Hello, and welcome to today's Colony Bankcorp, Inc. First Quarter 2022 earnings call. My name is Bailey, and I will be the moderator for today's call. All lines will be muted during the presentation portion of today's call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Andy Borrmann, Chief Financial Officer. Andy, please go ahead.
Thanks, Bailey. To get started this morning and to keep the lawyers happy, I'm just gonna make a quick opening statement, disclosure. 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.
Good morning. Thanks, everyone, for joining our call this morning. I wanna thank all of our shareholders for their support. Of course, we added a number of new shareholders this quarter, completing our capital raise in February, and so appreciate all the new investors in our company, as well, and appreciate your interest and support. This is our first quarterly earnings call that we're doing, and the way we expect to handle these is that you guys have and have had the press release and investor presentation that we put out, so we'll make a few brief general comments about that and quickly turn it over for question and answer. We had a good quarter on the loan side, despite loans ticking down early in the quarter due to continued payoff headwinds.
We had a great quarter of production and ended up at what is a 7% annual run rate in core loan growth. That is slightly below what we're targeting of 8%-12%. You know, if you look at our average loans for the quarter, our average loans are actually below our ending balance last quarter, so we did not get the benefit on the revenue side of steady loan growth for the quarter, but we did end up the quarter with good growth. We're of course early now in the second quarter, but we like what we see so far, and we feel good about our loan pipeline and confident we'll be in the 8%-12% range that we've indicated in loan growth for the full year.
Our fee income side of our business certainly faces some headwinds in the mortgage area. Obviously we've faced in the last little while some unprecedented rate increases. That's easy to see the immediate impact that has, but maybe what's not so obvious to see is the challenge that we have in housing inventory. That is also playing into that. Despite that, we had a good level of mortgage production this quarter, and we think those things will shake themselves out, and we'll continue to have a strong mortgage business. In our small business specialty lending area, our government-guaranteed lending, we are seeing some lower demand there due to the changes in the guarantee and the guarantee fee.
We've added some production capacity in terms of business development officers on that side to try to ramp that up and keep that going. On the banking side of fee income, of course, the first quarter is a shorter quarter and always a little light on the banking fee side, but we are seeing good trends in that area as well. Of course, this is the first fully integrated quarter with the SouthCrest acquisition that was announced a year ago. It was completed on August 1, and the core conversion was in November. We're pleased with how that integration is going, and we think that we're gonna continue to see the strong synergies we're seeing as a combined company there.
Our credit quality remains strong, and the economic outlook in our markets is good. This quarter we also announced an efficiency initiative that you read about in our release. I'm proud of our team for taking a proactive approach to move us towards our efficiency goals. This affects our banking division almost exclusively, and it's reducing our workforce there by about 6%. We're closing two smaller branches in rural markets where we have nearby branches. We expect the impact from customer attrition to be minimal on both the deposit and the loan side from these changes.
We also don't expect to see any disruption in loan production from these changes in our staffing. These staffing changes are not impacting our non-interest income lines of business, so we don't expect it to affect revenue generation there. I described it to our team, and I kind of tell you the same way we look at this as pruning so we can continue to grow in an efficient manner. With that, I'm gonna turn it over to Andy Borrmann, who will make a few more comments.
Thank you. You know, given what we've experienced in the interest rate environment here in the first quarter, sort of no surprise that unrealized losses in the bond portfolio have been experienced by everybody. Obviously, our bond portfolio is a little larger than some of our peers. We did move approximately 15% of the portfolio to HTM to hold to maturity in January, on January 1, another 17% to HTM on March 1. While our OCI was, you know, $30 million effectively larger than it was on December 31, these moves did reduce the OCI impact that we had during the quarter by almost $20 million.
One of the other things I would say is that with the rapid change that we've seen in rates, there's been a bit of pricing dislocation on the loan side. You know, customers have been used to 3 handles here in Atlanta and sort of throughout Georgia for a long time. You know, we're doing our best to generate appropriately priced loan growth, and we're still confident in our loan growth numbers. As Heath said, you know, our pipelines remain solid, but there is sort of this pricing lag impact that we're seeing that hopefully will resolve itself over the next, you know, 60 or 90 days as people get more accustomed to seeing a 3% 10-year sort of number.
You know, we remain asset sensitive similar to the end of the fourth quarter in our 10-K numbers. We do expect the increase in rates to be an overall benefit to our spread income. Clearly, it did you know slow the non-spread fee income in the first quarter. Some of the benefit or some of the slightly lower expense numbers that you saw in the quarter was related to variable expense to that production. Overall, you know, our expense load was we were happy with where it came in on a core basis, but we do feel like we have more work to do on that front. That's really all I have. Heath, I'll pass it over to you.
