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. [Operator Instructions] 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 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. And so 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're doing in the way we expect to handle these is that you guys have and have had the press release and investor presentation that we put out. So we'll make a few brief general comments about that and 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 at what is a 7% annual run rate in core loan growth. That is slightly below what we're targeting of 8% to 12%.

If you look at our average loans for the quarter, our average loans 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 did end up the quarter with good growth. .

And we're, of course, early now in the second quarter, but we like what we see so far, and we feel good about our loan pipeline and confident we'll be in the 8% to 12% range that we've indicated in loan growth for the full year. Our fee income side of our business certainly faces some headwinds in the mortgage area. .

Obviously, we've faced in the last little while some unprecedented rate increases. And so that's easy to see the immediate impact that has. But maybe what's not so obvious to see is the challenge that we have in housing inventory. And so that is also playing into that.

But despite that, our -- we had a good level of mortgage production this quarter, and we think those things will shape themselves out, and we'll continue to have a strong mortgage business. .

In our small business specialty lending area, our government guaranteed lending, we are seeing some lower demand there due to the changes in the guarantee and the guarantee fee. We've added some production capacity in terms of business development officers on that side to try to ramp that up and keep that going. .

And on the banking side of fee income, of course, the first quarter is a shorter quarter and always a little light on the banking fee side, but we are seeing good trends in that area as well. Of course, this is the first fully integrated quarter with SouthCrest acquisition that was announced 1 year ago.

It was completed on August 1, and the core conversion was in November. .

We're pleased with how that integration is going. And we think that we're going to continue to see the strong synergies we're seeing as a combined company there. Our credit quality remains strong, and the economic outlook in our markets is good. .

This quarter, we also announced an efficiency initiative that you read about 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 2 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 the loan side 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 I kind of tell you the same way, we look at 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. .

So thanks, Heath. So given what we've experienced in the interest rate environment here in the first quarter, sort of no surprise that unrealized losses in the bond portfolio have impacted have been experienced by everybody. Obviously, our bond portfolio is a little larger than some of our peers. .

We did move approximately 15% of the portfolio to HTM to held to maturity on January 1. Another 17% to HTM on March 1. And while [RCI] was $30 million effectively larger than it was on December 31. These moves did reduce the OCI impact that we had during the quarter by almost $20 million. .

One of the other things I would say is that with the rapid changes we've seen in rates, there's been a bit of pricing dislocation on the loan side. Customers have been used to 3 handles here in Atlanta and sort of throughout Georgia for a long time.

And we're doing our best to generate appropriately priced loan growth, and we're still confident in our loan growth numbers. .

As Heath said, our pipelines remain solid, but there is sort of this pricing lag impact that we're seeing that hopefully will resolve itself over the next 60 or 90 days as people get more accustomed to seeing a 3%, 10-year sort of number. .

And 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 to be an overall benefit to our spread income. But clearly, it did slow the nonspread fee income in the first quarter.

Some of the benefit or some of the slightly lower expense numbers that you saw in the quarter was related to variable expense to that production. .

But overall, our expense load was -- we were happy with where it came in on a core basis, but we do feel like we have more work to do on that front. So that's really all I have. Heath, I'll pass it over To you. .

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

[Operator Instructions] The first question today comes from Kevin Fitzsimmons from D.A. Davidson. .

So yes, I appreciate you guys doing a quarterly call. This will be helpful.

First, on the announced efficiency initiative, I guess on that, I'm just curious, #1, why now? Is it more to -- is it something you've been looking at for quite a while? Or is it in response to some pressures out there on the top line you see?.

And then of that $3 million in savings you're targeting, is that mostly going to fall to the bottom line? Or is it being used to invest elsewhere.

So in other words, it's just kind of replacing expenses from there to another area like digital or some other areas?.

Thanks, Kevin. That's a good question. Certainly, it's important for us to achieve some better long-term efficiency numbers. We have a large branch network relative to our size due to our rural background. We know that. We like that.

