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 prospective 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 conditions, 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 -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 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 sold 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 but 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 at 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. 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 that are drags on that ROA 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 that we have a large provision expense because 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 and so we do that but it causes us to increase our provision above normal as well and so that's about 11 basis points that it's hitting our ROA versus a you know if we were more growing in the middle of our long-term range if we were at about 10% loan growth. Our new business lines and our startup markets that are not hitting the you know 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 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 you know that's another place where we've made significant progress if you'll recall even back in our history over the last few years since I've been here at Colony you know we had moved that ratio up from the 60s to the 70s then the pandemic hit and that into the 50s and now we're moving that back up into the mid-60s now and expect to continue to be able to move that up over time and then of course another area in 2020 and 21 mortgage and SBA which are big important part of business added about 19 basis points to our ROA and this year it's only seven this last quarter is 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 so you know between those things we are very confident have a clear path to get to where we want to be in profitability in the intermediate term we're in 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 that on our ability to go out and hire more bankers although you know we certainly always are on the lookout for that and we'll look to add strategically where we can but we can get the long 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 teams doing on that especially given such a tough operating environment with a rapid change in rates a few other things i want to highlight on the quarter we did move 190 million dollars of securities in the quarter to help to maturity as we monitor the potential negative impact our a o c i happening because of the 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 and three quarters since and then also just given the current equity market and the lack of you know i think 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 dollars which is about five percent of shares outstanding at the current market prices which we we think is really creates a great opportunity at current pricing levels for 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 marinac of janey montgomery scott christopher please go ahead

hey thanks good morning um wanted to ask uh andy and heath about the loan growth we saw uh by market um it seems to be strength not just in atlanta but in the other markets like middle georgia coastal georgia and now birmingham um 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

yeah so we too are pleased that we're seeing that you know across the footprint um obviously we we think we have capacity across the footprint certainly in the birmingham market where it's you know we're really just starting to gain momentum there and in birmingham and huntsville and so i think you know definitely because we're coming off a low base from a percentage number you'll see some outsized growth there but uh we expect to see growth across the footprint we have strong pipelines across the footprint and we think you know we're seeing opportunity to look at really good uh credits uh across the footprint even as we continue just due to um potential macro concerns to tighten up credit boxes we we still see a 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

okay great and over time can birmingham become as big as say middle georgia or coastal georgia i know that's probably a couple 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 uh 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 uh we think i 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 um you know the the folks that we've hired over there have the type of capacity that our corporate bankers here in atlanta have um 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 uh you know andy the the securities that were moved into htm was there any difference between those securities under the ones that remained and available for sale

so chris the way we the way we attacked is is highly similar to what we've done the the last couple of quarters where we you know moved incrementally along along this front so we're trying to maintain maximum flexibility uh with the available for sale portfolio so we still have available for sale bonds and just about every category we have every sector that we we're invested in so that you know if rates turn around and go the other way and you know for example taxables get more expensive than tax freeze or 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 hovdee group dave please go ahead

um yeah good morning gentlemen um he's andy just curious uh you know noted the margin expansion here but noted that uh look at my calculations looks like overall loan yields average loan yields pulled in just curious that dynamic here and you know it sounds like you know you still got this the pedal to the metal from a growth perspective but do you think you'll reach a point um just in you know the the near-term funding capability or does that really have to you know of course you have to ratchet up uh deposit cost just curious how you sort of balance the growth versus the funding equation here over the near term thanks yeah so david it's a you know that's one of the operational daily questions we have basically um you know we have we have been ratcheting up our loan yields as we go um you know you can say maybe we haven't been rationing maybe as much as our peers uh in the last you know 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 um you know these these um 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 um you know secondary if we can get it uh organic we'll get it organic if we can't then we'll do it wholesale for the time being 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 um change the way we incent uh deposit gathering during um the last 90 days and we'll be doing that again uh you know we'll continue to run that sort of incentive for the foreseeable future got it and noted uh you know good good expense control off some of the choppiness of the in the second quarter uh as you look out at the operating expense outlook you think this is a good run rate over the near term or should we follow some uh you know modest expense or inflationary expense or increases into 2020 where he just cares how we should think about operating expenses yeah i think i think uh you know our biggest line item is obviously personal expense i think that's uh going to be a pressure on everybody so i don't want to um you know think that we're going to be excluded from the everybody category i do think there will be some personal expense pressure i think generally we have we believe we have the team we need for the next um sort of short 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 uh relationship business and we we um you know hired people we believe in we've invested in those people um 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 we're pretty much in the 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 then one one final question here um you obviously noted the good growth he broke out the rapid region just

curious any

call you can provide in terms of what low and segments growth during the growth this quarter versus last quarter back to them i'll get back in queue

we're generally seeing um you know long growth across the board similar to our portfolio and obviously you know when you look across our portfolio uh significant amount of of commercial real estate significant amount of of um of mortgage as well uh one to four we're seeing the growth kind of across all categories we are

like

i said in some of the areas that you would expect we continue to tighten our credit box uh for example um commercial uh in the in the cre category like retail office and we continue to see good opportunities in some of those areas despite you know us tightening the credit metrics so we feel good about that but it is coming you know across the board heavy commercial real estate because our current portfolio and what we do is heavy commercial real estate

