Yahoo Finance Colony Bankcorp, Inc. (NASDAQ:CBAN) Q1 2024 Earnings Call Transcript
Colony Bankcorp, Inc. (NASDAQ:CBAN) Q1 2024 Earnings Call Transcript April 25, 2024
Colony Bankcorp, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to Colony Bank’s First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. Later, you’ll have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call is being recorded. I’ll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Colony’s Chief Financial Officer, Mr. Derek Shelnutt.
Derek Shelnutt: Thanks, Abby. 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 risks 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 condition, 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.
Heath Fountain: Thanks, Derek, and I want to thank all of you for being on the call today and for your support of Colony. We’re pleased with our improved operating results in the first quarter as well as the progress that we’ve made over the last several quarters. We’ve managed to build on our core customer relationships, strengthen our complementary lines of business, and align expenses with our current growth outlook, all while continuing to innovate and enhance our customer experience. I first want to thank and congratulate our team members on a great quarter. It’s their commitment to achieve our internal mission to build a sustainable, high performing, independent bank that’s driving our improved earnings. In the first quarter, operating net income increased nearly $400,000 and a lot of that’s driven by continued improvement in our non-interest income lines of business.
Non-interest income increased almost $1 million on an operating basis. Last quarter, we mentioned that we expect to see a few more basis points of margin decline, and we did see 1 basis point during the first quarter which was slightly better than our expectations. We saw some stability and slowing in the rise of our cost of funds during the quarter. However, as you all know, as we’ve entered into the second quarter, we’ve seen the rate environment heat back up. The five and 10-year treasury have increased over 40 basis points since the end of the quarter, and you’ve also seen the likelihood of rate cuts this year continue to diminish. That’s driving more competition for deposits in the marketplace, and we will see that put continued pressure on our funding costs.
Given that while we’re closer to the end of margin contraction, we could see margin decline another 3 basis points to 5 basis points from here. If this environment stays where it is now, before we start to see that recover and expand, we believe in the second half of the year. Derek’s going to discuss the next items in more detail, but during the first quarter, we did make some strategic balance sheet adjustments, including the sale of securities and some loans, as well as the pay down of broker deposits and borrowings. These adjustments are part of our ongoing balance sheet management and we likely will see similar transactions, particularly the security sales, going forward, when we believe they’re appropriate helpful to future earnings.
We’re glad to see our complementary lines of business continue to progress. The performance of those lines are highlighted on Slide 9. There is seasonality to our Marine, RV and our Merchant Service lines of business. So when you look at Q1 last year, we saw a lot of improvement over Q1 this year. Even though they’re down a little bit from Q4, we do expect Marine, RV to be profitable going forward and Merchant to reach profitability in the next quarter or so. The biggest driver in the increase in our non-interest income was from gains on sale of SBA loans. During the first quarter, our SBSL or Small Business Specialty Lending group hit the high mark over the last year or so. We continue to see success with our small dollar lending program and expect to see those do well over the next several quarters.
For mortgage, the first quarter is typically a slower quarter for mortgage in any kind of environment and of course, we still see a challenging interest rate environment for mortgage. However, we did see our mortgage group break – come pretty close to breakeven in the first quarter and certainly improvement over where we were in the first quarter of 2023. We did see loans decline during the first quarter, primarily as a result of the sale of portfolio mortgage loans that I mentioned earlier and that Derek will go into more detail on, and some criticized loans that paid off during the quarter. However, if you look at our average balance of loans, we were down only about $3 million quarter-over-quarter in average balance, and our current loan levels today and our pipeline indicate we should expect some modest loan growth for the rest of this year, which is what we’ve been forecasting the last few quarters.
Total deposits did go down quarter-over-quarter, but that was primarily due to the payoff of broker deposits. We are glad to report that our core customer deposits increased by about $12 million over last quarter, and we remain focused on building core deposits and deepening our customer relationships. Expense discipline remains a priority and although non-interest expense increased slightly from the prior quarter, it was offset by increased non-interest income. So our net non-interest expense to average assets, which given our business lines is really how we think best to judge our operating efficiency. That number was 1.38 on an operating basis in the first quarter, which is exactly the same as it was last quarter, and a significant improvement from 1.78 in the first quarter of 2023.
We feel good about our overall credit quality. Non-performing loans decreased quarter-over-quarter in addition to the decrease in net charge-offs over the prior quarter. The charge-offs we have seen are primarily related to the unguaranteed portion of our SBA loans. We expect to see some – we did expect to see that increase in charge-offs as we talked about the last couple of quarters, and we expect to see some of those small dollar loans to have that as well and we started to see that. However, those loans do have a great premium that we sell those for, and so we think it’s a great revenue source for our SBSL team and overall very profitable product. Innovation, as I mentioned earlier, despite the focus on we’ve had on expense control, we’ve continued with innovation.
It’s an important part of our growth strategy, our ability to better serve our customers effectively and efficiently. Our team’s got a number of innovation initiatives that they’re working on that will give us a better customer experience and boost our customer service standards of being collaborative prompt and simple, and we’re looking forward to seeing some of that roll out through the rest of the year. And with that, I’m going to turn it back over to Derek, who’s going to go over the numbers in some more detail.
