Hello, and welcome to today's Colony Bank 3Q 2022 Earnings Conference Call. My name is Jordan and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Andy Borrmann, Chief Financial Officer to begin. Andy, please go ahead..

Thanks, Jordan. Good morning, everybody. Thanks for joining us this morning. I'm going to make a quick opening statement of some disclosures to keep the lawyers happy. 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 COVID pandemic, variations of the company's asset, businesses, cash flows, financial condition, prospects and other results of operations. With that Heath, I'll turn it over to you..

Thanks, Andy. And thanks, everyone for being on the call today. We appreciate your continued interest in Colony. We're pleased to report an improvement in earnings in the third quarter compared to the second quarter.

Particularly, I want to highlight the quality of our earnings as more of our earnings and earnings growth is coming from our traditional banking and recurring revenue. Businesses, as compared to our transactional businesses, our core banking business makes up about 93% of our earnings this quarter and about 90% of the earnings year-to-date.

And that's up from about 75% in the previous two years. Loan growth this quarter, as you see, remained strong. Our loans increased over 9% from last quarter. So 37%-ish annualized growth rate.

This is really the second consecutive quarter we've seen this accelerated loan growth and our pipeline remains strong and we expect to see this continued accelerated growth for the next quarter or so.

Due to that accelerated growth, we provided 1.3 million for loan losses during the quarter, despite continued improvements in asset quality trends, but felt the need to make sure we provided to keep up with the loan growth.

The loan growth continues to move the needle on our loan to deposit ratio, moving up from 62% last quarter to 66% this quarter, and that's up from 56% at the end of last year, so significant progress there.

And that's something we've talked about a lot for a long time about is, the key to achieving our profitability goals is to get that overtime up to more of 80% to 90% range.

That loan growth led to an improvement in both our margin, which went from 315 to 325, but even more importantly, to an increase in the gross dollars of net interest income up 9% from last quarter. We were really pleased also to post deposit growth of 3% in the quarter in a pretty tough deposit environment.

We've been working hard on the deposit side to ensure we're able to fund the loan growth and the -- really solid core customer base we have at Colony, its allowed us to raise deposits both through selective specials targeted customer acquisition strategies, just trying to do our best to target the increases versus increasing rates too much as a whole -- across our whole deposit base.

Mortgage origination was slightly down from last quarter, but I still think a pretty strong level considering the rate environment that we're in. And so due to that and also we still continue to see a shortage of inventory in our markets, especially Middle Georgia, Augusta, Savannah markets, which are big mortgage origination markets for us.

And so given the higher rate environment, we're also seeing more portfolio and ARM products being used. And then of course, given the inventory shortage, we're doing more construction to perm. So this quarter, we only had sold loans of about 70% of what our production wise.

And so that of course decreases our upfront income on our mortgage group, but I still think they're doing a really good job of originating throughout this tough interest rate environment. In our government guaranteed business, what we call our SBSL, small business specialty lending, we were down a little bit over last quarter.

We've got a good pipeline there and feel like we'll end the year strong in that front. As we look at our earnings this quarter and the progress we're making, I'd like to point you to a slide we put in our Investor Day to Slide 12 that is the path to high performance. And we discussed that we expect to get to a 120 ROA by the end of 2024.

This quarter we're at 75 basis points, and what we wanted to do is kind of walk you through some of the things that are drags on our -- on that ROA and also things where we think we have opportunities and where we're making progress.

And one of the -- of course, the big things is that we have a large provision expense because of the outsized loan growth. We certainly think it is wise to take advantage of the opportunity to grow loans, really quality loans in this environment, so we do that. But it causes us to increase our provision above normal levels as well.

And so that's about 11 basis points that is hitting our ROA versus a -- if we were more growing at our -- in the middle of our long-term range as we were at about 10% loan growth.

Our new business lines and our start-up markets that are not hitting the profitability levels that we expect in the long term, those are running us about $800,000 in net expense per quarter. And so that's another 9 basis points, so just between those 2 items. And we're making progress on all of those.

