Q3 2023 Colony Bankcorp Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to colony back three quarter.
During this conference call at this time all lines R&D Center animals.
During the presentation, we will conduct a question answer session.
If at any time during this call jewelry Grammy to see Sir Please press star zero for the operator.
<unk> is being recorded today October 26.
I would now like to turn the conference over to the Eric Schoen Chief Financial Officer. Please go ahead.
Thanks <unk>.
Before we get started I would like to go through our standard disclosures.
Certain statements we make on this call could be constituted as forward looking statements within the meaning of the Securities Act of $19 33, and the Securities Exchange Act of $19 34.
Current and 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 pandemics variations of the company's asset businesses cash flows financial condition and prospects and the results of operations.
I would 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 Robert.
And with that I will turn the call over to our Chief Executive Officer.
Thanks, Derik I want to thank everyone for being on the call today and for your interest in colony. We're pleased with our results for the third quarter as we continue to navigate.
Challenging and changing economic environment, our earnings increased over last quarter as we began to see the results of many strategic initiatives. We've been working on over the past several quarters and we will continue to work on in the quarters to come.
Im going to share an overview of activity from the quarter, and then hand, it over to Derek who is going to go into more detail on the results.
Our net interest income for the quarter increased as we continued to diligently navigate the way, we price loans and manage our customer relationships on the deposit side.
We also saw the full impact of some earlier strategies such as the hedging we put in place in Q2, which has positively benefited our interest expense.
We're glad to share that our noninterest incomes increase quarter over quarter and it represents about 33% of our total revenue.
We've seen increases in our newer complementary lines of business as well as increases in deposit related.
Charges and fees.
We remain focused on growing our complementary lines of business and feel it is important to diversify our noninterest income sources, especially with those that are less sensitive to the rate and economic environments.
There's certainly been some slowdown in our mortgage division driven by the current rate environment, and we continue to make changes there to our staffing and product mix.
In order to achieve breakeven there.
We're really proud of our noninterest expense efforts non.
Non interest expenses declined half a million dollars from last quarter teams worked really hard over the past several quarters to reduce expenses.
In order to.
Be more complementary to the moderate growth projections and we're seeing the impact of those efforts.
And even though we are mindful of the expenses.
We do look at that alongside our long term strategies and we've been able.
Even with the expense initiatives.
As to continue to invest in technology and infrastructure that will benefit our customers now and in the future.
This past quarter, we went live with a new data warehouse and API technology that will allow us to better.
Manage and use our data it will also allow us to integrate other platforms and fintech products, what our core we think this is a big step forward in our long term innovation strategy and it's going to have positive impacts on how we serve our customers, how we market our products and enhance our.
<unk> and profitability.
We also continue to look for opportunities to add to our teams very strategic hires.
It will enhance long term strategy.
Even while we have seen.
Decreases in our overall staffing levels.
Asset quality remained strong we saw a decrease in nonperforming loans from the prior quarter, our provision was up this quarter.
And our net charge offs were up primarily due to a few SBA loans from our SBA sale Division.
Where the portion of the loan that's not government guarantee was charge offs.
We mentioned this last quarter.
That we were seeing some weakness there and of course, our SBA portfolio is primarily variable rate loans and so they've seen the most increases quickly in their payments. This is an area, where we may see some some small charge offs going forward, but really it was a small number of low.
Loans.
Impacted and our team is doing a good job of managing those.
Our loan growth slowed.
From the previous quarter to annualize.
Annualized rate of about 6% a lot of the growth came from consumer, particularly marine RV.
This season the.
The summer buying season.
We expect that.
Our loan portfolio growth for this and our overall portfolio to continue to slow for the next few quarters.
Our total deposits were down a little from last quarter and historically, we've seen a slight dip in the third quarter our deposit base is.
Is very diversified.
I have a slide on that.
And the and the.
And the Investor presentation, but we do see some seasonality analogy from municipalities as they spend down during the year and from our.
Rural customer base in agriculture.
As we see the activity.
There and we would generally expect both of those segments to increase in the fourth quarter.
As agricultural producers sell crops in as municipalities see property tax payments.
Come in our total deposits are still up for the whole year, despite being down for.
For the quarter, they were up about 4% for the whole year.
Our margin was flat quarter over quarter actually increased one basis point the repricing of deposits.
Has slowed but the environment remains competitive and we will continue to see our overall cost of funds increase.
While we stayed flat our modeling shows we could see still.
A potential for another five to 10 basis points of margin compression over the next quarter or two.
So with that I'm going to turn it over to Derek to go over the financials in a little more detail.
I'll begin with our earnings for the quarter net income increased about $502000 quarter over quarter.
Compared to the prior quarter, we saw net interest income increased 440000.
Noninterest income increased 766000.
Noninterest expense declined by 551000.
Interest income increased during the quarter as we remained focused on loan pricing relative to our funding costs.
Growth in some areas have slowed we did see growth in consumer loans, especially in our marine and RV Division.
The summer buying season as Heath mentioned, we do expect that marine RV lending to slow as we move in.
Until the end of the year and out of that traditional buying season.
And then we've also had some repricing on loans as they renew which has also helped a little.
Interest expense on deposits also increased during the quarter as competition on deposit pricing still remains strong and we also continue to see some mix and rate changes on existing deposit.
Where we saw improvement on the interest expense side as with our <unk> borrowings average balances for the quarter were down compared with last quarter and we also had a full quarter of the hedging strategy. We put into place at the end of Q2, which has helped US helped us both from the initial positive carry on the swaps.
And the hedge against the increase in borrowing rates that we've seen recently.
We did see an increase in the end of quarter <unk> balance sheet balances, which al will discuss here in a minute when I talk about deposits and funding.
With noninterest income the increase in noninterest income during the quarter as a product of several different components on slide 16, and 17 in the Investor presentation. We show a representation of how the mix has changed over the recent years and recent quarters.
From deposit relationship related income the net increase in service charges and interchange fees was about $244000 for the quarter.
The noninterest income component from our S. P. S. L division increased about $163000 during the quarter.
