Colony Bankcorp, Inc.

Thank you. Thank you. I would now like to turn the conference over to Brenda Collins, Communications Manager. You may begin.

Thanks, Karla. 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 All of which are available on our website. I would also like to add that during our call today, we will reference our second quarter earnings release and investor presentation, which were both filed yesterday, so please have those available to reference. I'll call over to our Chief Executive Officer, Heath Fountain.

Thanks, Brantley, and thank you to everyone for joining our second quarter earnings call today. We are pleased to report continued improvement in our financial performance for the quarter and I'm proud of our team members for all the work they are doing to help us achieve our objectives. A major highlight from the quarter was the announcement of our partnership with First Reliance Bank. Integration planning is already well underway with both management teams working closely together to ensure we remain on track for a legal close in the fourth quarter. On the regulatory front, our merger applications have been submitted and we expect to file the S-4 in the near future. The second quarter also marked our first full period of performance following the successful TC federal systems conversion and customer integration in Q1. Our expectation was to achieve a 1.20% operating ROA after fully realizing our targeted cost savings and we were able to hit that 1.20% operating ROA this quarter. We believe this puts us in a good position to improve on that operating ROA going forward. Operating net income increased over $1.5 million from last quarter. The primary drivers of the increase were continued margin expansion, improved operating non-interest income, as well as decreased operating non-interest expense. Loan growth during the quarter was about 8.5% annualized as we saw an increase in production compared to the first quarter. This brings us up to 7% annualized loan growth year-to-date. The weighted average pricing on new and renewed loans remains steady, actually increasing slightly from the first quarter as we keep pricing discipline a priority. I'm proud of our team's efforts on pricing, which is one of the key factors that drives our continued margin growth. The lending environment is competitive and a rising rate outlook has resulted in some softening pipeline. While we previously expected loan growth to track towards the lower end of our 8% to 12% target, our commitment to disciplined pricing and strong underwriting standards means near-term growth could land slightly below our 8% threshold. We believe in the short term that achieving our financial objectives is important. and achieving organic growth near the low end of our range helps us achieve our long-term financial goals rather than growing in a way that puts pressure on our financial performance or diminishes the strength of our balance sheet. We saw a slight decline in total deposits this quarter. While this is a normal seasonal trend for us, deposit landscape across our footprint does remain competitive. We have managed to maintain a steady cost of funds and our team members continue to focus on building deposit-first relationships with a focus on operating accounts and primary consumer account relationships. Operating non-interest income increased by about $950,000 from the first quarter, which was led by increased revenue from many of our business lines. and operating non-interest expense declined more than $500,000. Our SPSL division had improvement on a pre-tax basis as shown on slide 19. However, we still have a lot of opportunity for more improvement and expect that to start to show over the next few quarters. In addition to finding the right partners to grow with through M&A, organic growth is also a key part of our long-term strategy. We operate in some of the best markets in the Southeast and will continue to focus on growth across our existing footprint. Our upcoming merger with First Reliance will add even more markets that are ideally suited for organic growth. During the quarter, we added several experienced bankers to our team that will help us continue our focus on organic growth. In our Columbus market, we added Colby Carden as a private banker. In our Douglas market, we added Lee Taylor as market president. In our Savannah market, we added Phillip Anderson as market president. And in our Jacksonville MSA, we've recently added Jeff Udy as regional president with a focus on building core customer relationships in the suburban growth markets west of Jacksonville. These additions represent our commitment to organic growth by building core relationships in existing markets and further expand our market share. As we work towards reaching our M&A milestones with First Reliance over the next several quarters, our focus remains both on a seamless integration and driving organic growth across our core footprint. The First Reliance team is incredibly excited about our partnership. They see the clear value in what we can build together, and their leadership is fully energized by the operational scale and broader opportunities the combined company brings to both our customers and our team members. With that, I'll turn it over to Derek to go over the financials in more detail.

