morning. We appreciate it.

Thanks, Chris. Thanks, Chris.

Our next question comes from Dave Bishop of Hovde Group. Dave, please go ahead.

Yeah, good morning, gentlemen. Heath, Andy, just curious, you know, noted the margin expansion here, but noted that, look, my calculations look like overall loan yields, average loan yields pulled in. Just curious, that dynamic here, and, you know, it sounds like, you know, you've still got the pedal to the metal from a growth perspective, but do you think you'll reach a point just in terms of the growth? Does it sort of outstrip the, you know, the near-term funding capability, or does that really have to, you know, force you to ratchet up deposit costs. Just curious how you sort of balance the growth versus the funding equation here over the near term. Thanks. Yeah. So, David, that's one of the operational daily questions we have, basically. We have been ratcheting up our loan yields as we go. You can say maybe we haven't been ratcheting them up maybe as much as our peers in the last 60, 90, 120 days. But when we see the opportunity for some really good deals, we're willing to be very competitive. We think there's a better interest rate environment to be competitive to get the right deals, given the fact that our loan deposit ratio is still in the 65% range. So, you know, these – the funding we have, we're trying to make sure it's as organic as we can have it. And we sort of have not changed strategies to what we said in the second quarter, which is that wholesale funding will be – You know, secondary, if we can get it organic, we'll get it organic. If we can't, then we'll do it wholesale for the time being. And when loan growth slows down, we'll sort of let the dust settle and it'll all sort of shake itself out, hopefully with more organic funding. We did, you know, change the way we incent deposit gathering during the last 90 days. and we'll be doing that again. You know, we'll continue to run that sort of incentive for the foreseeable future. Got it. And noted, you know, good expense control of some of the choppiness in the second quarter. As you look out at the operating expense outlook, do you think this is a good run rate over the near term, or should we bottle up some – modest expense or inflationary expense or increases into 2023. Just curious how we should think about operating expenses. Yeah, I think our biggest line item is obviously personnel expense. I think that's going to be a pressure on everybody. So I don't want to think that we're going to be excluded from the everybody category. I do think there will be some personnel expense pressure. I think generally... We believe we have the team we need for the next sort of short to intermediate term cycle of the life of Colony Bank. If we have opportunities to bring on strong people, we will bring them on. This is a relationship business and we have hired people we believe in. We've invested in those people and we're going to continue to invest in good folks. But overall sort of non-personnel side, I'd like to think we're pretty much in the ballpark of where we're going to be for at least the next sort of three to six months, and we'll see after that. Got it. And one final question here. You obviously noted the good growth. You broke out the geographic region. Just curious, any call you can provide in terms of what loan segments drove the growth this quarter versus last quarter? Thanks. I'll get back in queue.

we're generally seeing, um, you know, long growth across the board, similar to our portfolio. Um, and obviously, you know, when you look across our portfolio, uh, significant amount of, of commercial real estate, significant amount of, of, um, of, uh, mortgage as well. Uh, one to four, uh, we're seeing the growth kind of across all categories. We are, like I said, in, uh, Some of the areas that you would expect, we continue to tighten our credit box, for example, commercial in the CRE category, like retail, office, and we continue to see good opportunities in some of those areas despite us tightening the credit metrics. So we feel good about that, but it is coming across the board. heavy commercial real estate because our current portfolio and what we do is heavy commercial real estate.

I would add to that to say during the quarter and as we go forward, you've seen some of our peers start to back off of certain categories. Heath has put it well in the past, which is that there's There are always things to do with the right people, and we're going to be trying to bank the right people. We are changing our prices on certain categories to, you know, sort of reflect the fact that areas are higher risk than they might have been a year or two ago. And we're trying to not just from a credit box standpoint, but also from a pricing standpoint, you know, get paid for the risk that we're taking. Yeah, I appreciate the color.

Our next question comes from Kevin Fitzsimmons of DA Davidson. Kevin, the line is yours.

