Colony Bankcorp - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 diluted EPS was $0.38, slightly above Wall Street consensus of $0.375*, while “revenue” (net interest income after provision + noninterest income) was $28.5M, modestly below the $29.9M consensus*. Net interest margin rose 9 bps QoQ to 2.93% on stronger loan growth and lower cost of funds.
• Loans grew $78.3M (+4.25% QoQ) and deposits rose $54.6M, with mix shifting toward low-cost DDA; management expects modest margin increases through 2025, aided by cooling deposit competition and favorable new loan pricing.
• Noninterest income was seasonally soft (SBSL sales down QoQ), but management cited improving pipelines in SBSL and mortgage for coming quarters; Q1 provision increased to $1.5M, consistent with growth and stable credit trends.
• Strategic updates: credit card program launched; Ellerbee Agency acquired (EPS-accretive), KBRA affirmed ratings with Stable outlook—supporting confidence in diversified noninterest income and durable deposit franchise.
• Potential catalysts: earlier-than-expected loan growth and margin inflection; incremental noninterest revenue from new products and insurance; possible resumption of investment securities sales to fund growth; ongoing buybacks and dividend support.

What Went Well and What Went Wrong

• What Went Well

  • Net interest margin improved to 2.93% from 2.84% QoQ, driven by loan growth and lower cost of funds; management expects modest NIM increases in 2025.
  • Loans +$78.3M QoQ on strong production and fewer payoffs; deposits +$54.6M with growth concentrated in low-cost transactional accounts.
  • Strategic execution: launched consumer/commercial credit cards to build interchange income; acquired Ellerbee Agency (EPS-accretive, expands insurance footprint).

• What Went Wrong

  • Noninterest income fell to $9.0M (−$1.3M QoQ) largely on seasonal SBSL sales; deposit service charges and interchange also down due to fewer days in the quarter.
  • Provision for credit losses increased to $1.5M (vs. $0.65M in Q4) to support portfolio growth; NPLs rose to $12.5M from $10.8M QoQ, though management sees no systemic issues.
  • “Revenue” missed consensus as higher provision and seasonal fee softness offset stronger NII; SBSL revenues fell by ~$1.6M QoQ within normal first-quarter seasonality.

Transcript

Operator (participant)

Good evening, ladies and gentlemen, and welcome to the Colony Bank first 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 immediate assistance, please dial star zero. This call is being recorded on Thursday, April 24, 2025. I would now like to turn the conference over to Brantley Collins, Communications Manager. Please go ahead.

Brantley Collins (Communications Manager)

Thanks, Chloe. 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 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 both our earnings release and our quarterly investor presentation, both of which were filed yesterday, so please have those available to reference.

With that, I will now turn the call over to our Chief Executive Officer, Heath Fountain.

Heath Fountain (CEO)

Thanks, Brantley, and thank you to everyone for joining our first quarter earnings call today. We're really pleased with our first quarter financial results and pleased to see continued improvement in both net interest income and margin. Better-than-expected loan growth in the first quarter, along with growth in lower-cost transactional deposit accounts, helped drive margin higher. On last quarter's call, we mentioned we expected to return to normal levels of loan growth in 2025, but felt that we would not see those levels until later in the year. That growth came earlier than we thought and was due to strong loan production but also fewer payoffs than anticipated. First quarter annualized loan growth was 17%, and while we feel good about our pipeline for the rest of the year, future quarters are likely to be closer to our more normal range of 8%-12% annualized growth.

The increase in our deposits was about 8.5% on an annualized basis and close to $55 million for the quarter. We are starting to enter that time of year where we begin to see seasonal outflow, particularly in municipal deposits, but we still have ample on-balance sheet liquidity and cash flow from our bond portfolio to continue to fund lending activities. Derek will touch on that later. We feel good about how the growth in both loans and deposits positions us well for the rest of the year. Seasonally, the first quarter activity for both mortgage and SBSL is generally slower, which we mentioned on last quarter's call, and that was the driving factor in the decrease in non-interest income. We are seeing indications that activity will pick up this coming quarter, and that's in line with what is the normal seasonality of this for us.

