Q4 2023 Colony Bankcorp Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to colony Bank fourth quarter 2023 conference call. At this time all lines are in a listen only mode.
During the presentation, we will conduct a question and answer session. If at any time. During this call. If you require immediate assistance. Please press star zero.
Later.
This call is being recorded on Thursday January 25th 2024.
I'd now like to turn the conference over to Derek <unk> Chief.
Chief Financial Officer. Please go ahead.
Thanks, Julie and 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.
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 assets businesses cash flows financial condition prospects and other 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 reference.
And with that I will turn the call over to our Chief Executive Officer Keith film.
Thank you Derek and thanks to everyone for being on the call today.
Before we start diving into the results I do want to congratulate Derek on being promoted to our CFO, We announced this Tuesday morning, This week and derek's been serving as CFO of colony Bank and Chief Accounting Officer for the company Derek has done a really great job over the last year as we've made this transition.
Into this new role and so I just wanted to take a moment to acknowledge and thank him and wish him well in this new role.
I'm going to run through and highlight some of the activity for the quarter and the year and then I'll pass it back to Derrick to get into more of the details.
Since the beginning of the rate hikes in really in earnest in 2023, we've changed the way we've operated our business. We've had an increased focus this year on efficiency developing core customer relationships, improving our complementary lines of business.
Manage managing expenses to align with the current environment and the opportunities there.
Our team's done a really great job, we've made a lot of progress in areas, where we saw opportunities to adapt to the changing environment.
And we're confident that the success we've had in those areas is going to make us or has made us better and it's going to ultimately lead to improved performance in the future when we get to margin expansion again.
So in the fourth quarter, our earnings were slightly lower than the third quarter, that's primarily a product of increased funding costs and additional provision expense.
We indicated last quarter, we expect the margin to decline another five to 10 basis points in Q4, and it did decline by about eight basis points. However.
However, we do continue to see easing pressure on deposit cost and the rate of increase on the deposit side is slower.
Our interest income did increase for the quarter, but of course, the interest expense outpaced that and so that led to the slightly lower net interest income.
We continue to see assets reprice into higher rates.
That funding costs continuing to slow so we think those trends will.
Starting to move in the right direction as I've mentioned it slowed toward the end.
The fourth quarter, and so what we're forecasting going forward.
Is margin to be.
Flat or slightly down next quarter before we start to see an expansion in later.
Later in 2024.
Our provision expense was higher in the fourth quarter charge offs were at similar levels to what we saw in the third quarter.
And we did see a slight increase in our classified and criticized loans last quarter. We also mentioned, we'd likely see some additional charge offs going forward related to our Sps L and really with the guaranteed loans where those.
Floating rates, increasing so much putting pressure on those bars. Our team is doing a really good job of managing that risk.
We remain confident in our overall credit quality in the small increases we've seen.
Are isolated we haven't seen any widespread issues that would otherwise lead us to believe there are any larger credit concerns.
The criticized classified levels are really it's still very low all in overall levels and we've outlined some more information on criticized and classifieds and flat 29 of our presentation just to give you some granularity of all of that.
As loans.
Noninterest income was lower in the fourth quarter, primarily due to the seasonality of our mortgage.
In addition to just the challenges with the mortgage environment.
Service charges increased with our concerted effort to improve days and our.
Our Sps L Division revenue also increased.
Noninterest expense declined in the quarter.
We're really proud of what we've been doing in.
In addressing noninterest expense, but.
But we don't necessarily expect them to remain at this level going forward we are.
As we look into next year.
Have annual compensation increases go into effect.
Derek will talk more about where we expect noninterest expense going forward.
With the change in the rate environment, we saw.
In the fourth quarter, the fair value of our securities portfolio to improve which led to the.
18% improvement in our OCI, which we're glad to see.
Total deposits for the quarter were down from the prior quarter, but this was all really due to the pay off and reduction of brokered deposits. So on our core deposit base basis. When you look at our customer deposits, they increased both quarter over quarter and year over year.
