Q4 2022 Colony Bankcorp Inc Earnings Call
Okay.
Okay.
Hello, and welcome to the colony Bank fourth quarter 'twenty to 'twenty Two conference call. My name is high ran up coordinating your call today.
To answer your question during the Q&A. Please press star one on your telephone keypad.
And I'll now hand over to Eric Schoen, let's begin Derek. Please go ahead.
Yeah.
Thanks, Eric before we get started today I would like to go through our standard disclosures certain statements. We make on this call can be constituted as forward looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 1930 for current and prospective investors are cautioned that any such forward looking statements are not guarantees of future performance.
But involves known and unknown risks and uncertainties factor.
Factors that could cause. These differences include but are not limited to pandemics variations of the company's assets businesses cashflows financial condition and prospects on other results of operations.
I'd also like to add that during our call today, we will reference both our earnings release, and our quarterly Investor presentation, both of which were filed yesterday. So please have those available to reference.
That I will turn the call over to our Chief Executive Officer.
Yeah.
Thanks, Derik I want to thank everyone for being on the call today.
Before I get into the operating results I want to cover a couple of other things that you read in the release.
First this week, we said goodbye to our longtime team member and director Terry Hester, who passed away on Sunday.
Starting with colony and 1978 and served with the company over 42 years spending much of his career as our CFO . He was also a director since 1990.
Terry was a dedicated member of our team to colony family was really part of his family and he is going to be.
Sorely missed by his family and our teams so our sympathies go out to all those that.
Worked closely with him and certainly to his family.
Second you saw that we also announced.
Yesterday that Andy Boardman, our CFO , who is leaving the company to pursue other career opportunities Andy.
Andy joined Us in 2021 through our merger with South crashed and we appreciate all he has contributed in his time here and we wish him well in his future endeavors. We.
We started a search process for a replacement for A&D in the meantime, I've been named acting CFO of the holding company.
Most of you know I spent eight plus years as the CFO of Heritage Financial group.
We have a deep management bench and I'm confident I can provide the support that our accounting and finance team needs to make sure we have a smooth transition and I'm going to serve as the primary investor relations contact for you during this transition.
Also our chief Accounting officer, Derek shall not who's who's on this call has been named the acting CFO of our operating subsidiary Colony Bank.
Derek is a CPA and has experience in public accounting and in banking.
He joined our team in 2020 and played a key role in the development of our accounting team. He's handled a lot of our accounting work when it comes to M&A also Alco and all aspects of operations I have a lot of confidence in him and his ability to lead us through this transition as well.
So with those behind if someone can get right into the quarter you got a good bit to cover our.
Our earnings were up slightly from last quarter reporting 31 cents versus 30.
Since last quarter.
And I wanted to note that our earnings completely came from the banking Division. This quarter Slide 13 in our presentation shows you our break down by segment and our banking made up all of it for the quarter net and so while the earnings were only slightly up for the quarter, we made significant strides.
<unk> throughout the year in terms of how much of our earnings is coming from our core banking.
We of course had significant headwinds from an interest rate perspective on the mortgage banking side this quarter.
And as rates peaked over seven at the end of the third quarter and going into the fourth like a lot of other banks with significant mortgage businesses. We saw a real shift from a secondary market products into our portfolio adjustable rate products during the quarter.
And so our gain on sale was staying on about a half a million from last quarter.
And that's down nearly a million nine from the fourth quarter of last year.
On slides 16, and 17 in our presentation, you can kind of see how our.
Our originations have been impacted our originations actually remained strong, but our sales were down significantly in the fourth quarter as we move to portfolio products and our.
Our strategy really in mortgage right now is to keep our purchase focused origination team together.
Give them product to get out to our customers recruit new originators are within our footprint and just be poised to take advantage of the opportunity.
When when rates settle out there's a lot of folks in the mortgage business right now not.
Affiliated with banks that are really getting out and I think it'll be primed when are rates settle out a little bit.
Our net interest margin was down slightly went down from $3 25 to 323, but our net interest income in dollars was up over half a million dollars.
Primarily.
Due to our loan growth and so what's happening is our loan growth is outpacing our deposit growth and so we are having to.
