Colony Bankcorp Inc (CBAN) 2024 Q3 法說會逐字稿

Good day, everyone, and welcome to the today's Colony Bank third quarter, 2024 conference call. (Operator Instructions). It is now my pleasure to turn the conference over to Mr. Derek Shelnutt.

Thanks Marjorie. 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 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 risk 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 conditions, 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 Heath Fountain.

Thanks Derek and thanks to all of you joining our third quarter earnings call today. Before we get started on the quarterly results, I just want to say a few words about the impact of Hurricane Helene on our team, our customers and communities that happened right at the end of the third quarter.

We were very fortunate that none of our team members were injured by the storm. In spite of the fact that about 10% of our team were impacted by damage, or during the storm or, or 10% or more, several of our communities were impacted significantly with tree damage, wind damage, power outages.

And the like today, those communities have power restored. They've moved back to some level of normalcy. I'm really proud of how our team stepped up to help each other and their communities, whether it was serving over 2000 meals immediately after the storms manning chainsaws to clear roadways and driveways or making financial contributions to help their fellow team members and members of their community, our team really went above and beyond my expectations and in true community bank fashion, they stepped up and I'm really proud of our response.

While many of our communities were hit with that storm, we did not see near the level of devastation that was seen in, in some areas like eastern Tennessee and in western North Carolina and we don't expect any material financial impact from the storm at this time. But our thoughts and prayers are certainly with all those impacted by hurricane Helene and other recent storms.

So now moving to our operating results, we're really pleased with the quarter. Glad to see continued progress being made in our complementary lines of business which are reported to us, our operating net income increased $238,000 during the quarter as we saw increases in both net interest income and noninterest income.

All of our complementary lines of business were profitable in the third quarter and combined, pretax net income increased over 20% net interest income increased approximately $132,000 in the third quarter and this is the first quarter over quarter increase in the past year. And we saw that despite a slight decrease in margin during the quarter with the rate environment changing in the latter part of the third quarter and the fed beginning to ease it has allowed us to focus on reducing our funding costs and it's relieved a lot of pressure on both the pricing of deposits and the competition that we've seen for deposits. We still have a lot of opportunity though, for earning asset yields to continue their climb. So, it leads us to a point where we do feel comfortable that we've seen the bottom of margin decline and expect margin to expand going forward. We'd expect that to be rather modest to start with and then improve further as we get into 2025.

Total deposits grew in the third quarter, and we saw customer deposits return after some seasonality that we mentioned on last quarter's call. Along with deposit growth, there was some mix shift that occurred where we saw CD and money market accounts increasing and DDAs decreasing which had a negative impact on our margin for the quarter.

We were pleased to see loan growth tick up a little bit. So, we were around 4% on an annualized basis. A little over $20 million for the quarter. We are starting to see the pipeline pick up, but it does take some time to get stuff through the pipeline. We would expect to see similar loan activity in the fourth quarter. It could be down a little. We do expect some large payoffs in Q4 that could put pressure on our loan growth, but we do expect to get back to more normalized growth rates for us in 2025.

In the second quarter, we did have some increases in nonperforming loans and, and or in the second quarter, nonperforming loans are criticized were at historic lows. So, we did see some increases this quarter. So, it wasn't unusual coming off those lows, but we still feel good about credit quality and we're not seeing anything pop up that gives us concern about any larger issues or systemic weakness.

I mentioned our complementary lines earlier. Our increase in noninterest income was led by good quarters for both mortgage banking and for our SBSL, mortgage rates did go down a little bit in the third quarter they ticked back up a little bit as we've seen, especially even in the last few weeks and so there's still a challenging environment there, there's inventory challenges so, mortgage may not see the kind of quarters that we saw this quarter, but it was good to see that improvement there.

Our other lines of business are growing, and we're excited about the opportunities for more growth going forward, disciplined around efficiency and expense, expenses continued in the third quarter. The metric we've talked about a lot that we track. Our, operating net noninterest expense to average assets was 1.32% on an operating basis, which has continued to improve quarter over quarter for the last seven quarters. We expect that to say around 140% or below, which will give us a lot of upside to net income as margin begins to expand.

Earlier this week, we announced hiring of Cissy Giglio as our Director of Optimization and this just highlights kind of the priority and commitment we have to efficiency and profitability as we move back into margin expansion and growth again. We're going to keep our focus on efficiency, ensure that we're able to scale and improve earnings as we grow.