We also announced during the quarter about our entry in the northwest, Florida with the addition of car sales as our regional market executive we're glad to have Paul on the team and look forward to opportunities to build customer relationships in those markets, particularly Tallahassee and the Florida Panhandle.
Those are markets that we're very familiar with having bank many customers in those areas due to the proximity to our south Georgia markets.
As outlined in slide nine we see a trend of.
For the year overall improvement in our startup.
Vince complementary lines of course fourth quarter is a slower quarter.
Particularly the seasonality of our <unk>.
Marine RV.
<unk> been pleased with the progress of these businesses, we continue to focus on these.
Vince: All lines of business in 2024 to ensure they continue to improve and our noninterest income and better serve the needs of our customers.
We're also very pleased to announce an increase in our quarterly dividend to <unk> 11, two five cents per share.
Our dividend is very important to our long term shareholders, especially those individual shareholders and the communities. We serve many of whom are significant bank customers.
This marks the eighth consecutive year of increased dividends and reflects the confidence we have in our earnings.
As we look out into 2024, we expect we will continue to see some loan growth, but we're probably looking at under 5% loan growth for the year.
Which is.
Vince: As much a reflection of customer demand as it is it is our own appetite.
Vince: We will be focused really on three primary areas internally.
Vince: First deposits looking to retain and grow our current deposit relationships looking to develop new relationships from our calling efforts and our marketing efforts.
All of our or the majority of our incentives around deposit gathering.
Vince: The second is in our noninterest income looking to certainly improve our mortgage revenue is the right market stabilizes a little bit.
Vince: And then growing the revenue as I mentioned earlier now other complementary business lines and as we better utilize our customer data.
And integrate those businesses entire internal processes and.
Vince: And third is inefficiency looking to maintain the discipline on expenses that we put in place in 2023.
And looking for other opportunities to serve our customers more efficiently we use the service standards internally collaborative prompt and simple and when we have opportunity to continue to improve that customer experience get more efficient in that to achieve those standards. So now I will turn it over to Derek and he's going to go into the <unk>.
<unk> in more detail.
Derek: Thank you Heath I'll start with our earnings for the quarter net income decreased 206000 quarter over quarter and when compared to the prior quarter. We saw net interest income decreased approximately 744000 noninterest income decreased 414000, but we also saw solid noninterest expense declined by about one.
Derek: $3 million.
Interest income increased from the previous quarter as we continue to see assets reprice to higher rates and experienced modest loan growth.
Loan growth did slow to an annualized 4% compared to 6% in the prior quarter.
Speaker Change: And as we mentioned last quarter, we did see a slowdown in our RV and marine data, our RV and marine lending division during the off season.
Interest expense outpaced the increase in interest income during the quarter.
Speaker Change: As Heath mentioned, we're starting to see that slow down and the increase in the fourth quarter quarter over quarter was lower than the previous quarters in 2023.
Net interest income declined in the fourth quarter and led to an additional margin compression of eight basis points, which was in line with our forecast that we mentioned on last quarter's call.
Although we've seen a lot of reduction in the overall pressure on funding costs, we still see competition for deposits.
You can see the slowdown in those deposit costs on slide 21 in the Investor presentation.
Speaker Change: And from here going forward, we're likely to see margin drop maybe another three to five basis points before we start seeing any margin expansion.
While we're optimistic that we will see margins starting to go up at some point, we think that will be likely in the second half of 2020 for second half of this year and the timing and how much that increases will largely depend on external factors, such as timing and magnitude of any fed cuts this year.
Noninterest income decreased 414000, which was primarily due to a decrease in mortgage related income.
Over $500000 typically we see mortgage income drop off this time of year.
And overall mortgage environment is still really tough.
Net net service charge and fee income increase around 18% quarter over quarter, which is about $395000.
Speaker Change: SBA gain and related income from our Sps cell Division increased 347000 from the prior quarter.
Commission from our insurance Division also increased quarter over quarter.
Other noninterest income was down but if you remember from our last quarterly call. We mentioned we had a few one time items in the third quarter that we didn't expect to see again in the fourth quarter. Other noninterest income was in line or maybe even slightly up from earlier quarters of the year.
