Good afternoon. Thank you for attending today's Colony Bankcorp, Inc. Conference Call. My name is Tamia, and I will be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. It is now my pleasure to pass the conference over to our host, Andy Borrmann, CFO of Colony Bankcorp, Inc. Please proceed.
Thanks, Tamia. First of all, thank you to everyone who's on the call. We recognize the relatively quick turnaround today from the earnings release to the call, so we appreciate you joining us. To get started this afternoon, to keep lawyers happy, I'm just gonna make a quick opening statement. 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 conditions, prospects, and other results of operations. With that, Heath, I'll turn it over to you.
Thank you, Andy, and thanks, everyone, again for being on the call. Like Andy said, I know it was a quick turnaround time, ap preciate y'all working with us on that logistical issue there. Let me just walk through, I think it was a really solid quarter for us, but it was certainly noisy. I would like to kinda walk through some of the moving pieces that we've laid out for you for the quarter and kinda give you a little color on some of those.
During the quarter, we took a $1.35 million charge to personnel expense for our previously announced efficiency initiative, and that initiative was largely completed during the quarter. We also had some charges that related to the rapid increase in interest rates that we saw this quarter.
We took a $751,000 charge to interest expense due to the write-down of acquired FHLB advances that came from the SouthCrest acquisition. Those were called during the quarter. We had a $316,000 hit to non-interest expense due to the write-down of servicing assets on our government-guaranteed loan portfolio.
You know, we had those things that we wanted to highlight during the quarter. We had a great loan growth quarter, w e added nearly $100 million in loans. That's nearly a 30% annualized growth rate. It was good to see us getting that traction after running a little bit behind, you know, where we were hoping to be earlier in the year.
That increase in loans led to us providing $1.1 million to our loan loss reserve. You know, despite improving credit metrics and credit outlook remaining stable, we did feel the need to put $1.1 million in to cover the loan growth we experienced during the quarter.
Of course, that's ahead of where we were expecting to need to put in the allowance due to the growth and I think certainly our analysts that follow us were projecting lighter numbers than that as well. When you take, you know, those items into account, you know, I think we had a really good quarter. You know, I'd like to note a couple other things for the quarter.
You know, really for the last couple of years, our mortgage and our government-guaranteed or what we call our small business specialty lending, our SBSL group, helped drive our results, you know, as we worked on improving our core bank earnings. This quarter, you know, with the challenging environment for mortgage and for government-guaranteed lending, we really saw, you know, the core bank performing well and driving the large majority of the net income.
It was good to see that in the core bank. This is also the Q1 where we saw very little PPP income. So, in the previous quarter, it was about half a million dollars, and we did not have that, you know, this quarter.
With all that taken into account, you know, again, like I said, it's a bit noisy, but I think you can see why we're happy with the quarter and positive about our earnings outlook. You know, in addition to the operating results that we detailed, we were also able, during the quarter, to complete a $40 million subordinated debt offering.
You know, really in the first half of this year, you know, really proud of what we've done there to shore up our capital base with the $60 million capital raise in Q1. Plus this, it really puts us in a great place from a capital perspective to work through any economic uncertainties out there so p roud of what we did this quarter, proud of our team and what's been accomplished. That's really all the prepared comments I have so a t this time, Tamia, if you'd like to open up the lines for questions, please do so.
Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, press star one.
As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause briefly as questions are registered. The first question comes from Kevin Fitzsimmons with D.A. Davidson. Your line is open.
Hey, good evening, everyone. Apologies if I haven't made it through the whole release or deck yet. If you've already covered this in the release. But just wondering if you could talk about the margin. I know there was that $751K probably created some noise in it, but just looks like it went up 2 basis points linked-quarter. If you could help us how to think about the trajectory of the margin going forward in Q3 and beyond assuming what the market's assuming the Fed's gonna do, how you guys are positioned. Thanks.
Sure, Kevin, thanks for the question. Yeah, that 7.50 does put a little bit of a wrench in that math, clearly. You know, the way we pencil out the math, it looks to be about 32 basis points of impact. I would say our margin ended up being, you know, mid-3.40s, 3.45-ish, 3.47%, depending, you know, on how you probably annualize that.
Realistically, you know, I think that's a good starting point for the NIM going into the Q3. We do continue to expect to get some benefit going forward, both from the interest rate environment and the asset mix change.
You know, as we look at the loans we've been putting on the books, we have seen pricing from the beginning of the Q2 end of the Q1 , beginning of the second quarter to the end of the second quarter, and this month improved pretty meaningfully, as you can imagine. We do expect some benefit there going into the Q3 still from the Q2 level.
Is it fair to say that Q3 might be the biggest quarter of expansion and then it tails off after that as deposit betas accelerate?
Yeah. I think that's a fair position. That would probably be our baseline assumption. We try not to make too many interest rate assumptions, Kevin, just given the volatility in that market obviously here recently but I think that's our baseline expectation.