We're very excited about our recently announced acquisition of Ellerbee Agency and are excited to have them as part of the Colony Insurance team. On slide 10 in our investor presentation, we provide some highlights of the deal, which will be EPS accretive, and we also have a separate presentation with more detail on that acquisition that was filed earlier this month. We're glad to have Sean Ellerbee joining us as Director of Sales for Colony Insurance and look forward to Sean and his team being part of the growth and continued success of our insurance division. Insurance is an important part of our long-term desire to grow non-interest income, and it's also an important part, along with wealth management or other complementary lines, to becoming the primary source of financial services in our branch network where we have thousands of loyal long-time deposit customers.

We're also excited to have launched our credit card program for both consumer and commercial credit cards during the quarter. Our team has worked hard to achieve a successful launch, and we are proud to be able to expand our product offering to our customers. We feel this is a great solution from a service perspective to our customers, but also a great way to generate significant non-interest income over time through interchange fees. I'd like to take a moment to acknowledge the recent volatility we've seen in the markets, both in the equity and fixed income markets. As you're all aware, increased uncertainty around global trade and tariff policies contributed to heightened market fluctuations and shifts in rate expectations.

While this environment's introduced new dynamics, we want to emphasize that at this point, we've not seen any developments that have had an impact on our customers or on the health of our loan portfolio. Our team's closely monitoring the evolving landscape, including policy changes and their ripple effects across industries and consumer behavior. We're maintaining regular dialogue with our customers, especially those in sectors more directly exposed to trade dynamics, to ensure we remain proactive and responsive to their needs. We have not seen any indicators that would give us cause for concern about large-scale disruptions that could significantly impact the overall credit quality of our portfolio. Many of the customers we've spoken with have been proactive in adjusting to the changing environment, taking thoughtful steps to manage their supply chains, pricing strategies, and their businesses accordingly.

This disruption in the market and the drop in equity prices in the banking sector certainly played into the M&A environment in banking. As noted in the past, we certainly expect to participate in bank M&A. Short-term volatility in stock prices may have an impact on timing, but we continue to have discussions and nurture relationships with potential targets, and we think opportunities still exist for M&A in this environment. In speaking of M&A, we've also seen a significant amount of M&A activity in our footprint, and we're excited about the opportunity that creates for us to grow our customer base and recruit talent. Lastly, I want to recognize a few changes on our board of directors. This past quarter, Paul Joiner joined the board and brings over two decades of finance and accounting experience to our board. Paul's a valuable addition.

We welcome him and look forward to his meaningful contributions to the company. Additionally, we announced the retirement of Ed Loomis, who has been part of Colony since 2012. As a director and as a former CEO, Ed's played an instrumental role in shaping the direction and strength of our organization, and his insight, leadership, and dedication have left a lasting impact. We're deeply grateful for his contributions and wish him all the best in his full retirement. With that, I'm going to turn it over to Derek to go over the financials in more detail.

Derek Shelnutt (CFO)

Thank you, Heath. Operating net income declined by $1.1 million in the first quarter due largely in part to normal seasonal declines in a few of our non-interest income lines of business, particularly SBSL, which we mentioned on last quarter's call and was expected and not unusual. Pipelines for both mortgage and SBSL have increased, indicating more revenue opportunity as we move forward into a period with higher seasonal activity. Pre-provision net revenue increased almost $1.5 million on an operating basis when compared to the first quarter of 2024, and this highlights the continued improvement in our core earning fundamentals. Net interest income increased by approximately $480,000 in the first quarter. Both loan growth and a reduction in our cost of funds were contributing factors.

Our loan growth was primarily in the later half of the quarter, so we should see a positive impact to earning asset yields in the second quarter. Our cost of funds for the quarter was 2.07%, which is about a 12 basis point decline from the previous quarter and a 25 basis point decline from the third quarter of 2024. The majority of our deposit growth was in low-cost transactional DDA accounts, which has been and continues to be a focus area on deposits. Margin increased 9 basis points to 2.93%. That's up from 2.84% in the prior quarter. We still expect to see modest increases in margin throughout the remainder of 2025, given our current rate environment outlook. First quarter operating non-interest income decreased about $1.7 million and was driven by decreased activity in our SBSL division, where revenues fell by $1.6 million.

