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Good morning, ladies and gentlemen, and welcome to Colony Bank Fourth 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. [Operator Instructions] This call is being recorded on Thursday, January 25th, 2024. I would now like to turn the conference over to Derek Shelnutt, Chief Financial Officer. Please, go ahead.

Thanks, Julie. 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.

Thank you, Derek, and thanks to everyone for being on the call today. Before we start diving into the results, I do want to congratulate Derek on being promoted to our CFO. We announced this Tuesday morning this week, and Derek's been serving as the CFO of Colony Bank and Chief Accounting Officer for the company. Derek has done a really great job over the last year as we've made this transition into this new role. And so I just wanted to take a moment to acknowledge him, and thank him, and wish him well in this new role. I'm going to run through and highlight some of the activity for the quarter and the year, and then I'll pass it back to Derek to get into more of the details. Since the beginning of the rate hikes and really in earnest in 2023, we've changed the way we've operated our business. We've had an increased focus this year on efficiency, developing core customer relationships, improving our complementary lines of business, and managing expenses to align with the current environment and opportunities there. And our team has done a really great job. We've made a lot of progress in areas where we saw opportunities to adapt to the changing environment. And we're confident that the success we've had in those areas is going to make us or has made us better, and is going to ultimately lead to improved performance in the future when we get to margin expansion again. So in the fourth quarter, our earnings were slightly lower than the third quarter. That's primarily a product of increased funding costs and additional provision expense. We indicated last quarter, we expect the margin to decline another 5 to 10 basis points in Q4 and it did decline by about 8 basis points. However, we do continue to see easing pressure on deposit costs and the rate of increase on the deposit side is slower. Our interest income did increase for the quarter, but of course, the interest expense outpaced that. And so that led to the slightly lower net interest income. We continue to see assets repricing the higher rates and that funding cost continue to slow, so we think those trends will start to move in the right direction. As I mentioned, it slowed toward the end of the fourth quarter. And so what we're forecasting going forward is margin to be flat or slightly down next quarter before we start seeing expansion later in 2024. Our provision expense was higher in the fourth quarter. Charge-offs were at similar levels to what we saw in the third quarter, and we did see a slight increase in our classified and criticized loans. Last quarter we also mentioned we'd likely see some additional charge-offs going forward related to our SBSL, and really, with the guaranteed loans, with those floating rates increasing so much, putting pressure on those bars. Our team is doing a really good job of managing those. We remain confident in our overall credit quality and the small increases we've seen are isolated. We haven't seen any widespread issues that would otherwise lead us to believe there are any larger credit concerns. The criticized and classified levels are really, it's still very low, overall levels. And we've outlined some more information on criticized and classifieds in Slide 29 of our presentation, just to give you some granularity of those loans. Noninterest income was lower in the fourth quarter, primarily due to the seasonality of our mortgage, in addition to just the challenges with the mortgage environment. Service charges increased with our concerted effort to improve those and our SBSL division revenue also increased. Noninterest expense declined in the quarter. We're really proud of what we've been doing in addressing noninterest expense. But we don't necessarily expect them to remain at this level going forward. As we look at the next year, we'll have annual compensation increases go into effect and Derek will talk more about where we expect noninterest expense going forward. With the change in the rate environment we saw in the fourth quarter, the fair value of our AFS securities portfolio improved, which led to a 18% improvement in our OCI, which we were glad to see. Total deposits for the quarter were down from the prior quarter, but this was all really due to the payoff and reduction of broker deposits. So, on a core deposit basis, when you look at our customer deposits, they increase both quarter-over-quarter and year-over-year. We also announced during the quarter about our entry into Northwest Florida with the addition of Kyle Phelps as our regional market executive. We're glad to have Kyle on the team and look forward to the opportunities to build customer relationships in those markets, particularly, Tallahassee and the Florida Panhandle. Those are markets that we're very familiar with, having banked many customers in those areas due to the proximity to our South Georgia markets. Outlined in Slide 9, we see a trend for the year, overall improvement in our start-up lines, complementary lines. Of course, fourth quarter is a slower quarter, particularly the seasonality of our Marine/RV. But been pleased with the progress of these businesses. We continue to focus on these lines of business in 2024 to ensure they continue to improve, add to our noninterest income and better serve the needs of our customers. We're also very pleased to announce an increase in our quarterly dividend to $0.1125 per share. Our dividend is very important to our long-term shareholders, especially those individual shareholders and the communities we serve, many of whom are significant bank customers. This marks the eighth consecutive year of increased dividends and reflects the confidence we have in our earnings. As we look out into 2024, we expect we'll continue to see some loan growth, but we're probably looking at under 5% loan growth for the year, which is much a reflection of customer demand as it is our loan appetite. In addition to lending, we'll be focused really on three primary areas internally. First, deposits, looking to retain and grow our current deposit relationships, looking to develop new relationships from our calling efforts and our marketing efforts and all of our -- or the majority of our incentives around deposit gathering. The second is in noninterest income, looking to certainly improve our mortgage revenue as the rate market stabilizes a little bit and then growing the revenue, as I mentioned earlier, in our other complementary business lines. And as we better utilize our customer data to -- and integrate those businesses' entire internal processes. And third is in efficiency, looking to maintain the discipline on expenses that we put in place in 2023, and looking for other opportunities to serve our customers more efficiently. We use the service standards internally, collaborative, pronged, and simple. And when we have opportunity to continue to improve that customer experience, get more efficient in that to achieve those standards. So now I'm going to turn it over to Derek, and he's going to go into the financials in more detail.