Thank you, Heath. Operating net income increased to $11 million in the first quarter, and operating pre-provision net revenue increased approximately $2.2 million to over $16 million in the quarter. Earning asset yields continue to increase, driving margin higher quarter over quarter to 3.52% last quarter. Net interest income increased approximately $700,000 during the quarter and is attributable to an earning asset yield increase of six basis points driven by loan growth and pricing on both new and renewed loans. On slide 36, we show the weighted average rate on new and renewed loans by quarter. That rate for the second quarter was 7.14%, and that's up from 7.11% in the first quarter. To Heath's point earlier, pricing discipline is a key focus of ours, and that will continue to help with us gaining ground on margin. Our overall cost of funds for the second quarter was 1.95%, which is up one basis point from the first quarter, so relatively flat overall. We still expect to see modest increases in margin of a few basis points per quarter for the next several quarters. However, the competitive environment for both loans and deposits will really determine how much increase we see and could potentially slow that increase down. If our cost of funds remains stable on the liability side, we still have some upward repricing on the asset side that we will be able to capture to improve margin. The repricing schedule is shown on slide 38 in the deck. Operating non-interest income increased to $11.6 million, and that's up from $10.1 million from the same quarter of last year. On slide 19, we show pre-tax income by business line, an improvement in both quarter over quarter and compared to the same quarter last year. Colony Financial Advisors' pre-tax income increased in the second quarter, and the second quarter was the first full quarter after our transition from a managed program to a dual program where Colony receives more of the commissions and fees but also takes on additional related expenses. Assets under management are up almost 15% quarter over quarter and are currently at $637 million and that's up from $555 million in the prior quarter and up from $219 million in the second quarter of last year. Mortgage pre-tax income improvement was driven by higher production and sales in the second quarter as we entered a period of more seasonal activity. Quality insurance had a better quarter with more premiums in force and higher revenue. Pricing on policy premiums has been a challenge for the insurance industry. We've seen that ease some and remain optimistic for continued improvement and positive impact on both customer retention and acquisition. Bank referrals are up year over year. and we see that as good potential for increased sales revenue. Our SPSL division improved from the prior quarter on a pre-tax income basis. However, revenue from gain-on-sell activity was softer. As Heath mentioned, we expect to see improvement there in the coming quarters. Charge-offs in SPSL were similar to the first quarter and we're seeing those stabilize with expected improvement on the horizon. There was an outsized bully death benefit during the quarter of about $700,000, and that was an adjustment to our operating earnings. Operating non-interest expenses declined about $550,000 from the prior quarter. This is largely a result of post-merger integration cost savings, and we expect expenses to stay around this level for the third quarter and then increase after legal close with first reliance. Operating net non-interest expense to average assets was 1.51% in the second quarter, an improvement from the first quarter. We're still targeting a 1.45% or better net NIE for the long term, and getting to that 1.45% will be driven primarily on the income side. We do expect that metric to increase again post-legal close with first reliance and then trend back towards our target later in 2027. and Customer Integration. We'll be working to capture as much expense efficiency as possible immediately following the legal close of first reliance in the fourth quarter. However, there are a lot of our identified cost savings that we will not be able to capture until we get through the systems conversion in mid-2027. Provision expense totaled $1.9 million and was a slight increase from the prior quarter. Net charge-offs were similar to last quarter and were primarily from SPSL. Criticized loans remained stable and classified loans declined by about 14% or 5.6 million. Loan sales for investment increased 51.4 million or about 8.5% annualized. And although we saw growth across several markets in our footprint, the Columbus and Tallahassee markets were the top two in terms of loan growth in the second quarter, and growth in our Valdosta market has been strong year to date. Total deposits declined 76.2 million, and included in that reported number was the payoff of about 13.4 million of brokered deposits. It is not unusual for us to see seasonal deposit runoff this time of year, and some of that was right around the end of the quarter. If you look at our average balance of total deposits on page 9 in the earnings release, you can see that the average was stable with a slight increase during the quarter. This week, the board declared a quarterly cash dividend of $0.12 per share. TCE at the end of the quarter was 8.99% compared to 8.49% in the first quarter. Tangible book value per share also increased to $15.12, and that's up from $14.65 in the prior quarter. We did not purchase any shares in our stock buyback plan during the quarter. However, we view our buyback plan as an important tool to managing capital. and look to be consistently buying back shares over time as well as being opportunistic during market pullbacks. Yesterday, Perks for Lives also reported their earnings for the quarter. Their release is available on our website and overall they had a solid quarter. They reported operating EPS of 38 cents, operating ROA of 1.10% and operating earnings of 3.1 million, which is a meaningful improvement compared to the same period last year. They also had a quarter of good loan growth, and that came in a little higher than our forecast. Pressure Alliance has a strong lending team and great markets that will help drive organic loan growth going forward as a combined company. Their results were largely in line with our model forecast, and so we do not expect any adjustments to the pro forma information we previously released. That concludes my overview, and now I'll turn it back over to Heath before we take questions.

Thanks, Derek, and thanks to everyone for being on this call today. We're pleased with our performance this quarter, which met our internal expectations for performance and exceeded external expectations. I am proud of how our team executed on achieving our desired results from the TC federal merger, which positions us well for our upcoming merger with First Reliance and demonstrates the strength of our M&A strategy to gain scale and improve operating performance. Further, our expense and pricing discipline set us up well to finish the year strong. That wraps up our prepared comments. With that, I would like to call on Pruella to open up the line for questions.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press the star 1 on your telephone keypad, raise your hand, and join the queue. If you would like to require a question, please press the star 1 again. With that, our first question comes from the line of David Bishop with Hovey Group. Please go ahead.