Mortgage Division income did decrease by 284000, as we see slowing in that industry due to the rate environment.
Call. It insurance division saw revenue increase of $66000.
And noninterest income from colony wealth advisors increased $26000 and.
In merchant services income increased $10000 during the quarter.
All other noninterest income increased about $564000 and some of that was one time items.
So for the next quarter and going forward, we don't expect quite that same level of inquiries and really we kind of see this noninterest income.
Our remaining flat or even slightly down in some areas.
With noninterest expense, we have been focused on operation efficiency and managing expenses throughout the year the decline in noninterest expenses quarter over quarter as a result of those efforts are.
Our net and I E. The assets was 196% in the fourth quarter of 2022, and we've since seen that number decline with our third quarter of this year being at 114% on an operating basis. So a lot of improvement there total noninterest expenses for the quarter were $20 million 809.
1000, and $20 million 661000, excluding some final severance expenses from our reduction in force initiative.
We still feel comparable with our expected run rate around $20 million a quarter and remain focused on managing expenses to align with our strategy in the current environment.
Provision expense totaled $1 million for the quarter net loan charge offs were 898000, which is up from 200000 in the prior quarter.
On last quarters call, we mentioned the possibility of seeing some charge offs from SBA loans and these charge offs were on the non government guaranteed portion of a limited number of loans and that totaled a net of 714000.
Nonperforming loans decreased quarter over quarter by about 17% and we still feel good about the overall credit quality in the portfolio.
Total loans increased about $25 1 million.
Which is less than the previous quarter as we continued to see slowdown in overall growth there.
As we previously mentioned a lot of the growth came from the consumer loans on the Marine RV Division, we expect overall loan growth to continue to slow over the next few quarters.
Total deposits decreased $36 million during the quarter.
This was related to the seasonality of a small portion of our deposits, particularly the municipal and government deposits as well as some agricultural type deposits as Heath mentioned earlier, and historically looking back, especially pre pre COVID-19, we see a small dip in the third quarter as these muni deposits and AG.
It's kind of a run off but then see increases in the fourth quarter as property tax payments come in and as crops are sold by some of our.
For all agricultural type deposits.
Our FHL B borrowings increased $30 million during the quarter and this was really towards the end of the quarter. This was a short term advance and we expect us to be repaid as we see those municipal funds come in during the fourth quarter.
Taking a look at the margin we've seen some stability that is kept for increases in liability cost more aligned with our earning asset increases this led to a margin essentially being flat quarter over quarter.
I don't think we're necessarily out of the woods, yet and we remain disciplined on pricing any new loans of renewal.
Renewals relative to our current funding costs and the expectation of any increases in those cost of funds going forward there.
There are so many factors that could cause margins to decline a little more before we see it start to increase.
Overall liquidity remains robust and we outlined the various sources of liquidity on slide 15 in the presentation, we have over $1 $3 billion in total liquidity and liquidity sources available.
We didn't have any discount window or other federal was our borrowings at the end of the quarter and did not have any outstanding borrowings from any of our fed funds lines.
With investments, we haven't seen a lot of that activity in the securities portfolio throughout the year.
Deployed the cash flow elsewhere on the balance sheet and primarily to fund our loan growth.
We continue to evaluate the portfolio and market conditions to assess the possibility of some restructuring there in.
In the Securities portfolio, and then redeploying some of those proceeds the.
These bonds can be redeployed to achieve a better position from both an earnings and a L. M perspective, and some of the important factors that we consider or look at as part of just evaluating any type of restructure and the securities portfolios really the market conditions are reasonable earn back under a couple of years.
No loss then.
It's greater than a portion of our quarterly earnings as to not erode capital and then understanding the best use of those proceeds.
One last comment about taxes for the quarter, there was little increase in our tax rate from the prior quarters, we've been close to 18% to 19% ETR and that moved up to around 22% for Q3.
This is a result of increased tessera disallowance related to our tax free municipal.
Which is driven by an increase in our overall cost of funds. So going forward, we expect a range of about $20 to 22% on that as we see that.
Kris slightly just related to that Tetra disallowance.
And now I'll turn it over to <unk> to discuss our banking and business lines.
Thanks Darren.
First I want to touch on a few things on the banking side of the house.
Heath and Barry mentioned, we are seeing loan growth slowed.
We expect that to continue over the next several quarters.
We really are seeing very little volume at all on the commercial real estate side.
Really that's more of a result of the pricing in today's market to maintain to make sure that we can maintain a proper margin as well as just a generally slowing demand was the increase in borrowing costs in the marketplace.
We have not really changed any of our underwriting standards. There we remain pretty consistent throughout the cycle. So I guess my point, there would end up being it's not a credit credit driven slowdown is really more of an environment.
Pricing slowdown.
The loan growth, we are seeing is coming from RV and marine.
Jason.
Both mentioned and as well the funding up of consumer residential construction loans.
Thousands are continuing to be to be built we have implemented a number of add.
Number of average to see our fee income increase some on the consumer side.
As well as some fees on the treasury side as well for those customers.
We did see some of the some of that benefit this quarter, but we would expect to see a greater benefit during the first fourth quarter and going forward. So I think that should be.
Positive for us going forward.
We are having.
Success in winning new business on the Treasury.
We've actually reduced the overall tier three.
Through.
Third part of our Expunction initiatives, but we have been able to add back a couple of strong producers that have come from a larger and more regional banks that have strong relationships and are giving us opportunities to get in front of us.
Really good significant customers.
Our bankers are also focused on deepening relationships and this yourself.
As you have seen and I'll talk a little bit more on that I'm on slide seven but it has helped us drive more revenue with merchant service business and also with our insurance businesses.
And in addition to that our branches are.
Made a lot of progress on the referral and sales activities, which we are very proud of that.
Our bankers are also stay focused on staying in touch with our own customers.
Reviewing the business performance of all of our.
Major relationships.
Proactively addressing any weaknesses that we see but as Ive stated earlier, we feel.
We still feel confident about where we stand from the overall credit on our loan portfolio.