Thank you, Heath. I'll start with our earnings for the quarter. Net income decreased $206,000 quarter-over-quarter. And when compared to the prior quarter, we saw net interest income decreased approximately $744,000, noninterest income decreased $414,000, but we also saw noninterest expense decline by about $1.3 million. Interest income increased from the previous quarter as we continue to see assets repriced to higher rates and experienced modest loan growth. Loan growth did slow to an annualized 4% compared to 6% in the prior quarter. And as we mentioned last quarter, we did see a slowdown in our RV and Marine lending division during the off-season. Interest expense outpaced the increase in interest income during the quarter. But as Heath mentioned, we're starting to see that slow down. And the increase in the fourth quarter, quarter-over-quarter, was lower than previous quarters in 2023. Net interest income declined in the fourth quarter and led to an additional margin compression of 8 basis points, which was in line with our forecast that we mentioned on last quarter's call. Although we've seen a lot of reduction in the overall pressure of funding costs, we still see competition for deposits. You can see the slowdown in those deposit costs on Slide 21 in the investor presentation. And from here, going forward, we're likely to see margin drop maybe another 3 to 5 basis points before we start seeing any margin expansion. And while we're optimistic that we will see margins starting to go up at some point, we think that will be likely in the second half of 2024, second half of this year. And the timing, and by how much that increase is will largely depend on external factors such as timing and magnitude of any Fed cuts this year. Noninterest income decreased $414,000, which was primarily due to a decrease in mortgage-related income of over $500,000. Typically, we see mortgage income drop off this time of year. And the overall mortgage environment is still really tough. Net service charge and fee income increased around 18% quarter-over-quarter, which is about $395,000. SBA gain and related income from our SBA sale division increased $347,000 from the prior quarter. Commission from our insurance division also increased quarter-over-quarter. Other noninterest income was down. But if you remember from our last quarterly call, we mentioned we had a few onetime items in the third quarter that we didn't expect to see again. And so the fourth quarter other noninterest income was in line or maybe even slightly up from earlier quarters of the year. And as Heath mentioned, we've seen improvement in our newer lines of business and expect that trend to continue as we move through 2024. Noninterest expenses totaled just under $19.6 million for the quarter, which was a decrease from the third quarter. We're still committed to operational efficiency and expense discipline. In 2023, we managed to improve our net NIE to average assets from 1.96% in the fourth quarter of 2022 to 1.35% in the fourth quarter of 2023. And this was a result of a lot of hard work and effort from all of our team members. Going forward, our expectation is to be in the 1.40s on that net NIE, and project our quarterly noninterest expenses to be around $20 million, which is a little bit higher than this past quarter. As Heath mentioned, in the first quarter of 2024, we'll have annual compensation increases go into effect, and then we'll likely see some other expenses trend up slightly as we see activity pick up as we move out of the slower winter months. Provision expense totaled $1.5 million for the quarter. On last quarter's call, we mentioned the potential for some more charge-offs and this quarter, net charge-offs were $692,000, which was similar to the previous quarter. We did see a slight increase in total nonperforming loans quarter-over-quarter, but NPLs still remain low relative to the whole portfolio. Our classified and criticized loans increased, and we've broken that down for you on Slide 29 in the investor deck. The increases are related to a small number of loans across different loan types. And right now, we aren't seeing any issues with any specific loan types or anything that really gives us a lot of calls for concern. Criticized and classified loans still remain at a relatively low level compared to overall loans. Total loans increased to about $18.5 million or around 4%, which is less than the previous quarter. We still continue to see that slowdown. And again, we expect to see modest loan growth in 2024. And any pickup we do see there will likely occur in the latter half of the year. Total deposits were down $46.5 million, and it was the result of the paydown of broker deposits. During the quarter, we reduced broker deposits by around $55.1 million and grew our core customer deposits by $8.6 million. In addition to the broker deposits, we also paid down FHLB advances by $10 million as part of reducing our reliance on the more expensive wholesale funding. Slide 17 outlines our liquidity at the end of the quarter, and we're still in a great position there with access to over $1.3 billion in liquidity. We do realize the bank term funding program is likely going away this quarter. Now we haven't used it at all, and so it really won't have an impact to our overall access to liquidity. We didn't have any discount window or other Federal Reserve borrowings at the end of the quarter and did not have any outstanding borrowings from any of our Fed fund lines. An area where we saw improvement was in the fair value of our investment portfolio with rates moving down as the market adjusts to potential Fed rate cuts. We've seen the fair value of the AFS portfolio increase over $16 million from the previous quarter, which translates to a $12 million improvement in our AOCI. This increase in the fair value of the portfolio creates a little more room for us to potentially look harder at restructuring a small portion of the portfolio. Again, this is something that we're continually looking at and any losses would be limited to a portion of our quarterly earnings. The mortgage environment is still challenging, and we continue to evaluate and make adjustments to our products and pricing. Our focus has been on breakeven for our mortgage division, and we did end up breaking even in the fourth quarter with just a slight amount of profit there. We still believe mortgage is an important part of our long-term strategy, and we are hopeful to see improvement again once the environment gets a little better. In our SBSL division, the pipeline for the small express loans is strong and we see this as a good opportunity going forward. The premiums on the express loans are typically a little higher, and we expect that volume to increase throughout 2024. We're still seeing slowing demand for the larger loans. So more volume in these express loans is a good way to replace some of that slowing demand for larger loans. We did have a few more charge-offs related to SBA loans this past quarter, which Heath mentioned earlier. However, NPLs decreased for SBSL division quarter-over-quarter. Heath mentioned earlier, the improvement in our start-up lines, again, that's outlined on Slide 12. There's a lot of opportunity that we see for these lines to continue to improve over the next year. Some of these new lines became profitable in 2023, and we expect the remaining ones to be profitable sometime in 2024. And now I'll turn it back over to Heath for any final comments before we take questions.

