Colony Bankcorp, Inc.

Hello and welcome to the Colony Bank fourth quarter 2022 conference call. My name is Harry and I'll be coordinating your call today. To ask a question during the Q&A, please press star or the one on your telephone keypad. And I'll now hand over to Derek Schellner to begin. Derek, please go ahead.

Thanks, Harry. Before we get started today, I would like to go through our standard disposures. 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 risk 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, Keith Foundon.

Thanks, Derek. I want to thank everyone for being on the call today. Before I get into the operating results, I want to cover a couple of other things that you read in the release. First, this week we said goodbye to our longtime team member and director, Terry Hester, who passed away on Sunday. Terry started with Colony in 1978 and served with the company over 42 years, spending much of his career as our CFO. He was also a director since 1990. Terry was a dedicated member of our team. The Colony family was really part of his family, and he's going to be sorely missed by his family and our team, so our sympathies go out to all those that work closely with him and certainly to his family. Second, you saw that we also announced yesterday that Andy Borman, our CFO, is leaving the company to pursue other career opportunities. Andy joined us in 2021 through our merger with Southcrest, and we appreciate all he has contributed in his time here, and we wish him well in his future endeavors. We started a search process for a replacement for Andy. In the meantime, I've been named acting CFO of the holding company. Most of you know I spent eight plus years as the CFO of Heritage Financial Group. We have a deep management bench and I'm confident I can provide the support that our accounting and finance team needs to make sure we have a smooth transition. And I'm going to serve as the primary investor relation contact for you during this transition. Also, our chief accounting officer, Derek Shelnut, who's on this call, has been named the acting CFO of our operating subsidiary, Colony Bank. Derek's a CPA and has experience in public accounting and in banking. He joined our team in 2020 and has played a key role in the development of our accounting team. He's handled a lot of our accounting work when it comes to M&A, also ALCO, and all aspects of operations. I have a lot of confidence in him and his ability to lead us through this transition as well. So with those behind us, I'm going to get right into the quarter. We've got a good bit to cover. Our earnings were up slightly from last quarter, reporting 31 cents versus 30 cents last quarter. And I wanted to note that our earnings completely came from the banking division this quarter. Slide 13 in our presentation shows you our breakdown by segment. And banking made up all of it for the quarter net. And so while the earnings are only slightly up for the quarter, we've made significant strides throughout the year in terms of how much of our earnings is coming from our core banking. We of course had significant headwinds from an interest rate perspective on the mortgage banking side this quarter. As rates peaked over seven at the end of the third quarter and going into the fourth, like a lot of other banks with significant mortgage businesses, we saw a real shift from secondary market products into portfolio adjustable rate products during the quarter. And so our gain on sale was down about a half a million from last quarter. and that's down nearly $1.9 million from the fourth quarter of last year. On slide 16 and 17 in our presentation, you can kind of see how our originations have been impacted. Our originations actually remain strong, but our sales, you know, were down significantly in the fourth quarter as we moved to portfolio products and Our strategy really in mortgage right now is to keep our purchase-focused origination team together, give them product to get out to our customers, recruit new originators within our footprint, and just be poised to take advantage of the opportunity when rates settle out. There's a lot of folks in the mortgage business right now not affiliated with banks that are really getting out, and I think it'll be primed when rates settle out a little bit. Our net interest margin was down slightly. It went down from $325 to $323, but our net interest income in dollars was up over half a million dollars, primarily due to our loan growth, and so what's happening is our loan growth's outpacing our deposit growth, and so we are having to fund some things at our marginal cost and that's putting some pressure on our cost of funds but we really feel good about uh where our deposits are we've maintained good discipline on deposit pricing and still been able to grow our deposits uh we're up two and a half percent quarter over quarter and that excludes any wholesale deposits and you're going to hear d talk about our deposit focus in a minute it's a tough environment to predict interest rates. You know, we may see our margin stabilize or, or compressed slightly from this level, but we have opportunities to continue to put on higher earning assets, you know, at levels that may be slightly dilutive to NIM, but are going to be accretive to ROA and ROE. And we're going to do that. Um, our loan growth, as you saw was strong, um, And Dee will discuss that as well. Our asset quality remained really good. Non-performers were flat and criticized and classified loans went down. And so with that strong asset quality, we were able to provision a little less this quarter despite the loan growth. We are, just as a reminder, moving to CECL next quarter. And we continue to model that. Um, and as we disclosed last quarter, we think somewhere in the range of a 15, 15 to 25% increase in our reserve is, is going to happen with that adoption. Um, of course, Cecil was forward looking. And so, uh, how things will look forward now, uh, from, from three months from now, not so sure. So, um, just, just a reminder that that, that could change. Um, going in, uh, I want to talk about our performance and where we're going. We lay out kind of our path to high performance in