Colony Bankcorp, Inc.

Good morning, ladies and gentlemen, and welcome to the Colony Bank third quarter 2025 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 assistance, please press star zero for the operator. This call is being recorded on Thursday, October 23, 2025. I would now like to turn the conference over to Brantley Collins, Communications Manager. Please go ahead.

Thanks, Joelle. Before we get started, I would like to go through our standard disclosures. Certain statements that 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 risk 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 third quarter earnings release and investor presentation, which were both 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 third quarter earnings call today. We are pleased to report another quarter of improved operating performance. This is a result of our team members' continued dedication to serve our customers and communities with excellence, and our team's efforts are driving meaningful results. We continue to see improvement in operating earnings driven by net interest margin expansion for another consecutive quarter. We also saw improvement in our operating pre-provision net revenue, indicating continued improvement in core earnings. This earnings improvement along with improvements in our unrealized losses led to a strong increase in tangible book value for the quarter. We believe we are going to benefit from the Fed rate cuts on the funding side, and that will help margin But we do expect the rate of the expansion to be slower than what we saw in the earlier half of this year and to be more in line or slightly more than what we saw during the third quarter. I want to take a moment to reflect on just how much we have improved our margin over the last year. Q3 of 2024 was the low point in our margin. And since then, we've seen our margin expand 53 basis points. through discipline, relationship pricing, loan growth, and the repricing of assets and deposits. I'm pleased that the majority of this increase after tax has fallen to the bottom line as operating ROA improved from 81 basis points in Q3 of last year to 1.06 this quarter. The team has done a great job of allowing margin improvement to increase our earnings while still making strategic investments for future growth. That will continue to be our plan as we move forward and margin expands. We've been very pleased to see meaningful loan growth throughout the first half of this year. While that pace was exceptionally strong, we're now observing that start to settle into a more normalized and sustainable growth rate, which aligns well with our long-term projections and capital planning. This past quarter was around 9% annualized, which is lower than the first and second quarters this year, but for the year, still around 14% annualized loan growth rate. We're seeing customer demand pull back a little, some of which we think is customers being cautious about the economic outlook, and some of which is customers waiting for rates to fall further before they borrow more money. Based on the pipeline, we think the fourth quarter loan growth is going to be lower than this past quarter, which for the year should put us right around our long-term target of 8 to 12 percent a year. Our bankers remain committed to serving our relationship customers. and look to deepen our relationships with a consultative approach that can grow core deposits and increase fee opportunities. Non-interest income remains solid despite a little slowdown in our SBSL and mortgage divisions. On an operating basis, non-interest income increased over $1 million from the prior quarter. In the third quarter, we saw a meaningful increase in fee income as well as interchange income. In addition, financial advisors, colony insurance, and merchant all saw strong increases in revenues as those lines of business continue to grow and scale. Operating expenses were slightly higher this quarter, as we expected and mentioned on the call last quarter. As we invest in talent and see more activity in various products and services, we expect to see some expense increase to go along with that. This additional expense was offset by additional non-interest income and our operating net NIE to average assets improved quarter over quarter by four basis points as we continue to focus on efficiency. While recent headlines have focused on one-off credit events at some larger regional banks, our portfolio continues to perform well. Credit quality remains relatively stable overall. Past due and classified loans both improved quarter over quarter, reflecting continued strong credit discipline across our portfolio. While criticized loans and non-performing assets increased, they remain at manageable levels relative to our overall portfolio. Charge-offs were a little higher this quarter, primarily due to variability in our SBA portfolio, which we've discussed previously. At the bank level, net charge-offs remain at acceptable levels and in line with our expectations. With the federal government currently in the shutdown, we've been closely monitoring potential impacts on our business as well as the impacts to our customers and communities. Our teams are prepared to answer questions and provide guidance and assistance to our customers as needed. We've reviewed our portfolio to identify customers who may be affected, and at this time, we did not expect any material adverse impacts or credit concerns as a result of the shutdown. We remain focused on staying proactive, supporting our customers, and ensuring business continuity throughout this period. The area of our business that is most impacted by the shutdown is our SPSL group, which does government guaranteed lending. In anticipation of a potential shutdown, we were able to seek approvals on a number of loans prior to that shutdown. Our team is currently focused on continuing to develop new business and process loans as far along as possible during this time. Our ability to get final approvals and loans sold will be impacted, but we believe that as long as the government gets back open this quarter, the impact should be minimal. Turning to our pending merger with TC Bank Shares and TC Federal Bank, I'm pleased to report that everything continues to progress as planned. We filed our regulatory applications in August, and our S4 registration statement has been declared effective by the SEC. Both companies are well into the process of shareholder approval, which we expect to have at our meetings in November. We continue to expect the transaction to close in the fourth quarter with system conversion plan for the first quarter of next year. Coordination between our two organizations has been excellent. The teams are working closely together and integration planning is well underway. We're very excited about bringing our companies together and leveraging the strengths of TC Federal's franchise to expand our market presence and create new opportunities for our combined organization. We have made and communicated employment decisions for the combined company post the merger, and we are on track to achieve the financial metrics of the deal that we laid out at the announcements. As we think about M&A going forward, we are optimistic that there will be opportunities for Colony to participate in further M&A next year. We continue to proactively have conversations with banks that we feel would be a good strategic fit with Colony. We also expect that the smooth integration with TC will be beneficial to those discussions. We are also being very strategic about opportunities to grow our customer base and talent pool from the disruption that is occurring in our footprint with the other bank M&A that we are seeing. In terms of talent, we're very excited to welcome Mitch Watkins, a seasoned and well-respected banker to our Columbus, Georgia team. Mitch brings extensive experience and strong local relationships that will further strengthen our presence in this important market. We remain focused on investing in talent acquisition that supports our growth strategy and helps us solidify and expand our market position across our footprint. We look to make very strategic additions where it makes sense in commercial banking, wealth, and mortgage. Lastly, I'd like to take a moment and recognize one of our team members, Hugh Holler, our director of home builder finance, who was recently inducted into the Home Builders Association of Georgia Hall of Fame. This is a tremendous and well-deserved honor that reflects Hugh's deep commitment to this industry and the respect he's earned throughout the home building community. We're fortunate to have Hugh on our team. He exemplifies exceptional customer service, servant leadership, and strong relationship banking, and we congratulate him on this outstanding achievement. With that, I'm going to turn it over to Derek to go over the financials in more detail.