Okay, great. Just one question on, you know, I know credit looks good right now and it looks good for everyone. With such strong loan growth, I'm just curious if you guys contemplated kicking the allowance up more, you know, just given what you don't see that could still be out there or are you constrained by the model in doing that?
Yeah, Kevin, that's a good question. One thing, you know, to remember for us, we're not CECL yet. You know, we should be working through an incurred loss model. I think, you know, for us, with credit metrics improving, you know, we did move some of our other factors around.
We're seeing, you know, good trend, w e have made some underwriting adjustments, you know, and still seeing continued loan growth even with those underwriting adjustments. We feel good about what we're putting on. You know, with that being said, didn't really feel like the need to add more than to cover the growth during the quarter.
So, Heath, those underwriting adjustments, is that like you're just tightening up or is it you're looking at certain classes of loans and really tapping on the brakes in terms of your interest in them?
Yeah, you know, I think it's important for us and how we operate, you know, maybe versus some of the larger banks, that we stay nimble. We try to, you know, make adjustments, slight adjustments as we go versus, you know, some of our larger competitors, where we get the advantage sometimes to see where they move bigger swings, you know, in and out of certain classes.
We have looked at, you know, our concentrations and where we are and just ensuring that, you know, the stuff we put on in areas where we may be concentrated that is, you know, just tweaking the underwriting and then ensuring that we're not, you know, making exceptions in those categories that don't make really a lot of sense. That, you know, just being careful, I would say, in certain categories.
You know, not really slamming on the brakes anywhere, but looking around and making sure, you know, that we're being prudent in what we add, especially in areas where we might be concentrated.
Okay, great. Thanks, guys.
Thanks.
Thank you, Kevin.
Thank you. The next question comes from David Bishop with Hovde Group. Please proceed.
Yeah, good morning, gentlemen. Sort of dovetailing on Kevin's question, maybe on the opposite side and I apologize if I haven't had a chance to deep dive into the presentation either. Maybe conversely, what are you seeing on the funding side of the equation in terms of deposit growth this quarter and how, you know, obviously, I assume the 30% loan growth rate probably is not sustainable, but how are you thinking about, you know, sort of funding that the forward loan growth into the second half of the year?
Yeah, it's obviously a challenge right now, David. I mean, we expected our loan growth to pick up from the Q1 . I don't think 30% annualized was really a standard case for us. We are having to juggle a little bit. Loan deposit growth was effectively flat i f you back out the sub-debt, we were down a touch, but relatively flat given the fact we didn't increase pricing basically anywhere. We do believe that we're up against the cusp of having to look at deposit pricing to start to grow those balances again.
I think what you're gonna see from us, and probably a lot of folks who look like us, is we'll be juggling some wholesale funding, maybe a small brokered position for the next 6-9 months while this loan growth is in place. I don't know that it'll be in place that long, but let's say for the Q3 at least.
As we're able to start ramping up that deposit growth again, hopefully with some more competitive pricing, then we'll be able to shuffle those wholesale positions back down. I think you're gonna see us, sort of working on all fronts to fund this loan growth, which we do expect to have, you know, right now our pipelines for the Q3 look very strong.
You know, we're starting to get the very first hints of a little bit of, you know, I don't even want to call it hesitation, but just, you know, potentially slowing down a little bit in the Q4 given, you know, just the anecdotal stuff we're hearing but Q3 right now still looks pretty good.
Got it. Then, secondarily, I guess back to the loan discussion. Just curious what segments drove that growth this quarter? Curious, I saw the breakdown in terms of the various markets and the hires. Just curious how big you think the Huntsville and Birmingham markets could get from a loan growth perspective? Thanks.
Yeah. No, I think just from a you know from a breakdown geographically where that loan growth came from, it was fairly spread out across our footprint. I think roughly a third or a little more than a third came from the Atlanta market and then you know spread throughout our footprint pretty good after that.
We have not yet you know we brought lenders on in the quarter in Birmingham and Huntsville, but really haven't seen the benefit of that yet, t hat was later in the quarter and so we have strong pipelines there, and we think we'll see you know really strong growth there, but don't have that on the books yet so t hat wasn't really a part of this quarter.
As far as what we saw in terms of the lending breakdown, really very largely, you know, similar to the portfolio, you know, as a whole so w e continue to see, you know, commercial real estate growth. Obviously one of our concentrations that we have is, you know, trying to manage that, you know, the commercial real estate and particularly any non-owner occupied pieces of that.
Those are the areas where, you know, we're being a little more cautious in terms of making sure that we, you know, stick to our underwriting and in some cases or sectors, tighten up the underwriting, you know, probably especially in the areas, like non-owner occupied real estate related retail where, you know, consumer spending and things like that could cause a slowdown.
Was your last part of that question around the potential size of Birmingham and Huntsville?
In total?
Total, what we would expect from those.
Yeah. I mean, we're, you know, in Huntsville right now, you know, one commercial banker. In Birmingham, we would have 3. You know, those markets have a lot of upside potential. You know, today, when you think about our portfolio, you know, we've got in the top areas, we've got Atlanta, and then we would have the Savannah and several, you know, other markets in Georgia like, Columbus, Warner Robins, and Albany that are larger markets.
