Colony Bankcorp, Inc.

Good morning, ladies and gentlemen, and welcome to the Colony Bank Quarter 4 2024 Conference Call Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, January 23rd, 2025. I would now like to turn the conference over to Brantley Collins. Please go ahead.

Thanks, Rhi. 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, Brantley, and thank you, everyone, for joining our fourth quarter earnings call today. We're really pleased with our results in the fourth quarter and many of the accomplishments we've made over the course of 2024. Our team worked hard throughout the year to make sure we stayed on track and continued making progress towards our performance goals. This allowed us to finish the year on a positive note and set a foundation to keep that momentum going in 2025. As we mentioned on last quarter's call, we felt that margin had bottomed in the third quarter, and in the fourth quarter, margin did turn the corner and gain 20 basis points up to 2.84%. This led to an increase in net interest income of about $1.9 million quarter over quarter. This was a combination of easing from the Fed, reduced competition and short-term funding costs, as well as growth in non-interest bearing and low-cost interest bearing DDA accounts. Total deposits increased $43 million from the prior quarter and primarily in those low-cost deposit categories. Seasonally, the fourth quarter is where we typically see an increase in our municipal deposits and ag-related deposits. We generally see those balances start to decrease starting in the first and second quarter. On our last call, we also mentioned that we anticipated some loan payoffs of larger loans in the fourth quarter, and that did occur, contributing significantly to our decrease in loan balances for the quarter. These payoffs were at lower rates, so the impact to asset yields was minimal. We are seeing increased activity from our customers, and our loan pipelines are growing, so we do expect to see loan growth return in 2025 and be around 4% to 6% for the year, with more of that growth occurring in the second half of 2025. With M&A activity picking back up and a focus going forward of investing in long-term sustainable growth of the organization, we will be opportunistic in hiring an addition of bankers in our current markets and markets that complement our footprint. Non-interest income increased during the quarter led by our SBSL division. Our complementary business lines are still seeing progress with many having improvement in the fourth quarter compared to the fourth quarter of the prior year. Mortgage did see some slowdown in the quarter due to the significant increase in 10-year treasury rates during the quarter. Volume for SBSL and mortgage are seasonal, and we expect the first quarter 2025 level to be less than what we saw in the fourth quarter for both of those lines of business. We're also proud to announce another consecutive year of increase in our dividend. We feel the quarterly dividend is an important part of our overall return and value creation for all of our shareholders, and it's particularly important to our long-term community shareholders and our employee shareholders. Earlier this month, we announced some changes to our executive team with the promotions and additions of Ed Canup, Daniel Rents, and Laurie Sinn. Their leadership has allowed us to be successful with many of our initiatives over the past few years, and it's that leadership that will continue to drive progress towards achieving our goals. Our president, Dee Copeland, has also taken on additional responsibilities that will support growth and operations. Along with these changes, my focus will shift more to strategy, business development, M&A, and keeping us on the path to reaching our long-term goals. These leadership transitions will drive a better customer experience, enhance innovation, improve operational efficiency, and ensure that we can grow in the right ways going into 2025 and beyond. We also announced in the fourth quarter that we transferred the listing of our common stock to the New York Stock Exchange. We are excited about our partnership with NYSE and believe it'll be beneficial to our shareholders and stakeholders in the long term. Our team had a lot of success in 2024, despite many challenges and headwinds in the industry. We're optimistic as we head into 2025 that we have a good footing that will allow us to reach our goals in the short and long term. In both 2023 and 2024, our team was able to focus internally on operational efficiency, customer delivery, and technology enhancements. With the foundation we have been able to create over the past two years, Going into 2025, our focus will be on growing the organization in the right way that enables us to achieve our overall internal mission, which is to build a sustainable, high-performing, independent bank. With that, I'm going to turn it over to Derek to go over the financials in more detail.

