Colony Bankcorp, Inc. (CBAN) Q2 2025 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Colony Bank Second Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded on Thursday, July 2025. I would now like to turn the conference over to Brantley Collins. Please go ahead.

Thanks, Joanna. 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 our second quarter earnings release and investor presentation as well as our joint press release and investor presentation on the TC Federal merger, all 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, Brantley, and thank you to everyone for joining our second quarter earnings call. We're pleased to report improved financial performance this quarter, which reflects the continued improvement of our operations and success and discipline of our team members. Core earnings improved meaningfully in the quarter, supported by both loan growth and efficiency. We also saw continued expansion in our net interest margin, benefiting from pricing discipline on the asset side and our stable core deposit base. Also, we announced yesterday that we entered a definitive merger agreement with TC Bancshares, which operates TC Federal Bank in attractive markets in South Georgia and North Florida. We believe this partnership represents a compelling strategic and cultural fit. We'll discuss that transaction in more detail later in the call, including the expected benefits and timing. On the lending front, we delivered strong loan growth of 15% annualized rate in the second quarter, continuing the positive momentum we've seen this year. While growth came in just slightly below first quarter levels, we continue to see solid demand across both commercial and consumer portfolios. Looking ahead, we anticipate loan growth may moderate somewhat in the second half of the year, closer to the 10% to 12% range, but the pipeline remains very healthy. Our return on assets for the quarter was 1.02%, which is a meaningful improvement from the prior quarter and has been a short-term target for us, achieving that 1% ROA. So we're pleased we're able to achieve that. It came about a quarter earlier than what we had projected. We feel confident in our ability to maintain that 1% or better ROA going forward and now move towards our intermediate goal of achieving a 1.2% ROA. Margin increased to 3.12% in the quarter. And as we previously mentioned, that margin over 3% was where forecasts were indicating we would be at a 1% or better ROA. We still expect margin to increase in the second half of the year. However, with more normalized loan growth rate and a stabilizing cost of funds, we're likely to see the expansion be softer in the remainder of the year than what we saw in this past quarter. Noninterest income improved quarter-over-quarter as revenue increased across many of our complementary lines of business, particularly in mortgage. We also had a really good quarter in Marine and RV lending. While we did see improvement compared to the prior quarter, we still think there's an opportunity for meaningful improvement to enhance that performance across our business lines, and that's a real priority for us. Credit quality remained stable, and we saw improvement in nonperforming assets as well as criticized and classified loans. Net charge-offs increased slightly after being down last quarter, and that was driven by charge-offs in our SBSL division, which we mentioned on last quarter's call that we were likely to see some variability there. Overall, we feel good about what we're seeing in terms of credit quality, and we're happy with these trends. As expected, we experienced some seasonal deposit runoff during the second quarter, which is not unusual for us given the nature of our customer base and our local market dynamics. Importantly, though, core customer deposits, which exclude brokers are up year-over-year more than $75 million. We're also excited about the addition of two bankers in the Chattanooga MSA. We announced earlier this week, Rex Rutledge will be joining us as Chattanooga Market President and Kitty Griffith as a commercial banker. We look forward to them coming on our team and expanding our existing presence in the Chattanooga MSA, where we have one branch already in North Georgia and continue to build relationships in that market. Additionally, we were honored to celebrate our 50th anniversary by ringing the opening bell at the New York Stock Exchange last week. We were glad to be joined by team members, Board members and supporters who've been instrumental to our success. It was a proud milestone that reflects the many accomplishments we achieved as an organization and has been made possible by the dedication, talent and commitment of our entire team. So it was our honor to be there to represent them. With that, I'll turn it over to Derek to go through the financials in more detail.

