Colony Bankcorp, Inc. (NASDAQ:CBAN) Q4 2022 Earnings Conference Call January 27, 2023 9:00 AM ET
Derek Shelnutt - Acting Chief Financial Officer
Heath Fountain - Chief Executive Officer
Conference Call Participants
David Bishop - Hovde Group
Feddie Strickland - Janney
Hello, and welcome to today's Colony Bank Fourth Quarter 2022 Conference Call. My name is Harry, and I'll be coordinating your call today. [Operator Instructions]
And I'll now hand over to Derek Shelnutt to begin. Derek, please go ahead.
Thanks, Harry. Before we get started today, 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 1933 and the Securities Exchange Act of 1934. 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 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 base, so please have those available to reference.
And with that, I will turn the call over to our Chief Executive Officer, Heath Fountain.
Thanks, D. I want to thank everyone for being on the call today. Before I get into the operating results, I want to cover a couple of other things that you read in the release.
First, this week, we said goodbye to our longtime team member and director, Terry Hester, who passed away on Sunday. Terry started with Colony in 1978 and served with the company over 42-years, spending much of his career as our CFO. He is also a director since 1990. Terry was a dedicated member of our team, the Colony family, was really part of his family, and he's going to be sorely missed by his family and in our team. So our sympathies go out to all those that work closely with him and certainly to his family.
Second, you saw all that we also announced yesterday that Andy Borrmann, our CFO who is leaving the company to pursue other career opportunities. Andy joined us in 2021 through our merger with SouthCrest and we appreciate all he has contributed in his time here and we wishing well in his future endeavors. We started a search process for replacement for Andy.
In the meantime, I've been named Acting CFO of the Holding Company. Most of you know, I spent eight plus years as the CFO of Heritage Financial Group. We have a deep management bench, and I'm confident I can provide the support that our accounting and finance team needs to make sure we have a smooth transition, and I'm going serve as the primary investor relation contact for you during this transition.
Also our Chief Accounting Officer, Derek Shelnutt, who's on this call has been named the Acting CFO of our Operating Subsidiary Colony Bank. Derek is a CPA and has experience in public accounting and in banking. He joined our team in 2020 and played a key role in the development of our accounting team. He's handled a lot of our accounting work when it comes to M&A, also ALCO and all aspects of operations. I have a lot of confidence in him and his ability to lead us through this transition as well.
So with those behind us, I'm going to get right into the quarter. We got a good bit to cover our earnings were up slightly from last quarter reported $0.31 versus is $0.30 last quarter. And I wanted to note that our earnings completely came from the banking division this quarter. Slide 13 in our presentation shows you a breakdown by segment and banking made up all of it for the quarter net. And so while the earnings are only slightly up for the quarter, we've made significant strides throughout the year in terms of how much of our earnings is coming from our core banking.
We of course had significant headwinds from an interest rate perspective on the mortgage banking side this quarter. As rates peaked over seven at the end of the third quarter and going into the fourth, like a lot of other banks was significant mortgage businesses. We saw a real shift from secondary market products into portfolio, adjustable-rate products during the quarter. And so our gain on sale was down about $0.5 million from last quarter and that's down nearly $1.9 million from the fourth quarter of last year.
On slide 16 and 17 in our presentation, you can kind of see how originations have been impacted. Our originations actually remained strong, but our sales were down significantly in the fourth quarter as we move to portfolio products. And our strategy really in mortgage right now is to keep our purchase focused origination team together, give them product to get out to our customers, recruit new originators within our footprint and just be poised to take advantage of the opportunity when rates settle out, there's a lot of folks in the mortgage business right now affiliated with banks that are really getting out and I think it'll be primed when rates settle out a little bit.
Our net interest margin was down slightly. It went down from 3.25% to 3.23%, but our net interest income in dollars was up over $0.5 million, primarily due to our loan growth. And so what's happening is our loan growth is outpacing our deposit growth and so we are having to fund some things at our marginal cost and that's putting some pressure on our cost funds, but we really feel good about where our deposits are. We've maintained good discipline on deposit pricing and still been able to grow our deposits were up 2.5% quarter-over-quarter and that excludes any wholesale deposits. And you're going to hear D talk about our deposits focus in a minute.