And as Heath mentioned, we've seen improvement in our newer lines of business and expect that trend to continue as we move through 2024.
Noninterest expenses totaled just under $19 6 million for the quarter, which was a decrease from the third quarter.
We're still committed to operational efficiency efficiency and expense discipline in 2023, we managed to improve our net <unk> to average assets from 1.96% in the fourth quarter of 2022% to 135% in the fourth quarter of 2023.
Speaker Change: This was a result of a lot of hard work and effort from all of our team members.
Going forward, our expectation is to be in the $140 on that net NII.
Sure.
Project, our quarterly noninterest expenses to be around $20 million, which is a little bit higher than this past quarter as Heath mentioned in the first quarter 2024 will have annual compensation increases go into effect.
Speaker Change: And then we will likely see some other expenses trend up slightly as we see activity pick up as we move out of the slower winter months.
Provision expense totaled $1 $5 million for the quarter.
On last quarters call, we mentioned the potential for some more charge offs. This quarter net charge offs were 692000, which was similar to the previous quarter.
We did see a slight increase in total nonperforming loans quarter over quarter by NPL still remain low relative to the whole portfolio.
Speaker Change: Our classified and criticized loans increased and we've broken that down for you on slide 29 in the investor deck.
The increases are related to a small number of loans across different loan types and right now we arent seeing any issues with any specific loan types or anything that really gives us a lot of cause for concern criticized and classified loans still remain at a relatively low level compared to overall loans.
Total loans increased by $18 5 million or around 4%.
Speaker Change: Which is less than the previous quarter, we still continue to see that slow down and again, we expect to see modest loan growth in 2024, and then you pick up we do see there will likely occur in the later half of the year.
Speaker Change: Total deposits were down $46 5 million and it was the result of the pay down of our brokered deposits during the quarter, we reduced brokered deposits by around $55 1 million and grew our core customer deposits by $8 6 million.
Speaker Change: In addition to the broker deposits, we also pay down <unk> advances by $10 million as part of reducing our reliance on the more expensive wholesale funding.
Slide 17 outlines our liquidity at the end of the quarter and we're still in a great position there with access to over $1 3 billion in liquidity.
Speaker Change: We do realize the bank term funding program is likely going away. This quarter, we haven't used it at all and so really won't have an impact to our overall access to liquidity.
Speaker Change: We didn't have any discount window other federal reserve borrowings at the end of the quarter. It did not have any outstanding bonds borrowings for many of our fed fund lines.
Speaker Change: An area, where we saw improvement was in the fair value of our investments portfolio with rates moving down as the market adjusts to potential fed rate cuts, we have seen the fair value of the Ams portfolio increase over $16 million from the previous quarter, which translates to a $12 million improvement in our OCI.
Speaker Change: This increase in the fair value of the portfolio creates a little more room for us to potentially look harder at restructuring restructuring a small portion of the portfolio.
Again this is something that we're continually looking at and any losses would be limited to a portion of our quarterly earnings.
The mortgage environment is still challenging and we continue to evaluate and make adjustments to our products and pricing. Our focus has been on breakeven breakeven for our mortgage division and we did end up breaking even in the fourth quarter with just a slight amount of profit there we still believe mortgages on important part.
Our long term strategy.
And we are hopeful to see improvement again once the environment gets a little better.
Speaker Change: And our Sps cell division the pipeline for the small express loans is strong and we see this as a good opportunity going forward.
Premiums on the express loans are typically a little higher and we expect that volume to increase throughout 2024.
We're still seeing slowing demand for the larger loans.
More volume in these express loans is a good way to replace some of that slowing demand for larger loans.
We did have a few more charge offs related to SBA.
This past quarter, which Heath mentioned earlier.
Speaker Change: However, mpls decrease for Sps L division quarter over quarter.
You've mentioned earlier the improvement in our startup lines again, that's outlined on slide 12, Theres a lot of opportunity that we see for.
For these lines to continue to improve over the next year.
Some of these new lines became profitable in 2023, and we expect the remaining ones to be profitable sometime in 2024.
