Good afternoon. Thank you for attending today's Colony Bankcorp conference call. My name is Tamia, and I will be your moderator for today. [Operator Instructions] It is now my pleasure to pass the call over to our host, Andy Borrmann, CFO of Colony Bankcorp. Please proceed. .

Thanks, Tamia. First of all, thank you to everyone who's on the call, and thank you for -- we recognize the relatively quick turnaround today from the earnings release of the call. So we appreciate you joining us. To get started this afternoon, keep the leaders happy. I'm just going to make a quick opening statement.

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, 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. .

Thank you, Andy, and thanks, everyone, again for being on the call. And like Andy said, I know it's a quick turnaround time. Appreciate you all working with us on that logistical issue there. But let me just walk through, I think it was a really solid quarter for us, but it was certainly noisy.

So I would like to kind of walk through some of the moving pieces that we've laid out for you for the quarter and kind of give you a little color on some of those. .

During the quarter, we took a $1.35 million charge to personnel expense for our previously announced efficiency initiative, and that initiative was largely completed during the quarter. We also have had some charges that are related to the rapid increase in interest rates that we saw this quarter.

So we took a $751,000 charge to interest expense due to the write-down of acquired FHLB advances that came from the SouthCrest acquisition. Those were called during the quarter, and then $316,000 hit to noninterest expense due to the write-down of servicing assets on our government guaranteed loan portfolio. .

So we had those things that we wanted to highlight during the quarter. We also -- we had a great loan growth quarter. We added nearly $100 million in loans. That's nearly a 30% annualized growth rate. So it was good to see us getting that traction after running a little bit behind where we were hoping to be earlier in the year.

And that increase in loans led to us providing $1.1 million to our loan loss reserve. So despite improving credit metrics and credit outlook remaining stable, we did feel the need to put $1.1 million in to cover the loan growth we experienced during the quarter.

And of course, that's ahead of where we were expecting to need to put in the allowance due to the growth. .

And I think certainly, our analysts that follow us were projecting lighter numbers than that as well. So when you take those items into account, I think we had a really good quarter. .

I'd like to note a couple of other things for the quarter, really for last couple of years, our mortgage and our government guaranteed or what we call our small business specialty lending, our SBSL group, helped drive our results as we work on improving our core bank earnings.

And this quarter, with a challenging environment for mortgage and for government guaranteed lending, we really saw the core bank performing well and driving the lower majority of the net income. And so it was good to see that in the core bank. This is also the first quarter where we saw very little PPP income.

So in the previous quarter, it was about $0.5 million, and we did not have that this quarter. So with all that taken into account, again, like I said, it's a bit noisy, but I think you can see why we're happy with the quarter and positive about our earnings outlook. .

In addition to the operating results that we've detailed, we were also able, during the quarter, to complete a $40 million subordinated debt offering.

And so, really, in the first half of this year, really proud of what we've done there to shore up our capital base with the $60 million capital raise in Q1, plus it really puts us in a great place from a capital perspective to work through any economic uncertainties out there.

So proud of what we did this quarter, proud of our team and what's been accomplished. So that's really all the prepared comments I have. So this time, to me, if you'd like to open up the lines for questions, please do so. .

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

Apologies if I haven't made it through the whole release or debt yet so -- if you've already covered this in the release. But just wondering if you could talk about the margin. I know there was that $751,000 probably created some noise in it, but just looks like it went up 2 bps linked quarter.

If you can help us how to think about the trajectory of the margin going forward in third quarter and beyond, assuming what the market is assuming the Fed is going to do? How do you guys are positioned?.

Sure, Kevin. Thanks for the question. Yes, that $750,000 does put a little bit of a wrench in that math, clearly. The way we pencil out the math, it looks to be about 32 basis points of impact. So I would say our margin ended up being mid-3.40s, 3.45-ish, 3.47, depending on how you probably annualize that.

But -- so realistically, I think that's a good starting point for the NIM going into the third quarter. We do continue to expect to get some benefit going forward, both from the interest rate environment and the asset mix change. .

As we look at the loans we've been putting on the books, we have seen pricing from the beginning of the second quarter, end of the first quarter, beginning of the second quarter to the end of the second quarter and this month improve pretty meaningfully, as you can imagine.

And so we do expect some benefit there going into the third quarter still from the second quarter level. .

Is this -- is it fair to say that third quarter might be the biggest quarter of expansion and then it [indiscernible] off after that as deposit betas accelerate?.

Yes. I think that's a fair position that would probably be our baseline assumption. We try to not make too many interest rate assumptions, Kevin, just given the volatility in that market, obviously, here recently. But I think that's our baseline expectation. .

