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.