And now I'll turn it back over to Heath for any final comments before we take questions.
Thanks, Derek that ramps up all of our comments, we had said was that our ask Julie to open the lineup for any questions.
Speaker Change: Thank you ladies and gentlemen.
Have a question. Please press the star followed by the one on your Touchtone phone.
If you would like to withdraw your question. Please press the star followed by the two <unk>.
You're using a speaker phone please lift the handset before pressing any keys.
One moment. Please for your first question.
David <unk>: Your first question comes from David <unk> from.
Hum.
Please go ahead.
Hey, good morning, gentlemen.
Hi, Jason.
Hey, Derek just curious I appreciate the guidance in terms of the interest margin just curious.
How sensitive the margin as to the sort of the forward curve and the expectations in terms of the preferred I think.
Maybe three rate cuts just curious maybe.
Derek: How we should think about sensitivity in the margin to potential fed rate cuts.
Derek: Yeah, I'll make a comment and then.
Derek: Turn it there too.
We obviously don't know what the fed's going to do I think given.
Derek: Our guidance is given no change in rates, but.
<unk> lowered rates will improve margin if it's small.
Derek: Small cuts but.
Derek: We think that will probably it will take a quarter or two after the cuts.
Derek: Because we still have this rising.
Derek: Deposit cost that while it's rising last it's still rising a little bit.
And so it will take some time to address the Cds and some of the marginal funding cost we had I think the other part that makes it a little difficult to Dave is just <unk>.
Loan demand.
Derek: The lower loan demand.
Is.
Derek: As you know kind of helping some of that are causing some of that compression does continue to exist, whereas earlier in the year, we had a little bit higher loan growth. So some depends on that but ill Eric any other comments, yeah, and just to kind of touch on what he said about the deposits I think there'll probably be some.
Therefore, a majority of our deposits, we do have kind of pricing and different price points across our deposit base. We have some shorter term wholesale funding, which we would see.
More of an impact earlier, one but.
Some of our other deposits Cds and money market accounts, we have some that are priced higher than we would see some benefit but.
We also still have some that are better priced load that we might see some increases and so I think there'll be some benefit the margin if we do see rates decline.
But to <unk> point, it may take a quarter or two just as we kind of see some of that lag on some of the deposit cost side.
Derek: And from a loan repricing just remind us.
Derek: Maybe over the next.
Derek: Next year or so.
How about just maybe the near term fix to reprice and what the repricing at new origination deals.
Speaker Change: Yes, so I mean.
Speaker Change: Dave from a new origination standpoint.
We're seeing originations in the eights.
And so the new yield put on is really good where our challenge is is just in.
We'd love to have more of our loans re pricing.
More quickly, but do you want to hit on the repricing.
Yeah, Yeah, so I mean.
We don't have as much repricing. This years, we'd like to have I think we will see some benefits. There we will see some modest loan growth, which will help with that but right now we're seeing pricing in the <unk>.
As Heath mentioned in that so that'll be a benefit we are seeing.
<unk> will increase and our loan yields.
As we kind of move through the quarters, and we expect to see that ongoing this year as well.
Got it and then you had mentioned the nice uptick in that.
Deposit service charge increases.
Curious, what's driving that and is this sort of a nice or a new run rate doubled before us, but those things do you think.
Yes, sure. So we did implement some some new service charge fees this past quarter and it was actually I think at the end of Q3 at the very end. So really we got a full quarter's worth of.
Speaker Change: That income in and so that's a level that.
The level that we saw in the fourth quarter will be a good level kind of going forward on what we expect we might see some of that drop off a little bit as we see some people.
There is some opt out that they can do on some of those fees, but overall this increase here that we've seen is something that we.
We feel like is appropriate and going to stick around for a few more quarters going forward.
It's a mixture of fees on the consumer side of.
Speaker Change: Kind of getting more in line with our peers and also.
Speaker Change: Concerted effort on the Treasury side to go generate business same.
Price those products.
Speaker Change: Appropriately as well that you can do a little better or not.