Thank you, Heath. Net income increased $1.4 million compared to the first quarter. Increased net interest income and lower provision expense on improving credit metrics were the major contributing factors to the increase, along with improved noninterest revenue. Net interest income increased approximately $1.4 million quarter-over-quarter as we continue to see our earning asset yields gain momentum through loan growth and asset repricing. Our cost of funds for the quarter were down 3 basis points to 2.04%. We're seeing the cost of funds stabilize and expect them to be around this level unless there is a change to short-term interest rates. We have experienced the bulk of the downward repricing on funding costs, but we remain focused on keeping low-cost deposit growth a priority. Margin increased 19 basis points, led by an increase in our earning asset yields of 16 basis points. As Heath mentioned, we expect margin to continue to increase going forward, and it will likely be more moderate compared to this past quarter. Second quarter noninterest income increased over $1 million with gains in mortgage, SBSL and service charge-related revenue. Increased production activity in SBSL and mortgage are highlighted on Slides 13 and 14 in the investor presentation. This is positive momentum coming off a seasonally slower first quarter. However, we see a lot of opportunity to continue to leverage that momentum across our complementary lines of business to drive increased future performance. Noninterest expenses increased $1.8 million in the quarter, largely due to variable-based compensation expenses driven by increased activity. In other noninterest expenses, we did have an expense of about $340,000 related to the quarterly valuation adjustment on our SBA servicing asset. These adjustments are based on prepayment projections and market dynamics related to the value of servicing. Additionally, increased expenses for data processing were related to increased activity. Our net NIE to average assets was 1.52% for the quarter, and that's a little higher than our target of 1.45%. Noninterest income performance and expense discipline remain priorities for us as we work to target the 1.45% going forward. We have continued to trend better than our peer median on this key metric. With more activity we've been seeing in our noninterest income lines and with our investment in growing markets with the addition of bankers, we are likely to see noninterest expense a little higher, offset by noninterest income and interest income. We are expecting noninterest expenses to increase slightly to around $21 million to $22 million a quarter and may also see some variability on that based on activity in our business lines. Provision expense totaled $450,000 for the quarter and net charge-offs were $1 million. The majority of the net charge-offs were in our SBSL division, about $780,000 of that and the bulk were related to older loans originated prior to this interest rate cycle, and those were also originated prior to us tightening our credit requirements. Overall, credit quality remains strong. And as Heath mentioned, we saw improvement quarter-over-quarter on NPAs, classified and criticized loans. Loans held for investment increased $72.3 million. As Heath mentioned, we are still seeing a good loan pipeline, but will likely start trending towards a 10% to 12% growth range. The weighted average new and renewed loan rate for the second quarter was 7.78%, which has a positive impact on our portfolio yield and is shown on Slide 26. There's still a lot of opportunity to capture positive increases in the repricing of loans and investments. We have a repricing schedule on Slide 28 that outlines our base case forecasted repricing of both loans and investments. Total deposits decreased $66 million during the quarter, which we mentioned on our last call that we expected seasonality of deposits, and that was not unusual for us. We anticipate these deposits to seasonally return in the late third quarter and fourth quarter. As previously mentioned, deposits are up year-over-year by more than $75 million. We did not sell any investments in the second quarter, but given our increased loan growth and increasing margin, we are considering upcoming investment sales to further improve our balance sheet position and fund loan growth. We are evaluating the potential size of any sales, and we are considering a larger transaction to what we've done in previous quarters as part of that evaluation. During the quarter, we repurchased 62,000 shares at an average price of $15.46 as part of our stock repurchase program. We will continue to review the need for any possible repurchases used this year based on capital needs and market conditions. Additionally, earlier this week, the Board declared a quarterly cash dividend of $0.115 per share. I mentioned on last quarter's call that we are in the process of putting an active shelf registration in place or just to replace our 2021 shelf that expired. We feel this a part of prudent capital management to have a shelf in place, and we expect to have that filed during the third quarter. Our insurance division pretax income for the quarter was flat compared to the previous quarter as the team focused on integration and onboarding of the LOB insurance agency we acquired during the quarter. That integration has gone well, and we are seeing a ramp-up in volume. Policy sold increased 50% from the month of March compared to the month of June. There were also increased marketing expenses in the second quarter, which will drive future production and customer acquisition. That concludes my overview, and now I will turn it back over to Heath to begin the discussion about our merger announcement.

Thanks, Derek. We're excited about the merger we announced with TC Bancshares, which operates TC Federal Bank headquartered in Thomasville, Georgia. We appreciate the opportunity to share more details with you today. We shared a separate investor presentation and press release, which is available on our website. We also have Greg Eiford, the present CEO of TC with us today, and he'll share some of his perspective on the merger as well. I have tremendous respect for the organization that Greg and his team have built. Under his leadership, TC Federal has established a strong reputation for customer service, community engagement, and consistent performance. We're excited to bring together the two culturally aligned institutions and look forward to working closely with Greg and his team as we build on that success. We're also pleased that Greg will be joining our team as Executive Vice President and Chief Community Banking Officer. We look forward to working with him. Matt Higdon, TC senior lender, who will also be joining our team and other members of the TC team as we work through this. The combination is a transformational step that enhances our franchise and positions us for sustained long-term growth in key markets, both in Georgia and Florida. It enhances what we were already doing in Tallahassee and Savannah and provides us entry in the two great markets, Thomasville, Georgia and Jacksonville, Florida, two markets that we've long desired to be in. Together, this deal enhances our earnings power and our balance sheet strength through increased scale and operating efficiency. We expect the transaction to be immediately accretive to earnings per share, excluding onetime costs. and it really sets us up to be among the top performers in our peer group. From a cultural standpoint, there is strong alignment between our teams, and we're confident that the integration will be smooth and collaborative. The merger represents a natural next step in our growth strategy, and we believe it will deliver meaningful value to our shareholders, customers, team members and communities we serve. We expect the transaction to close in the fourth quarter of this year, pending shareholder and regulatory approvals and complete the core system conversion early next year. While our focus in the next quarters will be on a smooth transition for the TC team and customers. We believe there will be further opportunities for us to benefit from industry consolidation, and this deal illustrates our ability to be an acquirer of choice for community banks in our markets. Now I'd like to hand it over to Greg for any additional comments he'd like to add about the merger.

