Good day, everyone, and welcome to the Colony Bank Second Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session.

[Operator Instructions] Please note this call is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Chief Financial Officer, Derek Shelnutt. Please go ahead..

Thanks, Nicky. 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..

Thanks, Derek, and thanks to everyone joining our second quarter earnings call today. We're pleased with our improved operating results in the second quarter and we appreciate the hard work from our team members, which has allowed us to continue to achieve progress towards our strategic goals.

Operating net income increased close to $200,000 during the quarter as we continue to see improved performance from our complementary lines of business. All were profitable in the quarter with the exception of Marine/RV Lending which improved quarter-over-quarter, but was held back by sluggish sales in that industry.

Net interest income decreased slightly during the quarter and was driven by a continued increase in our funding costs, albeit at a slower pace than in recent quarters. Loan growth was relatively low this quarter. As we've mentioned previously, our loan growth expectations were modest for the year.

We do see our loan pipelines increasing and we do expect a little more growth in the second half of the year. Margin declined one basis point during the quarter, which was a little better than our expectations of a three to five basis point decline.

We still expect margin to improve in the second half of the year and Derek is going to speak in more detail to that later in the call. There was some seasonality in our deposit base in the second quarter. Historically, it's not unusual pre-COVID for us to see declines in the second quarter.

A large portion of the decline this quarter was related to tax payments from a small number of large depositors. And of course, we generally would expect to see those balances come back later in the year. And we also were able to reduce our brokered CD levels this quarter.

Our focus remains on deposits first and our bankers continue to develop relationships that include deposits and other opportunities. We are believers that the value created in banking is based on the deposit relationships we can build and so that's our primary focus. Credit quality remained strong.

Classified and criticized loans decreased during the quarter and those figures are available on Page 18 in the earnings release. At the end of the quarter, past dues were at very low levels. We had zero past due CRE loans at the end of the quarter.

We have confidence in the credit quality of our portfolio and we're not really seeing any areas at this time that gives us concerns about potential weakening. Our mortgage banking group was profitable in the second quarter and had its most profitable quarter since we started this rate cycle.

We started seeing more activity during the home buying season this spring, but we're seeing still low inventory levels have an impact on volume. But the outlook on rate stability and the market adjusting to the current level of rates are starting to help drive activity.

And we continue to adjust our product offering and staffing to remain competitive in the market and to remain profitable in this line. Our small business and specialty lending division had another great quarter. We've seen a lot of success from our small dollar loan program and these will continue to be a good source of revenue for our SBSL Group.

There is some slowdown expected in that going forward as we've seen many new entrants into that marketplace. And so while we expect to see revenue continue and this be a good product for us, it will not likely be at the same levels that we've seen in the first half of this year.

And we keep continue to focus on our core SBA loan customers and maintain a consistent pipeline in those products as well. Expenses were in line with our expectations and I think our team has done an outstanding job of maintaining efficiency and expense discipline over the last year.

Our operating noninterest expense to average assets was 1.36% for the quarter and it's shown at the bottom of Page 8 in the earnings release. Since we have multiple sources of noninterest income, we use this metric as a way to compare our noninterest expense to peers.

And we've moved in the peer group we measure from the bottom quartile in that group to the top quartile over the past year and we expect to stay there. Our commitment to our markets is important to us.

And although we focus on remaining disciplined with our expenses, we managed that with the long-term benefits of continuing to invest in innovation, technology and in our markets. Over the past few months, we've added experienced bankers to several of our markets based on needs and in some markets for transitions for upcoming retirements.

We're excited to have these new team members on board and look forward to the positive impacts that they're going to have on our customers and our communities.

And lastly, I'd just like to recognize two of our Board members who retired this past quarter, Jonathan Ross, who served as a Director since 2007 and Harold Wyatt, who served as a Director with us since 2021 and previously served as a Director of SouthCrest Financial Group for many years before its merger with Colony.

We wish them well and like to thank them for their leadership and their service to our shareholders, our team members, our customers and our communities. And with that, I'm going to turn it over to Derek, who will go over the financials in more detail..

Thank you, Heath. Both GAAP and operating net income increased during the quarter with operating net income increasing by a little over $170,000 as a result of increased noninterest income and lower provision expense driven by improvement in credit quality.