Hey, good morning, guys. Good morning, Kevin. I guess the way we've talked a little about margin, a little about loan growth, but taking a step back, the margin didn't seem like it expanded as much as I would have thought or what a lot of banks have seen, but But you guys have also put up stronger loan growth, too, and you're kind of signaling you're going to keep doing that, where a lot of banks have been signaling they're either tapping on the brakes or they're seeing pipelines line. But I guess it's just a trade-off, right, in terms of how you get to NII growth and Maybe the margin, percentage margin isn't going to expand quite as much because you're comfortable growing the loan book here. Is that the way to think about that tradeoff and how you guys are looking at it?

Yeah, I think, Kevin, as I said in my remarks, I think more important to us than the margin expansion is the dollars of net interest income growth. And so, uh, you know, a bank like ours that's built to be, you know, an 80 to 90% loan to deposit bank with the team and the investments we've made in, in, uh, the team, you know, not only production side, but in the strong credit team and operationally, um, we need to have that long growth occur. Um, obviously we need to be, um, cognizant of the credit environment and our credit boxes, which, as I mentioned, we continue to tighten. But that loan growth is really important to get the profitability metrics we want to be. When we have the opportunity to bank the right customers, we don't want to lose that deal loan rate. We want to make sure we can bring that into the bank. And so we've been moving those rates up and continuing to see those move up. But we've also, we've hired new bankers. We want to make sure we get those things profitable. So we should, you know, to manage our balance sheet appropriately, you know, make sure we get the deals and get the loans on the books. And so that's kind of been our approach. And I think it's been pretty systematic. And I think, you know, I'm very proud of the team and the growth we've been able to achieve. Now, That being said, we are looking out. We are cognizant of pipelines, and why are they expanding? As Andy said, there's opportunities as other banks get out. What we prefer to do, my whole career spent a lot of time getting loans from the larger banks when they decide to be either full foot on the gas pedal or full foot on the brakes. we prefer to just make adjustments within the areas. And so as we make those adjustments, the stuff that comes in is of higher credit quality and maybe of higher credit quality in the portfolio as a whole in that sector. And so we try to give our customers an offer in an area when we have the opportunity to, even if it's a tight credit box. And today, you know, if we have a solid investor who went out to six banks and a year ago, he'd have gotten six offers and we'd all been competing on rate. Now, they're going to have one or two probably no's on that deal. We're going to have a higher rate than a year ago and a better credit structure. We think it's a good time to put some new relationships on the books that we feel good about.

Kevin, I would echo that and add that you know, it also gives us a chance to look at customers that we wouldn't have looked at before because they were XYZ Bank's customers and always being taken care of. And XYZ has now said, we're not doing pick your category anymore. But one of the things I'd say about margin, I think that we have, at least that I can recall in my career, Kevin, have not experienced is because the rate change was so fast, sort of that, you know, Refis would normally slow down, not come to full complete stop, and that probably has hurt our margin a little bit as well.

So, Andy, would you think maybe the margin doesn't expand in leaps and bounds like we're seeing about other banks, but maybe it kind of creeps higher for a longer period of time, whereas other banks are going to see it peak sooner? Yeah.

Yeah, Kevin, I hope that's the case. I mean, we're looking a long way in the future now. You know, short term, if our loan growth continues at the rate it is, you know, we're going to have to fund it with some more expensive money. But hopefully we can replace that money over time with the incentives we're putting in place for deposits. And so maybe we get some, like you're saying, sort of a tail out there that it's a little bit past some of our peers.

And I guess relative to other banks, you guys seem to have a, you know, it's not a good thing because I know you want to get the loan and deposit ratio higher, but it gives you flexibility to be a little more aggressive on loans than, than some of the other banks are facing. Because you mentioned earlier, it's a tough deposit environment and their loan and deposit ratios are getting back up to pre pandemic and it's kind of limiting their flexibility. So, okay.

Yeah. That's, That's right. And we still have a ton of capacity, not just on the loan side, but we still have a fair amount of cash up at the holding company. We've pushed some down during the quarter to support additional loan growth. We still have the ability to do that. Obviously, we announced the buyback, so we feel good about our capital position. And We're going to make sure that we're levering and allocating that capital to the best of our ability given the dynamics.

Great. And you mentioned the buyback. I was going to ask about that. Is it fair to say that's something we should expect to see you use it in short order, or is it something that's more insurance to have on hand in case we really have more disruption in the markets?