Thank you, Heath. Both GAAP and operating net income increased in the fourth quarter, with operating net income increasing by about $1.8 million as a result of increased net interest income and increased non-interest income. Interest income increased by $1.4 million in the fourth quarter. Interest income on loans increased, although the overall balances declined. The increase is a product of continued renewals at higher rates and new production at rates that are higher than the portfolio average. Interest income on our cash balances with banks also increased from the prior quarter and was due to increased balances as a result of deposit growth, loan payoffs, and investment sales. Total interest expense declined about $544,000 from the previous quarter, and the interest expense on deposits was the bulk of that, with a decline of $498,000. As Heath mentioned, net interest income increased over $1.9 million, and margin increased 20 basis points to 2.84%. Overall cost of funds was about $219,000 in the fourth quarter, and that was down from our high in the third quarter. of 232. This was driven by both the rate cuts and growth in low or no-cost transaction type DDA accounts. Heath mentioned that these are typically seasonal and balances will start to decrease sometime around the second quarter. In terms of margin outlook, we expect to see a modest increase in margin throughout 2025, but quarter over quarter, not as much as we saw during the past quarter. The market expects the Fed to move slower on rate cuts in 25, and the fourth quarter DDA balances will seasonally decline, and these will both have some impact on the increases in margin that we do see. Fourth quarter operating non-interest income increased 174,000 and increased over 1.6 million when compared to the fourth quarter of 2023. Mortgage revenue decreased about 267,000, driven by lower sales and increases in the 10-year treasury yield. Mortgage production and sales are highlighted on slide 15, and although sales were down quarter over quarter, production has been steadily increasing. We expect mortgage to be profitable in 2025, but those levels will be dependent on rates. Our SBSL division had a great quarter, with revenue increasing 536,000 quarter over quarter, Production was a little higher in the fourth quarter, and we expect to see the first quarter of 2025 to be softer than what we saw in both the third and fourth quarters of 24. Seasonally, it's not unusual to see a slowdown during this time of the year. SVSL division production and sales volume is broken down on slide 14. Fourth quarter was the highest quarter for sales, and we are likely to see that decrease in the first quarter or two of 25. Operating non-interest expenses increased $700,000 from the prior quarter. There were some increases in production-related compensation, but primarily the increase was due to implementation costs for our new online banking platform. Operating net NIE to average assets was 1.35% for the quarter, and our target has been around that 1.40%. As we see margin and net interest income increase, we're going to look at a target that's closer to the 1.45% going forward. We will likely see non-interest expenses around 21 million per quarter or slightly higher as we shift back to a focus on growth and investment for the long-term success of the bank. Our tax rate in the fourth quarter was lower than previous quarters due to donations made to organizations in our communities, and we received state tax credits for those donations. The donations totaled over $450,000 during the quarter and were dollar for dollar credits. We anticipate a 2025 effective tax rate around 21%. Overall for 2025, given the current outlook, we see being able to reach our near-term ROA target of 1% in the fourth quarter of 2025 and be able to maintain that going forward. The first quarter of the year is generally impacted by fewer number of days and seasonality among our business lines. We do not expect the first quarter of 25 to be as strong as the fourth quarter of 2024, but we do see modest progress building after the first quarter to get us to that 1% ROA in the fourth quarter of 2025. Provision expense totaled $650,000 for the quarter, a slight decrease from the prior quarter. Non-performing loans declined And net charge-offs were a little higher than previous quarters, primarily due to one loan that was charged off on the bank side, and that was about $750,000. Overall credit quality remains strong, and we haven't seen anything that indicates otherwise. Total loans held for investment decreased $43 million, and as we mentioned last quarter, we expected a few larger payoffs, and those were drivers of the decline. Loan production in the fourth quarter in terms of new funded commercial loans was about 15% higher than the year-to-date average for the first three quarters of 2024. So we're still seeing increasing levels of loan production. We do see activity in the pipeline for 2025 and expect to see a shift back towards traditional levels of loan growth later in the year. The first quarter or two may be a little slow to flat, and then we'll see an increase in the back Total deposits increased $43 million, and that was driven by expected fourth quarter seasonality, primarily on municipal deposits. We had maturities of broker CDs around $11.5 million. So our customer deposits actually grew by about $54 million, and that was in primary low and no-cost transaction on DDA accounts. Our overall cost of funds decreased 13 basis points, and the factors behind that were really the cuts from the Fed, growth in low-cost accounts, and just cooling deposit competition throughout our footprint. We still have many opportunities to see the cost of funds decrease, although with fewer Fed cuts on the horizon and seasonal outflow of muni deposits in Q1 and Q2, that decrease will likely not be as much as we experienced in the fourth quarter. Again, this quarter, we sold some investments for a loss, and those are summarized on slide 32. The transaction was very similar to what we've done in previous quarters. Since those sales, Rates on the longer end of the curve have increased and short-term rates have decreased. Margin has started to improve, and our on-hand liquidity position heading into 2025 has improved when compared to the start of 2024. With that, we intend to pause our quarterly security sales going forward. We will continue to analyze market conditions and our balance sheet to determine if it's appropriate to pick those back up at some point, but we don't anticipate that in the near term. During the quarter, we repurchased 35,000 shares at an average price of $15.40 as part of our stock repurchase program. In December, the board authorized the extension of that repurchase program through the end of 2025. Additionally, yesterday the board declared a quarterly cash dividend of 11.5 cents per share, and we're proud to continue another quarter of dividends. Slide 13 provides a breakdown of pre-tax income for our complimentary lines of business. Overall, the fourth quarter of 2024 was a net improvement on a pre-tax basis of close to $1.7 million compared to the fourth quarter of 2023. As I mentioned earlier, mortgage has had a challenging quarter with the increase in interest rates, but ended with an overall profitable 2024, which was a considerable improvement over 2023. Merchant services are still right around break-even, but we feel good about the amount of referrals coming from the bank and expect to see that continue. Quality insurance showed an improvement in the fourth quarter as we begin to see the impacts of the removal of some underwriting restrictions in the industry that were put in place earlier in the year. Quality insurance had its best month on record in December as it relates to the number of units of production. That concludes my overview, and now we'll turn it back over to Heath for any final comments before we take questions.