Thank you, Heath. I'd like to start by saying how excited we are about this partnership and the opportunities it brings to our customers, employees, and communities. When evaluating strategic options for the future of our organization, it became clear that Colony was the ideal partner. Their proven track record, forward-looking strategy and commitment to doing things the right way made them the right choice, when we knew we respect our legacy while helping us grow into the future. Our teams have spent significant time together over the past several months, and it's clear there is a strong cultural alignment between our organizations. From how we support our employees to how we serve our customers and to how we show up in the community. Our values are remarkably consistent. Colony's investment in technology and digital tools is impressive, and it gives our customers access to an expanded suite of modern user-friendly banking solutions while still maintaining the high touch service we've always provided. We believe in the things Colony is doing to grow its earnings, and we expect this transaction will add significantly to the future performance of Colony. I'm incredibly proud of what our team has built at TC Federal, and I'm confident that this partnership with Colony will take it to the next level. We're excited to be part of this next chapter together.

Thank you, Greg, and we are as excited as you are, and we look forward to seeing what we can accomplish together as we combine our organizations. Now Derek is going to go through some of the details of the transaction.

Thanks, Heath. As Heath mentioned, this is a strategic and financially compelling transaction. The consideration mix is structured as 80% stock and 20% cash, which allows us to preserve capital, maintain strong regulatory ratios and align both shareholder bases with the future success of the combined company. We expect double-digit EPS accretion by year 2, driven by revenue growth, scalable operating leverage. And although we have not modeled them, we do believe we will see synergies in the combined company, particularly as we are able to expand our complementary business lines across the TC customer base. On a pro forma basis, the combined organization will have approximately $3.8 billion in assets, $3.1 billion in deposits and $2.4 billion in loans, making us one of the leading community banks in the Southeast. Slide 4 in the merger investor presentation provides an overview of pro forma modeling, and we expect approximately 8.4% EPS accretion in 2026 and 11.9% in 2027. Tangible book value dilution per share is only 5.74% with an earn-back of less than 3 years. Our cost saves are modeled at 33.4% of TC's projected noninterest expenses. In addition, the projected loan interest rate mark is 3% with a gross credit mark of 1.4% of TC's projected loan portfolio balance at closing. This transaction enhances ROA to a projected 1.19% in 2026 with a projected net interest margin of 3.43%, from a capital ratio perspective, pro forma TCE is at 7.9%, leverage ratio at 9.8% and total risk-based capital of 15.9%, resulting in a strong capital position for the combined company. And with that, I will hand it back over to Heath for final remarks.

Thanks, Derek. And again, thanks to all of you for being on the call today. We're pleased with our performance this quarter, and we're very excited about the partnership with TC and the opportunities for the combined company. That wraps up our prepared comments. And with that, I'll call on Joanna to open up the line for any questions you might have.

[Operator Instructions] The first question comes from Christopher Marinac at Janney Montgomery Scott.

I wanted to ask about the quarter first and then the acquisition. From the standpoint of kind of loan pipelines and where the progress goes beyond this last quarter that we saw, could you just update us on kind of a reasonable growth rate organically? And then the same goes for deposit costs and if they would be stable? And then I'll follow up on the merger after.

Yes. Thanks, Chris. As far as loan growth, we were 16% in the prior quarter, 15% in this past quarter. We're thinking more probably in the 10% to 12% range for the rest of the year. We still have strong pipelines. They're not quite as full as they were as we ended up the year and into the first and second. So I think we feel comfortable getting down to that level. As far as deposit costs, we have seen those flatten out. We think we've squeezed most of the juice we can get out of our deposits where they are right now. So we think there'll be -- but we're not looking to see them increase significantly, looking for pretty flat deposit costs, barring some action by the Fed.