And some things that are marginal cost and that's putting some pressure on our cost of funds, but we really feel good about where our deposits are we've maintained good discipline on deposit pricing and still been able to grow our deposits.
We're up two 5% quarter over quarter and that excludes any wholesale deposits and youre going to hear D talk about our deposit focus in a minute.
It's a tough environment to predict interest rates you know, we may see our margin stabilize or are compressed slightly from this level.
But we have opportunities to continue to put on higher earning assets you know at levels that may be slightly dilutive to NIM, but are going to be accretive to our ROA and ROE V and we're going to do that.
Our loan growth as you saw was strong.
And D or discuss that as well our asset quality remained really good non performers were flat in criticized and classified loans went down and so with that strong asset quality, we were able to provision a little less this quarter. Despite the loan growth.
We are just.
Just as a reminder, move into seasonal next quarter and we continue to model that.
And as we disclosed last quarter, we think somewhere in the range of 15, 15% to 25% increase in our reserve.
Is going to happen with that adoption.
Of course diesel was forward looking and so how things will look forward now from from three months from now not so sure. So I'm just just a reminder that that that could change.
Going in Ah I want to talk about our performance in and where where we're going we lay out kind of our path to high performance in the presentation.
Slides nine through 11, but I want to share three highlights first is achieving strong organic growth. We are doing that we're executing that well on the loan side I think in this environment, we're executing that well on the deposit side Oh, you know just growing deposits in this environment is tough, but we're doing it.
Increasing noninterest income as the second of our three highlights there and you know mortgage b and down has hurt us obviously on the revenue side, but I think there's real opportunity for that to return.
And still you know our S. P. S. L teams doing strong and we have opportunity to continue to grow in insurance merchant and treasury as well.
And then lastly is just a real focus now is shifting to internal opportunities.
No. We think M&A is going to be on the back burner for a while so we're really just focused internally.
Driving internal referrals, we just you know.
Got it and go on with our CRM system internally to track back focusing on the profitability of our new business lines and ensuring we capture the operating efficiencies from all the.
Investments we've made in technology.
And then really it's managing expenses you know we've been in a growth mode and we've been growing significantly we're limiting.
You know our hiring now in our strategic end market hires we're not gonna be expanding.
New markets right now in this environment.
Reducing controllable expenses business development travel those kind of things and then also lower than our core provider calls we are in the final stages of renegotiating, our core agreement and we except expect some cost saves to start flowing from that here in the first quarter.
This year and just addressing you know our overall level of expenses as you know.
Since I've been here from 2018, and we've averaged 18% growth per year.
Assets, we've gone from a billion two to just under 3 billion. We've added multiple lines of business mortgage to small business specialty lending group insurance merchant, we've gone into new markets. We've done whole bank acquisitions, we've done another number of smaller type acquisitions and so.
We moved into this growth phase at a time the columns platform was not prepared to to to go into a growth mode. That's not what they have been in so we've been investing significantly in people.
<unk> and technology, and we really have the team in place now we largely have the systems in place.
But.
Given you know where we are the amount of growth we've experienced looking ahead.
It were you know potential slowing economy is we're really shifting our focus from external opportunities to grow to internal opportunities to improve efficiency and profitability.
And so that's that's where we're focused on and as we laid out last quarter Slide 12, just talks about where do we get how do we get from.
You know our our OE Aw this quarter was 77 Bips, how do we get to that one point to run rate by the end of 2024, which is what we've been internally targeting and that just walk you through on that slide a few things you know.
Excess growth is you know higher than normal call some excess provision that six basis points in the quarter.
New lines of business, you know to get from where they are today and we have some detail on this in there it's a six basis point.
Drag this quarter.
Our mortgage and SBA you know really.
Year to date have only contributed six basis points of our away nine net the two nail each other out this quarter and contributed nothing to our away and you know those are businesses that really carried as the last couple of years contributing about 19 bps of our OE and so those are good.
To be profitable lines for us and we do expect that it is to get somewhere.
In the 10% of our.
Range or 10 basis point range and Dan finally loan growth you. All know we've been growing loans, we've really built our infrastructure from a personnel and technology standpoint, both on the front line in the back office to be to have a fully loaned up balance sheet.
And you know every five base, 5% improvement in our loan to deposit we get about seven bps of R. O a.
So you know you start adding those up.
