Colony Bankcorp - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered a clean beat: diluted EPS of $0.46 versus Wall Street consensus of $0.405; total income (net interest income before provision + noninterest income) of $32.48M versus $32.30M consensus. Bold beat driven by margin expansion, lower provision, and stronger fee lines. The beat is notable given only 2 EPS and 1 revenue estimates were published, limiting breadth but still signaling outperformance. EPS/Revenue estimates from S&P Global.*
• Net interest margin expanded to 3.12% (+19 bps QoQ; +44 bps YoY), with CEO citing “well‑positioned balance sheet and stable funding costs.” Provision fell to $0.45M from $1.50M in Q1, and ROA improved to 1.02%.
• Loans grew +$72.3M QoQ to $1.99B; deposits dipped seasonally by $66.3M QoQ but are up $96M YoY. Mortgage production accelerated to $94.9M and SBSL sales to $17.9M, supporting noninterest income.
• Strategic catalyst: definitive merger agreement to acquire TC Bancshares (valued at ~$86.1M), expected to close in Q4 2025; management guides to double‑digit EPS accretion by year two and a pro forma ~$3.8B asset base, enhancing scale and efficiency. Near‑term stock narrative: margin expansion + estimate beat + accretive M&A setup.

What Went Well and What Went Wrong

What Went Well

• Margin and ROA inflection: NIM reached 3.12% (+19 bps QoQ), ROA hit 1.02%. CEO: “Net interest margin expanded meaningfully… return on assets improved as we maintained strong operating leverage.” CFO added cost of funds declined to ~2.04% in Q2 and stabilized.
• Broad-based fee momentum: Noninterest income rose to $10.10M, helped by mortgage fees and stronger SBSL sales; mortgage production/sales jumped to $94.9M/$65.3M respectively.
• Credit metrics improved: NPAs fell to $11.42M from $13.01M QoQ; criticized/classified loans edged lower. CEO: “Credit quality remains solid, with improvements in several key metrics”.

What Went Wrong

• Seasonal deposit runoff: Total deposits decreased $66.3M QoQ (to $2.56B), concentrated in interest-bearing demand and savings/money market; CFO expects seasonal return late Q3/Q4.
• Higher operating costs: Noninterest expense increased to $22.0M (+$1.8M QoQ) on variable comp tied to activity and a ~$340k valuation adjustment to SBA servicing assets; net noninterest expense/avg assets rose to 1.52%.
• Elevated net charge-offs: Net charge-offs rose to $1.0M, largely in SBSL (~$0.78M), with management guiding for continued higher charge-offs in SBA due to older loans repricing at higher rates.

Transcript

Speaker 3

Good morning, ladies and gentlemen, and welcome to the Colony Bankcorp, Inc. second quarter 2025 conference call. At this time, our lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Thursday, July 20, 2025. I would now like to turn the conference over to Brantley Collins. Please go ahead.

Speaker 4

Thanks, Shannon. Before we get started, I would like to go through our standard disclosures. Certain statements we note on this call could be constituted as forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Current and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance but involve known and unknown risks and uncertainties. Factors that could cause these differences include, but are not limited to, pandemics, variations of the company's assets, businesses, cash flows, financial condition, prospects, and other results of operations. I would also like to add that during our call today, we will reference our second quarter earnings release and investor presentation, as well as our joint press release and investor presentation on the TC Bancshares merger, all of which were filed yesterday, so please have those available to reference.

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

Speaker 0

Thanks, Brantley, and thank you to everyone for joining our second quarter earnings call. We're pleased to report improved financial performance this quarter, which reflects the continued improvement of our operations and the success and discipline of our team members. Our earnings improved meaningfully in the quarter, supported by both loan growth and efficiency. We also saw continued expansion in our net interest margin, benefiting from pricing discipline on the asset side and our stable core deposit base. Also, we announced yesterday that we entered a definitive merger agreement with TC Bancshares, Inc., which operates TC Federal Bank in attractive markets in South Georgia and North Florida. We believe this partnership represents a compelling strategic and cultural fit. We'll discuss that transaction in more detail later in the call, including the expected benefits and timing.

On the lending front, we delivered strong loan growth of 15% annualized rate in the second quarter, continuing the positive momentum we've seen this year. While growth came in just slightly below first quarter levels, we continue to see solid demand across both commercial and consumer portfolios. Looking ahead, we anticipate loan growth may moderate somewhat in the second half of the year, closer to the 10% to 12% range, but the pipeline remains very healthy. Our return on assets for the quarter was 1.02%, which is a meaningful improvement from the prior quarter and has been a short-term target for us, achieving that 1% ROA. We're pleased we're able to achieve that. It came about a quarter earlier than what we had projected.