Those are both helpful. And then on the merger with TC, is the change in accretion from '26 to '27 purely just based on the timing of your systems conversion. I was curious if that date has been locked in?

It's not just based on that. That is part of that is the timing of expense changes, but it's also based on continued organic growth of the organization. So our expectations are based on that. So it's a little bit of both of those, Chris. We have not nailed down an exact date just yet for that conversion. We're working through that, but expect that to be in the first quarter.

And Heath, just one last one on the merger. Do you think that there's enough other potential acquisitions in the future for you to look at something else as '26 comes into focus? Or would you just assume handle TC stand-alone and not consider something else at this point?

Yes. We are very focused on ensuring that this goes through in a great manner. But between our team and the TC team, we've got a lot of great bankers, a lot of people very experienced in doing these transactions. So first priority is making sure that goes through. But we continue to look for opportunities. We continue to have conversations. And I do think there'll be further opportunities. We don't plan to just be on the sidelines because of this, but that is the #1 priority is making sure this goes through well, but we continue to look and have conversations and see disruption in the marketplace, and we do think that there will be other opportunities for us as we go into next year.

The next question comes from Kyle German at Hovde Group.

I was hoping you can provide some insight on the overall health of the loan portfolio, particularly in the SBA lending segment?

Sure. I'd be happy to. I think from an overall perspective and as we mentioned, our total nonperforming criticized classified levels came down. We do continue to see in those criticized classified and nonperforming levels, there is activity. We've seen new stuff come in, some stuff go out and get resolved. And in the past quarter, we had some good resolution to some problem loans that I think helped us better-than-expected resolution. So it's good to see that kind of activity. We don't see anything systematic where we're seeing whole categories or industries that we have major exposure to. We're not seeing anything systemic. We continue to see isolated impacts of borrowers. As mentioned, in the SBA portfolio, we -- some of what we've been seeing are some of the older loans they've been at -- they started at lower rates and then rates went up a lot on them, that put a lot of pressure on them, and we're seeing that have impact on the businesses. And so we do expect that is an area where we'll continue to see higher charge-offs, but there -- our premium revenue and what we're doing in that side of the business is very strong. So we kind of expect a higher charge-off level there. We are seeing, I think, that get a little better through these resolutions, but do expect it to be somewhat elevated in that area going forward.

And also, just to add a little bit of color. In our earnings release, we break out a table on the guaranteed versus unguaranteed portion. Some of the increase in what we've seen in SBSL this year has been from buying back some of that guaranteed portion, which is guaranteed by SBA and not have the same -- not have any losses because of that government guarantee. So that is part of also what you're seeing in terms of activity in SBSL portion?

And we will have that from time to time. Sometimes we'll make decision to buy in the loan back in if we think we can work that out quickly. And sometimes just situation by situation, sometimes we may not buy back in that unguaranteed portion -- I mean, the guaranteed portion in order to work that out. So we did have a little bit of increase due to that this quarter, even though the net increase was a net less decrease.

And I was also hoping you can provide some additional color on the -- how much additional runway you see for loan repricing?

Yes. So we still are in a really good place in terms of the ability to see assets continue to reprice. I think we indicated we're in over around 7.78%, I believe, for new and renewed loans this quarter. So we're putting loans on at a good rate. Our overall portfolio yield is only slightly above 6%. So we feel good about that. I think Derek mentioned the slide in the investor presentation that breaks down our loan and investment repricing. There's obviously repricing in the investment portfolio, too. And what's good about where we sit right now is even with even if we do get some level of rate cut in the second half of the year, we'll still be repricing assets. It will be lower than what we did this quarter in terms of new asset generation, but it will still be significantly higher than where our asset yields are. So we think that still puts us in a really good place to improve margin as we've talked about on the positive side being sort of -- we're kind of at the place where we're not going to get much margin improvement from here without a rate change on the liability side. We still have significant opportunity to get improvement on the asset yield side. Again, we've been getting it on both sides and now it will just be coming from -- more from the asset side. So we do expect that margin expansion to not been quite as strong as it has been this past couple of quarters.

That concludes today's Q&A session. I will turn the call back over to Heath Fountain for closing comments.

Yes. Thank you, everyone, for being on the call today. Thank you, Greg, for being here with us. We appreciate everyone’ support of Colony Bancorp, and we look forward to talking to you again soon. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask you please disconnect your lines.