It's a tough environment to predict interest rates. We may see our margin stabilize or are compressed slightly from this level. But we have opportunities to continue to put on higher earning assets at levels that may be slightly dilutive to NIM, but are going to be accretive to ROA and ROE and we're going to do that.
Our loan growth as you saw was strong, and D will discuss that as well. Our asset quality remained really good. Non-performers were flat and criticizing classified loans went down. And so with that strong asset quality, we were able to provision a little less this quarter despite the loan growth. We are just as a reminder moving to CECL next quarter. And we continue to model that. And as we disclosed last quarter, we think somewhere in the range of a 15% to 25% increase in our reserve is going to happen with that adoption. Core CECL was forward-looking and so how things will look forward now from three months from now, not so sure. So just a reminder that, that could change.
Going in, I want to talk about our performance and where we're going. We lay out, kind of, our path to high performance in the presentation. Slides nine through 11, but I want to share three highlights. First is achieving strong organic growth. We are doing that. We're executing that well on the loan side. I think in this environment, we're executing that well on the deposit side. Just growing deposits in this environment is tough, but we're doing it.
Increasing non-interest income is the second of our three highlights there. And mortgage being down has hurt us obviously on the revenue side, but I think there is real opportunity for that to return. And still our SBSL team is doing strong and we have opportunity to continue to grow in insurance, merchant and treasury as well.
And then lastly is just a real focus now is shifting to internal opportunities. We think M&A is going to be on the back burner for a while. So we're really just focused internally. Driving internal referrals, we just you know, gotten going with our CRM system internally to track that, focusing on the profitability of our new business lines, and ensuring we capture the operating efficiencies from all the investments we've made in technology.
And then really, it's managing expenses. We've been in a growth mode and we've been growing significantly. We're limiting our hiring now to strategic end market hires. We're not going to be expanding to new markets right now in this environment. Reducing controllable expenses, business development, travel, those kind of things and then also lowering our core provider costs. We are in the final stages of renegotiating our core agreement and we expect some cost saves to start flowing from that here in the first quarter of this year.
And just addressing our overall level of expenses, as you know, since I've been here in 2018, we've averaged 18% growth per year in assets. We've gone from $1.2 billion to just under $3 billion, we've added multiple lines of business, mortgage, small business, specialty lending group, insurance, merchant. We've gone to new markets. We've done whole bank acquisitions. We've done another number of smaller type acquisitions.
And so we moved into this growth phase at a time, that Colony platform was not prepared to go into a growth mode, that's not what they have been in. So we've been investing significantly in people in processes and technology. And we really have the team in place now. We largely have the systems in place. But given where we are, the amount of growth we've experienced, looking ahead at where potential slowing economy years. We're really shifting our focus from external opportunities to grow to internal opportunities to improve efficiency and profitability. And so that's where we're focused on.
And as we laid out last quarter, slide 12, just talks about where do we get -- how do we get from ROA this quarter was 77 bps. How do we get to that 1.2 run rate by the end of 2024, which is what we've been internally targeting. And I just walk you through on that slide a few things. Excess growth is higher than normal, call some excess provision that 6 basis points in the quarter. New lines of business to get from where they are today. And we have some detail on this in there, it’s a 6-basis point drag this quarter.
Mortgage and SBA really year-to-date have only contributed 6 basis points of ROA, 9 net, the 2 netted each other out this quarter and contributed nothing to ROA. And those are businesses that really carried us the last couple of years contributing about 19 bps of ROA. And so those are going to be profitable lines for us and we do expect those to get somewhere in the 10% of range or 10 basis point range.
And then finally, loan growth, you all know we've been growing loans; we've really built our infrastructure from a personnel and technology standpoint both on the front line and the back office to be -- to have a fully owned balance sheet. And every 5% improvement in our long -term deposit, we get about 7 bps of ROA.