As you can see on slide seven.
We have continued to focus on getting our startup launch profitable RV marine with the growth there has reached profitability this quarter.
Merchant team is very close.
And it's continuing to make progress of their monthly as we have great additions to new customers on a daily and weekly basis, so that trajectory looks good going forward.
In addition, the Alabama team is making great progress on the environment, where the growth has been more limited on the profitability there is either going to be driven through.
Increasing loans deposits of course, or we continue to manage expense expenses diligently.
For the overall company.
If you look at the height of that investment we have improved our $500000 on a quarterly improvement of $2 million on an annualized basis from the height of our investment in a startup.
We expect to see continued progress.
So the performance on all of these business lines.
I do want to take a minute.
Touch on mortgage and SBA, So first from an operational perspective on mortgage.
We continue to focus on breakeven during this environment as Derek touched on earlier, we did have a small loss for the quarter.
But we are actively adjusting staffing levels to be in.
Excuse me in line with current demand.
We've also changed several of our product offerings.
Removed a few as we continually evaluate what works in todays environment would be elevated interest interest rate for both our customers and for the bank pricing is important.
Our focus mainly today is on the secondary market and the pricing, making sure we are pricing loans. It can be sold to the secondary market.
We've pretty much eliminated the portfolio of products and the construction firm product at this point with the exception of earn very strong customer relationship where we need to.
Where we need to take care of those.
Long term colony customer.
We think mortgages are important to our long term success as a community bank. So we are committed to it where it is.
Very actively managing it in today's environment to make sure there's not an overall drag.
Pro forma.
Our SBS So division, we're working on building and implementing a system towards the smaller.
All our southern AG loans.
So that should be in place during the fourth quarter.
We will be.
We will be able to see some positives on a four quarter, but really starting in the first quarter of next year, we will see some good revenue generation from that.
Have seen slowing from the larger loan demand as you can imagine with the.
The floating rates that go with the BSL portfolio it has slowed demand.
So that is part of our moving focus to those smaller shoveling my orange as well.
We did see as we stated earlier the decrease in classified and criticized loans from the prior quarter and Sps and.
And we had a decrease in nonperforming loans from the prior quarter as well.
Operator: Good morning ladies and gentlemen, and welcome to Colony Banc, 3-4-2023 Conference Conference Call. At this time, all lines are in listen only mode. Following the presentation will conduct a question and answer session.
And the one.
As we talked about earlier from a charge off standpoint, yes. It was.
From a skew smaller loans that we had talked about last quarter. So.
Thanks.
Operator: If at any time during this call you require me to assistance, please first are zero for the operator. This call is being recorded today, October 26th, 2023.
Good improvement there from a quarter over quarter.
We are seeing kind of a negatively into the pipeline.
So I'll stop there and hand, it back over to Heath.
Operator: I will now like to turn the conference over to the directorial at Chief Financial Officer. Please look ahead.
Thanks, Dave I appreciate those comments that really wraps up our prepared remarks and with that we'll call loan certainly go to open the lineup for questions.
Derek Shelnutt: Thanks, Sir Gia.
Derek Shelnutt: Before we get started, I would like to go through our standard exposures. Certain statements we make on this call could be constituted as forward-looking statements within the meaning of the Securities Act of 1933 and a Securities Exchange Act of 1934. Current prospective investors are cautioned that any such forward-looking statements are not guarantees for future performance but involve known and unknown risks and uncertainties. Factors that could cause these differences include but are not limited to pandemics, variations of the company's asset, businesses, cash flows, financial condition, prospects, and other results of operation.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
You have a question. Please press star one if you want to withdraw your question. Please press star two.
Your questions will be bold in their reserves they are received.
We are using a speaker phone please use the handset before pressing any piece.
One moment. Please for your first question.
Your first question comes from Phase two plan from Janney Montgomery Scott. Please go ahead.
Derek Shelnutt: I would 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 followed yesterday, so please have those available to record.
Hey, good morning, gentlemen.
480.
Just wanted to start with.
The incremental cost of raising new deposits today.
Heath: With that, I will turn the call over to our Chief Executive Officer. Thanks, Derek. I want to thank everyone for being on the call today and for your interest in colony. We are pleased with our results for the third quarter as we continue to navigate challenging and changing economic environment. Our earnings increased over the last quarter as we begin to see the results of many strategic initiatives we've been working on over the past several quarters and will continue to work on in the quarters to come.
What are what are your deposits coming on at and how much variation do you see among different parts of your footprint.
Yes.
That's a good question nothing that's changed over the course of the quarter.
<unk>.
The beginning of the quarter, we were seeing a little bit less.
Pressure on deposits and a little less competitive compared to.
Heath: I want to share an overview of activity from the quarter and then hand it over to Derek who is going to go into more detail on the results. Our net interest income for the quarter increased as we continue to diligently navigate the way we price loans and manage our customer relationships on the deposit side. We also saw a full impact of some earlier strategies such as the hedging we put in place in Q2, which has positively benefited our interest expense.
The prior quarter, but as we got towards the end of the quarter and I would say into the.
The environment. We're in today is move probably from needing to be in the high fours to to bring in new business in the low fives.
To bring in new business on the deposit side. So we have seen that.
Move up a little bit towards the end of the quarter, but thats sort of the area. We're at to bring in new money.
Heath: We're glad to share that our non-interest incomes increase quarter over quarter and it represents about 33% of our total revenue. We've seen increases in our newer complimentary lines of business as well as increases in deposit-related charges and fees. We remain focused on growing our complimentary lines of business and fuel. It's important to diversify our non-interest income sources, especially with those that are less sensitive to the rate and economic environments.
Understood and along those same lines as we appear to be near the end of the hiking cycle potentially.
How are you thinking about cycle to date total deposit betas, I think I've pegged at around 29% today could we see that rise into the mid thirty's.
So there's a little bit of catchable on deposits or do you think you are more or less nir.
The peak on deposit costs.
No I think we're going to see that continue to rise I mean, the the the unknown there right as what we.