Thanks, Derek. That wraps up all of our comments we had. So with that, I'll ask Julie to open the line-up for any questions.

Thank you.[Operator Instructions] One moment please for your first question. Your first question comes from David Bishop from Hovde. Please go ahead

Hi. Good morning, gentlemen.

Hi, David.

Good morning.

Hey, Derek, just curious, I appreciate the guidance in terms of the net interest margin. Just curious how sensitive the margin is to the, sort of the, forward curve and the expectations in terms of the Fed? I think you were thinking maybe three rate cuts. Just curious, maybe, how we should think about sensitivity of the margin to potential Fed rate cuts?

Yes, I'll make a comment and then turn it to Derek too. We obviously don't know what the Fed is going to do. I think given our kind of guidance has given no change in rates, but lower rates will improve margin if it's small cuts. But we think that will probably -- it will take a quarter or two after the cuts, because we still have this rising deposit costs that while it's rising less, it's still rising a little bit. And so it will take some time to address the CDs and some of the marginal funding costs we had. And I think the other part that makes it a little difficult too, Dave, is just the loan demand. The lower loan demand is kind of helping some of that or causing some of that compression just continue to exist, whereas earlier in the year, we had a little bit higher loan growth. So some depends on that. But I'll -- Derek, any other comments you want to make?

Yes. And just to kind of touch on what Heath said about the deposits. I think there will probably be some lag there for a majority of our deposits. We do have kind of pricing and different price points across our deposit base. We have some shorter-term wholesale funding, which we would see more of an impact earlier on. But some of our other deposit CDs and money market accounts, we have some that are priced higher that we would see some benefit. But we also still have some that are priced low that we might see some increases in. And so I think there'll be some benefit to margin if we do see rates decline. But to Heath's point, it may take a quarter or two just as we kind of see some of that lag on some of the deposit cost side.

