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. If you'd like to register a question, please press star followed by one on your telephone keypad. I'm now gonna 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 gonna 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 assets, 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 wanna 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 a 37% 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.
Significant progress there, and that's something we've talked about a lot for a long time, is the key to achieving our profitability goals is to get that over time up to more of the 80%-90% range. That loan growth led to an improvement in both our margin, which went from 3.15 to 3.25, and 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 has 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. 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.
You know, given the higher rate environment, we're also seeing more portfolio and ARM products being used. Of course, given the inventory shortage, we're doing more construction to perm. This quarter, we only had sold loans of about 70% of what our production was. 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.
You know, 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 deck, it's slide 12, that is the path to high performance. We've discussed that, you know, we expect to get to a 1.20% ROAA 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, you know, some of the things that are drags on our ROAA and also things where we think we have opportunities and where we're making progress. You know, 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. We do that, but it causes us to increase our provision above normal levels as well. That's about 11 basis points that it's hitting our ROAA versus a, you know, if we were more growing at our, in the middle of our long-term range, if we were at about 10% loan growth. Our new business lines and our startup markets that are not hitting, you know, the profitability levels that we expect in the long term, those are running us about $800,000 net expense per quarter. That's another nine basis points.
Just between those two items, and we're making progress on all of those, and that's, you know, about 20 basis points right there between just those two items. You know, each five percentage points we move our loan to deposit ratio, we're picking up, you know, we think estimating on a fairly conservative basis about nine basis points of ROAA. You know, that's another place where we've made significant progress. If you'll recall, even back in our history, over the last few years since I've been here at Colony, you know, we had moved that ratio up from the 60s to the 70s, then the pandemic hit, and back 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.
Another area in 2020 and 2021, mortgage and SBA, which are a big, important part of our business, added about 19 basis points to our ROAA. This year it's only seven basis points, this last quarter it was only five basis points. You know, those are lines of business where we have great teams and doing a great job through this environment. We think those are gonna stabilize at a more normal level at some point as rates stabilize and the market stabilizes. You know, between those things, we are very confident, have a clear path to get to where we wanna 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 aren't really basing any of that on our ability to go out and hire more bankers. Although, you know, we'd 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. We're confident in making this happen, and we're showing progress on that each quarter. I'm proud of the work the team's doing on that, especially given such a tough operating environment with the rapid change in rates. A few other things I wanna highlight on the quarter.
We did move $190 million of securities in the quarter to held to maturity as we monitored the potential negative impact our AOCI happening because of 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.
Just given the current equity market and the lack of, you know, 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 decline of the 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 really creates a great opportunity at current pricing levels for long-term investment. We were glad to see that support and think that we believe in where Colony stands today.
Those are all my prepared remarks. 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.
As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two, and please ensure you're unmuted when speaking. Our first question comes from Christopher Marinac of Janney Montgomery Scott. Christopher, please go ahead.
Hey, thanks. Good morning. Wanted to ask Andy and Heath about the loan growth we saw by market. There 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.
Yeah. We too are pleased that we're seeing that, you know, across the footprint. Obviously, we think we have capacity across the footprint, certainly in the Birmingham market where it's newer, you know, we're really just starting to gain momentum there in Birmingham and Huntsville. I think, you know, definitely because we're coming off a low base from a percentage number, you'll see some outsized growth there. We expect to see growth across the footprint. We have strong pipelines across the footprint, and we think, you know, 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. I would expect to see it across the footprint.
You know, opportunities in the Atlanta area and Birmingham could potentially be a little bit stronger than some of the other areas, but we should see it pretty spread out.
Great. Over time, can Birmingham become as big as, say, Middle Georgia or Coastal Georgia? I know that's probably a couple of years away, Heath, but just curious if that is a possibility in the big picture.
Yeah, absolutely. We think that's a great opportunity there. You know, 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. We think there's a big opportunity for that to be one of our, you know, strong regional areas.
Christopher, 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, you know, realistically, four or five of those guys could produce a pretty significant portfolio over the next three years.
Great. Last question. You know, Andy, the securities that were moved into HTM, was there any difference between those securities and then the ones that remained and available for sale?
Christopher, the way we attacked it is highly similar to what we've done the last couple of quarters where we, you know, moved incrementally along this front. We're trying to maintain maximum flexibility with the available for sale portfolio. We still have available for sale bonds in just about every category we have, every sector that we're invested in, so that, you know, if rates turn around and go the other way and, you know, 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.
Great. Thanks for hosting us this morning. We appreciate it.
Thanks, Chris.
Thanks, Chris.