This past quarter, we launched a new digital online banking platform, which really came from our commitment to invest in and enhance our technology to improve our customer experience. Our teams really worked hard to ensure a successful launch and a seamless transition.

We're proud to have a platform that is state of the art that has robust features that our customers can use to stay connected and take care of their banking needs. That's also going to support this platform will also support our vision for where we want to go with growth and expansion and more abilities to do things from a digital perspective. This investment also opens up the opportunity to increase our marketing and business development efforts through the efficient use of data. So, we're really excited about that as well.

So, you know, to kind of summarize that with reduced pressure on cost of funds and the rate environment we're in stable credit and asset quality growing loan pipeline. We believe there's a lot of upside opportunity as we head into the fourth quarter and into 2025 and so with that, I'll turn it over to Derek to go into more details on the financials.

Thank you, Heath GAAP and operating net income increased in the third quarter with operating net income increasing $238,000 as a result of increased net interest income and increased noninterest income interest income increased by over $1.2 million in the third quarter. As a result of loan growth and continued repricing of earning assets.

We still see good opportunity to increase earning asset yields and interest income. Even in a declining rate environment, there are still a lot of loans that will reprice up at maturity and that reprice is enough to support increases in overall yields, interest expense on deposits increased about $1 million as we saw a mix shift in deposits.

It's not unusual to see a decline in our municipal DDAs in the third quarter as they start their new budget year and then those deposits return in the fourth quarter when property taxes are collected, we have adjusted our deposit rates in response to market changes and cooling competition that happened primarily in the later portion of the quarter. So we have not yet seen the full impact of that but it we expect it to reduce or change the upward trajectory that we've seen on deposit costs over the last several quarters.

As Heath mentioned, net interest income increased quarter over quarter after several quarters of decline and even though margin was down four basis points.

This increase along with the improvement in our funding environment are good indicators that the lowest part of the margin is behind us. We feel that the expansion of margin will start off gradually for the next quarter or two and we're conservative how we're thinking about the number of magnitude of fed rates going forward that may impact that increase in margin.

Moving to noninterest income. Third quarter, operating noninterest income increased about $417,000 led by a good quarter for mortgage. With mortgage related fee revenue being up about $370,000 NSF and deposit fees were up slightly compared to the previous quarter. And although our small business specialty lending division revenue decreased slightly, it was still better than an average quarter for them.

Operating noninterest expense increased about $240,000 and that was a result of some variable based compensation related to noninterest income. And our SBA servicing valuation, we feel good about operating net interest net noninterest expense to average assets at 1.32% and see it remaining here and between our target of 140% going forward. Provision expense totalled $750,000 for the quarter; the loan growth contributed to the increase compared to the prior quarter.

Non-performing loans also increased during the quarter. But again, as he mentioned, that was coming off a quarter at very low levels. We're not seeing anything unusual outside of the normal course of business that would otherwise give us any concern. Net charge offs were down during the quarter. And it is likely we will see levels going forward that would be more comparable to the 1st and 2nd quarter of this year.

Total loans held for investment increased $20 million from the prior quarter or roughly 4% annualized. As we mentioned on our last call, our pipeline suggested more growth in the second half of the year and that's what we're starting to see.

Also, as he mentioned, we do expect the number of payoffs in the fourth quarter which will hold back on growth a little bit. There's good upside on the re-deployment because those payoffs are coming in off rates that are well below the market.

Total deposits increased about $64.7 million of which half were about customer deposits and the other half were brokered CDs tied to a cash flow hedge.

Our deposit growth was the money market and retail CDs as we saw a mix shift in overall deposits, a large portion of our lower cost interest bearing DDA balances declined. And again, was a result of the municipal deposits which I mentioned earlier, although it is still early, we haven't seen any deposit runoff or anything that would indicate that as we started to reduce rates to align with the market.

Additionally, we have between $70 million $80 million of retail CDs maturing in the fourth quarter that are above our current board rate. So we see a lot of opportunity there for reduction in our retail CD cost.

Federal home loan bank advances decreased in the quarter by $20 million as we paid off a short term advance.

And as we saw the steeping of the inversion of the curve during the quarter, we did employ some additional cash flow head strategies which helped reduce the pressure on any costs that we may see in in wholesale funding. If the fed does not cut rates as fast as some forecasts have suggested.

