Colony Bankcorp Inc
NASDAQ:CBAN
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Colony Bankcorp Inc
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Hello, and a warm welcome to Colony Bank First Quarter 2023 Conference Call. My name is Candice, and I'll be your coordinator for today's call. [Operator Instructions].
I would now like to hand the conference over to, Derek Shelnutt, to begin. Derek, please go ahead.
Thanks, Candice. 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, so please have those available for reference.
And with that, I will turn the call over to our Chief Executive Officer, Heath Fountain.
Hi, everyone, for being on the call today. We're pleased to report solid results and what's turned out to be a very unusual environment this quarter. Following the failures of Silicon Valley and Signature Bank, our industry received a real test of liquidity and really a test of financial strength and confidence in the banking industry.
As a whole and we passed that test and I think the vast majority of the banking industry did I do want to thank our team for all their hard work and extra effort in communicating and working with our customers during this uncertain time, I think that the disruption that we had during the quarter really highlighted the value in core deposit franchises like ours. We have not had to borrow from the Fed's Bank Term Funding Program and we have no overnight borrowings outstanding at the end of the quarter.
During the call, we're going to -- and in our investor presentation, we'll highlight the strength of our deposit base and our liquidity and share some new information with you on that. I'm going to run through a quick overview today of the quarter and then Derek's going to highlight our earnings and liquidity and then “D” Copeland, will give an update on our operating businesses.
We did see very good stability in our deposits this quarter, despite the uncertainty in the marketplace and we were pleased to see that. From an earnings perspective, earnings were down quarter-over-quarter, but excluding one-time items, our operating earnings were level with last quarter. Of course Q1 is the shortest quarter of the year with less days to earn interest and fees, and it's a seasonally weak period for mortgage origination. So, we're pleased to report operating earnings in-line with last quarter.
Again, this quarter, as in the last couple of quarters, all of our earnings came from our banking division, which highlights the strength of our core banking business. We're focused on improving the profitability of our mortgage and other operating businesses and D, will give you an update on the significant process we're making there.
Loans this quarter grew at about a 14% annualized rate, but given the current economic outlook and decrease customer demand, we would expect loan growth to be flat or slightly up for the remainder of the year. Our margin did decline quarter-over-quarter as expected due to the continuing increase in deposit rates, which outpaced the growth in our earning asset yields. We expect that pressure to continue and expect margin to be in the low 3s or high 2s for the remainder of 2023 given current interest rate forecast.
Non-interest income remained fairly level this quarter. Again, this is a seasonally light quarter for us in non-interest income due to the less days and the seasonality of mortgage. Mortgage revenue was flat compared to last quarter and insurance and other non-interest income held offset the decreases that we also saw in our government guaranteed lending this quarter. We have a lot of opportunities to see non-interest income grow throughout the year, so we're very excited about that.
One of the areas we saw significant improvement this quarter was in operating expenses which were down $662,000 from last quarter and down about $1.3 million when you exclude one-time severance costs and contract termination costs related to the SouthCrest acquisition. So, we were glad to see that.
Asset quality remained strong levels were criticized and classified assets remain steady as the net charge-offs. And then just in terms of capital management, we did not buy any shares back this quarter. We certainly think this is a very attractive level to be buying our shares but given the uncertainty in economy, the uncertainty in the regulatory environment following the recent bank failures, we just think it's a better time to be building capital right now.
So all in all, a good first quarter, it sets us up well to achieve our goals this year, which includes a focus to get to a 1% ROA run rate by the end of the year.
So, now I'm going to turn it over to Derek Shelnutt, our Chief Accounting Officer to go over the financials in more detail.
Thanks, Heath. First, I'd like to cover some information about liquidity and deposits. We've added a number of slides in our investor presentation to provide you with more information on our liquidity and our deposit base.
Starting on slide 18, we lay out some additional information on our deposit accounts. We're growing our customer base in terms of total accounts but we are seeing our customers shift their balances as you might expect in a higher interest rate environment from [DBA] (ph) accounts to interest-bearing accounts.
On slide 19, you can see that our deposits are spread throughout our footprint with the strongest deposit base being in our legacy South George footprint.