Heath: There's certainly been some slowdown in our mortgage division driven by the current rate environment. We continue to make changes there to our staffing and product mix, and in order to achieve break even there. We're really proud of our non-interest expense efforts at the non-interest expenses decline half a million dollars from last quarter. Teams worked really hard over the past several quarters to reduce expenses in order to be more complimentary to the moderate growth projections and we're seeing the impact of those efforts.
What we may or may not see the fed continuing to do.
Assuming we level out into this higher for longer.
Somewhere around now.
Yeah.
We could see rates stabilize but if we get increases you know we're going to see that continue to move up some so.
Pretty hard to hard to predict but you know the.
I guess.
You know.
Heath: And even though we're mindful of the expenses and we do look at that alongside our long-term strategies and we've been able even with the expense initiatives to continue to invest in technology and infrastructure that will benefit our customers now and in the future.
As we look at the data.
When we look towards the end of the quarter were up to the high Thirty's.
Cycle.
Today, and so I think we will see that creep up a little more.
Re stabilize just the catch up of getting rates to where they need to be.
Heath: This past quarter we went live with a new data warehouse and API technology that will allow us to better manage and use our data. It will also allow us to integrate other platforms and fintech products with our core. We think this is a big step forward in our long-term innovation strategy and it's going to have positive impacts on how we serve our customers, how we market our products and enhance our operations and profitability.
That makes sense.
Switching gears here I know you talked about expense initiatives, some technology investments new hires.
You get some good information on the deck and it seems like there is some.
Near term.
<unk> should stay flat or maybe come down a little bit we'll see but can you talk about.
Longer term over the course of 'twenty for what we should expect in terms of an expense.
Heath: We also continue to look for opportunities to add to our team through strategic hours where it will enhance long-term strategy even while we have seen decreases in our overall staffing levels. Asset quality remains strong. We saw a decrease in non-performing loans from the prior quarter. Our provision was up this quarter and our net charge also up primarily due to a few SBA loans from our SBSL division where the portion of the loan that's not a government guarantee was charged off.
Growth rate for the year should we look at something low low single digits.
Mid single digits, just trying to think about net net how much we see expenses potentially wise over the course of the year.
Yes, sure and so you know obviously expense management is.
One our radar the biggest piece there be in the head count.
Piece of that and we've seen good progress there.
You know as we go into next year in our budgeting in our discussions.
Talked a lot about.
Heath: We mentioned this last quarter that we were seeing some weakness there and of course our SBA portfolio is primarily variable rate loans and so they've seen the most increases quickly in their payments. This is an area where we may see some some small charge offs going forward but really it was a small number of loans impacted and our team's doing a good job of managing those.
Got the managed the inflation costs on our current team.
That we have in place relative to overall expenses and find ways to.
To continue to improve that.
And manage that I think youll see expenses flatten out.
And then we'll look to continue.
Two to maintain.
When they start going back up because they will at some point right.
Heath: Our loan growth slowed from the previous quarter to annualized rate of about 6 percent. A lot of the growth came from consumer, particularly marine RV during this season, the summer by end season. We expect that our loan portfolio growth for this and our overall portfolio to continue to slow for the next few quarters.
You'll see a low single digit type increases.
Except if we have the opportunity to generate revenue.
So we.
We are really focused on that net noninterest expense to average assets, which Derek mentioned, we drove down from Quito.
I think it actually at one point peaked a little over two to under to.
Heath: Our total deposits were down a little from last quarter and historically we've seen a slight dip in the third quarter. Our deposit base is very diversified. We have a slide on that in the investor presentation but we do see some season annality from municipalities as they spend down during the year and from our rural customer base and agriculture as we see that activity there and we would generally expect both of those segments to increase in the fourth quarter as agricultural producers sell crops and as municipalities see property tax payments, and our total deposits are still up for the whole year, despite being down for the quarter.
To like $1 42 on operating basis and so.
There are some moving pieces there that we have to consider a REIT like on the mortgage side.
We know that could improve as we as we.
We continue to adjust.
<unk>.
But we'd also look to add you know.
One the <unk>.
Any other revenue generating lines of business. We can if we can get an immediate pickup to net and Aida assets and so with our noninterest side.
Sure.
Noninterest complementary lines of business.
Those are going to add noninterest expense, obviously, but but but improve that net in aida assets. So.
On the expense side I think it will start creeping up a little bit at some point next year, but I think we can continue to improve that net in Aida assets a little bit.
Heath: They're up about 4% for the whole year. Our margin was flat quarter-over-quarter, actually increased one basis point. The repricing deposits have slowed, but the environment remains competitive, and we will continue to see our overall cost of funds increase. While we stated flat, our modeling shows we could see still a potential for another five to ten basis points of margin compression over the next quarter of two.
And then at some point, we're going to get to a place where mortgage will level off in the environment and you could see that improve it will increase total expenses, but will help us improve that net in Aida asset. So that's where we're really focused on that net and Aida assets. So I hope that helps you kind of understand how were.
Thinking about it.
No that's very helpful.
Just one last question for me as you look to slow loan growth do you think over the course of 'twenty four you could potentially look at reducing the level of brokered over time to replace that with core deposits.
Derek Shelnutt: So with that, I'm going to turn it over to Derek to go over the financials in a little more detail. Thanks, Steve. I'll begin with our earnings for the quarter.
Derek Shelnutt: In order, net income increased about $502,000 quarter-over-quarter, and when we compare to the prior quarter, we saw net interest income increased $440,000, non-interest income increased $766,000, and non-interest expense declined by $551,000. Interest income increased during the quarter as we remain focused on loan pricing relative to our funding costs. While growth in some areas is slowed, we did see growth in consumer loans, especially in our marine RV division, through the summer buying season.
Maybe giving you a little bit of tailwind in the back of the year and some deposit costs, assuming we have a fed pause.
Yeah, we definitely you know.
We want to get.
Work on that mixture and so that's something as we look at between loan growth slowing in the cash flow off the loan portfolio and also the investment portfolio.