Our next question comes from David Bishop of Hovde Group. Dave, please go ahead.
Yeah. Good morning, gentlemen. Heath and Andy, just curious, you know, noted that the margin expansion here, but noted that, look, it by my calculations looks like overall loan yields, average loan yields pulled in. Just curious, that dynamic here, and you know it sounds like you know you've still got the foot pedal to the metal from a growth perspective. Do you think you'll reach a point just in terms of the growth, does it sort of outstrip the you know the near-term funding capability, or does that really have to you know force you to ratchet up deposit costs? Just curious how you sort of balance the growth versus the funding equation here in the near term. Thanks.
Yeah. David, it's, you know, 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 them up maybe as much as our peers in the last 60, 90, 120 days. 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.
You know, 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 strategy for what we said in the second quarter, which is that wholesale funding will be, you know, secondary if we can get it. We'll get it organic. If we can't, then we'll do it wholesale for the time being. When loan growth slows down, we'll sort of let the dust settle and it'll all sort of shake itself out, hopefully with more organic funding. We did, you know, change the way we incent deposit gathering during the last 90 days, and we'll be doing that again. You know, we'll continue to run that sort of incentive for the foreseeable future.
Got it. Noted, you know, good expense control of 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 build in some you know modest expense or inflationary expense or increases into 2023? Just curious how we should think about operating expenses going on.
Yeah, I think you know, our biggest line item is obviously personnel expense. I think that's gonna be a pressure on everybody, so I don't wanna you know, think that we're gonna be excluded from the everybody category. I do think there will be some personnel expense pressure. I think generally 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 you know, have hired people we believe in. We've invested in those people. We're gonna continue to invest in good folks.
Overall, sort of non-personnel side, I'd like to think we're pretty much in the ballpark of where we're gonna be for at least the next sort of three-six months, and we'll see after that.
Got it. One final question here. You obviously know the good growth. You broke out the geographic region. Just curious if any color you can provide in terms of what loan segments growth drove the growth this quarter versus last quarter? Thanks, and I'll get back in queue.
We're generally seeing, you know, loan growth across the board similar to our portfolio. Obviously, you know, when you look across our portfolio, significant amount of commercial real estate, significant amount of mortgage as well, one to four. We're seeing the growth kind of across all categories. 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, you know, us tightening the credit metrics. We feel good about that, but it is coming, you know, across the board, heavy commercial real estate because our current portfolio and what we do is heavy commercial real estate.
I would add to that to say, you know, during the quarter and as we go forward, you know, you've seen some of our peers start to back off of certain categories. You know, Heath has put it well in the past, which is that, you know, there's it always seems to do with the right people, and we're gonna be trying to bank the right people. We are changing our prices on certain categories to you know sort of reflect the fact that areas are higher risk than they might have been a year or two ago. We're trying to, not just from a credit box standpoint, but also from a pricing standpoint, you know, get paid for the risks that we're taking.
Got it. Appreciate the color.
Our next question comes from Kevin Fitzsimmons of D.A. Davidson. Kevin, the line is yours.
Hey, good morning, guys.
Morning.
Morning, Kevin.
Just, I guess the way, you know, we've talked about a little about margin, a little about loan growth, but like taking a step back, you know, 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 gonna keep doing that, where a lot of banks have been signaling they're either tapping on the brakes or they're seeing pipelines fine. I guess it's just a trade-off, right, in terms of how you get to NII growth and maybe the margin, percentage margin isn't gonna 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?
Yeah, 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. You know, a bank like ours that's built to be, you know, an 80%-90% loan to deposit bank with the team and the investments we've made in the team, you know, not only production side, but in a strong credit team and operationally, we need to have that loan growth occur. Obviously need to be cognizant of the credit environment and our credit boxes, which like Heath mentioned, we're continuing to tighten. 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 loan rate.
You know, we wanna make sure we can bring that into the bank. We've been moving those rates up and continuing to see those move up. We've also hired new bankers. We wanna make sure we get those things profitable to manage our balance sheet appropriately, you know, make sure we get the deals and get the loans on the books. That's kind of been our approach, and I think it's been pretty systematic, and I think, you know, 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, you know, my whole career spent a lot of time to getting loans from the larger banks when they decide to be either full foot on the gas pedal or full foot on the brakes. We prefer to just make adjustments within the areas. As we make those adjustments, the stuff that comes in is of higher credit quality and maybe of higher credit quality than the portfolio as a whole in that sector. 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. Today, you know, if we have a solid investor who went out to six banks, you know, a year ago, he'd have gotten six offers, and we'd all been competing on rate.