The fourth quarter was a great quarter for our SBSL team, and we mentioned that we would see lighter revenues in the first quarter. Activity has picked up in the SBSL pipeline, so we should see more production and sales revenue in upcoming quarters. Revenues in our mortgage division were slightly higher and expenses slightly lower in the quarter, and the division was profitable. Deposit service charge-related revenue and interchange fees were down about $220,000, and this is due to a shorter quarter with fewer days. Non-interest expenses decreased around $1 million in the quarter and was related to decreases in variable expenses based on activity, as well as lower advertising and donation expenses. As you may remember, we had about $450,000 in community-related donations through state tax credit programs during the last quarter, and that was in the fourth quarter of 2024.

Our Net NIE to average assets, was 1.44% in the quarter and increased from 1.35% in the prior quarter. In last quarter, we mentioned that we would likely see an increase and that we were targeting around 1.45% in our forecast. We expect net NIE to remain around this level, which is still well below our peer median. Our effective tax rate for the quarter was a little over 20%, which was in line with our guidance from last quarter, where we mentioned a 21% ETR for 2025. Provision expense totaled $1.5 million, and the increase is related to our loan growth. Net charge-offs were $606,000, which is consistent with levels observed during the first half of last year. We expect future quarters to remain within this range, although there may be some variability driven by our SBSL division.

Non-performing assets were $12.4 million, classified loans were $26.4 million, and criticized loans were $55.8 million. We feel that these are still at historically low levels, and balances are not driven by any systemic credit issues that cause concern. We've had a few isolated issues in agricultural production lines and trucking loans, but they represent a small portion of our portfolio, and balances are relatively low compared to loans as a whole. Committed ag production lines represent around 1.5% of the portfolio, with 0.8% outstanding, and trucking is about 0.63% of the loan portfolio. Our CRE loans and other loan types are still performing well from a credit perspective, and past dues have remained at low levels. We had two CRE past dues at the end of the quarter totaling less than $200,000. Loans held for investment increased $78.3 million.

We mentioned last quarter that we expected to see loan growth in 2025, and that started earlier than we were forecasting. Fewer expected payoffs also contributed to that growth. Our pipeline is still strong, and we expect to see continued loan growth this year, but it may not be at the same levels that we saw this quarter. We feel good about the rates and the credit we are seeing on deals, and loan production is expected to drive an increase in our loan yields this year. Our new and renewed loan weighted average rate is highlighted on slide 27, and that was 7.72% for the quarter. Total deposits increased $54.6 million in the quarter as we remain focused on the Deposit First culture. Slide 22 in the investor presentation outlines our deposit mix and illustrates the decline we've seen in our cost of interest-bearing deposits over the last two quarters.

We're still seeing cooling deposit competition across our footprint, which we think will help keep cost pressures minimal. As previously discussed, we typically experience seasonal fluctuations in our deposit base with runoff beginning around this time of year, particularly within our municipal and agricultural-related deposits. This may slow the rate of decrease on our cost of funds and could have an impact on how much increase in margin we see. Our cash to assets was a little over 7% at the end of the quarter, which gives us room to continue funding loan growth. Our cash flow from the bond portfolio is expected to be around $80 million-$90 million for the remainder of the year based on our base case modeling. This is without any investment sales.

We mentioned last quarter a pause on investment sales, but given our loan growth and outlook, we may resume sales in upcoming quarters. Those would be at levels similar to the transactions we did each quarter in 2024. During the quarter, we repurchased 38,000 shares at an average price of $16.45 as part of our stock repurchase program. Additional repurchases could be likely going forward as market conditions and volatility could provide us with the opportunity to purchase shares at attractive levels. Additionally, yesterday, the board declared a quarterly cash dividend of $11.50 per share. Our previous shelf registration from 2021 has expired, and we plan on going through the process to have an active shelf in place for future flexibility in capital management. Slide 13 provides a breakdown of pre-tax income for our complementary lines of business.

Again, it was a seasonally lighter quarter for many of our lines, but we anticipate activity to pick up. We're still seeing good progress on referrals and pipelines, and so we're optimistic about the future performance in our complementary lines of business. That concludes my overview, and now I'll turn it back over to Heath for any final comments before we take questions.