Derek Shelnutt: As Heath mentioned, we do expect that marine RV lending to slow as we move into the end of the year and out of that traditional buying season, and then we've also had some repricing on loans as they renew, which has also helped a little. Interest expense on deposits also increased during the quarter as competition on deposit pricing still remains strong, and we also continue to see some mixing rate changes on existing deposits.
Opportunities to knock out some higher cost funding.
Anything we do on the high end, we try to keep short as we can so that we can.
We have opportunities to pay that off.
I guess the the other.
The thing too.
You know to think about that as Derek mentioned, we continue to look for opportunities to restructure.
And obviously with incremental.
Derek Shelnutt: Where we saw improvement on the interest expense side as with our FHLB borrowing, average balances for the quarter were down compared with last quarter, and we also had a full quarter of the hedging strategy we put into place at the end of Q2, which has helped us both from the initial positive carry on the swaps and the hedge against the increase in borrowing rates that we've seen recently. We did see an increase in the end of quarter FHLB balances, which I will discuss here in a minute when I talk about deposits in funding.
Borrowing costs, where they are.
Any kind of of restructure that we could look at doing the likely candidate for the proceeds of that would be borrowing.
Calls.
Understood. Thanks for the color guys.
Alright, Thank you Tony.
Thank you.
Your next question comes from David Bishop from the help the group. Please go ahead.
Yes. Thank you good morning, gentlemen.
Derek Shelnutt: With non-interesting income, the increase in non-interesting income during the quarter is a product of several different components. On slide 16 and 17 in the investor presentation, we show a representation of how the mix has changed over the recent years and recent quarters. From deposit relationship related income, the net increase in service charges and interchange fees was about $244,000 for the quarter. The non-interesting income component from our SPSL division increased by $163,000 during the quarter.
Good morning, David.
Hey Heath.
A D. Derek just curious I saw the.
The slide deck and in terms of some of the future initiatives to drive profitability I know on the long term objectives.
And maybe maybe it's unanswerable at this standpoint, but.
Getting the five complementary lines of business to that $1 million and net income is that going to be a function of just.
For some of these just a volume to take advantage of scale in some of these segments just curious.
What's the biggest driver to get you to or what happened what has to happen to get to those 1 billion dollar level.
Derek Shelnutt: Mortgage division income did decrease by 284,000 as we see slowing in that industry due to the rate environment. The quality insurance division saw a revenue increase of $66,000 and non-interesting income from colony wealth advisers increased $26,000 and merchant services income increased $10,000 during the quarter. All other non-interesting income increased about $564,000 and some of that was one-time item.
Sure. So when you look at what we're doing on the merchant side on the insurance side on the wealth side those three lines of business.
Our.
Those are more dependent on the referral network from the bank and those lines of business or what I would call infant stage.
Derek Shelnutt: Williams. So for the next quarter and going forward we don't expect quite that same level of increase and really we kind of see this non-interesting come remaining flat or even slightly down in some areas. With non-interest expense, we have been focused on operation or efficiency and managing expenses throughout the year. The decline in non-interest expenses is quarter of a quarter as a result of those efforts. Our net NIE to assets was 1.96% and the fourth quarter of 2022.
At colony.
We've only really within the last quarter or two.
Had the ability from our CRM and data perspective to get information out in front of our bankers and going into the next few quarters the ability to take that data and actually do proactive marketing with it and so I mentioned like our our data warehouse and our API connections so the ability to <unk>.
Take our internal data and be able to use that to cross sell into markets. Our current customers is really.
Derek Shelnutt: And we've sent that number decline with our third quarter this year being at 1.42% on an operating basis. So a lot of improvement there. Total non-interest expenses for the quarter were $20,881,000 and $20,661,000 excluding some final severance expenses from our reduction-inforced initiative. We still feel comfortable with our expected run rate around 20 million a quarter and remain focused on managing expenses to align with our strategy and the current environment. For vision expense total $1 million for the quarter, net loan charge-offs were $898,000 which is up from $200,000 in the prior quarter.
Been more on a manual basis and automated basis. So we haven't even really scratched the surface of opportunity. There. So you've got those three lines that are very.
In our.
Very.
Early on in their ability to produce income in orange at those levels and then you know.
With S. P. A R. S. P. S. L group and mortgage those are groups that were producing income above those levels, obviously, everybody knows about the challenges on the mortgage side.
That will level out at some point and we will be able to get there and then on the SBS L. As Dave mentioned we.
Derek Shelnutt: On last quarter's call we mentioned the possibility of seeing some charge-offs from SBA loans and these charge-offs were on the non-government guarantee portion of a limited number of loans and that totaled a net of 714,000. Non-performing loans decreased quarter of a quarter by about 17% and we still feel good about the overall credit quality in the portfolio. Total loans increased about 25.1 million which is left on the previous quarter as we continue to see slowdown and overall growth there. As we previously mentioned a lot of the growth came from the consumer loans in the marine RV division. We expect overall a loan growth to continue to slow over the next few quarters.
We did pull back a little bit this quarter and profitability, but a lot of that was related to those charge offs coming from the SBS L group and <unk>.
So that's a group.
That should easily be over those levels consistently so that's kind of the areas that we're focused on and there's a lot of upside opportunity.
For those areas, especially that are dependent on.
On the bank referrals and we're just.
Like I said, just beginning to scratch the surface on the opportunity there.
Got it Thats great color and then maybe just from a holistic standpoint.
Derek Shelnutt: Total deposits decreased $36 million during the quarter. This is related to the seasonality of a small portion of our deposits particularly the municipal and government deposits as well as some agricultural deposits as he mentioned earlier and historically looking back especially pre-COVID. We see a small dip in the third quarter as these you need deposits and ag deposits kind of run off but then see increases in the fourth quarter as property tax payments come in and as crops are sold by some of our rural agricultural type deposits.
You mentioned the D.
Indeed mentioned the pullback in Atlanta.
From a conservatism just a bad.
Credit just curious as you look out do you think this environment is sort of a low single digit growth mid single digit growth environment as you sort of put on your forecasting hat.
Yes, absolutely.