Okay. Great. Then just one question on -- I know credit looks good right now, and it looks good for everyone.

But with such strong loan growth, I'm just curious if you guys contemplated taking the allowance up more just given what you don't see that could still be out there? Or are you constrained by the model in doing that?.

Yes. Kevin, that's a good question. And one thing to remember for us, we're not CECL yet. And so we should be working through an incurred loss model. And I think, for us, with credit metrics improving, we did move some of our other factors around, but we're seeing good trends.

We have made some underwriting adjustments and still seeing continued loan growth even with those underwriting adjustments. So we feel good about what we're putting on. And so, with that being said, didn't really feel like the need to add more than to cover the growth during the quarter. .

So those underwriting adjustments, is that like you're just tightening up? Or is it -- you're looking at certain classes of loans and really tapping on the brakes in terms of your interest in them?.

Yes. I think it's important for us and how we operate maybe versus some of the larger banks that we stay nimble. We try to make adjustments, slight adjustments as we go versus some of our larger competitors where we get the advantage sometimes to see where they move bigger swings in and out of certain classes.

And so we have looked at our concentrations and where we are just ensuring that the stuff we put on in areas where we may be concentrated that is just tweaking the underwriting and then ensuring that we're not making exceptions in those categories that don't make really a lot of sense and that just being careful, I would say, in certain categories.

So not really slamming on the brakes anywhere, but looking around and making sure that we're being prudent in what we have, especially in areas where we might be concentrated. .

The next question comes from David Bishop with Hovde Group. .

Sort of dovetailing on Kevin's question maybe on the office side, and I apologize if I haven't had a chance to deep dive into the presentation either.

But maybe conversely, what are you seeing on the funding side of the equation in terms of deposit growth this quarter? And how -- obviously, the -- I assume the 30% loan rate probably is not sustainable, but how are we thinking about sort of funding that -- the forward loan growth into the second half of the year?.

Yes. It's obviously challenged right now, David. I mean, we didn't -- we expected our loan growth to pick up from the first quarter. I don't think 30% annualized was really a standard case for us. So we did -- we are having to juggle a little bit. Deposit growth was effectively flat.

If you back out the sub debt, we were down a touch, but relatively flat given the fact that we didn't increase pricing basically anywhere. We do believe that we're up against the cusp of having to look at deposit pricing to start to grow those balances again. .

I think what you're going to see from us and probably a lot of folks who look like us is we'll be juggling some wholesale funding, maybe a small broker position for the next 6 to 9 months while this loan growth is in place. I don't know that it will be in place that long, but, let's say, for the third quarter at least.

And then as we're able to start ramping up that deposit growth again, hopefully, with some more competitive pricing, then we'll be able to shuffle those wholesale positions back down. .

So I think you're going to see us sort of working on all fronts to fund this loan growth, which we do expect to have -- right now, our pipelines for the third quarter look very strong.

We're starting to get the very first hints of a little bit of -- I don't even want to call it hesitation, but just potentially slowing down a little bit in the fourth quarter given just the anecdotal stuff we're hearing, but third quarter, right now, still looks pretty good. .

Got it. And then, secondarily, I guess back to the loan discussion. Just curious what segments drove that growth this quarter? And I'm curious that's all the breakdown in terms of the various markets and the hires. Just curious how big you think is the Huntsville and Birmingham markets to get from a loan growth perspective. .

Yes. No. And I think just from a breakdown geographically where that loan growth came from, it was fairly spread out across our footprint. I think roughly 1/3 or a little more than 1/3 came from the Atlanta market and then spread throughout our footprint pretty good after that.

We have not yet -- we brought lenders on in the quarter in Birmingham and Huntsville, but really haven't seen the benefit of that yet. That was later in the quarter. And so we had strong pipelines there, and we think we'll see really strong growth there, but don't have that on the books yet. So that wasn't really a part of this quarter. .

As far as what we saw in terms of the lending breakdown, really very largely similar to the portfolio as a whole. So we continue to see commercial real estate growth. Obviously, one of our concentrations that we have is trying to manage that commercial real estate and particularly any nonowner-occupied pieces of that.

And so those are the areas where we're being a little more cautious in terms of making sure that we stick to our underwriting and, in some cases or sectors, tightened up the underwriting probably especially in the areas like non-owner occupied real estate related to retail where consumer spending and things like that, that cause a slowdown. .

And was your last part of that question around the potential size of Birmingham and Huntsville?.

In total. .

In total to what we would expect from those?.