Higher rate environment.
Got it.
A couple more questions.
<unk>.
Speaker Change: The downgrades on the classified criticized like you said they appear pretty granular from a dollar balance basis.
Just curious what drove those downgrades was the deterioration of our financials with end of the year.
Sort of looming repricing that could pressure debt service covenant, just curious, though what drove those downgrades.
Speaker Change: Yes, it's pretty much across the board I think we certainly.
This time, a year start to get financials in for folks that are later filers and we'll get those.
Speaker Change: Analyze and so it's definitely more I think on a prospective basis us analyze and financial statements.
Having concerns about re pricing.
And other trends in their business, but I would say, it's a lot rate driven.
Speaker Change: For the majority of it.
Speaker Change: Got it and then one final question you noted the uptick.
And Sps L.
Speaker Change: Charge off just curious.
Speaker Change: On a dollar basis or what percent of the.
Speaker Change: Current quarter and last quarter were related to the.
Speaker Change: That segment thanks.
So last quarter, a majority of those net charge offs were related to Sps sale that that was a smaller portion.
This quarter.
So it was.
I would I would say probably about 60% to 70% this quarter related to Sps sales. So yes.
There were some that was that was one of the.
Speaker Change: The.
Leading impact really on our net charge offs for both quarters.
Great. Thank you I'll hop back into the queue.
Ladies and gentlemen, as a reminder, so do you have a question. Please press the star followed by the one.
Your next question comes from Chris Marina <unk> from Janney Montgomery Scott. Please go ahead.
Hey, Thanks, good morning, Thanks for hosting us this morning.
To ask a little bit about the OCI improvement.
The information that you gave us in the slide deck about the various buckets.
Those are pre tax so I'm just trying to compare the total change in OCI with those three buckets because it looks like there was.
Some offset on taxes. So I just want to understand that better is there more the ICI recovery that can happen in the future.
Speaker Change: Yeah.
Yes, Chris.
In addition to our investments we do have a small amount of interest rate swaps that would.
That would all set that I think it was just a few hundred thousand dollars during the quarter I guess quarter over quarter that move was about a.
Milligan.
Speaker Change: Gain on the swaps of about 700 in last quarter, and then a loss this quarter of 300, and so you've got about a million moves there.
But that's obviously a fraction of the improvement we saw.
On the.
On the security side so.
We continue to.
The terms of the securities are coming in we try to rolling down the curve.
But obviously the biggest move to that would be if we continue to see rates come down.
Got it that makes sense. Thank you for that I appreciate that and then.
When we look at the loan yield that you have seen increase in loan yields over many quarters is there additional loan yield bumps that can happen even as the portfolio turns were just sort of a natural rate increases go through I'm, just kind of curious if theres more loan yield thats available. This next 12 to 18 months.
Speaker Change: Yeah, I think there is and that's kind of what we're forecasting in our budget for the year.
I don't we do have loans that will be re pricing will have new loans coming on at higher rates and so we will see the pickup.
Speaker Change: Across the next year, but I think it will be similar to what we've seen over the past couple of quarters.
Chris: Yeah, and I'll, just add Chris I mean, our total <unk>.
Loan yield I think it's $5 65 for the quarter.
Chris: We're putting loans on in the in the age or in some cases in the high Sevens.
Our total.
Duration of our loan portfolio is just over two and a half years and so we have.
Several hundred million dollars of loans repricing each year. So obviously, we're working hard.
Pushed the yields up on on these renewals and so.
It is.
Chris: Not having net growth.
<unk>.
Limit some of that but there is still significant opportunity to move our loan yields up and I think.
And the last.
A few quarters.
It's slow down some of that yield increase because we've been coming off of such a low base, but there is still an opportunity.
Each quarter to get some nice increases on that.
Chris: Loan portfolio.
And he is the mix between fixed and variable do you see that kind of still being relatively the same in the next year or so.
Well actually so from a production standpoint, we are seeing.
Continued.
More production on the variable side, the last couple of quarters.
But from an overall standpoint, we're still at a high percentage.