Did I just went through and you know by the end of next year, just with those you know we get somewhere around maybe 115.
And that's without counting the business lines getting more profitable that's just them breaking even and that's without leveraging technology managing expenses down. So you know that's our plan our team comes in everyday to execute on that and we think we can deliver on that.
A couple more things before I turn it over to day to talk about production side.
Our our Aoc I, you know our unrealized loss in our securities portfolio.
We saw that go sideways this quarter, which was nice to see after several quarters of rates going up and really causing a negative there.
<unk> added some more disclosures slides 31 to 35 gives you a lot of break down of our investment portfolio. We just want you to see that we don't have a lot of credit exposure, there interest rates or what's driving our our losses, we are seeing our yield creep up a little bit.
And I'm hopeful that where rates are we reached our.
Our peak extension there.
I think we're going to start seeing our duration or average life come down and there's a real opportunity to recover a lot of tangible book value as we see see that stabilize and so we are taking opportunities from time to time, when we see rates move down to trim holdings and we would look at you know potential opportunities.
If we can get a quick payback to trim the portfolio and take losses, but we're looking to really avoid that if we're successful in our deposit strategy, especially.
And then lastly, just on the dividend.
11 cents for the quarter were glad to be able to do that for our retail investors that's about half of our shareholder base and so it's a very important component of the investment for them.
I think it also expresses the confidence we have and our board has in our ability to keep improving our earnings.
Would those highlights I'll turn it over today and he's going to talk about the production side of the mine can our business lines.
Thanks, Hey.
On the commercial side of the bank, we had another great quarter of loan growth.
Keith mentioned earlier, we had 95% growth over last quarter. If you annualize that it's a 40% annualized growth rate I do want to point you to a few slides here to talk a little bit about the color on the loan.
Portfolio growth if you look at it starting on page.
28, it will break down break down some of these details I would tell you. The main the main point that I'd like to leave you with is on slide 30.
And really it gives you a breakdown over the last several quarters.
The loan to values with which we've been originating the CRE.
Our non owner occupied CRE portfolio has what I would call a very very low loan to value I guess my way of saying it is our customers put cash in the deals.
And we feel good about the lungs are we originated them.
We have a we've had the opportunity to grow the lungs, but as you can see where those originations where you've been able to keep them.
Strong credit metrics as well and really as we move towards the end of the year. We have continued to tighten our credit based on the environment that we see coming forward and in addition to that we've moved rates up as the fed has moved.
We've been moving slowly with them I would say as we approach the end of the year and as we turn here and we've been more aggressive in moving rates up and I'll talk a little bit more about the fact that Ohio and.
And our expectations.
Through the first few quarters this year.
So as we raise that up at significantly reduced.
Should significantly reduce the loan growth from our originations in CRE. This year, we definitely will see loan growth slowing, but what I will say is for the first and second quarter I think we will still see elevated loan growth.
Two reasons, one we still have a strong pipeline even with these elevated.
Whether these elevated part with this elevated pricing.
In addition to that we've done construction lending and as those draws happened on those lines. It will continue to add our loan growth to what we do in the first half of the year our expectation for the second half of the year is to move back more into kind of our long term goal of 8% to 12% loan growth.
As we maintain the credit discipline that we've put in place as well as execute on the pricing strategy that we are that we've put in place as well.
Hum.
To me one of the things I think that's been really important with us as I was glad to report that we had 2.5% deposit growth over the quarter.
And that excludes all wholesale deposits are to me that's a really good number.
In a tough rate environment.
We've got good markets for deposit growth and we've got bankers that can deliver on this deposit growth when called al.
Some of the changes that we've made as we go into 2023 is we've really made some significant changes in our incentive plans for the commercial side and the majority of their plans will be focused on deposit growth as well as referrals to these other ancillary lines that Heath talked about and then I'll go into a little.
But more in just a minute.
This is a new focus for colony.
And I think we are starting to see the success. We started this in the third quarter I think we had a good number in the third quarter and then there's two 5% growth in.
The fourth quarter, I'm I'm proud of as well.
And Treasury, we've spent the last year developing our different treasury products and building out the team to help deliver on treasury. It puts us in a position that we can that we can deliver on the customer needs that we have from from our commercial customers.