Now, you know, they're gonna have one or two probably no, on that deal. We're gonna have a higher rate than a year ago and a better credit structure. We think it's a good time to put some new relationships on the books that we feel good about.
Yeah. Kevin, I would sort of echo that, you know, this 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. XYZ has now said, "We're not doing pick your category anymore." But one of the things 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, you know, they have normally slowed down, not come to a full, complete stop, and that probably has hurt our margin a little bit as well.
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?
Yeah, Kevin, I hope that's the case. I mean, that we're looking a long way in the future now. You know, short term, if our loan growth continues at the rate it is, you know, we're gonna 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. Maybe we get some, like you're saying, sort of a tail out there that's a little bit past some of our peers.
I guess relative to other banks, you guys seem to have a, you know, it's not a good thing because I know you want to get the loan 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 deposit ratios are getting back up to pre-pandemic, and it's kind of limiting their flexibility. Okay.
Yes. That's right. You know, we just, we still have a ton of capacity, not just on the loan side, but we still have, you know, 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 had announced the buyback, so we feel good about our capital position. You know, we're gonna make sure that we're levering and allocating that capital to the best of our ability given the dynamics.
Great. 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?
Yeah, I think, you know, I would say we don't plan to be aggressive, but I can also say not sure, you know, what the market looks like and what happens in the marketplace. We wanted to have that tool available to us, you know, in our capital management stack that we have not had in the past. It'll just be basically to see, you know, what opportunities we have in the marketplace and what happens. Really, you know, less aggressive on that, but more of an 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 that Dee Copeland now stepping in as President. I was just curious of what he's been focusing his time on and whether his observations or any changes he's putting in place. Just wanna see how he's affecting change at the company. Thanks.
Yeah, sure. He's not on the call, but he is hitting the ground running well. I think Dee's initial focus is really on ensuring that some of our ancillary lines and some of the things that, you know, have been started, that we get those integrated and we get to the profitability goals we want on those. Because, you know, some of the more commercial lending pieces the last few quarters especially are already working really well. His first focus is on, you know, those areas that we need to ensure, you know, get to the profitability. We're seeing some good things that Dee's doing out there and, you know, having been a part of the team, you know, really in an advisory capacity for a year, he had already built relationships throughout the company.
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.
Great. Thanks very much, guys.
Thanks, Andy.
We have a follow-up question from David Bishop of Hovde Group. Dave, please go ahead.
Yeah, thank you. Hey, Heath, the 10 basis points, the ROAA drag on some of the newer lines of business, the Marine/RV, and the new markets, you've obviously allocated a decent amount of expense dollars in terms of, you know, hiring some new lenders there. From a growth perspective and it may be a breakeven or profitability perspective, just curious if you have a timeline or any sort of visibility when you think that drag becomes a positive?
Dave, this is Andy. I think, you know, obviously those lines of business will. The timeline 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 2023.
Got it. I know there's you guys do some aspect of you know builder home builder finance segment. Just curious, as you talk to your builders, I mean, you noted the thoughts of inventory, which seems to be a national issue. The financial health of those builders you're doing business with, are they holding up pretty well, being able to manage their project flow and inventory? Just curious, what you're seeing on that front from a credit perspective.
Yeah. I think that, you know, there's definitely in the markets, you know, 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, you know, how they manage their lot inventory and their development. So they're continuing, you know, to go through. I think at the margin, you know, they may have had where houses were, you know, multiple bidders and where, you know, it was really aggressive. Now it's just they're selling things, you know, still faster than normal, but not as quick maybe as they were.
There's a real mismatch in the housing, I think, that has been, you know, built and the demands. We see a pretty good outlook on that despite, you know, the rate challenge from the buyers. We're not seeing any, you know, real, like, meaningful price reductions or things like that. Stuff selling at levels of profit that are really good for the builders and, you know, we see them continuing forward.
Got it. Maybe one last question. I don't know if you have this, but curious if you had either the cost of deposits at quarter end or the margin if that was available. Thanks. I'll hop off.
Give me one second. The cost of funds at the end of the quarter was up just a touch. Hang on just a second. Let me get a good number for you. Yeah, well, I'm not gonna have it right this second, David. I think I'm going off the top of my head here, so don't, you know, quote me exactly. I think we were about 50-55 basis points cost of funds at the end of the quarter.
Okay. Did you have the margin by any chance at the end of September?
Yeah, it was a little bit higher than the 3.25% we just reported.
Got it. Appreciate the color.
Yep.
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.
This concludes today's call. Thank you for joining. You may now disconnect your lines.