Heath Fountain (CEO)

Thanks, Derek. That wraps up our prepared comments, and with that, I'll call on Chloe to open up the lines for questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. If you have a question, please press the star key followed by one on your touch-tone phone. You will hear a one-tone prompt acknowledging your request. Your questions will be called in the order they are received, and if you would like to decline from the polling process, please press the pound key. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. One moment for your questions. We have a question on behalf of Dave Bishop. What are the trends and expectations for SBSL, loan growth and asset quality, as well as pricing for the rest of the year, and any impacts from recent actions from the current administration?

Heath Fountain (CEO)

Okay. Thanks for that question, Dave. I guess, first off, let me just address, as I did in the prepared comments, about the recent actions we've seen related to tariffs and trade policy. We are being very vigilant of what impact that may have on our customers, as I mentioned, especially those that could be more heavily impacted by import and export trade. I think that overall, we've been very pleased with the comments we've been having, the discussions we've been having with customers. I think a lot of our customers going through the COVID cycle really became very aware of their supply chains, maybe more so than they had been in the past as they came to a grinding halt during COVID and started looking for contingency supply plans, different ways to purchase inventory, different sources, different countries.

I think having gone through that COVID experience where the supply chain stopped has really been beneficial and made our customers more aware of what they're seeing in supply chains, where their supply chains come from that they may have taken for granted before. I think customers have become more flexible in how they acquire inventory items for production, resale, whatever it may be. I think the discussions we've had have made us feel a lot better about some of that. A lot of comments that they don't expect supplies to be halted like they were before, but obviously costs may change, and they may need to look for different supply sources if they are unable to pass some of the higher tariff items, those costs onto their end consumer.

Way less disruption, I think, than they saw during COVID, but obviously it is going to require some adjustments in operating models for some customers. We feel good so far, and I think many of our customers also feel this will be short-lived, that this tariff negotiation is not going to be permanent and that things will settle down in a quarter or two. Again, as we mentioned, long term, we feel good about it. In the short term, we might see disruption, and we kind of stand by ready to work with our customers to work through any short-term issues they may encounter.

As far as SBSL, again, as Derek mentioned, we had a banner fourth quarter that we knew was not going to repeat due to just the nature of that high level, historically high level of production in that quarter, plus the seasonality of the first quarter where we generally see it come down. We do see good activity in SBSL, good building of our pipelines, and expect to return to levels we've seen in previous years. We will see, I think, good activity and pickup in the remainder of the year from our SBSL group and feel good about the historical margins we've had in that business as well. We feel good about the outlook for SBSL.

Operator (participant)

Okay. Second question from Dave Bishop. What net interest margin impacts do you expect from a 25 basis point rate cut?

Heath Fountain (CEO)

I'll let Derek kind of give some more guidance on that, but we do feel in general well-positioned for the current rate cut expectations that are in the marketplace. We're still in a place where small cuts, I think, will help us improve margin, but if we don't see those, we'll still see improved margin just from the repricing of assets. Derek, do you want to add a little more color to that?

Derek Shelnutt (CFO)

Yeah, sure. I'll kind of start with the impact to our earning asset yield. Right now, our loan portfolio yield is around 6%, but our new and renewed weighted average rate is in the mid to high 7%. If we do see a quarter point cut or even two quarter point cuts and some loan production, we'll still see pricing at a level that's favorable to the loan portfolio yields and would increase those yields. In addition to that, we still have cash flow from the bond portfolio that's coming in just naturally, and those yields are at a lot lower rate. There's opportunity there to pick up, redeploy that cash into loans or other investments or cash and get a pickup there on overall earning asset yields.

On the cost side, we've been able to achieve some cuts to our higher rate money market accounts and CDs that are at or more than the cuts from the Fed. We've been able to achieve that. I think that's evident by the reduction across the funds. We think we can continue to achieve that just with the overall cooling deposit competition environment that we're seeing. There's a lot of opportunity to see earning asset yields increase and our cost of funds decrease with a 25 basis point cut from the Fed. That's going to have a positive overall impact to margin. That should continue to help us along our path in seeing margin increase.

Operator (participant)

Ladies and gentlemen, if there are any additional questions at this time, please press star followed by one. As a reminder, if you are using a speakerphone, please keep the handset before pressing any keys. There are no further questions at this time. Please continue.

Heath Fountain (CEO)

All right. Thanks again, everyone, for being on the call today. Thanks for your support of Colony Bankcorp, and we appreciate you being on the call and look forward to speaking with you again in the future.

Operator (participant)

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect.