Hello, and welcome to today's Colony Bankcorp, Inc. First Quarter 2020 Earnings Call. My name is Bailey, and I will be the moderator for today's call. 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 going to 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 '33 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 that involve known and unknown risks and uncertainties. Factors that could cause such differences include, but are not limited to, the 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 want to thank all of our shareholders for their support. And of course, we added a number of new shareholders this quarter, completing our capital raise in February. I 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 expect to handle this way—keeping in mind that you have had the press release and investor presentation that we put out. We'll make a few brief general comments about that and then 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 with what is a 7% annual run rate in core loan growth, which is slightly below our target of 8% to 12%. Our average loans for the quarter 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 ended up the quarter with good growth. We're early now in the second quarter, but we like what we see so far, and we feel good about our loan pipeline and are confident we will be in the 8% to 12% range that we indicated for loan growth for the full year. Our fee income side of the business faces some headwinds in the mortgage area. Obviously, we faced some unprecedented rate increases lately, leading to immediate impacts. However, we're also dealing with challenges related to housing inventory, which is playing into those fees. Despite that, we had a good level of mortgage production this quarter, and we believe those factors will shape themselves out, allowing us to continue to have a strong mortgage business. In our small business specialty lending area, our government-guaranteed lending is seeing some lower demand due to changes in the guarantee and the guarantee fee. We have added production capacity in terms of business development officers on that side to try to ramp that up and keep it going. On the banking side, of course, the first quarter is always a shorter quarter and typically light on the banking fee side, but we are seeing good trends in that area as well. This is also the first fully integrated quarter with the SouthCrest acquisition that was announced one year ago, completed on August 1, and the core conversion was in November. We are pleased with how that integration is going, and we believe we will continue to see strong synergies as a combined company. Our credit quality remains strong, and the economic outlook in our markets is good. This quarter, we also announced an efficiency initiative that was detailed 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 is 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 loan sides from these changes. We also don't expect to see any disruption in loan production from these changes in our staffing, and these staffing changes are not impacting our noninterest income lines of business, so we don't expect that to affect revenue generation there. I described it to our team and suggest you consider it the same way; we view this as pruning so we can continue to grow in an efficient manner. With that, I'm going to turn it over to Andy Borrmann, who will make a few more comments.

Thanks, Heath. Given what we've experienced in the interest rate environment here in the first quarter, it's kind of no surprise that unrealized losses in the bond portfolio have been experienced by everyone. Our bond portfolio is a little larger than some of our peers. We did move approximately 15% of the portfolio to HTM—held to maturity—on January 1, and another 17% to HTM on March 1. While the unrealized gains were $30 million, they effectively larger than they were on December 31. These moves reduced the OCI impact we had during the quarter by almost $20 million. I would also say that with the rapid changes we've seen in rates, there has been a bit of pricing dislocation on the loan side. Customers have been used to lower rates for a long time, and we're doing our best to generate appropriately priced loan growth; we remain confident in our loan growth numbers. Our pipelines remain solid, but there is sort of this pricing lag impact we're seeing that hopefully will resolve itself over the next 60 or 90 days as people get more accustomed to these new rates. We remain asset-sensitive, similar to the end of the fourth quarter in our 10-K numbers, and we do expect the increase in rates overall to benefit our spread income. However, it clearly did slow the nonspread fee income in the first quarter. Some of the benefit, or some of the slightly lower expense numbers you saw in the quarter, were related to variable expenses due to that production. Overall, we were happy with where our core expense load came in, but we feel we have more work to do on that front. That's really all I have. Heath, I'll pass it over to you.

Thank you, Andy. With that, I'll ask Bailey if you can go ahead and open it up for questions.

The first question today comes from Kevin Fitzsimmons from D.A. Davidson.

I appreciate you guys doing a quarterly call. This will be helpful. First, on the announced efficiency initiative, I'm just curious: #1, why now? Is it something you've been looking at for quite a while, or is it in response to some pressures you see on the top line? And of the $3 million in savings you're targeting, will that mostly fall to the bottom line, or is it being used to invest elsewhere? So, in other words, is it just kind of replacing expenses from one area to another like digital or some other areas?