We feel confident in our ability to maintain that 1% or better ROA going forward and now move towards our intermediate goal of achievement of 1.2% ROA. Margin increased to 3.12% in the quarter, and as we previously mentioned, that margin over 3% was where forecasts were indicating we would be a 1% or better ROA. We expect margin to increase in the second half of the year. However, with more normalized loan growth rate and a stabilizing cost of funds, we're likely to see the expansion be softer in the remainder of the year than what we saw in this past quarter. Non-interest income has improved quarter over quarter as revenue increased across many of our complementary lines of business, particularly in mortgage. We also had a really good quarter in marine and RV lending.

While we did see improvements compared to the prior quarter, we still think there's an opportunity for meaningful improvements to enhance that performance across our business lines, and that's a real priority for us. Credit quality remains stable, and we saw improvement in non-performing assets as well as criticized and classified loans. Net charge-offs increased slightly after being down last quarter, and that was driven by charge-offs in our SDSL division, which we mentioned on last quarter's call that we were likely to see some variability there. Overall, we feel good about what we're seeing in terms of credit quality, and we're happy with these trends. As expected, we experienced some seasonal deposit runoff during the second quarter, which is not unusual for us given the nature of our customer base and our local market dynamics.

In Florida, the core customer deposits, which exclude brokers, are up year over year more than $75 million. We're also excited about the addition of two bankers in the Chattanooga market. We announced earlier this week Rex Rutledge will be joining us as Chattanooga Market President and Teddy Griffiths as a Commercial Banker. We look forward to them coming on our team and expanding our existing presence in the Chattanooga market where we have one branch already in North Georgia and continue to build relationships in that market. Additionally, we were honored to celebrate our 50th anniversary by ringing the opening bell at the New York Stock Exchange last week. We were glad to be joined by team members, board members, and supporters who've been instrumental to our success.

It was a proud milestone that reflects the many accomplishments we achieved as an organization, and it's been made possible by the dedication, talent, and commitment of our entire team. It was our honor to be there to represent them. With that, I'm going to turn it over to Derek to go through the financials in more detail.

Speaker 1

Thank you, Heath. Net income increased to $1.4 million compared to the first quarter. Increased net interest income and lower provision expenses have proven to play the metrics from the major contributing factors to the increase along with improved financial preparedness. Net interest income increased approximately $1.4 million quarter over quarter as we continue to see our earning asset yields gain momentum through loan growth and our therapy projects. Our cost of funds for the quarter were down three basis points to 2.04%. We're seeing the cost of funds stabilize and expect them to be around this level unless there is a significant source of interest rate. We've experienced a bulk of the downward repricing on funding costs, but we remain focused on keeping low-cost deposit growth a priority. Margin increased 19 basis points led by an increase in our earning asset yields of 16 basis points.

As Heath mentioned, we expect margins to continue to increase going forward, and it will likely be more moderate compared to the second quarter. Non-interest incomes increased over $1 million for gains and mortgage, SDSL, and service charge-related revenue. Increased production activity in SDSL and mortgage were highlighted on files 13 and 14 in the investor presentation. This is positive momentum coming off a seasonally slower first quarter. However, we see a lot of opportunities to continue to leverage that momentum across our complementary lines of business to drive increased user performance. Non-interest expenses increased $1.8 million in the quarter, largely due to variable-based compensation expenses driven by freight activity. In other non-interest expenses, we did have an expense of about $340,000 related to the quarterly valuation adjustment on our SBA servicing assets. These adjustments were based on prepayment projections and market dynamics related to the value of the services.

Additionally, increased expenses for data processing were related to increased activity. Our net NIE to average assets was 1.52% for the quarter, and that's a little higher than our target of 1.45%. Non-interest income, performance, and expense discipline remain priorities for us as we work to target the 1.45% going forward. We have continued to trend better than our peer region on those key metrics. With more activity presenting in our non-interest income lines and with our investments growing markets, with the addition of bankers, we are likely to see non-interest expenses a little higher, offset by non-interest income. We are expecting non-interest expenses to increase slightly to around $21 to $22 million a quarter and may also see some variability on that based on activity in our business lines. Provision expense totaled $450,000 for the quarter and net charge-offs were $1 million.

The majority of the net charge-offs were in our SDSL, the distant about $780,000 of that, and the bulk were related to older loans originated prior to the fiscal trade cycle. Those were also originated prior to level ties depending on our credit requirements. Overall, credit quality remains strong and as Heath mentioned, we saw improvement quarter over quarter on NPAs, classified, and criticized loans. Loan helper investment increased $72.3 million. As Heath mentioned, we are still seeing a good loan pipeline that will likely start trending towards an expense to 12% growth rate. The weighted average new and renewed loan rate for the second quarter was 7.78%, which has a positive impact on our portfolio yield and shown on slide 26. There is still an opportunity to capture positive increases in the repricing of loans and investments.