Continuing to see slowdown but growth.
You know for the remainder of the year and again you know obviously as you're forecasting you guys think about a lot of things out of our control with the fed in the economy, but if kind of things outlook stays similar to now I could see it being flat or even maybe slightly negative into the first part of next year.
Derek Shelnutt: Our FHLB borrowings increased 30 million during the quarter and this was really towards the end of the quarter. This was a short-term advance and we expect this to be repaid as we see those municipal funds come in during the fourth quarter. Taking a look at the margin we've seen some stability that has kept our increases and liability costs more lined with our earning asset increases. This led to margin essentially being flat quarter of a quarter.
From a from a loan.
Perspective.
So.
That's kind of where we think it will go.
Got it.
I know you mentioned.
A little bit of a delay in terms of velocity, the Alabama LPL just curious maybe what what's driving that lag just given that it's typically thought of as a pretty robust market is it just because the market conditions interest rates. Just curious maybe an update what you are saying in terms of loans and deposits in that market.
Derek Shelnutt: I don't think we're necessarily out of the woods yet and we remain disciplined on pricing any new loans or renewals relative to our current funding costs and the expectation of any increases in those costs of funds going forward. There's still many factors that could cause margin to decline a little more before we at Starten Creek.
Yes.
If you really look at the profitability there is going to be driven.
Derek Shelnutt: Overall, liquidity remains robust, and we outline the various sources of liquidity on slide 15 in the presentation. We have over $1.3 billion in total liquidity and liquidity sources available. We didn't have any discount window or other Federal Reserve borrowings at the end of the quarter and did not have any outstanding borrowings from any of our Fed funds line.
Our acquisition of deposits and through.
Long growth.
In today's environment, it's not market driven but the environment.
There's a lot of them.
Team over there.
It has done a good job in brain.
<unk>.
And our customers relationships that go with that.
Derek Shelnutt: With investments, we haven't seen a lot of activity in the securities portfolio throughout the year. We deployed the cash flow elsewhere on the balance sheet and primarily to fund our loan growth. We continue to evaluate the portfolio and market conditions to assess the possibility of some restructuring there in the securities portfolio and then redeploying some of those proceeds. These funds could be redeployed to achieve a better position for both an earnings and the L.M, perspective.
Okay.
Sure.
Alright.
Yes.
Derek Shelnutt: Some of the important factors that we consider a look at as part of evaluating any type of restructure and a securities portfolio, really the market conditions are reasonable. I'm back under a couple of years, no loss that's greater than a portion of our quarterly earnings that did not arrive capital and then understanding the best use of those proceeds.
Absolutely.
Do you you were cutting out a little bit, but I'll, just I'll just add to that comment.
You know when we started those initiatives.
The.
Patients were to grow loans faster than we have.
I would again repeat what I said earlier, we really haven't changed our our credit metrics.
But our desire.
From a pricing perspective, and a willingness to concede on pricing is not there in this environment and so.
It just between that and between the customer side.
Derek Shelnutt: One last comment about taxes for the quarter. There was a little increase in our tax rate from the prior quarters. We've been close to 18 to 19 percent EPR and that moved up to around 22 percent for Q3. This is a result of increased tepra disallowance related to our tax free municipal which is driven by an increase in our overall cost of funds. To go on forward, we expect a range of about 20 to 22 percent on that as we see that increase vitally just related to that tepra disallowance.
Not as much activity.
So the real estate SGR has pretty much gone it just takes longer to develop deposit in C&I type relationships. Our team is really doing a great job over there.
We are very committed and happy about that from a long term perspective.
It's just it's just the ramp up will take a little little longer and we've reduced some on the expense side from from that.
To match the growth expectations as well.
Alright do you have.
Dave: And now I will turn it over to D to discuss our banking and business funds. Thanks there. First I want to touch on a few things on the banking side of the house. Heath and Derek mentioned we are seeing long growth slow. We expect that to continue over the next several quarters. We really are seeing very little volume at all on the commercial real states. Really that's more of a result of the pricing in today's market to maintain, to make sure that we can maintain a proper margin as well as there's just a generally slowing demand with the increase in borrowing costs in the marketplace.
The dollar amount of loans outstanding at quarter end.
We do.
We put that in our earnings release I believe its about 40 something million.
$45 million.
At the end of the quarter.
That if you look at that.
You know it is increased significantly as we first got go in third quarter of last year going from 7% to 21. The end of 41 and then since then it's been slow or 41% to 44% to 45.
So just a little bit slower.
At this point.
Perfect I appreciate the color.
Dave: We have not really changed any of our underwriting standards there. We've made pretty consistent throughout the cycle. So I guess my point there would end up being it's not a credit driven slowdown. It's really more of an environment and pricing slowdowns. The long growth we are seeing is coming from RV and Marine. It's Heath and Dave but both mentioned and as well the funding up of consumer residential construction loans as those houses are continuing to be built.
Yep.
Thank you.
These human as a reminder, she'll do you have a question. Please press star one.
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Alright, well. Thank you again, everyone for being on the call. Thank you for your support of colony blank or we appreciate you being on the call and look forward to talking to you soon that concludes our call. Thanks.
Dave: We have implemented a number of efforts to see our fee income increase. Some on the consumer side as well as some fees on the treasury side as well for the business customers. We did see some of that benefit this quarter, but we would expect to see a greater benefit during the first fourth quarter in going forward, so I think that should be a positive for us going forward. We are having success in winning new business on the Treasury side.
Yes.
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Dave: We've actually reduced the overall team through part of our expense in this, but we have been able to add back a couple of strong producers that have come from larger, more regional banks that have strong relationships and are given us opportunities to get in front of some really good, significant customers. Our bankers are also focused on deepening the relationships, and this has helped us as you have seen, and I'll talk a little bit more on that on slide seven, but it's helped us drive more revenue with merchant service, business, and also with our insurance businesses.
Dave: And in addition to that, our branches have made a lot of progress in the referral and sales activity, which we are very proud of. Our bankers are also focused on staying in touch with our loan customers. We're reviewing the business performance of all of our major relationships and proactively addressing any weaknesses that we see, but as he stated earlier, we still feel confident about where we stand from the overall credit on our own portfolio gap.