And from a loan repricing, just remind us maybe over the next year or so, how much is maybe the near-term fixed to reprice and what the repricing at into new origination deals?

Yes. So I mean, from a, Dave, from a new origination standpoint, we're seeing originations in the eighth. And so the new yield put on is really good where our challenge is, is just in -- we'd love to have more of our loans repricing more quickly. But, Derek, do you want to hit on the repricing?

Yes, yes. So I mean, we don't have as much repricing this year as we'd like to have. I think we will see some benefits there. We'll see some modest loan growth which will help with that some. But right now, we're seeing pricing in the eighth, as Heath mentioned. And that -- so that will be some benefit. We are seeing a continual increase in our loan yields as we kind of move through the quarters, and we expect to see that ongoing this year as well.

Got it. And then you mentioned the nice uptick in deposit service charge increases. Just curious what's driving that? And is this sort of a nice or new run rate moving forward, for those fees, do you think?

Yes, sure. So we did implement some new service charge fees this past quarter. And it was actually, I think, at the end of Q3 at the very end. So really, we got about a full quarter's worth of that income in. And so that's a -- the level that we saw in the fourth quarter will be a good level kind of going forward on what we expect. We might see some of that drop off a little bit as we see some people -- there is some opt out that they can do on some of those fees. But overall, this increase here that we've seen is something that we feel like is appropriate and going to stick around for a few more quarters, going forward.

And it's a mixture of fees on the consumer side of kind of getting more in line with our peers and also a concerted effort on the treasury side to go generate business and to price those products appropriately as well that you can do a little better in a higher rate environment.

Got it. And then just one -- a couple of more questions. The downgrades on the classified and criticized, like you said, they appear pretty granular from a dollar balance basis. Just curious what drove those downgrades? Was it deterioration in borrow financials at the end of the year, sort of looming repricing that could pressure debt service covenant? Just curious though, what drove those downgrades?

Yes, it's pretty much across the board. I think we certainly this time of year, start to get financials in for our folks that are later filers, and we get those analyzed. And so it's definitely more, I think, on a prospective basis, us analyzing financial statements and having concerns about repricing and other trends in their business. But I would say it's a lot rate driven from the majority of it.

Got it and one final question. You noted the uptick in SBSL charge-offs. Just curious on a dollar basis or what percent of the current quarter and last quarter were related to the -- that segment? Thanks.

So last quarter, a majority of those net charge-offs were related to SBSL, but that was a smaller portion this quarter. So it was -- I would say probably about 60% to 70% this quarter related to SBSL. So there were some -- that was one of the leading impacts really on our net charge-offs for both quarters.

Great. Thank you. I'll hop back into the queue

[Operator Instructions] Your next question comes from Chris Marinac from Janney Montgomery Scott. Please go ahead.

Hey, thanks. Good morning. Thanks for hosting us this morning. I wanted to ask a little bit about the AOCI improvement. The information that you gave us in the slide deck about the various buckets, is -- those are pretax. So I'm just trying to compare the total change in the AOCI with those three buckets because it looks like there was some offset beyond taxes. And I just want to understand that better. Is there more AOCI recovery that can happen in the future?

Yes, Chris. So in addition to our investments, we do have a small amount of interest rate swaps that would offset that. I think it was just a few hundred thousand dollars during the quarter. I guess, quarter-over-quarter, that move was about a million because we had a gain in those swaps of about 700 last quarter and then a loss this quarter of 300, so you have about a million move there. But that's obviously a fraction of the improvement we saw on the security side. So we continue to the terms on these securities are coming in. We try to -- they're rolling down the curve. But obviously, the biggest move to that would be if we continue to see rates come down.

Got it. That makes sense. Thank you for that. I appreciate that. And then when we look at the loan yield that you have seen increased loan yields over many quarters, is there additional loan yield bumps that can happen even as the portfolio turns or just sort of a natural rate increases go through? I'm just kind of curious if there's more loan yield that's available in this next 12, 18 months?

Yes. I think there is, and that's kind of what we're forecasting in our budget for the year. I don't -- we do have loans that will be repricing. We'll have new loans coming on at higher rates. And so we'll see the pickup across the next year, but I think it will be similar to what we've seen over the past couple of quarters.