We have a repricing schedule on slide 28 to outline our base case forecast of repricing of both loans and investments. Total deposits decreased $66 million during the quarter, which we mentioned on our last call that we expected seasonality of deposits, and that was not unusual for us. We anticipate reduced deposits to seasonally return in the late third quarter and fourth quarter. As previously mentioned, the deposits are up year over year by more than 75 basis points. We did have strong investments in the second quarter, but given our increased loan growth and increasing margins, we are considering upcoming investment sales to further improve our balance sheet position and fund loan growth. We are evaluating the potential size of these sales, and we are considering a larger transaction to what we've done in previous quarters as part of that evaluation.

During the quarter, we repurchased 62,000 shares at an average price of $15.46 as part of our stock repurchase program. We will continue to review the need for repurchases this year based on capital needs and market conditions. Additionally, earlier this week, the board declared a quarterly cash dividend of $0.115 per share. I mentioned on last quarter's call that we are in the process of putting an asset shelf registration in place for our 2021 shelf that expires. We feel that as a part of prudent capital management, to have a shelf in place, and we expect to have that final in the third quarter. Our insurance division pre-tax income for the quarter was flat compared to the previous quarter as the team focused on integration and onboarding of the LLC insurance agency we acquired during the quarter. That integration has gone well.

We are seeing a ramp-up in volume. Policies sold increased 50% from the month of March compared to the month of June. There were also increased marketing expenses in the second quarter, which will drive user production and customer acquisition. That concludes my overview, and now I will turn it back over to Heath to begin the discussion about our merger and outcome.

Speaker 0

Thanks, Shannon. We're excited about the merger we announced with TC Bancshares, which operates TC Federal Bank, headquartered in Thomasville, Georgia. We appreciate the opportunity to share more details with you today. We shared a separate investor presentation and press release, which is available on our website. We also have Greg Eifert, the President and CEO of TC, with us today, and he'll share some of his perspective on the merger as well. I have tremendous respect for the organization that Greg and his team have built. Under his leadership, TC Federal has established a strong reputation for customer service, community engagement, and consistent performance. We're excited to bring together two culturally aligned institutions and look forward to working closely with Greg and his team as we build on that success. We're also pleased that Greg will be joining our team as Executive Vice President and Chief Community Banking Officer.

We look forward to working with him, Matt Hitchens, TC's Senior Lender, who will also be joining our team, and other members of TC's team as we work through this. The combination is a transformational step that enhances our franchise and positions us to sustain long-term growth in key markets, both in Georgia and Florida. It enhances what we were already doing in Tallahassee and Savannah and provides us entry into two great markets: Thomasville, Georgia, and Jacksonville, Florida, two markets that we've long desired to be in. Together, this deal enhances our earning power and our balance sheet strength through increased scale and operating efficiency. We expect the transaction to be immediately accretive to earnings for sure, excluding one-time costs, and it really sets us up to be among the top performers in our peer group.

From a cultural standpoint, there's strong alignment between our teams, and we're confident that integration will be smooth and collaborative. The merger represents a natural next step in our growth strategy, and we believe it will deliver meaningful value to our shareholders, customers, team members, and communities we serve. We expect the transaction to close in the fourth quarter of this year, pending shareholder and regulatory approvals, and complete the core system conversion early next year. While our focus in the next two quarters will be on a smooth transition for the TC team and customers, we believe there will be further opportunities for us to benefit from industry consolidation, and this deal illustrates our ability to be an acquirer of choice for community banks in our markets. Now I'd like to hand it over to Greg for any additional comments he'd like to add about the merger.

Speaker 1

Thank you, Heath. I'd like to start by saying how excited we are about the partnership and the opportunities it brings to our customers, employees, and communities. When evaluating strategic options for the future of our organization, it became clear that Colony was the ideal partner. Their proven track record, forward-looking strategy, and commitment to doing things the right way made them the right choice, one we knew would respect our legacy while helping us grow into the future. Our team has spent significant time together over the past several months, and it's clear there's a strong cultural alignment between our organizations and how we support our employees, how we serve our customers, and how we show up in the community. Our values are remarkably consistent.