Thank you, Heath. Operating net income increased $252,000 from the prior quarter. This increase is attributed to higher net interest income and operating non-interest income offset sum by increased provision and operating on interest expenses. Operating pre-provision net revenue, shown on slide 11, and in our earnings release under non-GAAP measures, improved both quarter over quarter and year over year. This sustained growth highlights the continued momentum and strength of our core earnings power. Then interest income increased $314,000 compared to the prior quarter by continued asset repricing and loan growth. Our cost of funds for the quarter was 2.03% compared with 2.04% in the prior quarter. As mentioned last quarter, we expected our overall funding costs to remain flat. The Fed cut late in the quarter will have more impact in the fourth quarter, and we expect to see that cost of funds number decline. Net interest margin increased five basis points from the prior quarter, which was a little slow down from the increases we saw earlier in the year. We expected this and mentioned it on last quarter's call. Our margin stands to benefit from the September Fed cut and any other cuts we may get in the fourth quarter. With more normalized loan growth expectations, we don't believe it will be a huge jump in margin quarter over quarter, and we're anticipating that to be a single digits going forward. Third quarter operating non-interest income increased just over a million dollars. Service charge and fee income increased $425,000, with some of that being activity-based and some being a result of a process we went through late in the second quarter to evaluate and adjust our fees. Other non-interest income increased $788,000, driven by increased interchange fee income, improved income from wealth, insurance, and merchant services, as well as a one-time gain from one of our FinTech investment fund partnerships. Slide 20 shows the improvement in third quarter for wealth, insurance, and merchant services. Mortgage and SBA sale activity has been a little slower this year, and mortgage was even slower in the third quarter. This is driven by changes in SBA lending guidelines on the SBA side and a slower housing market on the mortgage side. Operating non-interest expenses were up $624,000 quarter over quarter, reflecting continued investment in our people and growth initiatives. Compensation and benefit costs were higher in the quarter related to strategic hires to support our growth and business development strategy. A portion of those new hire expenses are short-term salary guarantees for commission-based employees, and those will end in the fourth quarter. Technology and innovation remains a focus for our long-term growth, and technology expenses were higher quarter over quarter as we continue to invest in ways to improve long-term efficiency, and provide for a state-of-the-art customer experience. We remain very disciplined in managing expenses and maintaining our focus on efficiency. We are confident in our ability to balance cost control with the strategic investments that position us for long-term organic growth. On an operating basis, the increase in non-interest income more than offset the increase in non-interest expense. Our operating net non-interest expense to average assets improved four basis points from the prior quarter to 1.48%. On a go-forward basis, we still target a net NIA to assets of around 1.45%. Fourth quarter expenses will likely include at least one month of TC federal expenses post-merger. Our systems conversion is planned for the first quarter, and we plan to achieve our targeted cost saves in the second quarter and beyond. One-time merger-related costs during the quarter were $732,000, and that was an adjustment to operating income. Also during the quarter, in our 10Q last quarter, we disclosed a wire fraud incident where the company was the target at losses total of $2.9 million. Upon recent new information, a portion of that loss that we believed to have been fully covered by insurance has become disputed, and in accordance with accounting standards, This quarter, we recognized a $1.25 million loss related to the disputed coverage. This is reflected in our adjusted income. All other coverages remain undisputed. We do not expect any other losses related to this matter and will continue to pursue all avenues for recovery. Any recovery will be recognized as non-operating income in future periods. Provision expense totaled $900,000 for the quarter, an increase from the prior quarter driven by loan growth. and charge-offs in our SBSL division. As we've mentioned before, SBSL charge-offs can have some variability, and that's what we experienced this quarter. Many of these SBSL charge-offs are related to older loans before we tighten credit requirements