And so that's about 20 basis points right there between just those 2 items. Each 5 percentage points we move our loan-to-deposit ratio, we're picking up we think, estimating on a fairly conservative basis, about 9 basis points of ROA. So that's another place where we've made significant progress.

If you recall even back in our history over the last few years since I've been here at Colony, we have moved that ratio up from the 60s to the 70s, then the pandemic hit and led into the 50s. And now we're moving that back up into the mid-60s now and expect to continue to be able to move that up over time.

And then of course another area, in 2020 and '21, mortgage and SBA, which are a big important part of our business, added about 19 basis points to our ROA and this year it's only 7%. This last quarter, it was only 5%. Those are lines of business where we have great teams and doing a great job through this environment.

But we think those are going to stabilize at a more normal level at some point as rates stabilize and the markets stabilize. So between those things, we are very confident to have a clear path to get to where we want to be in profitability in the intermediate term. We're in a place to achieve the near-term loan growth that we want.

We have the team members on board that we can do that with the team we have today and are really basing any of that on our ability to go out and hire more bankers, although we certainly always are on the lookout for that.

And we'll look to add strategically where we can, but we can get the loan growth we need from the team that we have in the bank today. And so we're confident in making this happen, and we're showing progress on that each quarter.

Proud of the work the team's doing on that, especially given such a tough operating environment with a rapid change in rates.

A few other things I want to highlight on the quarter, we did move $190 million of securities in the quarter to held-to-maturity as we monitor the potential negative impact to our AOCI, happening because of the declining rate and the declining value of our securities in a rising rate environment.

Our Board declared a dividend that's at the rate we've been going this whole year of $0.1075.

And then also, just given the current equity market and the lack of I think, interest in valuation that's going on in the equity market for banks in general, I think an emphasis we believe that's happening for us too on the tangible book value declines in securities and the confidence we have in how we execute our strategy, our Board made the decision to authorize a stock buyback plan of $12 million, which is about 5% of shares outstanding at the current market prices, which we think is -- really creates a great opportunity at current pricing levels for long-term investments.

So we were glad to see that support and think that we believe in where Colony sits today. So those are all my prepared remarks. And at this time, I'll call on Jordan to open up the lines for questions, and we'd be happy to answer any questions that you guys have today..

[Operator Instructions] Our first question comes from Christopher Marinac of Janney Montgomery Scott..

I wanted to ask Andy and Heath, about the loan growth we saw by market. It seems to be strength not just in Atlanta, but in the other markets like Middle Georgia, Coastal Georgia and now Birmingham. How should that play out the next couple of quarters? Just kind of curious on pipelines and kind of the split between the various markets..

Yes. So we, too, are pleased that we're seeing that across the footprint. Obviously, we think we have capacity across the footprint. Certainly, in the Birmingham market where it's newer, we're really just starting to gain momentum there in Birmingham and Huntsville.

And so -- I think definitely because we're coming off a low base from a percentage number, you'll see some outsized growth there. But we expect to see growth across the footprint.

We have strong pipelines across the footprint, and we think we're seeing opportunity to look at really good credits across the footprint, even as we continue just due to potential macro concerns to tighten up credit boxes, we still see strong growth.

So I would expect to see it across the footprint opportunities in the Atlanta area and Birmingham, could potentially be a little bit stronger than some of the other areas. But you should see it pretty spread out..

Great. And over time, can Birmingham become as big as, say, Middle Georgia, Coastal Georgia? I know that's probably a couple of years away, Heath, but just curious if that is a possibility in that big picture..

Yes, absolutely. We think that's a great opportunity there. We really try to focus on new markets where there's outsized share by the larger and big regional banks, and we think we compete very well against those, and we certainly have that in those markets over there.

And we think there's a big opportunity for that to be one of our strong regional areas..

And Chris, I would just add to that. The folks that we've hired over there have the type of capacity that our corporate bankers here in Atlanta have. So realistically, 4 or 5 of those guys could produce a pretty significant portfolio over the next 3 years..

Great.

And then last question, Andy, the securities that were moved into HTM, was there any difference between those securities and the ones that remained available for sale?.

So Chris, the way we've attacked it is highly similar to what we've done the last couple of quarters where we moved incrementally along this front. So we're trying to maintain maximum flexibility with the available-for-sale portfolio. So we still have available-for-sale bonds in just about every category we have, every sector that we're invested in.

So that if rates turn around and go the other way, and for example, taxables get more expensive than tax frees or whatever the case may be, we have an opportunity to take advantage of that if and when we need to..

Our next question comes from Dave Bishop of Hovde Group..

Yes. Heath, Andy, just curious, you noted the margin expansion here. But noted that, look, on my calculations, it's like overall loan yields, average loan yields pulled in. Just curious, that dynamic here, and it sounds like you still got the pedal to the metal from a growth perspective.

But do you think you'll reach a point, just in terms of the growth, does it sort of outstrip the near-term funding capability? Or does that really ratchet -- force you could ratchet up deposit costs.

Just curious how you sort of balance the growth versus the funding equation here over the near term?.

Yes. So David, it's -- that's one of the operational daily questions we have basically. We have been ratcheting up our loan yields as we go. You can say, maybe we haven't been ratcheting up maybe as much as our peers in the last 60, 90, 120 days. But when we see the opportunity for some really good deals, we're willing to be very competitive.

We think there's a better interest rate environment to be competitive to get the right deals, given the fact that our loan deposit ratio is still in the 65% range. So -- these -- the funding we have, we're trying to make sure it's as organic as we can have it.

And we sort of have not changed strategies to what we said in the second quarter, which is wholesale funding will be secondary if we can get it organic, we'll get it organic. If we can't, then we'll do it wholesale for the time being.

And when loan growth slows down, we'll sort of let the dust settle and all sort of shake itself out, hopefully, with more organic funding. We did change the way we incent deposit gathering during the last 90 days, and we'll be doing that again, we'll continue to run that sort of incentive for the foreseeable future..

Got it. And noted good expense control, some of the choppiness in the second quarter. As you look out at the operating expense outlook, do you think this is a good run rate over the near term? Or should we model in some modest expense or inflationary expense or increases into 2023? Just curious, how we should think about operating expenses..

Yes. I think our biggest line item is obviously personnel expense. I think that's going to be a pressure on everybody. So I don't want to think that we're going to be excluded from the everybody category. I do think there will be some personnel expense pressure.

I think generally, we have -- we believe we have the team we need for the next, sort of, short to intermediate term cycle of the life of Colony Bank. If we have opportunities to bring on strong people, we will bring them on. This is a relationship business, and we have hired people we believe in.

We've invested in those people, and we're going to continue to invest in good folks. But overall sort of nonpersonnel side, I'd like to think we're pretty much in the ballpark of where we're going to be for at least the next sort of 3 to 6 months, and we'll see after that..

Got it. And then one final question here. You obviously noted the good growth you broke out the geographic region.

Just curious any color you can provide in terms of what loan segments growth is in terms of growth this quarter versus last quarter?.

We're generally seeing loan growth across the board, similar to our portfolio. And obviously, when you look across our portfolio, a significant amount of commercial real estate, significant amount of mortgage as well, 1 to 4, we're seeing the growth kind of across all categories.

We are, like I said, in some of the areas that you would expect we continue to tighten our credit box, for example, commercial in the CRE category like retail, office. And we continue to see good opportunities in some of those areas despite us tightening the credit metrics.

So we feel good about that, but it is coming across the board, heavy commercial real estate because our current portfolio and what we do is in heavy commercial real estate..

And I would add to that to say, during the quarter and as we go forward, you've seen some of our peers start to back off of certain categories. Heath has put it well in the past, which is that there's -- there are always things to do with the right people, and we're going to be trying to bank with the right people.

We are changing our prices on certain categories to sort of reflect the fact that areas are at higher risk than they might have been a year or 2 ago. And we're trying to not just from a credit box standpoint but also from a pricing standpoint, get paid for the risk that we're taking..

Our next question comes from Kevin Fitzsimmons of D.A. Davidson. Kevin, the line is yours..