On slide 20, we've provided you with a breakdown of our business deposit customers by industry type. Given the concentrated nature of the deposits with some of the banks that have struggled with liquidity challenges recently, we thought it was important to highlight just how diversified our business customers are.
On slide 21, we show you the trends in our uninsured deposits. And as you can see, we did see a decrease in uninsured deposits this quarter. And we saw inflow to our [ICS] (ph) products and also just some general restructuring of some accounts from some of our customers to maximize their coverage of FDIC insurance.
Overall, we have a really low level of adjusted uninsured deposits, which would exclude our municipalities who have their deposits collateralized. We have sufficient off-balance sheet liquidity as highlighted on slide 15, to cover all of our adjusted uninsured deposits in a stress liquidity situation. I'd also like to address our AOCI, which is driven by unrealized losses in our securities portfolio. Our AOCI went from about $66 million last quarter to $60 million this quarter.
Slide 25 through 27 give you a breakdown of our investment portfolio, and we don't have a lot of the credit exposure in our portfolio, it's the interest rate changes that are driving those losses. We continue to see the yields creeping up and we also see our average life and durations decreasing from their peaks back in the second quarter and third quarter of last year.
There's significant opportunity to recover tangible book value, as we see rates stabilize and or come down from here. And from an earnings perspective, as Heath mentioned earlier, EPS was down to $0.29 this quarter compared to $0.31 last quarter. On an operating basis, earnings per share was flat at $0.31 this quarter and last quarter.
Our net interest income was down about $800,000 from last quarter with little over half that being due to the shorter quarter. Our earning asset yield increased 25 basis points from last quarter to 4.23%. This was exceeded by the 51 basis point increase we saw in our interest-bearing liabilities. And to give you an idea of what that looks like going forward, our cost of interest-bearing funds was around 1.66% at the end of the quarter compared to 1.47% for the whole quarter. And our cost of interest-bearing deposits was around 1.24% at the end of the quarter compared to 1.06% for the whole quarter.
Our provision for loan losses for the quarter was $900,000, which is in-line with last quarter and being driven primarily by our loan growth. We did adopt CECL during the first quarter and that resulted in a $1.2 million one-time charge to capital related primarily to the requirement in CECL to reserve for unfunded commitment.
As Heath mentioned, our non-interest income was flat compared to last quarter. Mortgage income was stable compared to last quarter, and as D, will discuss in more detail later, we saw a significant increases in our pipeline towards the end of the quarter as rates decrease and as we enter the traditionally strong spring home-buying season.
We are focused on driving down operating expenses and we want to drive our quarterly run rate of operating expenses down to $20 million per quarter by the end of the year. This quarter, excluding one-time charges, we were around $20.5 million. We shifted our team's focus internally given our outlook for lower growth and we are making adjustments to leverage technology and ensure that our staffing levels remain appropriate for our current outlook.
From a staffing perspective, we're down significantly in FTE this quarter, both in the banking division and in mortgage, and we'll continue to see those numbers come down both through attrition and through reduction in force. We've already implemented some of those reductions in the second quarter, particularly in our mortgage back office.
Our compensation expense quarter-over-quarter was flat when you exclude severance expenses. Of course in the first quarter, some of those decreases in staffing were offset by our annual compensation increases that occur in the first quarter. And we should see on a go-forward basis, we should see that number come down as these FTE reductions take hold.
Leveraging technology has always been a part of our path to profitability. However, we thought we would grow into some of this by adding capacity, but given our current outlook for lower growth, we'll continue you to make adjustments to our expense base and we believe we see the opportunity for other expenses to continue to come down. Also during the quarter, we renewed our core contract or core system contract and that resulted in about a $1 million annual savings and we realized the portion of that in the first quarter.
Now, I'd like to hand it over to D, to discuss our business plans.
Thanks, Derek. First, let me touch on loans. I'd like to talk a little bit about the loan growth on the commercial side of the bank. We had another great quarter of loan growth. As Heath mentioned, grew about 14% on an annualized rate for the quarter. That's significantly lower than it was last year. We expect to continue to slow down this year, and we likely will see loans stays flat to slightly up for the remainder of the year.