and often involve lower SBA guarantee percentages. This quarter represents the peak for charge-offs at SBSL. We do not expect them to increase from here. These are primarily variable-rate loans, so declining rate environments should provide some relief going forward. On the bank side, charge-offs remain low, and past dues improved quarter over quarter. We've seen more activity in loans moving in and out of classified and credit size, and our team has done a good job of working these loans. There's been a lot of recent media attention on credit challenges at some regional banks, particularly related to shared national credits. I want to note that we do not participate in any shared national credits, and our exposure to participation of loans is very limited. Our lending strategy remains focused on relationship-based, locally originated credits, where we know our customers and markets well. Loans held for investment increased $43.5 million from the prior quarter. As Heath mentioned, we are seeing that growth rate moderate some for the early half of the year, and that will put us near our long-term targeted growth rate. Slide 34 shows our weighted average rate on new and renewed loans of 7.83% during the quarter. when you compare that to our repricing schedule on slide 36 we still have opportunity to gain yield on maturing fixed rate loans as well as investments cash flow even if rates move down some from here total deposits increased 28.1 million during the quarter part of that growth reflects our strategic use of brokered funding to replace seasonal municipal deposit runoff we expect those municipal funds to return in the fourth quarter as tax revenues are we've typically experienced. We remain focused on building and deepening customer relationships that bring in high-quality, lower-cost deposits, which continue to be a core priority for our growth strategy. During the quarter, we sold securities for a pre-tax loss of around $1 million that netted close to $75 million in proceeds. Under the assumption of using half of those proceeds to fund loans and half to increase liquidity, our modeling indicated an earn-back of less than one year. The book yield sold on those investments was close to 3.16%, so there's opportunity to pick up meaningful yield there and increase interest income. We will continue to evaluate the need for future sales, as well as consider a larger transaction as part of those evaluations. We did not repurchase any shares during the quarter, but continue to review the need for any repurchases based on capital needs and market conditions. This week, the Board also declared a quarterly dividend to shareholders of 11.5 cents per share. We're still in the process of filing a new shelf registration as part of our capital management strategy and expect that to be filed very soon. Our TCE ratio at the end of the quarter was 8% compared to 7.43% for the same quarter last year. Tangible book value per share increased to $14.20 from $12.76 a year ago, reflecting consistent growth in tangible capital and our continued success in building long-term shareholder value. Slide 20 highlights our quarter-over-quarter pre-tax profit for our complimentary business funds. Mortgage had a slower quarter with production being down slightly compared to the second quarter. Expenses were a little higher due to some strategic hires of mortgage lending officers and the upfront cost and short-term salary guarantees associated with those hires. We believe these new MLOs will drive profitable growth for our mortgage division. The housing market and volatile interest rates have also caused some headwinds that contributed to the lower production during the quarter. SPSL was flat compared to pre-tax income in the prior quarter. The increased charge-offs were offset with decreased expenses. And as we see primary move lower, that should reduce some of the stress on the charge-off side. Marine and RV lending has had a good year and continues to improve. Pre-tax income is up $100,000 quarter over quarter. Loan balances are now around $90 million and have increased $45 million year over year. We are looking into the potential for pooled loan sales, which could provide a good source of non-interest income. Pre-tax income for both merchant services and colony wealth advisors increased meaningfully from the prior quarter as those business lines continue to grow and perform well. We are excited about the performance and outlook of these two lines of business. Colony Insurance closed on the OOB acquisition in May, and the second quarter was a focus on integration. The team is now focused on growth, referrals, and sales targets, with income increasing in the third quarter and continuing to scale. And that concludes my overview, and now I'll turn it back over to Heath before we take questions.