Thanks, Derek. That wraps up our comments. And with that, I'd like to call on Rhi to open up the line for any questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchstone phone, and you will hear a prompt that your hand has been raised. Should you wish to decline from the pulling process, please press the star followed by number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from David Bishop from Havdi Group. Please go ahead.

Hey, good morning, guys. This is John on for Dave. Good morning, John. So first off, congrats on the quarter and congrats to Ed, Daniel, and Lori on the promotions. So just starting off and really appreciate all the great color you gave around loan growth and the guidance you provided in the release and in your prepared comments. I guess I'm just curious as to the growth that you're envisioning in the back half of 2025. Is that coming from any specific segments? Do you envision any particular areas of your business being stronger than others?

Yeah, great question, John. So just a little color on the overall, you know, historically and part of our long-term plan is 8% to 12% organic growth, you know, leading into the – Rate increases that started happening in 2022, we were seeing those levels are higher of organic growth. And then, of course, as things cooled off and rates started to increase, we saw that slow down a pretty good bit. So we're thinking in that 4% to 6% range for the whole year with that coming in the second half of the year and being in that by the end of the year, that 8% to 12% run rate. so that leading into the following year, we would return sort of back to historic levels. There's no particular one segment in which we think, you know, or one particular industry focus or anything like that. We have seen CRE, you know, decline in our portfolio, just payoffs and natural declination in there. But we, you know, so we think we would see that area, you know, just because it is such a big concentration, it is a big area that most community banks focus in. We would expect to see that grow, but even within that, not anything in particular, you know, no particular verticals or anything like that. We kind of expect to see across the board And as Derek mentioned in his comments, we are seeing that activity pick up. We've been seeing that pick up for a little bit now. But post the election, I think we saw even more activity start to happen with our customers.

Fantastic. That's very, very helpful. Thank you. I guess maybe just pivoting to expenses now. I appreciate the color on anticipated hiring in 2025 and the NIE guide of 140 to 145. But maybe can you just help us think about the cadence of the hiring in 2025? And, you know, will that be lumpy in a few quarters or is it pretty much just a steady increase in expenses throughout the entire year?

I think we will see it fairly steadily. Although, you know, we'll say we do plan to be opportunistic when it comes to hiring talent. And as I mentioned in my comments, you know, we are seeing the pickup in M&A and historically in my career, we've seen hiring around M&A as teams become available that maybe weren't before. So you could see a little bit of lumpiness, but we don't expect you know, huge amounts of that. We feel good about our current production team and their ability. And so we're not talking about, you know, huge teams or anything like that. I think to get back to our growth goals, but more sporadic here and there fill in and adjacent markets, you know, and some within our footprint. So I think it'll be fairly steady, but at that same time, if we have the opportunity, to invest and it's possible that it's lumpy, but I don't really foresee it that way. As I mentioned in my comments, we're very focused on growing in the right ways and we've taken really good strides in profitability. And so we want to make sure that we're able to get the right terms and pricing on our loans and that we hire the right bankers to make sure we keep making progress on our profitability goals as well.

Fantastic. Very, very helpful colors. Thank you. And maybe just one more, if I may, on broader strategy. So many great, you know, tech and data initiatives going on at the bank right now. Can you maybe just share your thoughts on a few of those that you're most excited about, you know, moving into the new year?

Yeah, so a couple of thoughts around technology. We are, you know, we did in the second half of last year roll out a new digital banking platform, and that got us to, you know, a really good base level and a more nimble platform. So we're really excited about the opportunities to plug in other things to that that are, you going to be needs of our customers, especially on the treasury side. So we think we have a lot of opportunities there. And then on the efficiency front, we have a real focus on improving our processes internally and that having a positive impact on the customer experience and on operations, really allowing us to grow and scale. And so And we mentioned this in our investor presentation, but looking, we've got some robotic process automation that we plan to do. One project that will be coming up middle of the year and hopefully a few more later in the year. And what we're really focused on on the operational efficiency side with RPA and just other general process improvement is the ability to grow and scale. So it's not really things we expect to like have an immediate impact on lower and operating expenses, but what we think it will allow us to do as we pick up growth to do that in a more efficient manner going forward so that we're able to grow without adding relative amounts of expense. So that's part of our efficiency and profitability plan. So those are just a couple of things we're really excited about. We've got other things that we're working on as well around digital account opening and expanding that. So got a lot of good stuff going on on the innovation and technology side that I think the two keys to that are improving customer experience and the efficiency to be able to grow and scale more profitably.

Excellent. Thank you for taking my questions and congrats on the great quarter, guys.

Thank you, John. Appreciate it.

Thank you. As a reminder, if you wish to ask a question, please press star one. Okay, so there is no further question at this time. I will now turn the call to Heath Fountain. Please continue.

Thank you, Rhi, and thanks, everyone, for being on the call today. We appreciate your support of Colony Bank Corp, and we appreciate you taking the time out today and look forward to speaking with you again in the future. Thank you.

Thank you. Ladies and gentlemen, today's conference call has been concluded. Thank you for your participation. You may now disconnect. Thank you, everyone.