Colony Bankcorp Inc Q2 FY2024 Earnings Call

Good day, everyone, and welcome to the Colony Bank Second 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. Please note this call is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Chief Financial Officer, Derek Shelnutt. Please go ahead.

Thanks, Nicky. 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.

Thanks, Derek, and thanks to everyone joining our second quarter earnings call today. We're pleased with our improved operating results in the second quarter and we appreciate the hard work from our team members, which has allowed us to continue to achieve progress towards our strategic goals. Operating net income increased close to $200,000 during the quarter as we continue to see improved performance from our complementary lines of business. All were profitable in the quarter with the exception of Marine/RV Lending which improved quarter-over-quarter but was held back by sluggish sales in that industry. Net interest income decreased slightly during the quarter and was driven by a continued increase in our funding costs, albeit at a slower pace than in recent quarters. Loan growth was relatively low this quarter. As we've mentioned previously, our loan growth expectations were modest for the year. We do see our loan pipelines increasing and we do expect a little more growth in the second half of the year. Margin declined one basis point during the quarter, which was a little better than our expectations of a three to five basis point decline. We still expect margin to improve in the second half of the year and Derek is going to speak in more detail to that later in the call. There was some seasonality in our deposit base in the second quarter. Historically, it's not unusual pre-COVID for us to see declines in the second quarter. A large portion of the decline this quarter was related to tax payments from a small number of large depositors. And of course, we generally would expect to see those balances come back later in the year. And we also were able to reduce our brokered CD levels this quarter. Our focus remains on deposits first and our bankers continue to develop relationships that include deposits and other opportunities. We are believers that the value created in banking is based on the deposit relationships we can build and so that's our primary focus. Credit quality remained strong. Classified and criticized loans decreased during the quarter and those figures are available on Page 18 in the earnings release. At the end of the quarter, past dues were at very low levels. We had zero past due CRE loans at the end of the quarter. We have confidence in the credit quality of our portfolio and we're not really seeing any areas at this time that gives us concerns about potential weakening. Our mortgage banking group was profitable in the second quarter and had its most profitable quarter since we started this rate cycle. We started seeing more activity during the home buying season this spring, but we're still seeing low inventory levels have an impact on volume. But the outlook on rate stability and the market adjusting to the current level of rates are starting to help drive activity. And we continue to adjust our product offering and staffing to remain competitive in the market and to remain profitable in this line. Our small business and specialty lending division had another great quarter. We've seen a lot of success from our small dollar loan program and these will continue to be a good source of revenue for our SBSL Group. There is some slowdown expected in that going forward as we've seen many new entrants into that marketplace. And so while we expect to see revenue continue and this be a good product for us, it will not likely be at the same levels that we've seen in the first half of this year. And we keep continue to focus on our core SBA loan customers and maintain a consistent pipeline in those products as well. Expenses were in line with our expectations and I think our team has done an outstanding job of maintaining efficiency and expense discipline over the last year. Our operating noninterest expense to average assets was 1.36% for the quarter and it's shown at the bottom of Page 8 in the earnings release. Since we have multiple sources of noninterest income, we use this metric as a way to compare our noninterest expense to peers. And we've moved in the peer group we measure from the bottom quartile in that group to the top quartile over the past year and we expect to stay there. Our commitment to our markets is important to us. And although we focus on remaining disciplined with our expenses, we managed that with the long-term benefits of continuing to invest in innovation, technology and in our markets. Over the past few months, we've added experienced bankers to several of our markets based on needs and in some markets for transitions for upcoming retirements. We're excited to have these new team members on board and look forward to the positive impacts that they're going to have on our customers and our communities. And lastly, I'd just like to recognize two of our Board members who retired this past quarter, Jonathan Ross, who served as a Director since 2007 and Harold Wyatt, who served as a Director with us since 2021 and previously served as a Director of SouthCrest Financial Group for many years before its merger with Colony. We wish them well and like to thank them for their leadership and their service to our shareholders, our team members, our customers and our communities. And with that, I'm going to turn it over to Derek, who will go over the financials in more detail.