Interest income increased slightly over -- quarter-over-quarter with interest income on loans increasing by about $500,000.

Interest income from investment securities decreased in the quarter, partially by the redeployment of principal payments to fund loans or pay down borrowings, but largely due to a one-time accelerated premium recognition on an early payoff of a security, which decreased overall investment income.

That impact was about $250,000 and without that, net interest income would have been flat quarter-over-quarter. Interest expense on deposits increased from the first quarter, but we are still seeing the rate of that increase slow down. And as Heath mentioned, margin declined one basis point and that was better than our expectations for the quarter.

We still believe margin will start to expand in the second half of the year, but the exact timing will depend on several factors, including deposit competition and cost, loan fundings as well as any interest rate changes.

With margin declining only one basis point per quarter since the fourth quarter of 2023, we feel comfortable that we are at or very close to the bottom. Any further decline is likely to only be a basis point or so.

But we feel better about margin being in the midst of turning the quarter and seeing the next quarter margin being flat or up a few basis points.

Operating noninterest income increased from the prior quarter by $77,000, both our SBSL and mortgage income increased quarter-over-quarter, while other noninterest income declined, but that was due to one-time items in the first quarter related to BOLI and OREO. Noninterest expense remained stable quarter-over-quarter, decreasing $67,000.

As Heath mentioned, we are still focused on appropriately managing expenses relative to our growth expectations. And our operating net NIE to assets improved two basis points in the quarter and was four basis points better than our target of 1.40%.

While we still look for efficiency with expenses, continued progress in our complementary lines of business should keep us close to or better than our net NIE target. Provision expense totaled $650,000 for the quarter.

Slower loan growth in the quarter was a contributor, but we also saw some credit improvement this quarter with a decrease in classified and criticized loans.

As Heath mentioned, past dues were at low levels, which includes zero past dues on CRE loans on the bank side and a decrease in nonperforming and we've seen a decrease in nonperforming loans since the end of last year. Net charge-offs were relatively flat and similar to last quarter.

The majority of the charge-offs were related to the unguaranteed portion of SBA loans. The SBA small dollar loans represent most of the charge-offs and these loans do have a higher premium when they're sold, which offsets the higher losses. Total loans held for investment increased $6.6 million from the prior quarter.

As we mentioned on our last call, our pipeline suggests more growth in the second half of the year, but still at modest levels. Demand, credit appetite, rates and funding are all going to influence the exact level of growth we end up seeing. We still have opportunities this year for repricing on loans.

There are about $50 million to $60 million with maturities through the end of the year that are currently priced at 5% or lower. So we should see some benefit from that going forward. Total deposits were lower by about $62.5 million, of which $22 million were broker deposit paydowns.

And when you look at our deposit data pre-COVID, you typically see some seasonality and lower second quarter average deposits. Then you see those deposits return in the later half of the year. We did see some large outflows for tax payments from some of our larger depositors.

We've also seen seasonal supply and raw material purchases from our manufacturing and agricultural depositors. We are still focused heavily on deposits. FHLB advances increased in the quarter by $50 million. We took advantage of the inverted curve where we saw some opportunity to get some cheaper funding.

Additionally, a portion of that was short-term and the more attractive short-term pricing allowed us to shift out of the higher rate brokered CDs. This quarter, we continued our strategy of selling underperforming investments in the portfolio and redeploying those proceeds into higher-yielding assets and those results are summarized on Slide 29.

We sold approximately $9.3 million worth of securities, which included a loss of $425,000. The book yield was 3.26% and our earn-back estimates are around two years or less. We expect the continued similar restructures in the future and as appropriate and as market conditions allow.

During the quarter, as part of our stock repurchase program, we repurchased 20,000 shares for an average price of $11.90 and a total value of about $238,000. Yesterday, the Board declared a quarterly cash dividend of $0.1125 per share.

We understand our dividend is important to many of our investors and continuing our dividend represents the faith we have in the strength of our earnings. Mortgage net income was $138,000 for the second quarter, an increase of $152,000 from the prior quarter.