Yes. I mean we're in Huntsville right now, 1 commercial banker in Birmingham, we would have 3 -- those markets have a lot of upside potential.

Today, when you think about our portfolio, we've got -- in the top areas, we got Atlanta, and then we would have Savanna and several other markets in Georgia, like Columbus, Warner Robins and all being that are larger markets.

Certainly, we would expect, over a longer period of time, just with Birmingham and start to move up in the chain and the markets there where Savanna and Atlanta [indiscernible]. That's going to take a while if you think about it.

And we would look at lenders if we have an opportunity to get good lenders, but we don't need that to get good solid growth. .

Next question is from Christopher Marinac with Janney Montgomery. .

Heath and Andy, just want to go through the securities portfolio.

Anything changed there in terms of credit risk within those securities? And I guess maybe just a sense of kind of how some of those will mature and pay off over time?.

No, Chris. We really didn't have any change there. We haven't had any downgrades in our muni or our credit portfolios that I'm aware of. And realistically, as you and I have discussed over the years, we tend to be sort of 5- to 10-year window investors in most products, might get a little bit longer sometimes.

We do have a small pocket of treasury -- of our treasury portfolio that we'll look to sell if rate get to a spot where it makes sense to get out of those without any sort of loss. But right now, most of our maturities are no earlier than early '24. And out through, I think our duration right now in that portfolio is something right around 6. .

Got it.

And then I guess from a high level, do you see the liquidity on the balance sheet is kind of some of the strategic plan positions you to 2 years ago or 3 years ago, I mean, what is the sort of time frame that you've kind of transitioned this -- the balance sheet to where there's a much greater proportion of loans relative to where we are today?.

Yes. So Chris, like I said to an earlier question, I think we're going to be juggling some wholesale funding here for the next 6 to 9 months. But realistically, I think over the next -- it's hard to say what loan growth is going to be in 2023. I feel good about third quarter, but after that, it gets a little fuzzy.

I would say I would expect our -- if we're able to maintain what our stated targets are, which is 8% to 12%, realistically, should we be approaching a 70% loan-to-deposit ratio sometime in the second half of '23. I think that's probably a reasonable expectation.

And somewhere in the first half of '23, we get to start truly transitioning in security for loans and not juggling so hard with the wholesale funding. .

Got it.

And then, Heath, could you give us an update, I guess, on the merchant business and kind of how you see that playing out next year and presuming that next year is a big transition year for both product team?.

Yes. We're excited about the merchant team. They really got on board in December and pretty much took several months to kind of get our infrastructure in place, get our processing agreement and team in place. And so we're really probably only a couple of months into them getting out and actually being able to produce.

So I really don't have numbers I would project to you right now. But I'd say that we have a significant upside opportunity on the merchant team and what we can do there. .

And then just the other side, just from a -- I think there's a good opportunity to use that as a lead product to go after deposit customers on the commercial side. And I think, being realistic to think we might see some slowdown at lending at some point and the ability for our commercial bankers to focus on deposits and for us to use that.

And we also have a tremendous opportunity. We don't have -- we just put treasury team in place over the last few quarters and the ability to grow our commercial deposits that way, I think, is really strong and also to produce some fee income. So we've got some areas where we can see some nice fee income increases. .

Great. And then I guess the last one for me is just the Middle Georgia continues to add more to the portfolio. I know it's not as big as Atlanta.

But as you take forward another in 12, 18 months, what proportion of the company do you see Middle Georgia being that's still, I guess, a growth trajectory like we've seen year-to-date?.

Yes. We have some good things happening in Middle Georgia. That's a good vibrant economy. The Warner Robins area with the Air Force Base and everything going on there.

And then we added a lender in Macon, and we're seeing growth there, and we're putting a more significant office in place there, probably 12 months or so and would love to add bankers to the team in that market. That's a -- that Middle Georgia market is like many of our markets where there's large market share held by larger banks.

And of course, in that market in particular, you have -- you've got Renasant, you've got Cadence, having gone through the State Bank and then going through that cycle. So I think there's significant opportunity there for that to be a market that moves up in size pretty well. .

There are no further questions in the queue. [Operator Instructions] There are no further questions in the queue, so I will pass it back over to the management team for any closing remarks. .

Thanks, Tami, and thank you all for being on the call today. Thank you for your support of Colony. We appreciate it. And another thank you to our team for everything this quarter. And again, we appreciate the opportunity to talk to you. We look forward to speaking with you all again soon. Thank you. .

This concludes the Colony Bankcorp conference call. Thank you for your participation. You may now disconnect your lines..