Dave: As you can see on slide seven, we have continued to focus on getting our startup lines profitable, RV Marine, with the growth there has reached profitability this quarter. Our merchant team is very close and is continuing to make progress there monthly as we have great additions to new customers on a daily and weekly basis, so that trajectory looks good going forward. In addition, the Alabama team is making great progress on the environment where the growth has been more limited on the profitability there is either going to be driven through increasing loans deposits of course or as we continue to manage expenses diligently for the overall company.
Dave: If you look at the height of that investment, we have improved $500,000 on a quarterly improvement or $2 million on an annualized basis from the height of our investment in these startups. We expect to see continued progress to the performance on all of these business loans.
Dave: I do want to take a minute and touch on mortgage and SBSL first from an operational perspective on mortgage. We continue to focus on break even during this environment as Derek touched on earlier, we did have a small loss for the quarter, but we are actively adjusting staffing levels to be in line with current demand. We have also changed several of our product offerings and removed a few as we continually evaluate what works in today's environment with the elevated interest rates for both our customers and for the bank.
Dave: Pricing is important, our focus mainly today is on the secondary market and the prices making sure we are pricing loans, it can be sold to the secondary market. We have pretty much eliminated the portfolio product and the construction firm product at this point with the exception of very strong customer relationship where we need to take care of those long term colony customers. We think mortgage is important to our long term success as a community bank, so we are committed to it. We are just very actively managing it in today's environment to make sure there's not an overall drag on performance.
Dave: SPSL division. We're working on building and implementing a system for the smaller $1.7 8 loans. Our hope is that that should be in place during the fourth quarter and we'll be able to see some positives in the fourth quarter that really starting into the first quarter of next year. We will see some good revenue generation from that. We have seen slowing from the larger loan demand as you can imagine with the floating rates that go with the SPSL portfolio, it has slowed demand.
Dave: So that is part of our moving focus to those smaller $7.8 loans as well. We did see, as we stated earlier, decrease in classified and criticize loans from the prior quarter in SPSL and we had a decrease in non-performing loans from the prior quarter as well. And the one, and as we talked about earlier from the charge off standpoint SBA that was from a few smaller loans that we had talked about last quarter. So I think that there was a good improvement there from a quarter of a quarter of what we were seeing, kind of negatively into the pipeline.
Heath: So I'll stop there and hand it back over to Heath. Thanks, Dave. Appreciate those comments.
Heath: That really grabs up our prepared remarks.
Operator: And with that, we'll call on Sergei to open the line up for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press R1. If you want to withdraw your question, please press R2. Your questions will be pulled in the order they are received. If you are using a speakerphone, please leave the handset before pressing any keys. One moment please for your first question.
Philly Stucland: Your first question comes from Philly Stucland from Danny Montgomery Scott. Please look ahead. Hey, good morning, gentlemen.
Heath: I just wanted to start with the incremental cost of raising new deposits today. You know, what are what are the deposits coming on at and how much variation do you see on different parts of your footprint? Yeah, that's a, that's a good question. I think that's changed over the course of the quarter. I think, you know, the beginning and the quarter, we were seeing a little bit less pressure on deposits and a little less competitive compared to the prior quarter.
Heath: But as we got towards the end of the quarter, and I would say into the environment we're in today, it's moved probably from, you know, needing to be in the high forest to bring in new business to in the low fives to bring in new business on the deposit side. So we have seen that move up a little bit, you know, towards the end of the quarter, but that's sort of the area we are at to bring in new money.
Heath: Understood. And along those same lines as we appear to be near the end of the hiking cycle potentially. How are you thinking about cycle-to-date, total deposit betas? I think I've got around 29% today. Can we see that rise into the mid 30s? Just as there's a little bit of catchable on the province, or do you think you're more or less near the peak on deposit costs? No, I think we're going to see that continue to rise.
Heath: I mean, the unknown there, right, is what we what we may or may not see the Fed continuing to do. Assuming we level out into this higher for longer, somewhere around now, I think that we could see rates stabilize, but if we get increases, we're going to see that continue to move up some. It's pretty hard to predict, but I guess you know, as we look at the beta, you know, we're when we look towards the end of the quarter, we're up to the high 30s, you know, cycle today. And so I think we will see that creep up a little more, you know, if rates stabilize, you know, just to catch up of getting rates to where they need to be.
Heath: That makes sense. Solution gears. I know you talked about expense initiatives, some technology investments do hires, and you know, you had some good information on the deck, and it seems like there's some, you know, near term expenses should stay flat or maybe come down a little bit, we'll just see. But can you talk about, you know, longer term over the course 24, what we should expect in terms of an expense, you know, growth rate for the year, should we look at something, you know, low, low single digits, you know, mid, mid single digits, just trying to think about net net, how much we see expenses, potentially rise over the course of the year.
Heath: Yeah, sure. And so, you know, obviously expense management is, you know, really on our radar, the biggest piece there being, you know, the head count piece of that, and we've seen good progress there. You know, as we go into next year, and our budgeting, and our discussions, you know, we've talked a lot about, you know, we got the managed inflation costs on our current team that we have in place relative to overall expenses and find ways to continue to improve that.
Heath: And manage that, I think you'll see, you know, expenses flatten out, and then we'll look to continue to maintain a, when they start going back up, because they will at some point, right, you'll see low single digit type increases, except, you know, if we have the opportunity to generate revenue, and so, you know, we're really focused on that net, non-interest expense to average assets, which Derek mentioned that we drove down from, you know, I think it actually, at one point, peaked a little over two to under, you know, to like 142 on an operating basis. And so, you know, there's some moving pieces there, you know, that we have to consider, right, like, on the mortgage side, you know, that could improve as we continue to adjust there, but we'd also look to add on any other revenue generating lines of business we can if we can get an immediate pick-up to net NAA to assets.