Thanks, Kevin. That's a good question. Certainly, it's important for us to achieve better long-term efficiency numbers. We have a large branch network relative to our size due to our rural background. We know that, and we appreciate the positives that come from it in terms of fee income opportunities and generating other noninterest income. But we're constantly looking at that. Back in late 2020 and early 2021, we had another initiative where we went through this process. 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 is no special timing around this; we had the SouthCrest integration that needed to be behind us, as a lot of time, energy, and effort went into that, and this was just the next logical project for us to focus on. So, there's nothing to do with feeling any pressure on the top line side there. We continue to believe we have good opportunities for loan growth. Regarding the savings hitting the bottom line: There are certainly aspects of our technology spend that will increase expenses, but most of those are designed to generate revenue as well. We hope to see a good bit of this savings hit the bottom line. Additionally, we'll be adding more commercial bankers, and we are actively recruiting for that. We believe that those additions will create revenue to pay for themselves relatively quickly, but we will see some initial expense increase from that.

Great. One other question on the fee revenues: You talked about mortgage, and it looked like the SBA line came down quite a bit. Is that more seasonal due to coming off a very strong quarter last quarter? Or is that business just slower? I'm wondering if we're at a new normal or if there's still room for it to decline further.

Good question. The fourth quarter was a really strong quarter for our government-guaranteed lending group, so looking at it quarter-over-quarter, it was indeed unusually high last quarter. We have shifted a bit over the past year regarding government-guaranteed lending in our bank and many others, moving from a situation where there were only opportunities through the PPP, to offering the 90% guarantee without a guarantee fee, and now we're transitioning back to more conventional SBA and USDA lending. We're experiencing impacts from those changes. We still have a good backlog of projects coming through, and we're building our pipeline back up. We believe we're not going to see declines from current levels, but boosting that back up is crucial for us in the second quarter and the second half of the year.

Great. One last one for me: You mentioned earlier about the first full quarter of SouthCrest and that now the integration is behind you. You're seeing and expect pretty healthy organic growth; however, you also just raised capital. I would suspect you're looking to be opportunistic if there are M&A opportunities out there, aiming for situations to elevate that loan-to-deposit ratio. Given that, what do you think the likelihood is of finding an acquisition opportunity in the next year based on your current market observations?

Yes, good question. We are having active conversations, and there's plenty of activity in the marketplace. We believe there are significant opportunities for us to continue to grow through M&A, and we expect to have something to pursue on that front over the next year.

The next question comes from Christopher Marinac from Janney Montgomery Scott. Heath Fountain, CEO, responded that there are active conversations and considerable activity in the marketplace. He believes there are significant opportunities for growth through mergers and acquisitions, and they expect to pursue something in that area over the next year.

Andy and Heath, can you elaborate on the loan yield improvement? I know Andy touched on it in his remarks; I just want to gain further insights about April and how further Fed increases might impact your rates and expectations for future periods.

Yes, Chris, I'll address that, and thank you for the question. We're trying to remain disciplined with loan rates and capture benefits on new loans. Clearly, some of our variable-rate and adjustable-rate loans have already been repriced. This will be the last quarter we see any PPP benefit that impacts our yield; I'm hopeful that the first quarter will be one of the lowest for our loan yield overall. The market remains competitive, with overall loan-to-deposit ratios probably averaging 70% in Georgia. Lenders are eager to ramp up. We'll see how we fare, but it appears likely that you'll start receiving inquiries from serious borrowers who are no longer asking whether we're below 4, but instead if we're below 5. This trend could positively affect our future yields.

I would add to that, Chris, that we are engaging in discussions with our bankers and customers. We've been in a low and stable rate environment for a while, and our team is working with our customers to adjust to the emerging rate landscape. The good news is we aren't encountering many marginal deals that lack the capacity for higher rates. The shock of adjusting to new rates seems to be more of a sticker shock than a cash flow issue. That gives me optimism that we'll navigate through these adjustments effectively. We've been working hard to be disciplined with our pricing, but we're also acutely aware of our low loan-to-deposit ratio and the need to grow loans and create long-term value.

Great, thank you for that perspective. Additionally, Heath, regarding the current level of securities, are you expecting that to change significantly in the next year as you deploy more loans, or do you foresee other external expansions affecting that over time?