On page 12, you'll see a breakdown of the different loan growth by different markets. And you'll see that we had strong loan growth in both the Alabama and the Atlanta markets.
On slide 22, we have an additional breakdown of the overall loan portfolio. One area that has gotten a lot of attention this quarter from a lot of the other financial institutions and investors that are out there, we broke down further on slide 22, which is our office sector, and I thought I'd give you a little bit of information on what our office portfolio looks line.
Roughly 10% of our total loan portfolio is in the office sector, and doing that, if you look at ours, we do not really play. We don't have any of the high-rise offices that a lot of the other institutions do. Over half of our portfolio is single-storey office buildings, and we really have no offices over three storeys.
As you can see in the information provided, we have strong loan to values in the sector and only 9% of our portfolio is non-recourse. But as you can see in both of those, they are very low loan to values. We feel good about this portion of our book and probably one of the most telling stats is at the end of the quarter, we had zero past dues in the office sector.
I'll switch now to deposits. Deposits did grow slightly 1% quarter-over-quarter. If you exclude broker deposits, we will virtually flat for the quarter as well. If you look at slide 19, we’ll give you a breakdown of the deposits by market. And I think that's a very telling story for us is the majority of our markets are in that historic rural South Georgia portfolio, which is very much a very, very stable deposit base. We have a tremendous opportunity for deposit growth in the long-term in our higher growth markets and we look forward to that opportunity.
On the commercial side, our banker incentives have been moved this year and really at the beginning of the year prior to all of events that took place and are heavily focused on the deposits for 2023. We have implemented and rolled out retail incentive plans that are also focused on deposits as well, and these incentive plans have been in place since the beginning of the year.
Now, in treasury, we have added talent on the sales side very recently and we hope that this pick-up can help us in acquisition of deposits in the markets and we feel we can be very competitive there.
I'll switch now to a couple of our lines of business. First, I'll talk about the small business specialty lending. We had a good quarter there, and just as a reminder, those are variable rates and they are in general and in the prime plus two type of loans. So in today's rate environment, they are good loans for us to be making as they will move as rates do.
You can imagine though with those rates, there has been pressure on that business, but at the same time, we had good production. And you can see that on slide eight. This group has been consistently profitable. In addition to that, we are exploring other opportunities by adding small dollar lending and other specialty groups within the SBSL portfolio and those loans would have yields in excess of what I just mentioned previously.
On the mortgage side, we had a significant shift during the first quarter. Just wanted to -- we have moved more heavily back to the secondary market loans. That was most apparent in March. We did have some things in January and February that we closed out from year-end. And as you look at it, we moved to profitability in March and so for the month of March that we were there.
Slide nine, shows the mortgage production that we had, but in addition to moving to profitability in March, we also took actions needed to be done. We reduced back office expenses in the first quarter and have already reduced additional expenses in April that will show up in the second quarter as well.
We are seeing good locks and good production April, now in excess of where we were in March, which is very much a positive, we turn to profitability. We expect this to be mortgage to be profitable for the remainder of the year, assuming we stay in the rate environment that we are today.
Let me touch on a couple of the other new markets and start-up business. If you look on slide seven, there's a lot of different information that is there. I think one thing that is key to note is that, the losses in those businesses peaked in the fourth quarter and they should continue to come down and turn to profitability over the remainder of this year, in each and every one of those businesses.
I'll touch first on Alabama, we're making good progress with the team in Alabama. Our loans closed at about $41 million in Alabama which is almost double where we were at the beginning of the first quarter. We still have a good pipeline and we have done this with our team shifting over CRE to more C&I focused lending and of course deposit generation as well.
The Marine RV, this is really the first quarter that we have had this group in full operation. We closed the quarter with about $2 million in out-standings. We continue to see a ramp-up there which is positive. To-date, today through today, we are roughly $5 million, so we've had enough -- we've had another $3 million in production at the beginning of April. The one thing that is great about this is we have put strong credit scores and really strong returns on this business. Expenses in this business should not go up significantly with the adding of this portfolio. And so it should just be as we add assets, we'll get more and more profitability.
