Earnings call transcript: Colony Bankcorp beats Q4 2024 expectations

Colony Bankcorp Inc. surpassed analysts' expectations for the fourth quarter of 2024, reporting earnings per share (EPS) of $0.44 against a forecast of $0.33. Revenue also exceeded projections, coming in at $30.78 million compared to the anticipated $29.1 million. Following the announcement, Colony Bankcorp's stock rose significantly in aftermarket trading, reflecting strong investor confidence.

Key Takeaways

• Colony Bankcorp reported a 33% earnings surprise with EPS of $0.44.
• Revenue outperformed forecasts by $1.68 million, reaching $30.78 million.
• Stock price increased 12.1% in aftermarket trading.
• New digital banking platform launched to support growth.
• Federal Reserve's easing rates expected to benefit margins.

Company Performance

Colony Bankcorp demonstrated robust performance in Q4 2024, with notable increases in net interest income and total loans. The company also launched a new digital online banking platform aimed at bolstering future growth and digital expansion. This quarter's results reflect the company's strategic focus on innovation and efficiency.

Financial Highlights

• Revenue: $30.78 million, up from the forecast of $29.1 million.
• Earnings per share: $0.44, surpassing the forecast of $0.33.
• Total (EPA:TTEF) loans increased by $20 million, reflecting 4% annualized growth.
• Total deposits grew by $64.7 million.

Earnings vs. Forecast

Colony Bankcorp's actual EPS of $0.44 represents a 33% surprise over the forecast of $0.33. Revenue exceeded expectations by approximately 5.8%, indicating strong operational performance. This positive surprise is a continuation of the company's trend of outperforming market expectations.

Market Reaction

Following the earnings release, Colony Bankcorp's stock price jumped 12.1% in aftermarket trading, reaching $17.60. This increase comes after a slight decline of 2% during regular trading hours. The stock's movement highlights investor optimism in response to the company's strong financial performance and strategic initiatives.

Outlook & Guidance

Looking ahead, Colony Bankcorp anticipates normalized loan growth rates of 8-12% in 2025. The company expects modest margin expansion due to the Federal Reserve's easing of rates, which should reduce pressure on deposit costs. Additionally, there may be some restructuring of the investment portfolio to enhance returns.

Executive Commentary

"We are continuing to see improvement in our complementary lines of business," stated Derek Shelnut, Financial Officer. CEO Heath Fountain expressed optimism, saying, "We're excited about the opportunity that we have" and reaffirmed the company's growth trajectory with, "We do expect to get back to growth."

Q&A

During the earnings call, analysts inquired about potential loan payoffs in Q4 and the stability of fee income. Management highlighted new loan origination yields of around 8.23% and emphasized the stability in project financing, which is expected to support future growth.

Risks and Challenges

• Potential fluctuations in interest rates could impact margins.
• Competition in digital banking may pressure market share.
• Economic uncertainties could affect loan growth and deposit stability.
• Regulatory changes could pose compliance challenges.
• Market volatility may influence investment portfolio returns.

Full transcript - Colony Bankcorp Inc (CBAN) Q3 2024:

Marjorie, Conference Call Operator, Colony Bank: Good day, everyone, and welcome to today's Colony Bank Third Quarter 2024 Conference Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Today's call is being recorded. I will be standing by if you should need any assistance.

It is now my pleasure to turn the conference over to Mr. Derek Shelnut.

Derek Shelnut, Financial Officer, Colony Bank: 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 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 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.

Heath Fountain, Chief Executive Officer, Colony Bank: Thanks, Derek, and thanks to all of you joining our Q3 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 Q3. 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 during the storm 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 in their communities, whether it was serving over 2,000 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 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 some areas like Eastern Tennessee and 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 non interest income. All of our complementary lines of business were profitable in the 3rd quarter and combined pre tax net income increased over 20%. Net interest income increased approximately $132,000 in the 3rd 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 Q3 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 Q3 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 $20,000,000 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 4th 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 Q2, we did have some increases in our non performing loans and in the second quarter, non performing loans and criticized were at historic lows. So we did see some increases this quarter, somewhat 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 non interest income was led by good quarters for both mortgage banking and for our SBSL. Mortgage rates did go down a little bit in the Q3. They've 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 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. Discipline around efficiency and expense, expenses continued in the Q3. The metric we've talked about a lot that we track, our operating net interest expense to average assets was 1.32 percent on operating basis, which has continued to improve quarter over quarter for the last 7 quarters. We expect that to stay 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 drive. 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. And our teams really work 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 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 Q4 and into 2025.

And so with that, I'll turn it over to Derek to go into more details on the financials.