the presentation slides 9 through 11, but I want to share three highlights. First is achieving strong organic growth. We are doing that. We're executing that well on the loan side. I think in this environment, we're executing that well on the deposit side. You know, just growing deposits in this environment is tough, but we're doing it. Increasing non-interest income is the second of our three highlights there. Mortgage being down has hurt us, obviously, on the revenue side, but I think there's real opportunity for that to return. Still, our SBSL team is doing strong, and we have opportunity to continue to grow in insurance, merchant, and treasury as well. And then lastly is just, you know, our real focus now is shifting to internal opportunities. You know, we think M&A is going to be on the back burner for a while, so we're really just focused internally. Driving internal referrals, we've just, you know, gotten going with our CRM system internally to track that, focusing on the profitability of our new business lines and ensuring we capture the operating efficiencies from all the – investments we've made in technology. And then really it's managing expenses. You know, we've been in a growth mode and we've been growing significantly. We're limiting, you know, our hiring now to strategic in-market hires. We're not going to be expanding, you know, to new markets right now in this environment. You know, reducing controllable expenses, business development, travel, those kind of things. And then also lowering our core provider costs. We've are in the final stages of renegotiating our core agreement. And we expect some cost saves to start flowing from that here in the first quarter of this year. And just addressing our overall level of expenses, as you know, since I've been here in 2018, and we've averaged 18% growth per year in assets. We've gone from a billion to just under 3 billion. We've added multiple lines of business, mortgage, the small business specialty lending group, insurance, merchant. We've gone to new markets. We've done whole bank acquisitions. We've done another number of smaller type acquisitions. And so, you know, we moved into this growth phase at a time the Colony platform was not prepared to go into a growth mode. That's not what they have been in. So we've been investing significantly in people, in processes and technology and We really have the team in place now. We largely have the systems in place. But given where we are, the amount of growth we've experienced, looking ahead at where potential slowing economy is, we're really shifting our focus from external opportunities to grow to internal opportunities to improve efficiency and profitability. And so that's where we're focused on and As we laid out last quarter, slide 12, you know, just talks about where do we get, how do we get from, you know, our ROA this quarter was 77 bps. How do we get to that 1.2 run rate by the end of 2024, which is what we've been internally targeting? And I'll just walk you through on that slide a few things. You know, excess growth is, you know, higher than normal, caused some excess provision. That's six basis points in the quarter. New lines of business, you know, to get from where they are today. And we have some detail on this in there. It's a six basis point drag this quarter. Mortgage and SBA, you know, really year to date have only contributed six basis points of ROA. None net. The two netted each other out this quarter and contributed nothing to ROA. And, you know, those are businesses that really carried us the last couple of years contributing, you know, about 19 bps of ROA. And so those are going to be profitable lines for us. And we do expect those to get, you know, somewhere in the 10 percent of range or 10 basis point range. And then finally, loan growth. You all know we've been growing loans. We've uh, really built our infrastructure from a personnel and technology standpoint, you know, both on the frontline and the back office to be, to have a, a fully loaned up balance sheet. And, you know, every five, uh, base 5% improvement in our loan to deposit, we get about seven bips of ROA. And so, you know, you start adding those up, um, that I just went through and, you know, by the end of next year, just with those, um, You know, we get somewhere around maybe 115, and that's without counting the business lines getting more profitable. That's just them breaking even. That's without leveraging technology, managing expenses down. So, you know, that's our plan. Our team comes in every day to execute on that, and we think we can deliver on that. A couple more things before I turn it over to Dee to talk about production side. Our AOCI, our unrealized loss in our securities portfolio, we saw that go sideways this quarter, which was nice to see after several quarters of rates going up and really causing a negative there. I added some more disclosures. Slides 31 to 35 give you a lot of breakdown of our investment portfolio. We just want you to see that We don't have a lot of credit exposure there. Interest rates are what's driving our losses. We are seeing our yield creep up a little bit. And I'm hopeful that where rates are, we've reached our peak extension there. So I think we're going to start seeing our duration, our average life come down. And there's a real opportunity to recover a lot of tangible book value as we see that stabilize. And so We are taking opportunities from time to time when we see rates move down to trim holdings. And we would look at, you know, potential opportunities if we can get a quick payback to trim the portfolio and take losses. But we're looking to really avoid that if we're successful on our deposit strategy, especially. And then lastly, just on the dividend side, 11 cents for the quarter. We're glad to be able to do that for our retail investors. That's about half of our shareholder base. And so it's a very important component of the investment for them. I think it also expresses the confidence we have and our board has in our ability to keep improving our earnings. So with those highlights, I'll turn it over to Dee, and he's going to talk about the production side of the bank and our business lines.