We've seen some increase in the volume during the home buying season, but being held back slightly by home affordability and inventory. We believe mortgage will continue to improve and be profitable on a go-forward basis.

There's a lot of potential due to pent-up demand and if we see rates come down a little, we would expect to see more profit growth along with an increase in volume. Our small business specialty lending division had a net income of $1.3 million during the quarter. That's a $459,000 increase from the prior quarter.

The small dollar program has been successful and will continue to be a great product for that line of business. But as Heath mentioned, there have been new entrants to that market. And although premiums are still attractive, they've come down a little bit from their highs.

Going forward, we think this is still going to be a great product, but the related revenue will likely be a tad softer. The pipeline for core loans is still in good shape and has remained an important part of that business. On Slide 8, we provide a breakdown of pretax income for our complementary lines of business.

Our Marine and RV division continues to see loan growth, although it is slower than what we originally expected due to sluggish sales in the industry this season. The division is still trending towards profitability, but that may not occur for another quarter or two. Merchant Services had their first profitable quarter and referrals have been strong.

We are excited about the progress and expect to see that continue. The second quarter was lighter for our insurance division. In the first quarter and early in the second quarter, the insurance industry overall saw tighter underwriting requirements and a lower risk appetite.

We did see that relax near the end of the quarter and we remain optimistic about the rest of the year. Bank referrals have been increasing and we feel like we're going to start seeing the benefits of those. The division also invested and grow in the business during the second quarter, which had some upfront expenses associated with it.

That concludes my overview and now I'll turn it back over to Heath for any final comments before we take questions..

Thanks, Derek. That wraps our remarks up. And with that, I'll call on Nicky to open up the lines for questions..

[Operator Instructions] And we'll take our first question from Justin Marca with Hovde Group. Please go ahead..

Hey, guys. Good morning. On for Dave Bishop today. So you mentioned in your prepared remarks that pipelines are increasing.

Any particular segments where you're seeing good opportunities? And how are your overall growth prospects looking for, say, the next 18 months?.

Yes. It's really, I think, across the board, we are seeing a pretty diversified amount. We do have, obviously, we're -- if you look at our portfolio, it's largely real estate. And so we do have some nice opportunities on the commercial real estate front and we have the appetite and capacity there.

Our ultimate goals, we like to try to grow 8% to 12% a year. Certainly, we don't expect to see that this year. I think loans were down in Q1 and then up slightly this quarter, maybe in the like 1% annualized range. If we could potentially next couple of quarters, maybe see closer 2% to 5% type annualized growth, it's likely.

And then given the economic outlook right now and what things look like potentially leading into some higher single-digit growth as we go into next year..

Okay. And it sounds like a NIM trough might be in sight.

How are you feeling about overall deposit costs and loan yields for the second half and into '25? And do you have any rate cuts baked into those projections?.

So we feel good about where we are. We don't try to predict the rate cut. So we feel like our NIM return is going to come back regardless of rate drops. So we're thinking rate stability in our outlook. And as Derek mentioned in his remarks, a lot is just going to depend on funding pressure and on loan growth, we've got a lot of repricings coming up.

So we have a lot of the pressures lightening up on the deposit side. And on the loan side, we've got a lot that will reprice anyway and with a little bit of growth that will improve.

Derek, do you have any other thing to add to that?.

I agree. Just to add some additional color. We're continuing to see asset repricing through both the loan portfolio and the securities portfolio. And that's been pretty steady. And we have a lot of opportunity there.

Again, our cost of funds, our deposit cost has been steadily slowing down in terms of rate of increase and any Fed rate cuts that we may or may not see will have an impact on that, probably not drop it, but definitely slow it down even further. And so that's just going to help our overall funding costs and allow the assets to reprice faster.

And then at that point, we'll start seeing margin expansion. And again, I think we expect that to happen probably in the second half of this year at some point, even without any rate cuts and then continue on into '25..

Great. Thanks for taking my questions today..

Thank you..

[Operator Instructions] And we show no further questions at this time. I will turn the program back to our presenters for any closing or additional remarks..

Thanks again, everyone, for being on the call today. We appreciate your support of Colony Bancorp and we appreciate you being on the call..

And this does conclude today's program. Thank you for your participation. You may disconnect at any time..