And so, you know, you start adding those up, that I just went through and by the end of next year just with those, we get somewhere around maybe 115. And that's without counting the business lines getting more profitable. That's just them breaking even. That's without leveraging technology, managing expenses down. So that's our plan. Our team comes in every day to execute on that and we think we can deliver on that.
Couple more things before I turn it over to D to talk about production side. Our AOCI our unrealized loss in our securities portfolio, we saw that go sideways this quarter, which was nice to see after several quarters of rates going up and really causing a negative there. I added some more disclosures slides 31 to 35 gives you a lot of breakdown of our investment portfolio. We just want you to see that. We don't have a lot of credit exposure there. Interest rates or what's driving our losses. We are seeing our yield creep up a little bit. And I'm hopeful that where rates are, we've reached our peak extension there.
So I think we're going to store seeing our duration, our average life come down, and there's a real opportunity to recover a lot of tangible book value as we see that stabilize. And so we are taking opportunities from time-to-time when we see rates move down to Trim Holdings and we would look at potential opportunities if we can get a quick payback to trim the portfolio and take losses, but we're looking to really avoid that if we're successful on our deposit strategy especially.
And then lastly, just on the dividend $0.11 for the quarter, we're glad to be able to do that for our retail investors, that's about half of our shareholder base. And so it's a very important component of the investment for them. I think it also expresses the confidence we have and our Board has and our ability to keep improving our earnings.
So with those highlights, I'll turn it over to D and he's going to talk about the production side of the bank and our business lines.
Thanks, Heath. On the commercial side of the bank, we had another great quarter of loan growth. As Heath mentioned earlier, we had 9.5% growth over last quarter of annualized as of 40% annualized growth rate.
I do want to point you to a few slides in here to talk a little bit about the color on the loan portfolio growth. If you look at it starting on page 28, it will breakdown some of these details. I would say the main point that I'd like to leave you with is on slide 30. And really, it gives you a breakdown over the last several quarters of the loan to values with which we’ve been originating the CRE. Our non-owner occupied CRE portfolio has, what I would call, a very low loan to value. I guess, my way of saying it is our customers put cash in the deals. And we feel good about the loans that we've originated.
We have the opportunity to grow the loans, but as you can see with those originations, we've been able to keep strong credit metrics as well. And really as we move towards the end of the year, we have continued to tighten on our credit based on the environment that we see coming forward. And in addition to that, we've moved rates up as the Fed has moved. We've been moving slowly with them, I would say we approach the end of the year and as we turn year-end, we've been more aggressive in moving rates up. And I'll talk a little bit more about the fact that'll have in our expectations through the first few quarters this year.
So as we raise that up, it significantly reduces the loan -- it should significantly reduce the loan growth from our originations in CRE this year. We definitely will see loan growth slowing, but what I will say is for the first and second quarter, I think we'll still see elevated loan growth two reasons. One, we still have a strong pipeline even with these elevated pricing. But in addition to that, we've done construction lending and as those draws happen on those lines, it will continue to add loan growth to what we do in the first half of the year.
Our expectation for the second half of the year is to move back more into kind of our long-term goal of 8% to 12% loan growth as we maintain the credit discipline that we've put in place, as well as execute on the pricing strategy that we've put in place as well. You know, to me, one of the things I think that's been really important with us is, I was glad to report that we had 2.5% deposit growth over the quarter and that excludes all wholesale deposits. To me, that's a really good number. In a top rate environment. We've got good markets for deposit growth, and we've got bankers that can deliver on deposit growth when called on.
Some of the changes that we've made as we go into 2020 ‘30 is we've really made some significant changes in our incentive plans for the commercial side and the majority of their plans will be focused on deposit growth, as well as referrals to these other ancillary lines that Heath talked about and then I will go into a little bit more in just a minute. This is a new focus for Colony, and I think we are starting to see the success. We started this in the third quarter, I think we had a good number in the third quarter and then this 2.5% growth in the fourth quarter, I'm proud of as well.