All right. Thank you, Andy. With that I'll ask Bailey if you can go ahead and open it up for questions.
Thank you. The first question today comes from Kevin Fitzsimmons from D.A. Davidson. Kevin, please go ahead. Your line is now open.
Hey, good morning, guys. How are you?
Good, Kevin. Thanks.
Good. Yeah, appreciate you guys doing a quarterly call. This will be helpful. First, you know, on the announced efficiency initiative, I guess on that, I'm just curious, number one, why now? Is it more to, is it something you've been looking at for quite a while, or is it in response to some pressures out there on the top line you see? Then of the that $3 million in savings you're targeting, is that mostly gonna fall to the bottom line, or is it being used to invest elsewhere? In other words, it's just kind of replacing expenses from there to another area like digital or some other area. Thanks.
Thanks, Kevin. That's a good question. Certainly, you know, it's important for us to achieve some better, you know, long-term efficiency numbers. We have a large branch network relative to our size due to our rural background. We know that, we like that. We like a lot of the positives that come from that in terms of fee income opportunities to generate other non-interest income. We're constantly looking at that. Back in at the end of 2020, beginning of 2021, we had another initiative where we went through that process. You know, it's just important for us to recognize as we grow, we have to continue to look at that and rationalize our branch network.
There's no special, you know, timing of this other than, you know, we had the SouthCrest integration. We needed to get that behind us. A lot of time, energy and effort went into that, and this was just kind of the next logical project, you know, for us to focus on. Nothing to do with feeling any pressure on, in terms of the, you know, top line side there. You know, obviously, we continue to think that we're gonna have good opportunity for loan growth. In terms of, you know, dropping to the bottom line, certainly, there are some things that we are doing on the technology spend side that are going to increase expense, but most of those are designed to generate revenue, as well.
We hope to see, you know, a good bit of this hit the bottom line. The other thing that, you know, that we are doing that we think will, you know, potentially eat into some of this temporarily will be, you know, adding additional commercial bankers. We actively have added and continue to recruit. Obviously, those will, we think, you know, generate revenue to pay for themselves in a relatively short period of time. But you will see some increase from that.
Okay, great. Thanks, Heath. One other question on the fee revenues. You talked about mortgage. It looked like the SBA line came down quite a bit, but is that more coming, you know, seasonal and coming off a very strong quarter last quarter? Or is that business just you had mentioned slower demand. I'm just wondering, is this level more of a run rate, or does it still have more room to fall off? Thanks.
Thanks. Good question. The fourth quarter was a really strong quarter for our government-guaranteed lending group. You know, looking at it quarter-over-quarter, it was unseasonably high last quarter. Like I said, you know, we've had a shift. You know, if you think about the evolution over the last year or so of government-guaranteed lending in our bank and a lot of others, it went from no opportunity except for working through all the PPP, then into the era of having the 90% guarantee and not having a guarantee fee. Now we're kind of making that adjustment back to sort of normal SBA and USDA lending.
We're seeing that, you know, that change has impacted it. We still have a good bit of backlog of projects that are coming through. You know, we're building our pipeline back up. I think you'll see, you know, we think we're not gonna see falloffs from the levels we're at now. You know, building that back up is important part of what we're doing this quarter and the second half of the year.
Okay, great. One last one from me. You mentioned earlier about the first full quarter of SouthCrest, and now that integration is behind you. Just, you know, on one hand, it sounds like you're seeing and you expect pretty healthy organic growth. On the other hand, you guys just raised capital. I would suspect you're looking to be opportunistic if there's M&A opportunities out there. You know, I would think you would look for situations that can get that loan-to-deposit ratio up. All that being said, like, what do you think the likelihood, based on just what you're hearing out there in the marketplace, is that you guys might find an acquisition opportunity over the next year or so? Thanks.
Yeah. Good question. We are having active conversations. There is plenty of activity going on out there. You know, we think that there is significant opportunity for us to continue to grow through M&A, and our expectations would be that we definitely have something that we do on that front over the next year.
Great. Thanks, guys.
Thank you.
Thank you, Kevin. The next question today comes from Christopher Marinac from Janney Montgomery Scott. Christopher, please go ahead. Your line is now open.
Thanks very much. Andy and Heath, can you elaborate on the loan yield improvement? I know Andy touched on it in his remarks. I just wanted to get more color about April and how you expect, you know, further Fed increases to kind of impact your, the rates that you're charging and how that may look in future periods.