Thank you, Heath. During the quarter, both GAAP and operating net income saw increases, with operating net income rising by just over $170,000, driven by higher noninterest income and a reduced provision expense due to improved credit quality. Interest income rose slightly quarter-over-quarter, with loan interest income up by around $500,000. However, interest income from investment securities fell in part because principal payments were redeployed to fund loans or reduce borrowings, but mostly due to a one-time accelerated premium recognition from an early payoff of a security, which negatively impacted total investment income by about $250,000. Without this event, net interest income would have remained stable quarter-over-quarter. Interest expenses on deposits went up since the first quarter, although the rate of increase is slowing. As Heath noted, the margin decreased by one basis point, which exceeded our expectations for the quarter. We believe that margins will begin to improve in the second half of the year, but the precise timing will depend on various factors, including competition for deposits, costs, loan originations, and potential changes in interest rates. With only a one basis point decrease in margin each quarter since the fourth quarter of 2023, we feel confident we are nearing the low point, with any further declines likely to be minor. We are optimistic about seeing margins stabilize or increase slightly in the next quarter. Operating noninterest income rose by $77,000 from the previous quarter, with both SBSL and mortgage income increasing quarter-over-quarter, while other noninterest income fell due to one-time items in the first quarter related to BOLI and OREO. Noninterest expense remained stable, down $67,000 quarter-over-quarter. As Heath mentioned, we continue to focus on managing expenses effectively in relation to our growth expectations. Our operating net NIE to assets improved by two basis points this quarter and exceeded our 1.40% target by four basis points. While we continue to seek efficiency in our expenses, ongoing progress in our complementary business lines should help us achieve or exceed our net NIE target. Provision expense amounted to $650,000 for the quarter. Slower loan growth contributed, but we also experienced some credit improvements, reducing classified and criticized loans. As Heath highlighted, past dues are low, including zero past dues on CRE loans, and we have seen a decrease in nonperforming loans since the end of last year. Net charge-offs were relatively stable, similar to last quarter, primarily involving the unguaranteed portion of SBA loans. Small dollar SBA loans, which account for most charge-offs, have higher premiums when sold, helping to offset greater losses. Total loans held for investment grew by $6.6 million from the prior quarter. As noted in our last call, our pipeline indicates potential growth in the second half of the year, though at modest levels. Factors such as demand, credit appetite, rates, and funding will influence the actual growth we achieve. We also see opportunities for repricing on loans, with about $50 million to $60 million maturing by year-end currently priced at 5% or lower, which should provide benefits going forward. Total deposits declined by approximately $62.5 million, with $22 million of that attributed to broker deposit paydowns. Seasonal trends typically show lower average deposits in the second quarter, which tend to rebound in the latter half of the year. We noted significant withdrawals by larger depositors for tax payments and seasonal purchases of supplies and raw materials from manufacturing and agricultural clients. Our focus on deposits remains strong. FHLB advances increased by $50 million during the quarter, as we took advantage of the inverted yield curve to secure cheaper funding. Some of this was short-term, allowing us to shift away from higher-rate brokered CDs. In this quarter, we continued our strategy of divesting underperforming investments and reinvesting those funds into higher-yielding assets, as detailed on Slide 29. We sold about $9.3 million in securities, incurring a loss of $425,000, with a book yield of 3.26%, and we estimate an earn-back period of around two years or less. We expect similar restructures in the future as market conditions permit. During this quarter, we repurchased 20,000 shares under our stock repurchase program at an average price of $11.90, totaling approximately $238,000. Yesterday, the Board declared a quarterly cash dividend of $0.1125 per share. We recognize the significance of our dividend to many investors, and maintaining it reflects our confidence in the strength of our earnings. Mortgage net income for the second quarter was $138,000, up by $152,000 from the prior quarter. We have noted an uptick in volume during the home buying season, though somewhat tempered by home affordability and inventory issues. We anticipate continued improvement and profitability in the mortgage sector moving forward, especially with potential rate decreases leading to higher volume and profit growth. Our small business specialty lending division generated net income of $1.3 million this quarter, which represents a $459,000 increase from the previous quarter. The small dollar program has thrived and remains a valuable product, although new competitors have entered the market, slightly reducing premiums from previous highs. Nonetheless, we still view this product positively, though revenue may soften somewhat. The pipeline for core loans remains solid and is an important element of that business. Our Marine and RV division continues to experience loan growth, albeit slower than expected due to weakened industry sales this season. While the division is still on track for profitability, it may take another quarter or two to realize that. Merchant Services achieved its first profitable quarter, with strong referrals, and we are encouraged by this trend. The insurance division had a lighter second quarter; after seeing tighter underwriting standards and lower risk appetite earlier in the year, we observed a relaxation of those conditions toward the end of the quarter. We remain hopeful about the outlook for the remainder of the year, as bank referrals are increasing, and we anticipate benefiting from this trend. The division also invested in growth during the second quarter, incurring some initial costs. That concludes my overview, and now I’ll hand it back to Heath for any closing remarks before we take questions.