Yeah, I think, you know, I would say we don't plan to be aggressive, but I can also say not sure, you know, what the market looks like and what happens in the marketplace. We wanted to have that tool available to us, you know, in our capital management stack that we have not had in the past. And so it'll just be basically to see, you know, what opportunities we have in the marketplace and what happens, but really, you know, less aggressive on that, but more of ability to have that to pull the trigger on if we need it.

That makes sense. One last one for me. I don't know if he's on the call, but I know with D. Copeland now stepping in as in the president role, I was just curious what he's been focusing his time on and whether he's his observations or any changes he's putting in place. Just want to see how he's affecting change at the company.

Yeah, sure. He's not on the call, but he is hitting the ground running well. I think Dee's initial focus is really on ensuring that some of our ancillary lines and some of the things that, you know, have been started, that we get those integrated and we, we get to the profitability goals we want on those because the, you know, some of the, the, the more commercial lending pieces, the last few quarters, especially are already working really well. So his first focus is on, you know, those areas that we need to ensure, you know, get to the profitability. But we're seeing some good things that Dee's doing out there and, you know, having been a part of the team, you know, really in an advisory capacity for a year. He had already built relationships throughout the company. So it's not a real big change, but he's bringing some great ideas and some really good positive changes to what we're doing.

Great. Thanks very much, guys.

Thank you.

We have a follow-up question from Dave Bishop of Holti Group. Dave, please go ahead.

Yeah, thank you. Hey, the 10 basis points ROA drag on some of the newer lines of business, the indirect humane, marine, the RV, and obviously the new markets, you've obviously allocated a decent amount of expense dollars in terms of hiring some new lenders there. From a growth perspective and maybe a breakeven or profitability perspective, just curious if you have a timeline or any sort of visibility when you think that drag becomes a positive. So, Dave, this is Andy. I think, you know, obviously those lines of business will – the timeline for that will vary. Our goal internally overall is to have that $800,000 drag be gone sometime – late in 2023. I think if we're successful in lending in Alabama, if insurance is successful, already modestly profitable, that may speed up a little bit, but internally sort of our current, our current target is, is late 23. Got it. And then I know there's, you guys do some aspect of, you know, builder, home builder for dance, the segment. Just curious, as you talk to your builders, you noted the darts of inventory, which seems to be a national issue. Sort of the financial health of those builders you're doing business with, are they holding up pretty well? Are they able to manage their project flow and inventory? Just curious what you're seeing on that front from a credit perspective.

Yeah, I think that there's definitely – and the markets that we do the most of that are in – Augusta and Savannah and middle Georgia, um, a little bit, uh, on the Southwest side of Atlanta. Um, in, in each of those markets, there is a, uh, a lack of inventory. Um, those, uh, builders have, uh, been, uh, very conservative in how they, you know, how they manage their lot inventory and their, uh, development. And so they're continuing, you know, to go through. I think at the margin, you know, they may have had where houses were, you know, multiple bidders and, you know, it was really, really aggressive. And now it's just they're selling things in, you know, still faster than normal, but not as quick maybe as they were. But there's a real mismatch in the housing, I think, that has been built and the demands. And so we see a pretty good outlook on that despite the rate challenge from the buyers. We're not seeing any real meaningful price reductions or things like that. Stuff selling at levels of profit that are really good for the builders and you know, we see them continuing forward.

Got it. And then maybe one last question. I don't know if you have this, but curious if you had either the cost of deposits at quarter end or the margin, either, if that was available. And thanks. I'll hop off. Give me one second. The cost of funds at the end of the quarter – was up just a touch. Hang on just a second. Let me get a good number for you. No, well, I'm not going to have it right this second, Dave. I think I'm going off the top of my head here, so don't quote me exactly, but I think we were about 50 to 55 bps cost of funds at the end of the quarter. Okay. Did you have the margin by any chance up at the end of September? Yeah, it was a little bit higher than the 325 we just reported. Got it. Appreciate the color. Yep.

We have no further questions on the phone line, so I'll hand back for any closing remarks.

Thank you, Jordan. Appreciate it. Thanks, everyone, for being on the call today. We appreciate your support of Colony, and we look forward to speaking with you again soon. Thanks.

This concludes today's call thank you for joining you may now disconnect your lines.