Derek Shelnut, Financial Officer, Colony Bank: Thank you, Heath. GAAP and operating net income increased in the 3rd quarter with operating net income increasing $238,000 as a result of increased net interest income and increased non interest income. Interest income increased by over $1,200,000 in the 3rd 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 $1,000,000 as we saw mix shift in deposits. It's not unusual to see a decline in our municipal DDAs in the Q3 as they start their new budget year, and then those deposits return in the 4th 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 a full impact of that. But 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 4 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 2 and we're conservative how we're thinking about the number and magnitude of Fed rates going forward that may impact that increase in margin. Moving to non interest income. 3rd quarter operating non interest 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 non interest expense increased about $240,000 and that was a result of some variable based compensation related to non interest income and our SBA (LON:SBA) servicing valuation. We feel good about operating net interest net non interest expense to average assets at 1.32% and see it remaining here in between our target of 140,000 going forward. Provision expense totaled $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 Heath mentioned, that was coming off a quarter at very low levels.

We are 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 second quarter of this year. Total loans held for investment increased $20,000,000 from the prior quarter 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 are starting to see. Also as Heath mentioned, we do expect a number of payoffs in the 4th quarter, which will hold back loan growth a little bit.

There's good upside on the redeployment because those payoffs are coming in off rates that are well below the market. Total deposits increased about $64,700,000 of which half were about customer deposits and the other half were brokered CDs tied to a cash flow hedge. Our deposit growth was our 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 Additionally, we have between $70,000,000 $80,000,000 of retail CDs maturing in the 4th quarter that are above our current board rates.

So we see a lot of opportunity there for reduction in our retail CD costs. General Home Loan Bank advances decreased in the quarter by $20,000,000 as we paid off a short term advance. And as we saw the steepening of the inversion of the curve during the quarter, we did employ some additional cash flow hedge strategies, which help reduce the pressure on any cost that we may see 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 $7,600,000 worth of securities, which included a $454,000 loss.

The book yield on those was 2.61 percent and our earn back estimates are around 2 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 $0.1125 per share, and we're proud to continue another consecutive quarter of dividends. Mortgage net income was $275,000 for the 2nd 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 3rd quarter and generated some activity, rates have since moved back

Heath Fountain, Chief Executive Officer, Colony Bank: up. Just to give you

Derek Shelnut, Financial Officer, Colony Bank: a little bit of perspective on that, the Q3 of last year saw mortgage rates in the high 7s and low 8s and the Q3 of this year started in the high 6s, but dipped to the mid to low 6s. And then today, they're back up to the high 6s, maybe even low 7s 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 Q4 from our mortgage banking division, but we expect mortgage to remain profitable and that profitability level could be influenced by changes in rates and movement in the 10 year. Our small business and specialty lending division had net income of $1,500,000 during the quarter, a $174,000 increase from the prior quarter.

Charge offs on the unguaranteed portion of loans, they were down during the Q3, but are likely expected to return to similar levels that would be comparable to the 1st and second quarter of this year. Gain on sale revenue is forecasted to be at this level or slightly higher in the 4th quarter and then a little softer in the Q1, 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 8 provides a breakdown of pretax income for our complementary lines of business. No business line experienced a loss in the Q3 and all business lines showed improvement from the prior quarter with the exception of merchant, which shows breakeven, 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 3rd 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 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 increase volume and led to an increase in pre tax income in the Q3. So that concludes my overview and I will turn it back over to Heath for any final comments before we take questions.

Heath Fountain, Chief Executive Officer, Colony Bank: 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.

Marjorie, Conference Call Operator, Colony Bank: Thank you, sir. We will take our first question from Christopher Marinac with Janney Montgomery Scott.

Christopher Marinac, Analyst, Janney Montgomery Scott: Thanks. Good morning. I appreciate you taking 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 'twenty five.

I know there's a few moving parts in Q4 as Derek had outlined. Q4 as Derek had outlined.

Derek Shelnut, Financial Officer, Colony Bank: Is that a reasonable base?

Dave Bishop, Analyst, Hafi Group: Yes. Is that a reasonable base?

Derek Shelnut, Financial Officer, Colony Bank: Yes. I think that would be pretty reasonable to do. I mean, we're continuing to see improvement in our complementary lines of business that's leading to better non interest income. Our net NIE number that measures that contrast between non interest income and non interest expenses, that's been in our target and we expect it to remain there. We're not seeing anything that would cause that to be out of line.

And then we are seeing a conservative increase in margin as we go forward 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.

Heath Fountain, Chief Executive Officer, Colony Bank: And Chris, 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 the value we can create over the next couple of years, we start thinking about getting back to getting first to a one and then we talk about 1 ROA and then getting back to higher levels within 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 our historical growth rate of 8% to 12%, we're excited about the opportunity that we have there and really 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.

Christopher Marinac, Analyst, Janney Montgomery Scott: Great. Thank you both for that color. And just wanted to go back.