In addition in October we added a sales manager with years of Treasury experience.
And our structure really that allows us to proactively approach the way, we so I am the way we service our commercial deposits.
I'm going to move over and talk a little bit about some of the ancillary lines. Now if you look on the small business specialty lending or the SBA or government guaranteed lending on slides slide 15 excuse me.
I would say that our we had a consistently profitable year. If you look at each quarter and we delivered a consistent profitability are.
And and and I think we can see that hopefully going forward. We have a good pipeline coming into 2023 that is a slightly elevated over where we went into 2022 I'll talk a little bit about mortgage Heath has touched on this a little bit but we while our volumes were the same we did.
Reduce secondary market sales are one of the focuses that we do have for this year is really shifting that mix back to the secondary market sales are.
Rates have helped us in the near term rates have come back a little bit and it really made those secondary market loans more appealing.
The luxury that we did have as we have a balance sheet, where we could portfolio loans and we can keep that origination team together, but that is not.
The long term strategy that we want to have that is more an interim strategy until those rates stabilize.
Well, if you look on slides 16, and 17, we've laid out our production.
Year over year, and if you see our 'twenty to 'twenty three production in our 2022 production.
We're basically flat the difference in profitability was the short term secondary market sales for the year.
I also want to touch on a few of our new markets and our new lines of business or ancillary lines as we call them.
For Alabama, we have at the L. P O's and Huntsville, and Birmingham, we had a little over $20 million and growth are at.
Year end all of these all of these bankers who are hired either at mid year or after so that's a that's a half a year number.
Their pipelines are really good one of the things that we've done with incentive plans, but also with the direction is shifting their groups away from CRE as much and really focusing on our operating businesses and historically, Birmingham and Huntsville, they've been really good businesses for us.
See you in our commercial and industrial loan origination and deposits and the fees that go with those.
I would also like to say it should become profitable in the next quarter or two based on that loan growth.
And in a way that we look at it and we look forward to what their pipeline brings out shortly.
Shortly on marine and RV, we just start originating loans booked from personal loans last week.
And so there will not be much in the numbers here, but it's something that we've been working on too to get off the ground, it's a tremendous opportunity for us in the coming few years.
Well I think the best way to describe it from our standpoint is it is a very efficient way for us to generate loans and in addition, it gives us flexibility in the balance sheet because of those abilities to either hold them or to be able to sell them on the secondary market.
And in addition to that it's really just not a big spend for us in the short term until we get it to profitability and then in addition, it helps us add consumer loans to our portfolio. My expectation is that we will get to breakeven in the latter part of the year.
Lastly, I wanted to mention Ed Canup, who recently joined our team in November as Chief revenue Officer, and I wanted to.
Congratulate him on the early effect he is already making a he came to us from a capital city by he's got a wealth of knowledge and mortgage which in today's world is a great time to have that resource in addition to that well, but really he's just a career banker and has great.
Great experience across the board and it really already starting to make a big difference here I do like the way he's energized our are different ancillary lines about the opportunities that are ahead of them and even more importantly, making sure and pushing that we hit the revenue targets that we're talking about and that we stay.
Focused on driving each of those areas to profitability. During 2023, so with that Heath I will turn it back over to you. Thanks. Thanks D that that wraps up our prepared comments and with that I'd ask Harry to open.
Open up the line for questions.
Thanks, very much as a reminder, if you'd like to ask a question. Please do star one on your telephone keypad now.
And our first question today is from the line of David Bishop.
David Please go ahead.
Yeah.
Yeah, Good morning, Heath and D. I appreciate you taking the question Hey.
Maybe maybe D.
Just you had sort of alluded to the fact that.
You're raising loan pricing and maybe that's going to slow growth year.
But given the structure of the portfolio.
Do you think you're.
May be behind the curve or maybe competition in raising loan pricing and does that maybe give you a little bit of a lift in terms of loan yields.
And pricing and margin in the back half of the year, just how we should think about maybe how that plays out in the margin in the second half of the year.
Yeah. That's a good question I do think you know we are we could have certainly raised loan prices always quicker as rates moved up so fast.
Just to give you an idea.
We in the fourth quarter.
Our weighted average you know put on was about a little over six and a quarter before it was a little under five you go back to the end of last year. It was just barely over for <unk>.