You know, certainly we would expect over, you know, a longer period of time to see Birmingham and Huntsville start to move up the chain and be, you know, markets there where Savannah and Atlanta are for us today but t hat's gonna take a while, if you think about that. We would look to add lenders, you know, if we have an opportunity to get good lenders, but, you know, we don't need that to hit, you know, good solid growth.
Got it. I'll hop off and let someone else ask the next question.
Thanks, David.
Thank you. The next question is from Christopher Marinac with Janney Montgomery. Your line is open.
Thanks. Good afternoon. Heath and Andy, just want to go through the securities portfolio. Anything change there in terms of credit risk within those securities? I guess maybe just a sense of kind of how some of those will mature and pay off over time.
No, Chris, we really, really didn't have any change there. We haven't had any downgrades in our muni or our credit portfolios that I'm aware of. And, you know, realistically, as you and I have discussed over the years, we tend to be sort of 5-10 year pocket, you know, window investors in, I mean, most products Munis might get a little bit longer sometimes.
We do have a small pocket of treasury, of our treasury portfolio that we'll look to sell if rates get to a spot where it makes sense to get out of those without any sort of loss. You know, right now, most of our maturities are no earlier than early 24. You know, out through, I think, our duration right now on that portfolio is something right around 6.
Got it. I guess from a high level, you know, do you see the liquidity on the balance sheet as kind of, you know, some of the strategic plan position you for 2 years of growth, 3 years of growth? I mean, what is the sort of timeframe that you kind of transition this, you know, the balance sheet to where there's a much greater proportion of loans relative to where it is today?
Yeah. You know, Chris, like I said, to an earlier question, I think we're gonna be juggling some wholesale funding here for the next 6-9 months. But, you know, realistically, I think it's hard to say what loan growth is gonna be in 2023. I feel good about Q3 , but after that it gets a little, you know, fuzzy.
I would say, I would expect if we're able to maintain what our stated targets are, which is 8%-12%, you know, realistically, should we be approaching a 70% loan-to-deposit ratio sometime in the second half of 23, I think that's probably a reasonable expectation. Somewhere in the first half of 23, we get to start truly transitioning securities to loans and not juggling so hard with the wholesale funding.
Got it. And then Heath, can you give us an update, I guess, on the merchant services business and kind of how you see that playing out next year? I'm presuming that next year is a big transition year for that product team.
Yeah. We're excited about the merchant team. You know, they really got on board in December and pretty much took, you know, several months to kinda get our infrastructure in place, get, you know, processing agreement and team in place. We're really probably only a couple of months in to them getting out and actually being able to produce.
I don't really have any numbers I would project to you right now, but I'd say that, you know, we have a significant upside opportunity on the merchant team and what we can do there. Just, you know, the other side of, you know, just from a, I think there's a good opportunity to use that as a lead product to go after deposit customers on the commercial side.
I think, you know, being realistic to think we might see some slowdown in lending at some point, and ability for our commercial bankers to focus on deposits and for us to use that. We also have a tremendous opportunity. You know, we just put a treasury team in place, you know, over the last few quarters, and the ability to grow our commercial deposits that way, I think is really strong and also to produce some fee income. We've got some areas where we can see, you know, some nice fee income increases.
Great. Then I guess the last one for me is just, you know, Middle Georgia continues to add more to the portfolio. I know it's not as big as Atlanta, but, you know, as you think forward another, you know, 12, 18 months, you know, what proportion of the company do you see Middle Georgia being? Is that still, I guess, a growth trajectory like we've seen through to date?
Yeah. We have, you know, some good things happening in Middle Georgia. You know, that's a good, vibrant economy. You know, the Warner Robins area with, you know, with the Air Force base and everything going on there. We added a lender, you know, in Macon, and we're seeing growth there, and we're putting a more significant office in place there, you know, probably 12 months or so.
Would love to add bankers to the team in that market. You know, that Middle Georgia market is like many of our markets where, you know, there's large market share, you know, held by larger banks. Of course, in that market in particular, you have, you know, you've got Renasant, you've got Cadence having gone through the State Bank. And then, you know, going through that cycle. So, I think there's significant opportunity there for that to be a market that moves up in size pretty well.
Great. Thanks for taking my questions, guys. Appreciate it.
Thank you, Chris.
Thanks, Chris.
Thank you. There are no further questions in the queue. As a reminder, it is star one on your telephone keypad if you would like to ask a question. There are no further questions in the queue, so we'll pass it back over to the management team for any closing remarks.
Thanks, Tamia. Thank you all for being on the call today. Thank you for your support of Colony, w e appreciate it. Another thank you to our team for everything this quarter. Again, we appreciate the opportunity to talk to you. Look forward to speaking with you all again soon. Thank you.
This concludes the Colony Bankcorp conference call. Thank you for your participation. You may now disconnect your line.