We like a lot of the positives that come from that in terms of fee income opportunities to generate other noninterest income. But we're constantly looking at that back in -- at the end of 2020, beginning of in 2021, we had another initiative where we went through that process. .

And so it's just important for us to recognize as we grow, we have to continue to look at that and rationalize our branch network. So there's no special timing of this other than we have the SouthCrest integration.

We needed to get that behind us, a lot of time energy and effort went into that, and this was just kind of the next logical project for us to focus on. So nothing to do with feeling any pressure on in terms of the top line side there. Obviously, we continue to think that we're going to have good opportunity for loan growth. .

In terms of dropping to the bottom line. Certainly, there are some things that we are doing on the technology spend side that are going to increase expense, but most of those are designed to generate revenue as well. So we hope to see a good bit of this hit the bottom line. .

The other thing that we are doing that we think will potentially eat into some of this temporarily, we'll be adding additional commercial bankers. And so we're actively have added and continue to recruit.

Obviously, those will -- we think will generate revenue to pay for themselves in a relatively short period of time, but you will see some increase from that. .

Okay. Great. One other question on the fee revenues. You talked about mortgage. It looked like the SBA line came down quite a bit. But is that more seasonal and coming off a very strong quarter last quarter? Or is that business just -- you had mentioned slower demand.

I'm just wondering, are we at -- is this level more of a run rate? Or does it still have more room to fall off?.

Good question. The fourth quarter was a really strong quarter for our government-guaranteed lending group. And so that -- looking at it quarter-over-quarter, it was unseasonably high last quarter. .

We are -- like I said, we've had a shift. If you think about the evolution over the last year or so of government-guaranteed lending in our bank and a lot of others that went from no opportunity except for working through all the PPP then into the era of having the 90% guarantee and not having a guarantee fee. .

And now we're kind of making that adjustment back to sort of normal SBA and USDA lending. And so we're seeing that, that change has impacted it. We still have a good bit of backlog of projects that are coming through and we're building our pipeline back up. .

So I think you'll see -- we think we're not going to see fall offs from the levels we're at now. But building that back up is an important part of what we're doing in the second -- this quarter and the second half of the year. .

Okay. Great. One last one for me. You mentioned earlier about the first full quarter of SouthCrest and now that integration is behind you. Just -- on one hand, you're seeing -- it sounds like you're seeing and you expect pretty healthy organic growth. On the other hand, you guys just raised capital.

I would suspect you're looking to be opportunistic if there's M&A opportunities out there. I would think you want -- you would look for situations that can get that loan-to-deposit ratio up. .

So all that being said, like what do you think the likelihood based on just what you're hearing out there in the marketplace is that you guys might find an acquisition opportunity over the next year or so?.

Yes. Good question. We are having active conversations. There is plenty of activity going on out there. We think that there is significant opportunity for us to continue to grow through M&A, and our expectations would be that we definitely have something that we do on that front over the next year. .

The next question today comes from Christopher Marinac from Janney Montgomery Scott. .

Andy and Heath, can you elaborate on the loan yield improvement? I know Andy touched on it in his remarks, I just want to get more color about April and how you expect further Fed increases to kind of impact your -- the rates that you're charging and how that may look in future periods?.

Yes. So Chris, I'll hit that, and thanks for the question. We're doing our best to stay disciplined on loan rates and get the benefit of these rates on new loans. Clearly, some of our variable rate and adjustable rate loans have already repriced. .

Frankly, this will be the last quarter we see any PPP benefit in those forgiveness, those numbers hitting our yield. So I'm hopeful that effectively first quarter should be one of the lowest quarters for our loan yield overall. It's a hugely competitive market still with overall loan-to-deposit ratios in Georgia probably averaging in the 70% range.

So people are still trying really hard to ramp. .

It's -- we'll see how we do, but I do think you're going to -- you're starting to get phone calls from the truly professional borrowers where they're not asking you if you're below 4 anymore, they're asking you if you're below 5 anymore. So that part is favorable, I think, to our future yields. .