In addition, another positive to this is it is a great asset and generation for us and a great class but it also gives us the opportunity to sell portfolios in the future over the long-term if we want to originate fees.
And then lastly, I want to touch on merchant services. The merchant team is having good success. As our bankers have found out, this is a great lead product for calling on business customers for deposits and our referrals continue to grow every month, and our volumes are consistently increasing, which is really the main factor in growing to profitability. We continue to see a very good trajectory for this and expect to be at profitability during 2023 as well.
With that, I'll turn it back over to you, Heath.
Thanks, D. That wraps up our prepared comments for today. And so with that, I'll call on Candice, to open up the line for any questions we might have.
Thank you. [Operator Instructions]. So, our first question comes from the line of David Bishop of Hovde Group. Your line is now open. Please go ahead.
Yes. Good morning, gentlemen.
Good morning.
I am curious, Heath or D in term, I appreciate the disclosure on the start-ups. As you noted, it looks like the expense drag may have peaked. Do you see those potentially breaking even by the end of this year, maybe just where you see the overall sort of profitability or pre-tax profitability you provide trending throughout the year and can that term profit?
Yes, we do expect those to be all to be profitable by the end of the year on a run-rate basis. Alabama is pretty close given the loan growth there. So, we should see that this quarter or next, and then the others towards the end of the year. So, we do expect those to get to profitability by year-end.
Yes. All of them should be profitable this year. And the types of loans, the C&I loans in those markets, are those similar to the ones you're making in your core markets, just curious if there's any difference in sort of the tenor or nature of those loans within the Alabama.
Yes, if you’re talking about Atlanta and Alabama. I would say absolutely, they’re the exact same things that we do. It's a very similar type customer. Some of them may be slightly larger in size than our smaller it's, but not big, but they are exactly the same type customer we're banking in our other markets.
Got it. And then curious, it sounds like you've already addressed some of the back office, FTE headcount or such at least mostly in the mortgage banking unit. Do you worry about that cutting into meat impacting revenues, you think it's just sort of some of the excess that's been eliminated and it won't impact the production -- on the production side?
Yeah. Our expectation is that, it won't impact production. We've worked hard to really bring on great folks on the origination team and on the back office team, but just as we had built that out, we had excess capacity that just wasn't going to be -- wasn't going to be needed for a while and so we needed to go in and make sure we got the expense base to match the production side.
So, we have a real good outlook for production and the markets that we're in, lot of our mortgage origination comes from Middle Georgia, Augusta and Savannah, and you have very good still housing activity in those markets limited amount of inventory is a challenge but very active and good markets. And so, with rates leveling out a little bit, we've seen a lot more activity there.
Got it. And then, D, Heath, still it sounds like from the preamble with loan growth got it to be relatively flat. Still pretty -- still being pretty cautious in the construction to see a re-segment there, is that safe to say that you'll probably see some attrition there through the years, you move the concentration ratio down?
Well, I think we we're out. Let's call maybe selective on the CRE side. I mean, we will see some attrition but in today's environment, not a lot of payoffs happening. We'll continue to get amortization of course on those, but a lot of those are historic loans have been there for a while and would be refinancing at higher rates.
So, I don't think we'll have a ton of attrition, but at the same time, I think we will be more selective on the new loans that we generate in that portfolio.
I think what we're seeing, Dave, on the construction side, we have the homebuilder finance business that's also kind of like the mortgage, Augusta, Savannah, Middle, Georgia, a little bit South Atlanta. We're seeing those builders pull back even despite the fact that they're still having no problems turning inventory and selling, there just these builders have been through the cycle and made it through last time. And remember that and they are pulling back on the amount of housing starts they're doing. So, we're seeing that sector pull back as well.
Yes. I haven't been through the crisis last time, with you guys being down there, are you seeing any signs of overbuilding there to the markets pretty well balanced in terms of inventory versus demand, if not sure.
We don't see any overbuilding happening. There is still a real shortage, these are markets that are still seeing net population growth and just really very low level of inventory and very fast turn time still in all these markets.