In treasury, we spent the last year developing different treasury products and building out the team to help deliver on treasury. It puts us in a position that we can deliver on the customer needs that we have from our commercial customers. In addition, in October, we added a sales manager with years of treasury experience, and a structure really that allows us to proactively approach the way we sell and the way we service our commercial deposits.
I will move over and talk a little bit about some of the ancillary lines now. If you look on the small business specialty lending or SBA or government guarantee lending on slide 15, excuse me, I would say that we had a consistently profitable year. If you look at each quarter, we delivered consistent profitability and I think we can see that hopefully going forward. We have a good pipeline coming into 2023 that is slightly elevated over where we went into 2022.
I'll talk a little bit about mortgage, Heath has touched on this a little bit, but we -- while our volume were the same, we did reduce secondary market sales. One of the focuses that we do have for this year has really shifting that mix back to the secondary market sales. Rates have helped us in the near-term. Rates have come back a little bit. And it really made those secondary market loans more appealing. The luxury that we did have is we have a balance sheet where we could portfolio loans and we can keep that origination together, but that is not the long-term strategy that we want to have. That is more an interim strategy until those rates stabilize.
If you look on slides 16 and 17, we've laid out our production year-over-year. And if you see our 2023 production and our 2022 production were basically flat the difference in profitability was the short-term secondary market sales for the year.
I also want to touch on a few of our new markets and our new lines of business or ancillary lines as we call them. For Alabama, we have the LPOs in Huntsville and in Birmingham. We had a little over $20 million in growth at year-end, all of these bankers were hired either mid-year or after. So that's a half a year number. Their pipelines are really good. One of the things that we've done with the incentive plans, but also with direction is shifting their groups away from CRE as much and really focusing on operating businesses. And historically, Birmingham and Huntsville have been really good businesses for C&I or commercial and industrial loan origination and deposits and the fees that go with those.
I would also like to say it should become profitable in the next quarter or two based on that loan growth in a way that we look at it. And we look forward to what their pipeline brings in. I've said shortly on marine and RV, we just started originating loans, booked our personal loans last week. And so there will not be much in the numbers here, but it’s some that we've been working on to get off the ground. It's a tremendous opportunity for us in the coming few years. Well, I think the best way to describe it from our standpoint is it is a very efficient way for us to generate loans.
And in addition, it gives us flexibility in the balance sheet, because of those abilities to either hold them or to be able to sell them on the secondary market. And in addition to that, it's really just not a big spend for us in the short-term until we get it to profitability. And then in addition, it helps us add consumer loans to our portfolio. My expectation is that we will get too breakeven in the latter part of the year.
Lastly, I wanted to mention Ed Cannon, who recently joined our team in November as Chief Revenue Officer, and I wanted to Congratulate him on the early effect he's already making. He came to us from Capital City Bank. He's got a wealth of knowledge in mortgage, which in today's world is a great time to have that resource. In addition to that wealth, but really, he just career banker and has great experience across the board and it's really already starting to make a big difference here. I do like the way he's energized, our different ancillary lines about opportunities that are ahead of them.
And even more importantly making sure and pushing that we hit the revenue targets that we're talking about and that we stay focused on driving each of those areas to profitability during 2023.
So with that Heath, I will turn it back over to you. Thanks.
Thanks, D. That that wraps up our prepared comments. And with that, I'd ask Harry to open up the line for questions.
Thanks very much. [Operator Instructions] And our first question today is from the line of David Bishop of Hovde Group. David, please go ahead.
Yes, good morning. Heath, and D. Appreciate taking the question. Hey, maybe, D, just you had sort of alluded to the fact that you're raising loan pricing and maybe that's going to slow growth here. But given the structure of the portfolio, do you think you were maybe behind the curve or maybe competition in raising loan pricing? And does that maybe give you a little bit of a lift in terms of loan yields and pricing and margin in the back half of the year. Just how we should think about maybe how that plays out in the margin in the second half of the year?