Heath: With our non-interest side, non-interest or complimentary lines of business, those are going to add non-interest expense, obviously, but improve that net NAA to assets. So on the expense side, I think it will start creeping up a little bit at some point next year, but I think we can continue to improve that net NAA to assets a little bit. And then at some point, we're going to get to a place where mortgage will level off in the environment and you see that improve, you know, it'll increase total expenses, but it'll help us improve that net NAA to assets. So that's where we're really focused on that net NAA to assets.
Heath: I hope that helps you kind of understand how we're thinking about it. Now, that's very helpful. Just one last question for me, as you looked at slow loan growth, do you think over the course of 24, or you could potentially look at reducing the level of broker at over time or place that with poor deposits, maybe giving you a little bit of tailwind at the back of the year and some deposit costs, assuming we have a fed pause?
Heath: Yeah, we definitely, you know, want to, you know, get work on that mixture. And so, you know, that's something as we look at, you know, between long growth slowing and the cash flow off the loan portfolio and off the investment portfolio, you know, opportunities to knock out some higher cost funding. You know, anything we do on the high end, we try to keep short as we can so that we can, you know, that we have opportunities to pay that off.
Heath: I guess the other, you know, thing to, you know, to think about that is, as Derek mentioned, you know, we continue to look for opportunities to restructure. And obviously with incremental borrowing costs where they are, you know, any kind of of restructure that we could look at, do, and, you know, likely candidate for the proceeds of that would be borrowing calls. Understood.
Philly Stucland: Thanks for the call guys. All right. Thank you.
David Bishop: Your next question comes from David Bishop from the Hope League group.
David Bishop: Please welcome. Yeah. Thank you. Good morning, gentlemen. Hi, he's Derek just curious. I saw the five deck and in terms of some of the future initiatives to drive profitability. I know on the long term objectives. And maybe maybe financial at this standpoint, but, you know, getting the five complimentary lines of business to that one million in that income. Is that going to be a function of, of just, you know, for some of these just volume to take advantage of scale and some of these segments. Just curious how, you know, what's the biggest driver to get you to the, or what happened, what has to happen to get to this one million dollar.
Heath: Sure. So, you know, when you look at what we're doing on the merchant side, on the insurance side, on the wealth side, you know, those three lines of business are those are more dependent on the referral network from the bank and those lines of business are, you know, what I would call infant stage, you know, at Colony. We've only really within the last quarter or two, you know, had the ability from our CRM and data perspective to get information out in front of our bankers and going into the next few quarters, the ability to take that data and actually do proactive marketing with it.
Heath: And so I mentioned like our our data warehouse and our API connection. So the ability to take our internal data and be able to use that to cross sell and to market to our current customers is really been more on a manual basis, been automated basis. So we haven't even really scratched the surface of opportunity there. So you've got those three lines that are very, you know, very early on in their ability to produce income and aren't at those levels.
Heath: And then, you know, with SBA or SPSL group and mortgage those are groups that were producing income above those levels. You know, obviously everybody knows about the challenges on the mortgage side that will level out at some point and we will be able to get, you know, there and then on the SPSL as dimension, you know, we we we did pull back a little bit this quarter and profitability, but a lot of that was, you know, related to those charge offs coming from the SPSL group.
Heath: And so, you know, that's a group, you know, that should easily be over those levels, you know, consistently. So that's kind of the the areas that we're we're focused on and there's a lot of upside opportunity, you know, for those areas, especially that are dependent on on the bank referrals and we're just like I said, just beginning to scratch the surface on the opportunity there.
Heath: You know, that's great color. And then he's maybe just, you know, from a holistic standpoint, you know, you met just a, indeed, met just a pull back and lending, you know, from a conservatism, just a band, not credit just curious, but as you look out, you think this environment is a sort of a low single digit growth, mid single digit growth environment as you sort of put on your forecasting hat. Yeah, I think, you know, continuing to see slow down, but growth, you know, for the remainder of the year.
Heath: And again, you know, obviously, as you're forecasting, you got to think about a lot of things out of our control with the Fed and the economy, but if kind of things outlooks take similar to now, you know, I could see it being flat or even maybe slightly negative into the first part of next year. From a from a loan perspective. So, you know, that's kind of where we think it'll be.
Heath: I know that you mentioned a little bit of a delay in terms of the launch of the Alabama LPO. Just curious maybe what's driving that lag just given that it's typically thought of as a pretty robust market. Is it just the market's condition and interest rates just curious, maybe an update what you're seeing in terms of loans and deposits in that market? Yeah, the marketing hand, if you really look at the profitability there's going to be driven through the acquisition of deposits and through a long road, the Bayes environment, it's not market driven, but it's the environmental crisis.
Heath: A lot of people say the team over there has done a good job in bringing in our customers' relationships with that. I don't know if that's true or not, but I would just add to that comment, I think when we started those initiatives, the expectations were to grow loans faster than we have. I would again repeat what I said earlier, we really haven't changed our credit metrics, but our desire from a pricing perspective and the willingness to concede on pricing is not there in this environment.
Heath: And so it just between that and between the customer side, not as much activity. So the real estate side's just pretty much gone, it just takes longer to develop deposit and see an eye type relationship. Our team's really doing a great job over there, we are very committed and happy about that from a long term perspective. It's just the ramp up, we'll take a little longer and we'll do some on the expense side from that to match the growth expectations as well.
Heath: Do you have the dollar amount of loans off the end of the quarter? We put that in our earnings release, I believe it's about 40 something million, 45 million at the end of the quarter. And you know that if you look at that, you know, it increased significantly as we first got going, you know, third quarter last year going from seven to 21, then to 41 and then since then it's been slower, 41 to 44 to 45. So just a little bit slower at this point.
David Bishop: Perfect, appreciate the color. Thank you.
Operator: Please send your men as our reminders, would you have a question, please first are one. There are no further questions at this time, you may proceed.
Heath: All right, well, thank you again everyone for being on the call. Thank you for your support of Colony Bancorp. We appreciate you being on the call and look forward to talking to you soon.
Operator: That concludes our call.
Operator: Thanks.