Thanks, Derek. That wraps our remarks up. And with that, I'll call on Nicky to open up the lines for questions.

And we'll take our first question from Justin Marca with Hovde Group. Please go ahead.

Hey, guys. Good morning. On for Dave Bishop today. So you mentioned in your prepared remarks that pipelines are increasing. Any particular segments where you're seeing good opportunities? And how are your overall growth prospects looking for, say, the next 18 months?

Yes. Overall, we are experiencing a diverse range of opportunities. Our portfolio is primarily focused on real estate, and we have promising prospects in the commercial real estate sector, where we have both the appetite and capacity to engage. Our target growth is to achieve an increase of 8% to 12% annually. However, we do not anticipate reaching that this year. In the first quarter, loans decreased, but they have seen a slight increase this quarter, possibly around 1% on an annualized basis. In the next couple of quarters, we might see growth between 2% to 5% annualized, which is feasible. Given the current economic outlook, there is potential for stronger single-digit growth as we move into next year.

Okay. And it sounds like a NIM trough might be in sight. How are you feeling about overall deposit costs and loan yields for the second half and into '25? And do you have any rate cuts baked into those projections?

So we feel good about where we are. We don't try to predict the rate cut. So we feel like our NIM return is going to come back regardless of rate drops. So we're thinking rate stability in our outlook. And as Derek mentioned in his remarks, a lot is just going to depend on funding pressure and on loan growth, we've got a lot of repricings coming up. So we have a lot of the pressures lightening up on the deposit side. And on the loan side, we've got a lot that will reprice anyway and with a little bit of growth that will improve. Derek, do you have any other thing to add to that?

I agree. Just to add some additional color. We're continuing to see asset repricing through both the loan portfolio and the securities portfolio. And that's been pretty steady. And we have a lot of opportunity there. Again, our cost of funds, our deposit cost has been steadily slowing down in terms of rate of increase and any Fed rate cuts that we may or may not see will have an impact on that, probably not drop it, but definitely slow it down even further. And so that's just going to help our overall funding costs and allow the assets to reprice faster. And then at that point, we'll start seeing margin expansion. And again, I think we expect that to happen probably in the second half of this year at some point, even without any rate cuts and then continue on into '25.

Great. Thanks for taking my questions today.

Thank you.

We have no additional questions at this moment. I will now hand it back to our presenters for any concluding or extra comments.

Thanks again, everyone, for being on the call today. We appreciate your support of Colony Bancorp and we appreciate you being on the call.

And this does conclude today's program. Thank you for your participation. You may disconnect at any time.