Yes, Dave, that's a good question. I do think we could have certainly raised loan prices always quicker as rates moved up so fast. Just to give you an idea of -- we in the fourth quarter our weighted average, you know, put on was about a little over six and the quarter before it was a little under five. If you go back to the end of last year, it was just barely over four. And so there is some opportunity, I think, to see loan, our loan portfolio yield continues to go up.
If it wasn't for the interim, pressure on pricing that's really hard to predict on deposits just with what's going on out there and, you know, you see a lot of banks are losing funding which is causing them to get aggressive. I'd be more confident in that margin pickup. But I think there's an absolute opportunity to continue to see a loan yield pickup. I don't know if you want to add to that, D?
No, I think we've introduced even further pricing guidance, pricing sheets with our commercial bankers out there that we've been raising as we have moved forward. I would say at this point, we -- I would call us at the curve at this point, while they were new, because rates have stabilized out just a little bit when they were going up, we wanted to make sure we were honoring commitments to our customer and we had a balance sheet to be able to take that as long as long.
Got it. Just curious, where are you all [Indiscernible] at these days…
You know, I was curious of where you're standing the CRE concentration these days? Is that a limiting factor at all for CRE factored at all?
We are kind of right at the 100, 300 concentration limits we do have some capital at the holding company. We could push down for that, but we really -- we want to keep the mix is close to sort of where it is today. We're going to see CRE creep up a little bit just as some of the stuff we've already done. Funds up, but we're at a place where we really want to not see a whole lot more CRE added to the balance sheet.
Yes. And I would say the other thing I would bring up on that is part of it is us wanting to shift just because from an overall profitability to those operating businesses, because those are the ones that bring deposits with them, which is why we've been putting that. And those are also the ones that we can refer to treasury merchant services and drive our fee income. And as you know, well, anything we can drive in fee income is tremendously additive when we start looking at an ROA standpoint point. So that's -- so I think that's part of the focus on the shift as well.
Got it. And then one more question, I'll hop back into the queue. Heath, as you look out, the budget for OpEx probably a slowdown you guys will probably be pretty aggressive in expanding this year and hopefully to get the revenue benefits down the line. Do you have a target in mind either efficiency or a growth rate? Should we see that decline from the teens to be low-to-mid or high single-digits? Just curious if you have any sort of sense for expense targets are? Thanks.
Yes, that's a good question. And we have, as I talked about, invested significantly and we've got to now ensure we get the, kind of, returns out of those investments, we won't. So we are focused internally on a lot of projects to reduce operating expenses and certainly to basically hiring freeze that isn't strategic in market type hires. And so I think you'll see a little bit of a creep up from our fourth quarter run rate just from the standpoint of things we've done in the fourth quarter. But I think as we get into the second and third quarter, we have an opportunity to start to reduce our current run rate.
And then from a revenue generation standpoint, as mortgage revenue comes back and as these other lines of business get profitable, we'll be able to sort of grow into that run rate that's a little bit lower than where we are right now.
Got it. Thanks.
[Operator Instructions] And our next question today is from the line of Feddie Strickland of Janney. Feddie, your line is now open.
Hey, good morning. Apologize if I missed this in the opening remarks, but I was just curious what drove the rise in FTE headcount in the fourth quarter? And is there a timeline for these new hires to generate earnings if they're producers?
Yes. So there's really two things driving that. Number one, is that the fourth quarter was really the first quarter really since some of the aftermath of COVID that we've been able to get our retail staffing. Back to the level that we need to efficiently and service our customers well in our branch network. So that was a good bit of what you saw in Q4. And so those are on the lower end of the pay there.
And then we did have a number of mortgage hires and some of those were throughout the year, as we had the opportunity to pick up some production. I mentioned, I think we mentioned either on the call or in the earnings release that we picked up a team in Birmingham, for example, in the fourth quarter. And generally on those type hires, we're dealing with a three-month tight guarantee. I think as we roll into January on the mortgage side, we have rolled all our new producers are out of their guarantee period. And so they'll be in the commission world is how we compensate all our MLOs.