Again this quarter, we sold some investments for a loss and those are summarized on slide 29 in the investor presentation, we sold approximately $7.6 million worth of securities which included a $454,000 loss.

The book yield on those was 2.61% and our earn back estimates are around two years or less.

We expect to make similar transactions in the upcoming quarter to help speed up the restructure of the portfolio with the recent change in the outlook and the rate environment. We've seen an increase in the fair value of our overall portfolio. We are evaluating the possibility of a larger transaction in the future which would look similar to what we've done so far, just slightly larger in scale. During the quarter, we repurchased 35,000 shares at an average price of $15.05 as part of our stock repurchase program.

And then additionally, yesterday, the board declared a quarterly cash dividend of $11.25 per share and we are proud to continue another consecutive quarter of dividend.

Mortgage net income was $275,000 for the second quarter an increase of $137,000 from the prior quarter gain on sale and related revenue increased about $356,000 from the prior quarter. Mortgage rates dipped in the third quarter and generated some activity. But rates have since moved back up just to give you a little bit of perspective on that. In the third quarter of last year saw mortgage rates in the high sevens and low eight. And the third quarter of this year started in the high sixes but dipped to the mid to low sixes and then today they're back up to the high sixes, maybe even low sevens as we've seen a climb in the 10-year.

Inventory has also remained low in our markets which has slowed activity. So we'll likely see some decline in revenue in the fourth quarter from our mortgage banking division, but we expect a mortgage to remain profitable and that profitability level could be influenced by changes in rates and movement in the 10 years.

Our small business especially lending division had net income of $1.5 million during the quarter, $174,000 increase from the prior quarter charge off on the unguaranteed portion of loans they were down during the third quarter but are likely expected to return to similar levels. That would be comparable to the 1st and 2nd quarter of this year.

Gain on sale revenue is forecasted to be at this level or slightly higher in the fourth quarter and then a little softer in the first quarter, which is generally a slower quarter for SBSL, we're still seeing good volume in the pipeline for both our small express loans and our core loans.

Slide eight provides a breakdown of pretax income for our complementary lines of business. No business line experienced a loss in the third quarter and all business lines showed improvement from the prior quarter with the exception of merchant which shows break-even but was actually profitable by a few $100 and that's really due to seasonality in that line of business. We're still seeing a lot of good progress there, but processing volume does fluctuate a little bit due to seasonality. Marine and RV lending had a slower start to the year but was back to profitability in the third quarter.

We're still growing that line of business and plan to eventually get to a spot where we can create some additional revenue with sales of loan pools on the secondary market.

Talking a little bit about insurance last quarter, we discussed the tighter underwriting requirements and lower risk appetite earlier in the year that was impacting the industry and colony insurance.

We mentioned that we are starting to see some relaxing of those requirements and we have seen that and that's allowed our team to increase volume and led to an increase in pretax income in the third quarter.

So, that concludes my overview, and I'll turn it back over to Heath for any final comments before we take questions.

Thanks, Derek. That wraps up our comments and with that, I'd call on Marjorie to open up the line for any questions we might have got.

(Operator Instructions) Christopher Marinac, Janney Montgomery Scott.

Thanks, good morning. I appreciate you taking the call today for the call today.

I wanted to ask about the profitability going forward and to the extent that we could take the core earnings and annualize them, particularly in '25. I know there's a few moving parts in Q4 as Derek outlined. Is that a reasonable base?

Yeah, I think that would be pretty reasonable to do. I mean, we're, we're continuing to see improvement in our complementary lines of business that's leading to, you know, better noninterest income, our net NIE number that, that measures that contrast between noninterest income and noninterest expenses, you know, that's been in our target and we expect it to remain there. We're not seeing anything, that, that would cause that to, to be out of line and then, you know, we are seeing a conservative increase in margin as we go forward and, and couple that with a little bit of growth, I think it's pretty reasonable to kind of take this quarter look at it and annualize it as a good foundation for the next year.

And, Chris, you know, I think that we're committed to keeping this efficiency through our growth going forward and we do expect to get back to growth. And so when we think about, you know, the value we can create over the next couple of years, we start thinking about getting back to, you know, getting first to a one and then, you know, we talk about one ROA and then getting back to higher levels within, you know, where we can get back in the top quartile of our peer group. And if we can do that by also getting back to eventually within a few quarters of, of our historical growth rate of 8% to 12% you know, we're, we're excited about the opportunity that we have there and really, you know, having gone through this rate up environment and this margin pressure has really caused us to really focus hard on the expenses and on our operating efficiency and put us in a really good place to where we think we can go from here.