Chris: Still a higher percentage of homes on the fixed side, but we are chipping away at that.
Chris: Great. That's helpful. And then last question from me is there is a slide I think it's number 12 about the sort of data and analytics that you are now harvesting I'm sure. It's still early for what you want to do with that but what do you envision that data does for you. This next year or two I mean, do you kind of cross sell the same customer just more business at a.
Chris: Better profit margin do you see that data kind of helping you get net new customers I'm just sort of curious how you think through kind of where that's going to take it.
Yes, yes, that's a great question and we are a little early on we've really been building the data infrastructure.
The last year year, and a half and we have that infrastructure in place at this point now it's about utilization of the data and really trying to allocate that to the highest priority of where it can drive the biggest increase in revenue.
We have nearly 100000 customers.
And what we're trying to do is take that data and utilize that to present marketing opportunities to put in front of our bankers to.
To make sure that we do.
No. We're are both on the deposit side, where we're our customers other business is.
Where we can drive customers to wilt insurance merchant services. So.
Chris: Really.
Chris: The bulk of what's been driving our increased revenue in our business lines and what's been driving our business development as a company has been.
Just sheer calling effort and what we hope to do is by utilizing that data is going to give us marketing too.
Net that information both to put it in front of the customer, but also to our bankers to be able to direct that marketing or that calling effort.
So that's a big focus of ours this year next year.
And we think that's kind of the future and that's why it's important for us to have multiple lines of business to being able to drive more revenue per customer and and.
Chris: Help to optimize that customer base that we have an hour and a relatively small average SaaS range. If we can get that revenue from other services really makes that.
Low cost deposit network.
Chris: It is great, but theyre higher expenses, so that helps offset the increase this revenue and I think.
We should see continued improvement on the <unk>.
Chris: Noninterest income side from that.
Chris: For a long time.
We're just scratching the surface of that.
Chris: Great. That's really good color. Thank you both for the time and the background. This morning.
Chris: Thank you Chris.
Chris: Your next question comes from David <unk> from Husky. Please go ahead.
Speaker Change: Yes, just a couple of follow ups.
You noted obviously the addition of <unk>.
Speaker Change: Al.
This quarter.
Jumpstart the efforts in northern Florida.
Speaker Change: You did see sort of a lagging pre tax profitability on the Alabama LPL.
Does that could that potentially augment some of the efforts youre doing just given sort of the proximity on a geographic.
Speaker Change: Geographic basis, and that remind us on the marine RV lending was that.
Are those being generated for portfolio or do you tend to sort of group. Those every couple of quarters for bulk sale. Thanks.
Yeah, So first on Florida.
We did.
Yes.
Our goal there was to startup that effort with a.
Cost neutral manner, and so you do see.
Speaker Change: Areas.
Continue to improve their profitability, we've had a reduction in some other areas that help offset the increased expense there.
So we don't expect that to be a large net drag.
Then.
Remind me the marine RV, so to our goal we have not sold any.
But our goal is as we build that portfolio.
Season, some of that that we will have periodic sales of loans and so.
Speaker Change: We do think there is an opportunity to generate revenue.
From that that you haven't seen in our operation.
Yet we have portfolio and everything thus far.
Speaker Change: Got it and then Derek I think if I heard you.
Obviously.
Anything on expenses here, but we should expect some sort of inflationary pressure into the first quarter.
To 2024.
If I could take hold and annual compensation rates to take effect, but I hear you correct.
Speaker Change: That's right inside of kind of where we've landed on our forecast is around that $20 million quarter, Mark which is going to be higher than this past quarter end.
Speaker Change: Again, it just goes back to some of those increases that we know are coming in this first quarter and so that will that will.
Speaker Change: Cause that to go up a little bit.
Great I appreciate all the color this morning.
Speaker Change: Thank you.
Presenters there are no further questions at this time. Please proceed with your closing remarks.
Alright, well, we appreciate everybody being on the call today. Thanks again for your support of colony Bank poor and that concludes our call.
And ladies and gentlemen. This concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.
Hum.
Yes.
Yeah.
[music].