and i would i would add to that to say you know during the quarter and as we go forward you know you've seen some of our peers start to back off of certain categories you know he just put it well in the past which is that you know 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 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 um you know get paid for the risk that we're taking yeah i appreciate the color

our next question comes from kevin fit simmons of d.a davidson kevin the line is yours

hey good morning guys

morning

morning kevin just uh i guess i guess the way you know we've talked about a little about margin a little about loan growth but like taking a step back um you know 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 they're either tapping on the brakes or they're seeing pipelines um blind but i guess 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 you're comfortable growing the loan book here is that is that the way to think about that trade-off 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 percent loan to deposit bank with the team and the investments we've made in in uh the team you know not only productions but in the strong credit team and operationally we need to have that long growth occur um obviously we need to be um cognizant of the credit environment in our credit boxes which like as i mentioned we continue to tighten but that long growth is really important to get the profitability metrics we want to be um we want to when we have the opportunity to bank the right customers we don't want to lose that deal loan rate you know 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 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 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 expanding as indy said there's opportunities as other banks get out what what we prefer to do you know my whole career spent a lot of time getting loans from the larger banks when they decide to be either full gas on the full 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 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 and today you know if we have a solid investor who went out to six banks you know a year ago he'd gotten six offers and we'd all been competing on rate now you know they're going to have one or two probably knows on that deal and and and we're going to have a higher rate than a year ago and a better credit structure so we think it's a good time to to put some new relationships on the books that would feel good about

yeah and i kevin i would just i would sort of echo that and add that you know it's also gives us a chance to look at customers that we wouldn't have looked at before because they were xyz banks customers and always been taken care of and xyz has now said we're not doing pick your category anymore but one other thing 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 that you know refi 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 and leaps and bounds like we're seeing about other banks but maybe it kind of creeps higher for a longer period of time and and whereas other banks are going to see a peak

sooner i i yeah kevin i hope that's the case i mean that we're looking a long way in the future now you know i 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 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 some of our peers

and 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 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 um because you mentioned earlier it's a tough deposit environment and their loan deposit ratios are getting backed up to pre-pandemic and it's kind of limiting their flexibility so um

okay yeah that's that's right and you know we um we just uh we we still have a ton of capacity not just on the loan side but we still have you know um a fair amount of cash up at the holding company we've pushed them down during the quarter to support additional uh loan growth we still have the ability to do that obviously we had we announced the buybacks that we feel good about and you know we just 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 and um you you mentioned the vibe after i was going to ask about that is it fair to say that's something we should we should um expect to see you use it um in short order or is it something that's more insurance to have on hand in case we really have more disruption in the market

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

that makes sense um one last one for me i don't know if he's on the call but i know uh with d copeland now stepping in as in the president role i was just curious and what he's been focusing his time on and whether um his observations or any changes he's putting in place just want to see how he's he's uh affecting change affecting change uh at the company thank

you yeah sure he he's not on the call but um he is uh hitting the running well i think uh d's initial focus is really on ensuring that uh 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 um because the you know some of the the the more commercial lending pieces the last few quarters especially are already working really 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 um some good things that d's uh 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 uh a real big change but he's bringing some some ideas and some really good positive changes to to what we're

doing great thanks very much guys thanks thank

you

we have a follow-up question from dave bishop of haldi group dave please go ahead

yeah thank you hey he's the uh the 10 basis points the roa drag on some of the new reliance of business the indirect you mean uh marine the rv and the obviously the new markets you've you've obviously allocated a decent amount of expense dollars in terms of you know uh hiring some new lenders there uh from a growth perspective and it may be a break even a profitability perspective just curious if you have a timeline or any sort of visibility when you think that that drag becomes a positive so davis andy i think you know obviously those lines of business will the the timeline for that will vary our goal internally overall is to have that 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 but internally sort of our current our current target is is late 23 got it and then i know there's um you guys do some aspect of uh you know builder home builder finance the segment just curious as you talk to your builders you're looking you noted the darts of inventory which seems to be a national issue um the sort of financial health of those those builders you're doing business with are they holding up pretty well 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 uh you know there's definitely in the markets you know that we do the most of that are uh in augusta and savannah and middle georgia a little bit uh on the southwest side of atlanta in in each of those markets there is a lack of inventory those builders have been very conservative in how they you know how they manage their lot inventory and their development and so they're continuing you know to to to go through i think at the margin you know they may have had uh where houses were you know multiple bidders and when 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 um it's there's a real mismatch in the housing i think that has been you know built and the demands and so we we see a pretty good outlook on that despite you know the rate challenge from the buyers we're not seeing any uh you know real like meaningful price reductions or things like that stuff selling at levels of profit that are really good for the builders and um you know we we see them uh continuing forward

uh got it then uh maybe one last question or if you have this but uh curious if you had either the cost of deposits at quarter end or the margin uh either if that was available and thanks to hop off uh give me one second the cost of funds at the end of the quarter um um was uh was up just a touch hang on just secondly get a good number for you now well i'm not i'm not gonna have it right the second day i think i think uh i'm going off the top of my head here so don't you know quote me exactly but i think we were about 50 to 55 bips cost of funds at the end of the quarter okay did you have the margin by any chance up at the end of september uh yeah it was it was a little bit higher than the 325 um we just report god appreciate color yep

we have no further questions on the phone line so i'll hand back for any closing remarks

um thank you jordan appreciate it thanks everyone for being on the call today we appreciate your support economy 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