And I would just add to that, Chris, that we're having the conversations with our bankers with our customers. We've all been in such a relatively low and stable rate environment for a while that there's some coaching and some conversations going on both with our team and our customers as we adjust the new rate environment. .

I think the good news is with that is that we have not been seeing a lot of marginal deals or things that didn't have room for the rates to go up and for the projects and for the things to work for our borrowers. And so -- it's a little bit more, I think, sticker shock as we go through that than it is cash flow or deals working and things like that. .

So that has me optimistic that we'll be able to move through that. But for a good while now, a borrower would come in and ask us where we were on something and they go work on it for 6 or 8 months and they come back and we are at the same place. And that's obviously not happening anymore. So we just have some adjustment to work through as we get there.

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Of course, that's the same thing all of our competitors are going through as well. And so we're trying to be disciplined to pricing, but also realize we got a low loan-to-deposit ratio, and we need to grow loans and create longer-term value. .

Great. Thank you for that perspective.

And just as a follow-up, Heath, I mean, the level of securities today, did you see that changing materially in the next year as you put more loans to work? Or do you think that it really changes as a result of kind of other external expansion over time?.

Yes. So a couple of things on that. We certainly expect to be able to grow loans and have that eat into the amount of balance sheet that we're committing to the securities in terms of those -- the securities portfolio running off. The big unknown is just more on the deposit side. .

I guess we're entering -- I don't know how many consecutive quarters thinking maybe is this the quarter that some of these deposits start running off. And so we're not seeing that. We're seeing strong deposits. And so some of that is a little bit out of our control. I'm hopeful in thinking that we'll start to see some erosion of the deposits. .

We certainly don't expect to raise our deposit rates as interest rates go up. So I think there's an opportunity to kind of right size the balance sheet and increase that loan-to-deposit ratio to a more meaningful number. And so -- but at the same time, we're not going to push core deposit relationships out of the bank. .

And like I will say with these branch closures, we don't think those are going to be meaningful deposit decreases from that either. And we're not trying to do that. We're still in it for the long haul.

And so we're going to control it on pricing from any interest-bearing deposits, but we're still out trying to gather from our business customers and consumers noninterest-bearing deposits. And that's going to be another piece of that. .

But we're going to continue to move that loan-to-deposit ratio up, if we can get the loan growth we're expecting this year. .

Chris, I think I would just add on real quick sort of philosophically, we try to run the bank 3% to 5% total cash. And so that is sort of one of the backdoor drivers of whatever the size of the portfolio is as well. .

[Operator Instructions] The next question today comes from David Bishop from Hovde Group. .

Question for as it relates to the mortgage banking segment. You noted that obviously you're trying to get some more efficiencies on the banking segment there.

But if we continue to see rates rise or just curious how you view the ability to maintain or even improve on the efficiency in the mortgage segment if we do continue to see rates rise and potentially have a slowdown in the housing market. .

Yes -- no, thanks for that question, David. So just for everybody's benefit, our mortgage group that we have as a purchase money mortgage group driven primarily from our relationships of our loan originators to builders and to realtors. .

Certainly, as you can see with the changes each quarter in our noninterest income lines of business, there's a lot of variable expense on that front. We manage that closely. Our -- President of our mortgage division's incentive on net income, not on production, which is an important driver of how we manage that business.

We did add a good bit of originators over -- towards the end of last year. .

And we look and our average originators down probably 20%, 30% in their production. Again, some of that is where they've got a lot of prequalifications but are having a hard time getting contracts because of the tight market in a lot of our -- or the lack of inventory in a lot of our markets. .

So -- but between that line of business and our homebuilder finance group, we keep a close eye on the bigger markets where we have a lot of -- where we have a lot of homebuilding finance and we do a lot of mortgage business.

And what we're seeing is that we've entered this with such light inventory that we think that we've got to continue -- there's plenty of capacity to take that inventory. The market still is strong despite the rates. .