And then obviously we had, as D mentioned, some of the Alabama team that came in, in the third and fourth quarter. And those are a detailed about, you know, how -- where we are in loans and that group and where we expect them to get. And so we think that'll be profitable really soon.
Got it. Should we think about, I guess, trying to think about the retail investment that we think about that as an investment in deposit gathering effectively on the retail side. I mean, I know it's kind of filling position that you've had vacant for a little bit, but I guess my thinking is, if you have more folks on the retail side, it's probably a little easier to retain some of those deposits particularly in the more rural part of the footprint?
Yes. As I said earlier, I said the rural part of the footprint we had is a great deposit gathering franchise that we have. So I would agree with that. There are two things to also make sure we do -- are running everything on a staffing model. So as we have the transaction and those volumes that are out there, those levels will adjust either up or down based on the volume that we have.
In addition to that, I think it's a good way to think it on the deposit gathering, because we introduced a retail, which would include all of our universal bankers that Heath was talking about in our banking center managers. We've introduced an incentive plan for the first time this year, and it is very, very heavily driven on deposit gathering. And in addition to that referral to these other ancillary lines. And so, yes, so that investment is really for that group is about getting additional deposits and also, they can help us from an insurance and also merchant and drive these others to profitability. So I think that is the right way to think about it.
Got it. Thanks. That's helpful. And then just sticking with deposits, you have municipal deposits in some of these smaller cities, long time relationships. Are these municipalities asking for rate increases? And have you seen any significant change there in the past 10 months or so?
We do obviously have municipal relationships in our footprint. It does not represent a large portion of our deposits. I mean, just give you an idea at the end of Q2, it was $290 million at the end Q4, $320-ish million and so ours don't fluctuate as much as some other banks do. We do think we have an opportunity to call on more municipalities in this environment. And we've not seen a lot of pressure from them, because I think really more of the concern a lot of those that we have are operating type accounts. We have not really been active in going out and bidding home municipal deposits and that is one area with the improvement in the product set and our treasury staffing that we think we have an opportunity to go and really add to what we're doing on the muni side.
Got it. Thanks for taking my questions. I'll step back in the queue.
Thank you. We have a follow-up question from the line of David Bishop. David, your line is now open.
Yes. Heath, in terms of the improvement, the ROA, the decline in loan growth, is that implied that we're going to see a little bit of diminution and maybe a pullback in the level of provisioning as gross flows, assuming credit holds in there in the economic outlook. Just maybe directionally how we should think about the provision if growth does slow in the back end?
Yes. So I definitely think the lower loan growth certainly plays into that. And again, as D mentioned, kind of, what we envision or like right now is that we may have a quarter or two of loan growth that is above that, lower than it has been these last few quarters, but above our long-term 8 % to 12% growth rate.
However, if you take our growth rate and back it down after these first couple of quarters to a more normal rate, I still got us running to about an 80% loan-to-deposit ratio by the end of next year. That's with a couple of more quarters that are higher and then backing down. And I think provision will go with it. I guess the only caveat to that would just be sort of the new CECL modeling that we'll be doing going forward. We'll take into account some forward-looking economic factors that we really haven't been putting in now. But I think, I see it definitely trending down as our loan growth trends down assuming we're able to hold these credit metrics.
Got it. Then my follow-up to that in ancillary question, I think you mentioned the CECL impact. Remind me again that's neutral or regulatory capital, but a negative to TCE and that's going to be -- was it 20% of the state of reserve or whether the estimate at the moment is?
Yes. And you're right on that and it is we disclosed last quarter and we will put an updated disclosure in our 10-Q this quarter, but right now we got that 15% to 25% is the range we put there.
Great. Thank you.
[Operator Instructions] And it appears we have no further questions being registered at this time. So I'd like to hand back to Heath for any closing remarks.
Thanks, Harry, and thanks for everyone. Again, for being on the call today. I appreciate your support of Colony Bancorp. We appreciate it, and we welcome you to reach out to us if you have further questions. Thank you.
Thank you, everyone. This concludes today's call. You may now disconnect your lines.