Yeah. Chris, I'll hit that and thanks for the question. You know, we're doing our best to stay disciplined on loan rates and get the benefit of these rates on new loans. Clearly, we'll. You know, some of our variable rate and adjustable rate loans have already repriced. Frankly, you know, this will be the last quarter we see any PPP benefit in those forgiveness numbers hitting our yield. I'm hopeful that effectively first quarter should be one of the lowest quarters for our loan yield overall. It's a hugely competitive market still with overall loan-to-deposit ratios, and Georgia probably averaging in the 70% range, so people are still trying really hard to ramp.
We'll see how we do, but I do think you're starting to get phone calls from the truly professional borrowers, that or they're not asking you if you're below 4% anymore, they're asking you if you're below 5% anymore. That part is favorable, I think, to our future yields.
I would just add to that, you know, Chris, that, you know, we're having the conversations with our bankers, with our customers. We've all been in such a relatively low and stable rate environment for a while, that there's some coaching and some conversations going on, both with our team and our customers, you know, as we adjust to the new rate environment. I think the good news is, with that, is that, we have not been seeing, you know, a lot of marginal deals or things that didn't have room for the rates to go up and for the projects and for the things to work for our borrowers.
It's a little bit more, I think, sticker shock, you know, as we go through that than it is, you know, cash flow of deals working and things like that. That, you know, has me optimistic that we'll be able to move through that. You know, for a good while now, a borrower would come in, you know, and ask us where we were on something, and they'd go work on it for 6 or 8 months, and they'd come back, and we're at the same place. That's obviously not happening anymore. We just have some adjustment, you know, to work through as we get there. Of course, that's the same thing all of our competitors are going through as well.
We're trying to be disciplined to pricing, but also realize we've got a low loan-to-deposit ratio, and we need to grow loans and create, you know, longer-term value.
Great. Thank you for that perspective. Just to follow up, Heath, I mean, the level of securities today, do you see that changing materially in the next year as you put more loans to work and or do you think that it really changes as a result of kind of other external expansion over time?
Yeah. A couple of things on that. We certainly expect to be able to, you know, grow loans and have that eat into the amount of balance sheet that we're committing to securities in terms of those, the securities portfolio running off. You know, the big unknown is just more on the deposit side. I guess that we're entering our, I don't know how many consecutive quarter thinking maybe is this the quarter that some of these deposits start running off. We're not seeing that. We're seeing strong, you know, strong deposits. Some of that's a little bit out of our control. You know, I'm hopeful and thinking that we'll start to see some erosion, you know, with the deposits.
We certainly don't expect to raise our deposit rates, you know, as interest rates go up. I think there's an opportunity to kind of right-size the balance sheet and increase that loan-to-deposit ratio to a more meaningful number. You know, at the same time, you know, we're not going to push core deposit relationships out of the bank. Like I was saying, with these branch closures, we don't think those are going to be meaningful deposit decreases from that either. We're not trying to do that. We're still in it for the long haul, you know, we're gonna control it on pricing for many interest-bearing deposits, but we're still out trying to gather from our business customers and consumers, you know, non-interest-bearing deposits.
That's gonna be the, you know, another piece of that. We're gonna continue to move that loan-to-deposit ratio up if we can get the loan growth we're expecting this year.
Chris, I think I would just add on real quick, sort of philosophically, we try to run the bank 3%-5% total cash. You know, that is sort of one of the backdoor drivers of whatever the size of the portfolio is as well.
No, that all makes sense. Thank you both for the commentary, and, thanks again for hosting the call this morning.
Thanks, Chris.
Thanks, Chris.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from David Bishop from Hovde Group. David, please go ahead. Your line is now open.
Yeah. Thank you, and good morning, gentlemen. Question for you as it relates to just the mortgage banking segment. You noted that obviously you're trying to get some more efficiencies on the banking segment there, but if we continue to see rates rise, I was just curious how you view the ability to maintain or even improve on the efficiency of the mortgage segment if we do continue to see rates rise and potentially have a slowdown in the housing market.
Yeah, no, thanks for that question, David. So just, you know, for everybody's benefit, our mortgage group that we have is a purchase money mortgage group driven primarily from our relationships of our loan originators to builders and to realtors. Certainly, as you can see with the changes each quarter in our non-interest income lines of business, there's a lot of variable expense on that front. We manage that closely. Our President of our mortgage division is incented on net income, not on production, which is an important driver of how we manage that business. We did add a good bit of originators over, you know, towards the end of last year.
We look, you know, our average originator is down, you know, probably 20%-30% in their production. Again, some of that is, you know, where they've got a lot of pre-qualifications but are having a hard time getting contracts because of the tight market in a lot of our markets. Or the lack of inventory in a lot of our markets. Between that line of business and our home builder finance group, we keep a close eye on the bigger markets where we have a lot of home builder finance, and we do a lot of mortgage business. What we're seeing, you know, is that we've entered this with such light inventory that we think that, you know, we've got to continue.