Hey, good morning, Heath and Derek.

Morning, Dave.

Morning. Hey, Heath, just curious, you know, you mentioned, you know, some of the seasonality on the funding side, on the deposit side. Just curious, you know, where does, you know, sort of the deposit generation rank in terms of You know, priorities and when you're looking to, you know, list out new backers within your Georgia and Florida markets, is that sort of a key priority there? Are you still looking for, you know, primarily, you know, commercial, you know, asset generators? Just curious how you're thinking politically about the deposit generation engine.

Yeah, Dave, great question. And while they're both important, our team clearly recognizes that deposits are priority one. That's been our major focus and that will continue to be our major focus. I think that it's important for us to go out and secure key commercial relationships, but also to have the ancillary consumer business that comes along with those. So that's a priority. We mentioned, or I mentioned in the comments about adding a Private Banker in Columbus. We look to add some private banking resources in other markets as well. And that is primarily a deposit play and looking to grow assets under management for Colony Financial Advisors. So, you know, it's a real focus. We've got a lot of great wins in that area. And I think that's really important, especially in an environment where there's a lot of rate sensitivity on the deposit side. So I would just say going after key deposit relationships is priority one.

Got it. And then you recognized achieving the 120 operating ROA target. Just, you know, putting aside the benefits from the first reliance deal, Just organically, you know, where would the incremental improvements in terms of profitability come from here? Is it, you know, generating more from the fee income platform? Sounds like, you know, expenses are probably leveled out. Just curious where the organic improvement comes from a profitability standpoint.

Yeah. So, definitely, you know, we think we have opportunity to improve margin. I think as we've indicated and as we show in our deck, we still got a lot of asset repricing that is going to be beneficial to us. And so, you know, that plus the growth provides opportunity on the asset side. As you mentioned, as we mentioned the call on the liability side, we've about hit where we are. On the fee income side, there's a lot of opportunity. I mentioned, you know, our SBSL being down a little bit. I think we have a big opportunity there, and I think you'll see that pipeline and those revenues increasing. Opportunity on, again, on all the fee income businesses, you know, this second half of the year is usually better for mortgage than the first half of the year. Of course, as we get to the end of the year, we have the opportunity to add the First Reliance Mortgage and Colony together, which will create some greater opportunity for scale. So we're excited about that. We continue to see assets under management grow with our financial advisors team, and I think we'll see that continue. Insurance, we talked about a lot of good momentum in that area as well. And then in terms of other account generated fees, deposit service charges, debit, our merchant, those are all continuing to do well and continuing to grow. So I feel like we're in a position where not all of those things have to hit just right to create improvements in ROA. but I think we'll see continued improvement across the FISA.

Awesome. Great color. Appreciate the color. I'll hop out of the queue and get back on.

Thank you. And your next question comes from the line of Christopher Murdoch with Green Capital. Please go ahead.

Hey, good morning. I wanted to get back to the First Alliance merger and just better understand kind of how much of their Low growth is going to impact earnings in terms of taking existing clients and doing more with them. Is any of that in your numbers, or would that be upside as next year comes into focus?

Yeah, Chris, that's a good question. You know, we looked at really, and if you look like at this quarter, the organic loan growth that the First Reliance team had, it was strong and similar. to hire loan growth. So I think that they have the opportunity even without, you know, adding the additional capacity, you know, for growth at similar levels and within the range of our organic growth forecast of 8 to 12 percent a year. So there is upside opportunity, I think, just given the larger balance sheet of the combined company. Larger lending limits will be effective in a number of those larger markets that they're in. So I think there is upside to what we forecasted. I think we tried to be conservative, but I think there is upside to generate assets at a little bit faster level over time than what we projected.

Good. And then if we go back to the merchant servicing business or services business, as you've been expanding there for several quarters, is that ahead of schedule? And then what is the opportunity as you bring in First Reliance for that business line too?