Thanks, Derek, and again, thanks to everyone for being on the call today. We're very pleased with our performance this quarter. That's all of our prepared remarks, and with that, I'll call on Joelle to open up the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys.

One moment, please, for your first question. Your first question comes from Dave Bishop at Hovde.

How about given the disruption in D.C., seeing any trickle down to your borrowers and local economy?

All right. Well, appreciate Dave getting that question in. As I mentioned earlier, we are on the lookout for that. We really don't see a lot at this time. We have provided our team and our customers with resources to, you know, to help out as we see things. And we've scrubbed the portfolio to see if we have any exposures that we're concerned about. But at this time, we don't think there will be a material impact. We don't see any issues arising. Of course, I did mention, you know, the SPSL team and the government guarantee program. loans and what, you know, that there could be a potential impact there just as if it drags out longer. But we think if we get a resolution within, you know, the next little bit, it shouldn't have too much of an impact on Q4.

So, you know, feel pretty good about where that is overall at this time.

Related to loan pricing, what is the average roll-on versus roll rate this quarter and how NIM Outlook looks?

Yeah, absolutely. So I'll take that one. Great question. So when you look at the roll-off yields from our previous repricing schedule or our previous released investor presentation for the prior quarter, we had four quarter roll-off yields in the 5% range. And so our put on yield for the new quarter is also in our investor presentation. And it was the new and renewed rate was 7.83% for this quarter. So you can see there we have some meaningful pick up in yield. And even with rates moving down a little bit, we'll continue to see that. That will drive some net interest margin, growth, we expect that net interest margin growth to be, you know, both on the cost of fund side and the asset repricing side. But ultimately, going forward, we expect a modest growth in a single-digit range, but a little bit higher than what we saw this past quarter as we take advantage of some of those bad rate cuts.

Any NDFI loan exposure as well?

No, that's a great question. I appreciate Dave getting that question in. And we do not have any meaningful exposure to that. And I know that's been another area that we've seen a lot of concerns about and seen some situations as some other banks, larger banks have reported. And back to our comments that we made earlier, you know, our real focus in our organic growth strategy has been to bank customers that we know that are in our footprint, that we have a relationship with, or even that our bankers have maybe had relationships with at other banks in the past. So we really focus on the customers we know and the kinds of business that we think we can understand and adequately assess the credit risk.

There are no further questions at this time. I will now turn the call over to Heath for closing remarks.

Okay. Well, thanks again, everyone, for being on the call today.

We're really pleased with how the quarter went. and excited about the things happening in Q4 with TC and continued improvement in our margins. So we're very excited about where Kalani's headed, and we appreciate you being on the call today.

Thank you.

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