So, it's that there's really not any sign of deterioration at this point. And the biggest key to that is the lot inventory. I mean, that's becomes a big thing where you've got to where a lot of the builders are having to do their own lots because of the lack of lot inventory that is out which in the bad thing as we go into today's environment.
Got it. I'll hop in -- hop back into the queue. Thanks.
Thank you.
Thank you. Our next question comes from the line of Feddie Strickland of Janney Montgomery Scott. Your line is now open. Please go ahead.
Hi, good morning.
Good morning, Feddie.
Just wondering if you could talk about the balance between deposit costs and deposit retention. I mean it sounds like you think the South Georgia deposit kind of help you versus peers on that front, is that right?
A couple of things with that, it's the markets that we're in that have a little bit less probably level of competition than the larger markets. And it's also the average size of the depositor is smaller, and so when rates are moving up, from an environment we've been in where you were earning nothing on your deposits and it moves to 3% or 4% that makes a big difference on $100,000 but it makes less difference on $5,000.
And so, just given the consumer base that we have and the large number of customers, that's helpful, but it is a balance like you said and we are trying to manage that the best we can in terms paying fair deposit rates for our customers, but not blowing up our interest expense at the same time. And that's just something we're balancing every single day, but as you can see from our deposit balances, I think we're doing a pretty good job of balance in that and don't -- at this point, see the need to more drastically move those rates up, but obviously the rates are going to continue to move up as we -- as time goes on and freight stay at this level, we're going to continue to see those deposit rates move up.
That makes sense. Thanks, Heath. And switching gears, can you remind us of the securities cash flows. Just trying to peg AOCI unwind over the next 18 months, 24 months and figuring out what incremental tangible book you might get out of that?
I'm going to let, Derek, maybe give you some numbers, but I'll just say, that when we think about our valuation and the upside prospects for a stock, the amount of tangible book value that's going to roll back in through time, it is significant. And so, we really think that there's a lot of opportunity for that and of course during that time, as I mentioned and as we have on our slides, you'll see the rates are moving up on that that's left too. And we're seeing the maturities, we're just rolling the curve with those. And so, there's a lot of opportunity I think there for us to see, a good bit of book value accretion. And, Derek, do you want to give some of the cash flow numbers?
Yes. So, right now with principal interest and maturities, we're right around that $20 million mark per quarter plus or minus. And so we're going to -- I think that's pretty -- given this interest rate environment that's going to be pretty much where we're at unless interest rates move up or down significantly, which could extend or shorten our portfolio, especially on our pass through investments.
Got it. Thanks. That's helpful.
I hope that’s helpful, Feddie?
No, that's super helpful. Thank you for that. And just one last question from me, just thinking about the Bank Term Funding Program, I know you guys didn't tap it, and I know now rates have kind of moved up to more or less where FHLB is from what I've heard from other banks, but is there a situation where you consider using it just considering the pre-payment penalty or do you kind of view it in the same realm as the discount window?
So, when it first -- when it was first rolled out, and you had it available and then you had the Federal Home Loan Bank was getting hit with all advances, I presume coming from the larger regional banks that spread between FHLB and the Bank Term Funding Program was very significant. And, at that time though, I think the concern was if you utilize that -- are you -- is there some stigma related to that from the public or from investor regulators made it clear that they didn't see it that way.
And so -- but since things have settled out the home loan bank differential, as you mentioned, isn't as large as it was. The flexibility of having that ability to repay at any time without penalty is nice, but I think still just we're in this environment where you're one new story away from public confidence being potentially damaged. And of course no news outlet is looking to provide any positive news about the banking industry.
And so, I just think it's probably not worth it now especially given that differential. I think we look at it as a backup and we have looked at -- and we have pledged some of our more significantly under water securities to that, because it does give you flexibility there. But we look at more a backup in more of a situation like that. Just right now, that's an evolving situation as we look at what others are doing, but we don't want to be an outlier there.
Got it. Makes sense to me. Thanks for taking my questions.
Thank you.
Our next question comes from the line of Kevin Fitzsimmons of D.A. Davidson. Your line is now open. Please go ahead.