Great. Thank you both for that colour. And just wanted to go back to the asset sales that Derek mentioned, would those come over multiple quarters? Or is it just a onetime thing in the near term?

I don't think we would see outsized, you know, for, for more than a quarter. You know, we just continue to evaluate that. We're starting to see others, you know, do that as well. Don't expect anything super humongous either. You know, we're also focused on this, trying to, you know, build capital each quarter, improve our, our, our capital in terms of TCE. And so, you know, we don't want to eat up a lot of our earnings, but maybe something a little bigger than, than what we've done. Just kind of given the market and of course, it's kind of, you know, it's that 5 to 7 year part of the curve that we watch probably the most to kind of impact market value adjustments, any colour you want.

Yeah, that was good Heath and, and I would just, you know, say that we would, it might look at a one off transaction be a little bit larger than what we have been doing to Heath point, not anything super large. But you know, I mean, going forward in future quarters of next year, probably continue just to do smaller transactions like we've been doing as it makes sense. But again, anything larger would probably be a onetime thing in one quarter.

Got it sounds great. Thanks again for hosting the call this morning.

Thanks Chris.

Dave Bishop, Hovde Group.

Yeah, good morning, gentlemen, Question in terms of the expected payoff It sounds like there's some line of sight there. Just curious what we're hearing with other banks in the note that the sponsors are getting more comfortable taking projects rolling into new projects. Do you see that driving some of the payoff?

Dave, you're cutting out a little bit. Would you mind repeating? We heard pieces of that question but not the whole thing.

Sorry, there's an echo. Sorry, there's an echo apparently just curious, the drivers of the loan payoff, drivers of the loan payoff expected.

Okay. Yeah. So, we're just aware of projects that are coming to completion that don't typically have bank financing as part of their permanent takeout. And so that's where we're seeing payoffs come in project completion. So, they're expected type payoffs for the most part. And so that's where we that, that's, and you know how that is the timing of those can vary based on completion dates and those kinds of things. So, could be this quarter, we could see some flow into the first quarter. So just kind of, we'll see how that plays out.

And then good growth on construction, just curious the types of projects you're underwriting in the space.

Yeah, I mean, I would say that nothing that we're seeing in terms of like one specific type of industry or things that we're seeing. It's kind of across the board. I think, you know, we are seeing, I think more stability. I think we do see that borrowers you know, do see some stability of rates and that started returning, you know, throughout the year, but there was a time period there where you weren't sure when rates were going to stop going up and so, you couldn't pencil in infinite rate increases into your projects and now that you're getting to some stability where I think sponsors feel good about what longer term rates may be or what the worst case for longer term rates may be they feel comfortable moving forward with things. So, I think we just see sort of a tick up in activity across the board.

Got it. And then just curious, new loan origination yields this quarter.

What was that, Dave again? What was new loan originations?

Yeah, I think our average was just a little bit over 8% for the quarter.

Let's see. Yeah, this quarter's production a little over, just barely over 8%. 8.23%. And that's, coming down off of, I think our peak was maybe around 8.60% and 8.50%. So, we are starting to see that come down and expect to see it. You know, obviously continue to come down with the move in rates.

Got it and then he, it seems like you got 10 million is the new run rate for fee income. Do you feel comfortable about that level moving forward?

I think we're in a pretty good spot for that. You know, I think they, the only, you know, the challenge there, we, we mentioned mortgage, you have seen, you know, rates start to move back, and you still have the inventory challenge in our markets, but the economic activity is really good. I mean, it's not like when rates came down a little bit, the floodgates opened it, it ticked up a little bit. We've had some good recruiting on the mortgage side too. And, and trying to open up, you know, some additional MLOs there. So, I, I think we could see, see it, stay at about this level.

Great. I'll hop back in the queue.

Thank you and at this time we have no further questions, so I'll turn it back to our speakers for any final remarks.

All right. Well, thanks again. No further remarks, but really appreciate everyone's support of Colony Bank and appreciate you being on the call today. Thank you.

Thank you. And that does conclude today's program, and you may now disconnect.