Colony Bankcorp, Inc.

Good morning, ladies and gentlemen, and welcome to the Colony Bank second quarter 2023 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, July 27, 2023. I would now like to turn the conference over to Mr. Derek Chenault, Chief Financial Officer, please go ahead.

Thanks, Eleanor. 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 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 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, Pete Fountain.

Thanks, Derek, and I want to thank everyone for being on the call today. We're pleased with our results in the second quarter during some really unusual times. First and foremost, I want to thank all our Colony team members who have really had to pivot, and their priorities have changed over the last few quarters. I'm really proud of how the team has been able to do that, and that gives me a lot of confidence in how we're going to be able to execute on our strategic objectives as we move forward. We were able to increase earnings and grow core deposits in a time where the economic environment presents many challenges. I'm going to briefly highlight some of our accomplishments and initiatives during the quarter, and then I want to hand it over to Derek, who will provide more detail on our earnings and balance sheet, and then to Dee Copeland, our president, who will provide an update on our banking and complementary lines of business. During the quarter, we saw an increase in overall deposits with strong growth in our core deposits as we focused on building customer relationships and ensuring strong liquidity following the bank failures that happened at the end of the first quarter. Our outlook on our deposit pipeline remains positive with a lot of opportunity ahead of us. From an earnings perspective, earnings increased quarter over quarter as a result of increased non-interest income, driven primarily by strong mortgage demand in the busy home buying season. Our government-guaranteed lending pipeline remains steady, and our marine RV lending has increased, which will drive profitability in that line of business. We look forward to being able to increase non-interest income as we move throughout the rest of this year. This quarter, we did have one-time severance expenses related to reduction initiatives as we continue to evaluate and adjust costs based on our growth outlook. We expect the outcome of this initiative to reduce our salary and benefit expenses going forward, and we remain dedicated to our long-term investment in areas we believe will provide the most value for our customers and other stakeholders in the future. We don't expect these staffing changes to adjust our ability to grow, and we expect them to still be able to enhance our operations in the future. We are committed to enhancing the profitability of mortgage and our other complementary lines of business, and we saw those areas improve this quarter, and Dee will provide more update on that. Loan growth slowed this quarter to about 9%. It's higher than what we expected, but lower than what we have been seeing the last few quarters. We continue to see lower demand in this interest rate environment and expect our growth to slow further throughout the rest of the year. Margin pressure continues as we experience the quarter-over-quarter decline in margin. Our overall cost of funds is still outpacing the growth and yield of our earning assets. We remain cognizant of that pressure on our funding costs, and we've implemented some hedging and other strategies during the quarter to relieve some of that pressure, and Derek will give you more detail on those. Non-interest expenses were up a little under $300,000 this quarter. However, one-time severance expenses were 200,000 more than last quarter, and variable compensation expenses from our non-interest income lines of business increased half a million dollars. Of course, those increases were offset by increases in non-interest income for those lines of business. We're particularly proud of how we've improved non-interest income and lowered our recurring non-interest expense base. Given our many fee income businesses, we like to measure our efficiency as our net non-interest expense to average assets. And on an operating basis, we've improved that from 1.96% in this quarter a year ago to 1.58% this quarter. And we expect to continue to improve our efficiency as measured by this ratio. Asset quality is still strong, even though we saw a slight increase in non-performing loans for the quarter, primarily a little bit in our residential and a lot in our SBA portfolio. Non-performing CRE loans remain at very low levels, and we haven't seen anything in these areas that give us a lot of concern in these portfolios. We did also this quarter buy back 41,000 shares under our authorized stock repurchase plan. We continue prudent capital management and are committed to building capital levels. However, given the market reaction to some of the events in the banking industry, we felt like limited amounts of buybacks at attractive pricing levels were a prudent use of capital. Given the continued pressure on margin, we are projecting that it will take us longer to achieve our short-term objective of getting to a 1% ROA.