Derek Shelnutt: Thanks, Heath. I’ll start off with our earnings for the quarter. On a GAAP basis, net income decreased around $265,000, but excluding the loss on security sales, operating net income increased about $376,000. Interest income increased from the prior quarter, but was slightly outpaced by the increase in interest expense, which led to a decline in net interest income of about $220,000. This led to a slight margin decrease of 1 basis point from 2.70% in the prior quarter to 2.69% this quarter. The margin decline was a little less than our expectations as Heath mentioned earlier, and we still do expect to see some margin decline in the 3 to 5 basis point range before we start seeing any expansion. We have been seeing some slowdown in the increase of our cost of interest bearing liabilities, that was 2.58% in the first quarter, up 8 basis points from the fourth quarter.
To compare, the increase from the third quarter of 2023 to the fourth quarter of 2023 was 24 basis points from 2.26% to 2.50%. If interest rates stay where they are for a while, we’ll continue to see our cost of funds increase, but we expect it to be at a slower pace than what we saw throughout 2023. On an operating basis, non-interest income increased $973,000 during the first quarter. This was primarily a result of an increase in SBA gain and related fee income of $535,000 and is related to the increased gains from the newer small dollar loan product. Net service charge and fee income was slightly down due to fewer days during the quarter and revenue from both wealth and insurance showed some small increases from the prior quarter. Our BOLI income did increase quarter-over-quarter, but was a result of a one-time claim payout in the first quarter.
Non-interest expense totaled $20.4 million and most of that increase was in employee compensation and benefits. The first quarter is when we see annual salary increases go into effect, we typically see more payroll taxes at the beginning of the year and 401(k) match resets. On last quarter’s call, we mentioned that we would likely see an increase in expenses in the first quarter and that we were still targeting that 1.40% net NIE to assets, operating net NIE to assets was 1.38% in the first quarter and we see it being around that 1.40% range for the next few quarters. Total non-interest expense of around $20 million is what we’re expecting on a go forward basis, but it could be slightly higher based on activity and we would anticipate that we sell with non-interest income.
Provision expense totaled $1 million for the quarter. Net charge-offs were slightly down quarter-over-quarter. Total non-performing loans decreased $3.8 million from $10.2 million last quarter to $6.4 million this quarter. Of the $665,000 a net charge-offs, $535,000 of that was from the unguaranteed portion of SBA loans and our SBSL division. The small dollar express loans, which are 85% guaranteed have slightly higher losses, but they also have higher premiums when sold. We’ve recently tightened our underwriting a little on these and are still seeing good volume, so we think they’re going to be a good product long-term. Total loans held for investment decreased $24.5 million from the prior quarter. However, as Heath mentioned earlier, our quarterly average is down only about $3 million.
Overall loan demand has slowed, but the driver for this quarter was primarily the sale of $8 million of portfolio mortgages for $84,000 gain and payoffs close to $10 million in loans that no longer matched our credit standards. Based on our current pipeline, we still expect modest loan growth this year and on the last call, we said that we expected to see that pickup in the later half of the year, and that’s still what we’re anticipating. Total deposits declined $22 million and was due to the payoff of $34.5 million of broker deposits. We grew customer core deposits by $12.5 million and that still remains a primary focus area for us. Additionally, we paid down FHLB borrowings by $20 million during the quarter and in doing so further reduced our reliance on higher cost funding.
We did not have any outstanding overnight borrowings and still maintain a strong liquidity position. The overall value of our investments portfolio increased and led to an increase in OCI of about $1.3 million quarter-over-quarter. We did sell investment securities for a $555,000 loss during the quarter and a few details about that are highlighted on Slide 33 in the investor presentation. The fair value of those securities was around $8.6 million with a book yield of 2.05%. Our conservative estimates put that earn back at about two years, but could be shorter if deployed into loans. It’s likely that we will do some more restructuring going forward and those transactions would probably be of a somewhat similar size. The portfolio mortgage sales, pay downs on wholesale funding and investment security sales are all part of our prudent balance sheet management strategy and we feel that continuing to optimize our funding mix alongside restructuring underperforming assets puts us in a better position for overall margin improvement.
Mortgage is still seeing stable production relative to the higher rate environment. The first quarter pretax profit was right around breakeven and a big improvement over the first quarter of last year. In our SBSL division, the smaller express loans are doing well and offsetting some of the slowdown we’ve seen for the larger SBA loans. We continue to see improvement in our startup complementary lines of business. The breakdown of income on a pretax basis is on Slide 9. Marine and RV lending is seasonal and we’re just getting into the prime season now. However, we see considerable improvement when compared to the first quarter of 2023. Heading into the 2024 season, we’ve almost triple the number of dealers in our network when compared to the end of March last year.
And we’ve recently implemented auto decisioning software, which is aligned with our underwriting guidelines and enables us to quickly respond to dealers in our network. Merchant services has also made great progress, when compared to the first quarter of last year, the total number of customers are up 46% since last March. The total number of quarterly transactions are up 92% in the first quarter of 2024 compared to the first quarter of 2023. And the total quarterly volume is up 75% compared to the first quarter of 2023. Volume continues to increase and we have the capacity to significantly grow revenue with our current resources without adding a lot of additional expense. We also see this as a great lead product in developing full customer relationships with potential customers.
Colony wealth advisors continues to add revenue and increase assets under management and we see a lot of opportunity ahead. And for Colony insurance, we recently expanded our product offerings by adding a life insurance specialist to the team. We feel adding life insurance to our list of products allows us to better serve our customers and generate additional revenue. That concludes my overview, and now we’ll turn it back over to Heath for any final comments before we take questions.
Heath Fountain: Thanks, Derek. That does wrap up our comments, and with that I’ll call on Abby to open up the line for questions.
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