There's plenty of capacity to take that inventory. The markets still are strong despite the rates. Again, we're seeing the same thing on the consumer, like I was mentioning on the commercial side, is consumers have had plenty of capacity to go up in rate and in size of loans. That's certainly something we keep a close eye on. We do have the ability, obviously, to scale that business back from an operational, from a fixed expense standpoint as well, if we need to. You know, we did $400 million last year. You know, we are at $100 million in the shortest quarter of the year, or 97, I guess, is the actual number we did this quarter, I think.
You know, we look to continue to grow that. That's the current economic outlook. That certainly could change, but we would make adjustments to our business model if we need to. We still think, you know, that there's opportunity for us to increase our mortgage business through a cycle, just depending on what that cycle looks like.
Got it. I think, Heath, you know, maybe, I think he's interested.
David, we're having a little bit of a hard time hearing you, David.
Oh, sorry. Is this a little bit better?
That's better.
Okay, great. I think, in response to, I think it was Fitzsimmons question about potentially adding talent, this year. Heath, I'm just curious, maybe what the profile of the bankers you're targeting, if it's kind of commercial, sort of commercial bankers, commercial real estate, and are you targeting some of these coming out of some of the. Obviously, there's a rampant amount of consolidation that come out, so maybe targeting those that are maybe being disaffected by some of the the merger and acquisition activity with your footprint.
Yeah. What we are targeting is really very similar to what we have. We, you know, the bankers that we're talking to and that we've brought on are what I would call more generalists that would have, you know, definitely a commercial real estate, both owner-occupied and non-owner-occupied. We are primarily targeting those out of the larger regional and to some degree the national banks that it is a result of consolidation. When you think about markets like Savannah, Augusta, and Atlanta, you know, you've seen now some of these roll-ups where over the last couple of years, their business cards changed two or three times. And along with that, the processes and everything else. We're having good success recruiting out of there.
You know, we're generally trying to get folks that we think can bring $10-$20 million of business over in a relatively short period of time and carry $30-$50 million portfolios, you know, depending on the market that we're looking at. You know, smaller size would be in some of the more rural markets where, you know, the cost of the banker isn't as much, and the larger size would be in the larger markets like Savannah, Augusta, Atlanta.
Got it. Appreciate the color. You mentioned the interest sensitivity, referring back to the 10-K. Just curious, maybe a question for Andy, if there's been any sort of update in terms of what the impact is of a 100 basis point hike, rate hike would be on spread income over a 1-year period.
Yeah. David, you're, I can't quite give that to you yet. That'll be out in the Q. We've got some preliminary numbers. I don't think we're quite ready to disclose those yet.
I think to say that the numbers at the end of the year, it'll be similar.
Yeah.
To those numbers. So the outlook still remains strong if we can get, you know, if the rates stay in this higher range, we're happy to see them. Just causes a little, like we were talking about earlier, temporary, you know, dislocation for a little bit as the marketplace adjusts to it. We're happy to see the higher rates and hope we can, you know, like them to go up and stabilize, maybe not rise quite as quickly as they've risen in the last 60, 90 days each time, but happy to see rates increasing.
David, I think the one thing I can add, just from a structural standpoint, we can talk about is that with a lower cash balance, our overall asset sensitivity will obviously be a little bit lower, on an immediate basis, just given the fact we've allocated a little bit of that.
Got it. A couple of housekeeping questions. Just curious that there's been a little bit of bump in the effective tax rate, what we should be thinking about heading into the back half of the year. I don't know, in terms of the securities portfolios, you have the monthly cash flows off that, off the portfolio? Thanks. I'll stop there.
Yeah. Yeah. Happy to talk about those. Give me one quick second. We, you know, like you said, it's been a little bit bumpy. We're expecting the tax rate to be closer to 19%-20% going forward. On the monthly cash flows on the bond portfolio, we run a relatively bullet-like structure in our bond portfolio. Overall, we don't have a ton of variable cash flows, since the rest of our balance sheet is relatively variable. Best number I've got for you is in the high single-digit $ millions of cash flows a month from the portfolio. Obviously, depending on maturities, et cetera. Yep.
Appreciate the color.
Thank you, David. There are currently no further questions registered, so as a reminder, it is star followed by one on your telephone keypad. There are no additional questions waiting at this time, so I'll pass the conference over to Heath Fountain, CEO, for closing remarks.
Thank you, Bailey, and thank you everyone for being on the call today. Appreciate your interest in Colony. We appreciate you being on the call and look forward to speaking with you soon. Thank you.
That concludes the Colony Bankcorp, Inc. first quarter 2022 earnings call. Thank you for your participation. You may now disconnect your line.