So there is some opportunity I think to see loan our loan portfolio.
You'll continue to go up.
If it wasn't for that interim pressure on pricing, that's really hard to predict on deposits just with whats going on out there and you know you see a lot of banks are losing.
Finding which is causing them to get aggressive.
You know I'd I'd be more confident in that and that margin pick up but I think there is an absolute opportunity to continue to see our loan yield tick up I don't know if you want to add to that no. I think we've we've introduced are even further pricing guidance pricing sheets with our commercial bankers out there that we.
We've been raising them as we as we move forward I would say at this point, we I would call us at the curve at this point, while they were moved because rates have stabilized out just a little bit when they were going up we wanted to make sure we're honoring commitments to our customers and we had a balance sheet to be able to.
To be able to take those loans out.
Got it and I'm just curious.
Where are you off in these days.
I'm sorry.
Yeah.
Yeah, I was curious where you still have a CRE concentration ratio these days.
Is that a limiting factor at all for CRE growth factor at all.
Yeah.
We are kind of right at the 103 hundred concentration limits, we do have some capital at the holding company, we can push down for that but we really you know we want to keep the mix you.
You know is close to sort of where it is today, we're going to see CRE creep up a little bit just as some of the stuff we've already done.
Funds up, but where we're at a place where we really want to.
Not seeing a whole lot more.
CRE added to the to the balance sheet and I would say the other thing I would bring up on that is part of it is us wanting to shift just because from an overall profitability to those operating businesses because those are the ones that bring deposits with them, which is why we've been putting that and those are also the ones that we can refer.
Two treasury merchant services and drive.
Drive our fee income and as you know.
Well anything we can driving fee income is tremendously additive when we start looking at an ROE standpoint, so that's.
That's part of the focus on this shift as well.
Got it and then one more question and I'll hop back into the queue you.
Heath as you look out the budget for Opex.
A slow down you guys were obviously pretty aggressive in expanding this year and hopefully to get the revenue benefit down. The line do you have a target in mind, either efficiency or our growth rate should we see that decline from the teens to the low to mid or high single digits just curious.
If you have any sort of stats were.
The targets are.
Okay.
Yeah. That's a good question and you know we have you know as I talked about investing significantly and we got to know you know inch.
Sure we get the kind of returns out of those investments we won't.
So we are focused internally one you know a lot of projects to reduce operating expenses and certainly to.
You know basically hiring freeze that isn't strategic in market type higher and so.
You'll see a little bit of a creep up from our fourth quarter.
Run rate just from the.
The standpoint of things we've done in the fourth quarter, but I think as we get into the second and third quarter, we have an opportunity to start to reduce our current run rate and then you know from a revenue generation standpoint, you know this is the mortgage revenue comes back and as these other lines of business getting <unk>.
<unk>.
We will be able to sort of grow into that run rate, that's a little bit lower than where we are right now.
Alright. Thanks.
Yeah.
As a reminder to ask a question please to all staff by one on your telephone keypad now.
Our next question of the days from the line of finished stick Windows Jenny pretty your line is now open.
Hey, good morning.
Apologize if I missed this in the opening remarks, but I was just curious what drove the rise in FTE head count in the fourth quarter.
And is there a timeline for these new hires to generate earnings if their producers.
Yeah.
Yeah. So there's really two things driving that number one is the fourth quarter was really the first quarter.
Really since.
Some of the aftermath of Covid that we've been able to get our retail staffing.
Back to the level.
That we need to efficiently and.
Service, our customers well and are in our branch network. So that was a good bit of of what you saw in Q4 and so those are one the you know the the lower end.
Of the play there and then we did have a number of mortgage hires and some of those were throughout the year. As you know we had the opportunity to pick up some production I mentioned.
I think we mentioned.
Neither on the call or in the earnings release that we picked up a team in Birmingham for example in the fourth quarter.
And generally those type hires.
You know where we're.
Dealing with a three month type guarantee.
I think as we roll into January on the mortgage side.
We rolled all our new producers or out of their guarantee period, and so there'll be yen.
You know in the commission world as how we compensate all our M L loose.
And then obviously, we had a as Dave mentioned some.
Some of the Alabama team that came in in the third and fourth quarter.