And again, we're seeing the same thing on the consumer, like I was mentioning, on the commercial side as consumers have had plenty of capacity to go up in rate and in size of loans. So -- but that's certainly something we keep a close eye on.

And we do have the ability, obviously, to scale that business back from an operational -- from a fixed expense standpoint as well if we need to. .

We did $400 million last year. We are at $100 million in the shortest quarter of the year. So we think we are 97%, I guess, is the actual number we did this quarter. I think we look to continue to grow that. That's the current economic outlook. That certainly could change.

But we would make adjustments to our business model if we need to, but we still think that there's opportunity for us to increase our mortgage business through a cycle, just depending on what that cycle looks like. .

Got it. I think maybe... .

We're having a little bit of a hard time hearing you, David. .

Sorry, is this a little bit better?.

That's better. .

Okay. Great. I think in response to, I think, the question about potentially adding talent this year.

I'm just curious maybe what the profile of the bankers you're targeting with commercial -- to the commercial bankers, commercial real estate? And are you targeting some of these coming on and some of the -- obviously, there's a [indiscernible] amount of consolidation that [indiscernible] especially by some of the merger and acquisition activity, [indiscernible] footprint?.

Yes. So what we are targeting is really very similar to what we have. So we -- the bankers that we're talking to and that we've brought on are what I would call more generalists that would have definitely a commercial real estate, both owner occupied and nonowner occupied. .

We are primarily targeting those out of the larger regional and, to some degree, the national banks that it is a result of consolidation. And so when you think about markets like Savannah, Augusta and Atlanta. You've seen now some of these roll-ups where over the last couple of years, their business cards changed 2 or 3 times. .

And so -- and along with that, the processes and everything else. So we're having good success recruiting out of there.

We're generally trying to get folks that we think can bring $10 million to $20 million of business over in a relatively short period of time and carry $30 million to $50 million portfolios depending on the market that we're looking at, smaller size would be in some of the more rural markets where the cost of the banker isn't as much and the larger size would be in the larger markets like Savannah, Augusta, Atlanta.

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Got it. I appreciate the color. And then you mentioned the interest sensitivity referring back to the 10-K.

Just curious, maybe a question for Andy, if there's been any sort of update in terms of what the impact is of a 100 basis point hike rate hike would be on spread income over a 1-year period?.

Yes. So David, I can't quite give that to you yet, that will be out in the Q. We've got some preliminary numbers. I don't think we're quite ready to disclose those yet. .

I think to say that the numbers at the end of the year, it will be similar to those numbers. So the outlook still remains strong if we can get -- if the rates stay in this higher range. We're happy to see them, it just causes a little [indiscernible] earlier temporary dislocation for a little bit as the marketplace adjusts to it.

But we're happy to see the higher rates and hope we can like them to go up and stabilize, maybe not rise quite as quickly as they've risen in the last 60, 90 days each time, but happy to see rates increasing. .

David, I think the one thing I can add just from a structural standpoint, we can talk about is that with a lower cash balance, our overall asset sensitivity will obviously be a little bit lower on an immediate basis, just given the fact we've allocated a little bit of that. .

Got it. And then a couple of housekeeping questions. Just curious that there's been a little bit of bumpiness in the effective tax rate, what we should be thinking about heading into the back half of the year. And I don't know, in terms of the securities portfolio, do you have the monthly cash flows of that -- of the portfolio. I'll stop there. .

Yes. Yes. So happy to talk about those, give me one quick second. We -- like you said, it's been a little bit bumpy. We're expecting the tax rate to be closer to 19% to 20% going forward. And then on the monthly cash flows on the bond portfolio, we run a relatively bullet-like structure in our bond portfolio overall.

We don't have a ton of variable cash flows since the risk our balance sheet is relatively variable. .

And best number I've got for you is in the high single-digit millions of cash flows from the portfolio. Obviously, depending on maturities, et cetera. .

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

Thank you, Bailey, and thank you, everyone, for being on the call today. I appreciate your interest in Colony. We appreciate you being on the call 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..