Just -- I guess the way we've talked about a little bit about margin, a little about loan growth, but like, taking a step back.

The margin didn't seem like it expanded as much as I would have thought or what a lot of banks have seen, but you guys have also put up stronger loan growth, too, and you're kind of signaling you're going to keep doing that where a lot of banks have been signaling they're either tapping on the brakes or they're seeing pipelines lined.

But I guess it's just a trade-off, right, in terms of how you get to NII growth and maybe the margin -- percentage margin is going to expand quite as much because you're comfortable growing the loan book here.

Is that the way to think about that trade-off and how you guys are looking at it all?.

Yes. I think, Kevin, as I said in my remarks, I think more important to us than the margin expansion is the dollars of net interest income growth.

And so a bank like ours that's built to be an 80% to 90% loan-to-deposit bank with the team and the investments we've made in the team, not only production side, but in the strong credit team and operationally. We need to have that loan growth occur.

Obviously, we need to be cognizant of the credit environment and our credit boxes, which whatever mentioned will continue to tighten, but that loan growth is really important to get the profitability metrics we want to be. We want to -- when we have the opportunity to bank the right customers, we don't want to lose that deal on rate.

We want to make sure we can bring that into the bank. And so we've been moving those rates up and continuing to see those move up. But we've also -- we've hired new bankers. We want to make sure we get those things profitable. So we should, to manage our balance sheet appropriately, make sure we get the deals and get the loans on the books.

So that's kind of been our approach, and I think it's been pretty systematic, and I think I'm very proud of the team and the growth we've been able to achieve. Now that being said, we are looking out, we are cognizant of pipelines and why are they expanding. As Andy said, there's opportunities as other banks get out.

What we prefer to do, my whole career spent a lot of time getting loans from the larger banks when they decide to be either full gas on the -- full foot on the gas pedal or full foot on the brakes, we prefer to just make adjustments within the areas.

And so as we make those adjustments, the stuff that comes in is of higher credit quality and maybe a higher credit quality than the portfolio as a whole in that sector. And so we try to give our customers an offer in an area when we have the opportunity to, even if it's a tight credit box.

And today, if we have a solid investor who went out to 6 banks a year ago, he had gotten 6 offers, and we've all been competing on rate. Now they're going to have 1 or 2 probably who knows on that deal. And we're going to have a higher rate than a year ago and a better credit structure.

So we think it's a good time to put some new relationships on the books that we feel good about..

Yes. And Kevin, I would just -- I would sort of echo that, in that it also gives us a chance to look at customers that we wouldn't have looked at before because they were XYZ Bank's customers and always being taken care of an XYZ has now said, we're not doing "pick your category" anymore.

But one other thing I'd say about margin, I think that we have -- at least that I can recall in my career, Kevin, have not experienced is because the rate change was so fast, sort of that refis have normally slowed down, not come to full complete stop, and that probably has hurt our margin a little bit as well..

So Andy, would you think maybe the margin doesn't expand in leaps and bounds like we're seeing by other banks, but maybe kind of creeps higher for a longer period of time and whereas other banks are going to see it peak sooner?.

Yes, Kevin, I hope that's the case. I mean we're looking a long way in the future now. Short term, if our loan growth continues at the rate it is, we're going to have to fund it with some more expensive money. But hopefully, we can replace that money over time with the incentives we're putting in place for deposits.

And so maybe we get some -- like you're saying, sort of a tail out there that it's a little bit past some of our peers..

And I guess, relative to other banks, you guys seem to have a -- it's not a good thing because I know you want to get the loan-to-deposit ratio higher, but it gives you flexibility to be a little more aggressive on loans than some of the other banks are facing.

Because you mentioned earlier, it's a tough deposit environment and their loan and deposit ratios are getting back up to pre-pandemic and it's kind of limiting their flexibility, so. .

Yes, that's right. And we just -- we still have a ton of capacity, not just on the loan side, but we still have a fair amount of cash up at the holding company. We pushed some down during the quarter to support additional loan growth. We still have the ability to do that. Obviously, we announced the buyback, so we feel good about our capital position.