Heath Fountain, Chief Executive Officer, Colony Bank: Just wanted

Christopher Marinac, Analyst, Janney Montgomery Scott: to go back to the asset sales for Derek mentioned. Would those come over multiple quarters? Or is it just a one time thing in

Derek Shelnut, Financial Officer, Colony Bank: the near term? It's just a one time thing in the near term.

Heath Fountain, Chief Executive Officer, Colony Bank: I don't think we would see

Derek Shelnut, Financial Officer, Colony Bank: outsized for more than a quarter.

Heath Fountain, Chief Executive Officer, Colony Bank: We just continue to evaluate that. We're starting to see others do that as well. Don't expect anything super humongous either. We're also focused on this trying to build capital each quarter, improve our capital in terms of TCE. And so we don't want to eat up a lot of our earnings, but maybe something a little bigger than what we've done just kind of given the market and course it's kind of it's that 5 to 7 year part of the curve that we watch probably the most to kind of impact market value adjustments.

Derek Shelnut, Financial Officer, Colony Bank: Any color you want to

Heath Fountain, Chief Executive Officer, Colony Bank: add there?

Derek Shelnut, Financial Officer, Colony Bank: Yes. That was good Heath. And I would just say that we would might look at a one off transaction, it would be a little bit larger than what we have been doing to Heath's point, not anything super large. But 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 one time thing in 1 quarter.

Christopher Marinac, Analyst, Janney Montgomery Scott: Got it. Sounds great. Thanks again for hosting the call this morning.

Heath Fountain, Chief Executive Officer, Colony Bank: Thanks, Chris.

Marjorie, Conference Call Operator, Colony Bank: Thank you. And we'll take our next question from Dave Bishop with Hafi Group.

Dave Bishop, Analyst, Hafi Group: Yes. Good morning, gentlemen. Yes. Good morning, gentlemen. Good morning.

Question in terms of the expected payoff. Sounds like there's some line of sight there. Just curious, hearing other banks. Hearing other banks. In the note that sponsors are getting more comfortable taking new projects, are you seeing that as a new project?

Payoff? Probably some of the payoff.

Heath Fountain, Chief Executive Officer, Colony Bank: Dave, you're cutting out a little bit. Would you mind repeating? We heard pieces of that question, but not the whole thing.

Dave Bishop, Analyst, Hafi Group: Sorry, there's an echo apparently. Sorry, there's an echo apparently. Just curious, drivers of the loan payoff expected?

Heath Fountain, Chief Executive Officer, Colony Bank: Okay. Yes. 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's and you know how that is, the timing of those can vary based on completion dates and those kind of things. So, it could be this quarter, we could see some flow into the Q1. So, just kind of we'll see how that plays out.

Dave Bishop, Analyst, Hafi Group: And then good growth on construction and just various types of projects you're underwriting these days?

Heath Fountain, Chief Executive Officer, Colony Bank: Yes. 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 we are seeing more stability. I think we do see that borrowers do see some stability of rates and that started returning 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

Dave Bishop, Analyst, Hafi Group: board. Got it. And then just curious, new loan origination yields this quarter?

Derek Shelnut, Financial Officer, Colony Bank: What was that, Dave, again? What was new loan? Just curious question for the quarter.

Dave Bishop, Analyst, Hafi Group: Just curious question. Yes. Do you look up? New loan origination. New loan origination.

Yes.

Heath Fountain, Chief Executive Officer, Colony Bank: Yes. I think our average was just a little bit over 8%

Derek Shelnut, Financial Officer, Colony Bank: for the quarter.

Heath Fountain, Chief Executive Officer, Colony Bank: Let's see, yes, this quarter's production little over just barely over 8%, 8.23%, and that's coming down off of, I think, our peak was maybe around 8.60% than 8.50%. So we are starting to see that come down and expect to see it, obviously, continue to come down with the move in rates.

Dave Bishop, Analyst, Hafi Group: Got it. And then Heath, it seems like $10,000,000 is the new run rate for fee income. Do you feel comfortable about that level moving forward?

Heath Fountain, Chief Executive Officer, Colony Bank: I think we're in a pretty good spot for that. I think, Dave, the only the challenge there, we mentioned mortgage, you have seen rates starting 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 that the floodgates opened, it ticked up a little bit. We've had some good recruiting on the mortgage side too and trying to open up some additional MLOs there. So I think we could see it stay at about this level.

Dave Bishop, Analyst, Hafi Group: Great. I'll hop back after the queue.

Marjorie, Conference Call Operator, Colony Bank: Thank you. And at this time, we have no further questions. So I'll turn it back to our speakers for any final remarks.

Heath Fountain, Chief Executive Officer, Colony Bank: 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.

Marjorie, Conference Call Operator, Colony Bank: Thank you. And that does conclude today's program. You may now disconnect.

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