Yeah, the merchant services is going well. The great thing about that business is, you know, it's a lot of recurring revenue and we just continue to see that build. Our team does a great job with servicing on that, and that's where we get a real advantage, I think, over our competition. There's a lot of moving around in that business, so other providers, the clients see their primary contact change a lot, and with Colony, it's very consistent. So, we do have the opportunity that's been an outsourced product at First Reliance, and there's not a lot of customer penetration into that. So, we think that is a big opportunity to grow. And then, as well, this has been a great deposit account acquisition tool to us, being able to go in. Very easy for us. A lot of our prospects are disenfranchised with their current merchant provider, and we're able to go in and start the relationship with that and then continue to grow the relationship, open a deposit account for settlement when we go in with that business. So that's a real positive, both just from the fee income side, but also as a primary deposit relationship acquisition tool. And it's been even better, you know, last year we put our whole banking solutions group together where we have what I would call the payments group. It's the group focused on treasury, merchant, card, any way commercial customers get money into their account from their customers. and our their account to pay their vendors and their employees. And so as we put that group together, we found it's easier for our bankers to go calling on customers and prospects, have one point of contact internally. And then our advisors in that group are really looking to solve the problems that the customers are having. and I just sell a product or service and so that consultative approach I think is shown well and I look forward to that whole group being able to further support that. We'll have First Reliance team members become part of that group that are doing treasury services now but being able to serve that already know those customers and then being able to serve more products and service to them so I think there's a lot of upside opportunity there.

Great, Heath. Thanks for all that background. And my last question just goes back to kind of the progress you keep making in towns like Columbus. And I wanted to kind of understand, is the opportunity in Columbus as great as it is in Savannah and perhaps as you've been realizing in Augusta, just using those kind of tree as examples of expanding?

Sure. Yeah. No, that's a great question. And there is a lot of opportunity in Columbus. Obviously, our president, D. Copeland, is in that market. We've added to that team in that market. Of course, you have the Synovus Pinnacle deal, which is creating disruption, and they have an unbelievably outsized share of the market there in Columbus, and so whether it's them or other larger regional banks. We see that as one of our primary opportunities for growth and one of the ways that we can go out and acquire customers. And so you look at markets like that, you look at markets like Valdosta and Tifton and Albany as well, where some of these regional banks have large market share. It's an opportunity for us to grow Excellent. I'll leave it there. Thank you for hosting us this morning.

Thanks, Chris.

And we do have a follow-up question coming from David Fisher. We'd hope they approve. Please go ahead.

Yeah, Heath there. Just wanted to circle back on the loan guidance. Just curious, does that reflect more sort of a cautiousness, you think, in your outlook, or does that reflect, do you think, more borrowed behavior in terms of maybe what's happening from a geopolitical standpoint? Just curious maybe what you're seeing out there in terms of Yeah, thanks, Dave.

You know, I think it's a little bit of both. You know, we're in this place where the expectations have been, until recently, rates going down. And now we're in a time where the expectation is that rates may go up a little bit. And so I think that's changing the customer's thoughts a little bit and it's changing their ideas on whether they need to go with floating or fixed rate loans. And so you are seeing just, I think, some more consideration to that as they look at deals going forward and cash flows from expansions or CRE opportunities or things like that. and then I think a little bit of that as well is our pricing discipline. I've been really proud of what we've been able to do on new and renewed loans with keeping that new and renewed loan rate in the low sevens. When you look at just our core commercial business out of that, it's probably it's around 680. And so which is above par, which is a great place, I think, to be. So it's really a combination of that. I do feel like over the last couple of quarters, as the rate expectations change from down rates to flat or up rates, our spread between some of our competition that has been more aggressive has been narrowing. I feel like competitively it felt like there were some folks out there sort of betting heavily that rates were going to go down and then they didn't so they pulled their pricing up some so I feel like we're more competitive on rates now than maybe where we were a couple of quarters ago but you know there's just a lot of factors that go into that and as I mentioned for us with the amount of balance sheet repricing that we have that's going to help improve margin and then still getting good pricing and getting growth rates either at the lower end of our range or year-to-date just below it. If we can still get a growth rate up to that point by maintaining pricing, I think that improving margin, improving operating earnings, opens up more opportunities for us to reinvest in the business, to reinvest in technology, to reinvest in hiring and deepening our market share and some of our really good markets and invest back in the business. So we're willing to give up a little bit of organic growth to keep getting that higher margin. And I think that's the right thing for us to do at this point.

and I would just add to that too, you know, if you look at our new and renewed pricing, you know, last quarter, 7.14%, I mean, we, even if that were to come down a little bit, given our repricing and that's laid out in the repricing schedule on the deck, I mean, there's still room there to capture that repricing and if we, you know, keep this Stabilized funding costs, you know, kind of in line going forward, then we still have the opportunity to see an increase in margin, even if that 7.14 comes down a little bit. And so, you know, that may slow down the increase in margin some, but there's still a lot of opportunity to capture that and continue to see margin expansion.

And Dave, one other thing, a little bit lower growth gives opportunity to focus more on deposits.

Absolutely. Appreciate the call, Jeff.

And I'm sure no further questions at this time. I would like to turn it back to Mr. Heath Fountain for closing remarks.

Thanks, Priya. And again, thanks to all of you for being on the call today and for your support of Colony Bank. We're excited about the opportunities ahead and appreciate you all being here today. Look forward to speaking with you soon.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.