And those are you know <unk> talked about you know how where we are in loans in that group and where we expect them to get in so we think that'll be.
Profitable.
Really saying.
Got it should we think about I guess trying to think about the retail investment should we just think about think about that as an investment in deposit gathering effectively on the retail side I mean, I know, it's kind of filling positions that you've had vacant for a little bit but I guess my thinking is if you have more folks on the retail side.
It's probably a little easier to retain some of those deposits, particularly in the more rural part of the footprint.
Yeah as I said earlier I said that the rural part of the footprint. We have is a great.
<unk> gathering franchise that we have so I would agree with that.
Our two things to also make sure as we do.
Our running everything on our staffing model. So as we have the transaction and those volumes that are out there those levels will adjust either up or down based on the volume that we have in addition to that I think it's a good way to think it onto the deposit gathering because we introduced a.
Retail, which would include all of our Universal bankers that Heath was talking about and our banking center managers.
We've introduced an incentive plan for.
For the first time this year and it is very very heavily driven on deposit gathering and in addition to that referral to these other ancillary lines and so yeah. So that investment is really a product.
So that group is about getting additional deposits and also they can help us from an insurance and also March and drive these others to profitability. So I think that is the right way to think about it.
Okay.
Got it. Thanks, that's helpful and then just sticking with deposits.
Municipal deposits and some of these smaller cities longtime relationships.
Are these municipalities asking for rate increases and have you seen any significant change.
They are in the past 10 months or so.
You know we do obviously have you know municipal relationships and are in our footprint. It does not represent a large portion of our deposits I mean, just to give you an idea at the end of.
Of our Q2 it was a 290 million at the end of Q4 320 ish million and so you know.
Ours don't fluctuate as much as some other banks do we do think we have an opportunity to call on more municipalities in this environment.
And we've you know we've we have not seen a lot of pressure from them because I think really more of a concern a lot of those that we have are operating type accounts, we have not really been active in going out and beating AUM.
Municipal deposits.
Deposits and that is one area with the improvement in the product set and our treasury staffing that we think we have an opportunity to go and really add to what we're doing on the muni side.
Yeah.
Got it thanks for taking my questions I'll step back in the queue.
Okay.
Thank you we have a follow up question from the line if David Bishop David Your line is now open.
Yeah Heath.
And in terms of the improvement.
The decline in loan growth is that.
That imply that we're going to be a little bit of a stimulation of maybe a pullback in the level of provisioning as growth slows assuming credit holds in there the economic outlook, just maybe directionally, how we should think about the provision that if growth does slow in the back end.
Okay.
Yeah. So I definitely think you know.
The lower loan growth certainly plays into that and again as Dave mentioned kind of what we envision are like right. Now is that we may have a quarter or two of loan growth that is above that lower than it has been these last few quarters, but above our long term eight.
The 12% growth rate.
However, if you take our if you take our our growth rate in and back it down you know after these first couple of quarters to a more normal rate you know I still got US you know run into about an 80% loan to deposit ratio by the end of next year, you know that's with a couple of them.
More quarters that are higher and then backing down.
And I think provision you know it.
We will go with it I guess, the only caveat to that would just be sort of the new Cecil.
Modeling that will be doing going forward you know, we'll take into account. Some forward looking economic factors that we really haven't been putting in.
Now, but I think you know I see it.
Definitely trending down is as our loan growth trends down assuming were able to hold these credit metrics.
Whatever.
Do you have to do it at the moment.
At the moment, it yeah, and you're right on that and it is we disclosed last quarter and we you know we will put out updated disclosure in our 10-Q this quarter, but right now we've got that 15% to 25% is the range we put there.
Great. Thank you.
Yeah.
As a final reminder, if you would like to ask a question today. Please press star one on your telephone keypad now.
Our star one for any further questions.
Okay.
Yeah.
Yeah.
And it appears we have no further questions being registered at this time, so I'd like to hand back to <unk> for any closing remarks.
Yeah.
Thanks, Gary and thanks for everyone again.
For being on the call today appreciate your support of colony Bancorp. We appreciate it and we welcome you to reach out to US. If you have further questions. Thank you.
Yeah.
Thank you everyone. This concludes today's call you may now disconnect your lines.
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