We certainly expect to grow loans and have that impact the scale of our securities portfolio. The larger unknown is with deposits; we keep entering quarters hoping to see the point where some deposits begin to run off, but for now, we're experiencing strong deposits. Some of this is outside our control. I'm hopeful we will start to see deposits decrease. We don't anticipate raising our deposit rates as interest rates increase, which could allow us to size the balance sheet appropriately and bolster our loan-to-deposit ratio over time. We still plan to grow loans this year. Regarding branch closures, we don’t anticipate significant deposit losses, as we’re committed for the long haul. Our focus remains on gathering noninterest-bearing deposits from both business customers and consumers. This will be a key aspect of our strategy.

From a structural standpoint, we generally aim to run our bank with 3% to 5% cash, and this is one of the underlying factors driving the dynamics of our securities portfolio's overall size.

The next question today comes from David Bishop from Hovde Group.

Question regarding the mortgage banking segment: I understand you're pursuing efficiencies in banking there. However, curious how you view maintaining or enhancing efficiency in the mortgage segment as rates continue to rise or if there is a potential slowdown in the housing market.

Thanks for that question, David. To clarify, our mortgage group primarily functions as a purchase money mortgage group driven mainly by our loan originators' relationships with builders and realtors. As we've seen changes quarterly across our noninterest income lines, there are many variable costs associated here. We keep a close eye on those. The president of our mortgage division is incentivized based on net income, rather than production, which significantly influences management strategies for that business. Last year, we saw a good number of originators join, but their production levels seem down by approximately 20% to 30%. Some of this comes from having many prequalifications underway but struggling to secure contracts due to insufficient inventory in many markets. However, between this segment and our homebuilder finance group, we maintain focus on the larger markets where we have substantial homebuilding finance activity and do a considerable amount of mortgage business. We're entering this scenario with very light inventory, and we believe we still have the capacity to leverage it. The market remains strong despite the current rate environment. Moreover, we're seeing similar trends on the consumer side, as borrowers have managed to adapt to increasing rates and larger loans. We're prepared to adjust our operational model if necessary; we delivered $400 million last year and achieved $100 million in the shortest quarter. We are confident in our ability to continue growing, based on the current economic outlook, even if certain aspects may change.

I think there may be some difficulty hearing; let me know if this improves. In your previous response regarding adding talent, what is the profile of the bankers you're targeting for the commercial segment? Are you targeting those coming from other areas impacted by consolidation, especially from merger activities?

Our targets are quite similar to what we currently have. The bankers we are bringing on generally possess a strong generalist skill set, including commercial real estate, both owner-occupied and non-owner-occupied domains. Our primary focus is recruiting from larger regional and, to some extent, national banks that are feeling the pressures of consolidation. In areas like Savannah, Augusta, and Atlanta, we’ve noticed several mergers in recent years, which has resulted in changing business cards and organizational processes. We’ve seen success in recruiting from these situations. We're generally interested in bankers who can deliver $10 million to $20 million of business relatively quickly while managing portfolios of $30 million to $50 million, depending on the market. Smaller banks will have lower targets in more rural areas, while larger markets will drive larger expectations.

I appreciate the clarity. Given your reference to interest rate sensitivity in conjunction with the 10-K, I’m curious for Andy, if there's any update regarding the impact of a 100 basis point rate hike on spread income over the next year?

I can’t provide the specifics at this time; that will be disclosed in the upcoming quarterly report. We do have preliminary numbers, but we're not quite ready to share those yet.

I will say that the numbers at the end of the year should resemble those previous calculations, suggesting strong potential if we can maintain higher rates over the coming months. We are encouraged by the higher rates despite the short-term disruptions they create as the market adjusts. Our preference would be for interest rates to stabilize, rather than rise dramatically as they have recently.

David, just to add a structural comment: With a lower cash balance, our overall asset sensitivity will be slightly lower on an immediate basis due to this allocation.

There are currently no further questions registered. There are no additional questions waiting at this time. I'll pass the conference over to Heath Fountain, CEO, for closing remarks.

Thank you, Bailey, and thank you, everyone, for participating in the call today. We appreciate your interest in Colony 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 lines.