Yes. And I'll just add, Chris. I mean, our total loan yield, I think, is 565 for the quarter. We're putting loans on in the 8s or in some cases in the high 7s. Our total duration of our loan portfolio is just over 2.5 years. And so we have several hundred million dollars of loans repricing each year. So obviously, we're working hard to push the yields up on these renewals. And so it not having net growth will limit some of that, but there's still a significant opportunity to move our loan yields up. And I think in the last few quarters, it slowed down some of that yield increase because we've been coming off of such a low base, but there's still an opportunity each quarter to get some nice increases on our loan portfolio.

And Heath, the mix between fixed and variable, do you see that kind of still being relatively the same in the next year or so?

Well, actually, so from a production standpoint, we are seeing continued more production on the variable side the last couple of quarters. But from an overall standpoint, we're still at a high percentage, still a higher percentage on the fixed side, but we are chipping away at that.

Great. That's helpful. And then last question for me is, there's a slide, I think it's number 12 about the sort of data and analytics that you're now harvesting. I'm sure it's still early for what you want to do with that. But what do you envision that data does for you this next year or two? I mean do you kind of cross-sell the same customer just more business at a better profit margin? Do you see that data kind of helping you get net new customers? I'm just sort of curious how you think through kind of where that's going to take you.

Yes. That's a great question. And we are a little early on. We've really been building the data infrastructure for the last year, 1.5 years, and we have that infrastructure in place at this point. Now it's about utilization of the data and really trying to allocate that to the highest priority of where it can drive the biggest increase in revenue. So we have nearly 100,000 customers. And what we're trying to do is take that data and utilize that to present marketing opportunities to put in front of our bankers to make sure that we know where our -- both on the deposit side, where our customers' other business is, where we can drive customers to wealth, insurance, merchant services. So really, the bulk of what's been driving our increased revenue in our business lines, and what's been driving our business development as a company has been just sheer calling effort. And what we hope to do is by utilizing that data, it's going to give us marketing to present that information both to put it in front of the customer, but also to our bankers to be able to direct that marketing or that calling effort. And so that's a big focus of ours this year and next year. And we think that's kind of the future. That's why it's important for us to have multiple lines of business to be able to drive more revenue per customer, and help to optimize that customer base that we have and out in a relatively small average-sized branch. So if we can get that revenue up from other services, it really makes that low-cost deposit network is great, but there are higher expenses. So that helps offset to increase this revenue. And I think we should see continued improvement on the noninterest income side from that for a long time. We're just scratching the surface of that.

Great. That's really good color. Thank you both for the time and background this morning.

Thank you, Chris.

Your next question comes from David Bishop from Hovde. Please go ahead.

Yes. Just a couple of follow-ups. Heath, you noted, obviously, the addition of Kyle this quarter to jump start the efforts in Northern Florida. I did see sort of the lagging pretax profitability on the Alabama OPL. Did that -- could that potentially augment some of the efforts you're doing, just given sort of the proximity on a geographic basis? And then remind us on the Marine/RV lending, was that -- are those being generated for a portfolio? Or you tend to sort of group those every couple of quarters for bulk sale? Thanks.

Yes. So first on Florida, we did -- our goal there was to start up that effort with a -- in a cost-neutral manner. And so you do see areas continue to improve their profitability. We've had a reduction in some other areas that help offset the increased expense there. And so we don't expect that to be a large net drag. Then remind me the -- Marine/RV. So our goal, we have not sold any to date, but our goal is, as we build that portfolio up and season some of that, that we will have periodic sales of loans. And so we do think there's an opportunity to generate revenue from that, that you haven't seen in our operation yet. We have portfolio of everything thus far.

Got it. And then, Derek, I think if I heard you, obviously, you've been leaning on expenses here, but we should expect some sort of inflationary pressure into the first quarter and then to 2024 as FICA takes hold and annual compensation rates take effect. Did I hear you correct?

That's right. And so kind of where we've landed on our forecast is around that $20 million quarter mark, which is going to be higher than this past quarter. And again, it just goes back to some of those increases that we know are coming in this first quarter, and so that will cause that to go up a little bit.

Great. Appreciate all the call this morning.

Thank you.

Presenters, there are no further questions at this time. Please proceed with your closing remarks.

All right. Well, we appreciate everybody being on the call today. Thanks, again, for your support of Colony Bancorp, and that concludes our call.