And we just -- we're going to make sure that we're levering and allocating that capital to the best of our ability, given the dynamics..

Great. And you mentioned the buyback. I was going to ask about that.

Is it fair to say that's something we should expect to see you use it in short order? Or is it something that's more insurance to have on hand in case we really have more disruption in the market?.

Yes. I think I would say we don't plan to be aggressive. But I can also say, not sure what the market looks like and what happens in the marketplace. We wanted to have that tool available to us in our capital management stack that we have not had in the past.

So it will just be basically to see what opportunities we have in the marketplace and what happens. But really less aggressive on that, but more of ability to have that, to pull the trigger on if we need it..

That makes sense. One last one for me. I don't know if he's on the call, but I know with D Copeland now stepping in, in the President role, I'm just curious what he's been focusing his time on and whether his observations or any changes he's putting in place. Just want to see how he's affecting -- effecting change at the company..

Yes, sure. He is not on the call, but he is hitting the ground, running well.

I think D’s initial focus is really on ensuring that some of our ancillary lines and some of the things that have been started that we get those integrated and we get to the profitability goals we want on those, because the -- some of the more commercial lending pieces in the last few quarters, especially are already working really well.

So his first focus is on those areas that we need to ensure get to the profitability. But we're seeing some good things that these are doing out there. And having been a part of the team, really in an advisory capacity for a year, he had already built relationships throughout the company.

So it's not a real big change, but he's bringing some great ideas and some really good positive changes to what we're doing..

We have a follow-up question from Dave Bishop of Hovde Group..

Heath, the 10 basis points ROA drag on some of the new lines of business, the Indirect [indiscernible] -- Marine, the RV and obviously the new markets, you've honestly allocated a decent amount of expense dollars in terms of hiring some new lenders there.

From a growth perspective and may be a breakeven or profitability perspective, just curious if you have a time line or any sort of visibility when you think that drag becomes a positive?.

So Dave, this is Andy. I think obviously, those lines of business will -- the time line for that will vary. Our goal internally overall is to have that $800,000 drag be gone sometime late in 2023. I think if we're successful in lending in Alabama, if insurance is successful, already modestly profitable, that may speed up a little bit.

But internally, sort of our current target is late '23..

Got it. And then I know there's -- you guys do some aspect of builder -- homebuilder finance segment.

Just curious, as you talk to your builders, you're looking -- you noted the balance of inventory, which seems to be a national issue, sort of the financial health of those builders you're doing business with, are they holding up pretty well? Are they able to manage their project flow and inventory? Just curious what you're seeing on that front from a credit perspective..

Yes. I think that there's definitely -- in the markets that we do the most of that are in Augusta and Savannah and Middle Georgia, a little bit on the Southwest side of Atlanta. In each of those markets, there is a lack of inventory. Those builders have been very conservative in how they manage their live inventory and their development.

And so they're continuing to go through. I think at the margin, they may have had warehouses, where multiple bidders and it was really, really aggressive and now it's just they're selling things in -- still faster than normal, but not as quick maybe as they were.

But it's -- there's a real mismatch in the housing, I think, that has been built in the demands. And so we see a pretty good outlook on that despite the rate challenge from the buyers.

We're not seeing any real like meaningful price reductions or things like that, stuff selling at levels of profit that are really good for the builders, and we see them continuing forward..

Got it. Then maybe one last question. I don't know if you have this, but curious to get either the cost of deposits at quarter end or the margin, either if that was available..

Give me one second. The cost of funds at the end of the quarter was up just a touch. Hang on just a second. Get a good number for you. Well, I'm not going to have it right this second, Dave. I think -- I'm going off the top of my head here, so don't quote me exactly, but I think we were about 50 bps to 55 bps cost of funds at the end of the quarter..

Did you have the margin by any chance at the end of September?.

Yes, it was a little bit higher than the 325 we just reported..

We have no further questions on the phone line. So I'll hand back for any closing remarks..

Thank you, Jordan. Appreciate it. Thanks, everyone, for being on the call today. We appreciate your support of Colony, and we look forward to speaking with you again soon. Thanks..