Hi, good morning gentlemen. This is actually [Christian] (ph) on for Kevin.
Good morning.
So, just on loan growth, I know you guys mentioned that this year might be flat or slightly up. So, are there any certain areas you're experiencing slow-down in the loan pipeline? I understand mortgage has definitely seen a sort of a pullback, but just wondering if I'm being more specific on that.
Yes, I'll touch on that, Christian, it’s really I think our pipeline still looks good. I think some of it has been an intentional shift where a lot of our growth last year was in the CRE side and so a lot of that shift has just been reducing some of the appetite for the CRE side in today's environment.
And so, it really would be more kind of reducing that and making sure that we focus on businesses that we can get full relationships with deposits with loans and actually selling our other ancillary lines of business with them. So it's really more about that.
I think we may see a slight tick-up in the homebuilder crowd, just for the next month or two because of the -- it's building season. So, we'll watch that, but the reality is I think it's more just slowing down on the CRE side.
Got it. Thank you. And then just on loan re-pricing, wondering if you can provide any color just on how the new and replaced loan yields looked going into the quarter?
Yes, we can do that. I think that, I think last quarter, our weighted average put on yield was a little over 6%, and this quarter, it just a little under 7%. So, we're seeing that move up nicely. And so, we continue to get nice pickups in yield and we think that will continue to move higher given where rates are today.
And so, some of our loan portfolio has longer lead times than other and we're seeing -- we're being able to get the rates we need to get now as demands a little slower and as I think our competition is all doing what we're doing and that is looking to lower probably the amount of loan growth they're having.
Great. Thank you. And just one final one from me. So, as that demand kind of slows, just wondering how we should think about the provision going forward. I know this quarter was flat on that, I'm just wondering if you have any additional color for that?
Yes. I think that we will -- I mean, probably see provisions even though loan growth will slow some, I think, provisions might not go down as much just given that some of under CECL now, this is very much a forward looking forecast. And we would not be surprised to see slight increases in net charge-offs just in this environment, nothing major that we see coming down, but we probably wouldn't see provisions come down as much as if there wasn't this economic uncertainty out there and with CECL taking a look at some of those forward looking factors that might be getting negative in the coming quarters.
Great. Thank you for your time.
Thank you.
We now have a follow-up question from David Bishop of Hovde Group. Your line is now open. Please go ahead.
Yes, thanks. A quick question drilling down on the increase in broker deposits, just the broker deposit portfolio as well. Maybe some details on the tender there in terms of duration and maybe weighted average cost of those deposits?
Yes, I'll let Derek hit on some of the specifics, but I will just say, we've got a very low relative level of broker deposits and we looked during the quarter just to ensure liquidity given what was happening to make sure quarter end liquidity ratios look fine, probably get a little more brokered than we otherwise would. But, we still have a lot of opportunity or a lot of room there if we need it. We have a very low overall total brokered. And you are starting to see that market come in a little bit. And so, the differential there between what we can get in our customer markets versus broker markets is not as large as it was, say right after those bank failures. So, we'll continue to weigh that out. Derek, you want to talk about what those cost us?
Yes. So, we've had broker deposits that we brought in, back into last year and some of those have rolled-off and they've been at lower cost. What we've put on more recently has been shorter term in terms of tenor or so, a year or so or less kind of staggered out different terms there, the cost has been more than those rolling-off. So, we would see the overall cost increase there. And to give you just kind of some indication on what the broker rates are that we've been putting on has been somewhere plus or minus 5% range. So, that's where we expect those cost to be moving to, especially as we see some of these brokers that we took out last year starting to roll off, which were lower and doing great.
Okay. Got it. Thank you.
Thanks, Dave.
I've got no additional questions waiting at this time. I'll hand the conference back over to Heath Fountain, for closing remarks.
Well, I just want to thank everyone for being on the call today. We appreciate your support of Colony Bankcorp, and we appreciate you being on the call. Thank you. Have a great day.
Ladies and gentlemen, this concludes today's call. Thank you for joining. Have a great day ahead. You may now disconnect your line.