Colony's development in technology and digital tools is impressive, and it gives our customers access to an extended suite of modern, user-friendly banking solutions while still maintaining the high-touch service we've always provided. We believe in the things Colony is doing to grow its earnings, and we expect this transaction will add significantly to the future performance of Colony. I'm incredibly proud of what our team has built at TC Federal Bank, and I'm confident that this partnership with Colony will take us to the next level. We're excited to be part of this next chapter together.

Speaker 0

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

Speaker 1

Thanks, Heath. As Heath mentioned, this is a strategic and financially compelling transaction. The consideration makes the structure at 80% stock and 20% cash, which allows us to preserve assets, maintain strong regulatory ratios, and align both shareholder bases with the future success of the combined company. We expect double-digit EPS accretion by year two, driven by revenue growth and scalable operating leverage. Although we have not modeled them, we do believe we will see synergies in the combined company, particularly as we are able to expand our complementary business lines across the TC customer base. On a pro forma basis, the combined organization will have approximately $3.8 billion in assets, $3.1 billion in deposits, and $2.4 billion in loans, making our partnership the leading community bank in the Southeast.

Slide four in the merger investor presentation provides an overview of pro forma modeling, and we expect approximately 8.4% EPS accretion in 2026 and 11.9% in 2027. Tangible book value dilution for shares is only 5.74%, with an earnback lens of three years. Our cost savings are modeled at 33.4% of TC's projected non-interest expenses. In addition, the projected loan interest rate marks just 3%, with a gross credit mark of 1.4% of TC's projected loan portfolio balance and leasing. This transaction enhances return on assets to a projected 1.19% in 2026, with a projected net interest margin of 3.43%. From a capital ratio perspective, pro forma TCE is at 7.9%, leverage ratio at 9.8%, and total risk-based capital of 15.9%, resulting in a strong capital ecosystem for the combined company. I will hand it back over to Heath for final remarks.

Speaker 0

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

Speaker 3

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 one on your touch-tone phone. You will hear a pause that your hand has been raised. If you wish to decline from the polling process, please press star followed by the two. If you are using a speaker phone, please lift your headset before pressing any keys. The first question comes from Christopher William Marinac at Stifel Nicolaus. Please go ahead.

Speaker 2

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

Speaker 0

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

Speaker 2

Great. Those are both helpful. Thanks for that. On the merger with TC, is the change in accretion from 2026 to 2027 purely just based on the timing of the assistance conversion? I was curious if that date has been locked in.

Speaker 0

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

Speaker 2

Perfect. Heath, just one last one on the merger. Do you think that there's enough other potential acquisitions in the future for you to look at something else as 2026 comes into focus, or would you just assume you could handle TC standalone and not consider something else at this point?

Speaker 0

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

Speaker 2

Great. Thank you all for the time. I'll see you before.

Speaker 3

Thank you. The next question comes from Kyle German at Hobbs Group. Please go ahead.

Hey, thanks. Good morning. I was hoping you can provide some insight on the overall health of the loan portfolio, particularly in the SBA lending segment.

Speaker 0

Sure. I'd be happy to. I think from an overall perspective, and as we mentioned, our total non-performing, criticized, classified levels came down. We do continue to see, in those criticized, classified, and non-performing levels, there is activity. We've seen new stuff come in, some stuff go out and get resolved. In the past quarter, we've had some good resolution to some problem loans that I think helped us, better than expanded resolution. It's good to see that kind of activity. We don't see anything systematic where we're seeing whole categories or industries that we'd have major exposure to. We're not seeing anything systemic. We continue to see isolated impacts of bars. As mentioned in the, on the SBA portfolio, some of what we've been seeing are some of the older loans. They started at lower rates, and then rates went up a lot on them.

That put a lot of pressure on them. We're seeing that have impact on the businesses. We do expect that is an area where we'll continue to see higher charge-offs, but our premium revenue and what we're doing in that side of the business is very strong. We kind of expect a higher charge-off level there. We are seeing, I think, that get a little better through these resolutions, but do expect it to be somewhat elevated in that area going forward. Also, just to add a little bit of color, in our earnings release, we break out the table on the guaranteed versus un-guaranteed portion. Some have been increased and what we've seen is your assets from buying that guaranteed portion, which is guaranteed by SBA, and not had the same, or not had any losses because of the second opportunity.

That is part of also what you see in terms of that guaranteed from SBA.

Speaker 2

Yep. We will have that from time to time. Sometimes, you know, we'll make the decision to buy in a loan back in if we think we can work that out quickly. Sometimes, you know, this is situation by situation. Sometimes we may not buy back in that un-guaranteed portion, in order to work that out. We did have a little bit of an increase due to that this quarter, but even though the net increase, the net wasn't increased.

Thank you. I was also hoping you can provide some additional color on how much additional runway you see for loan regression.

Speaker 0

Yeah, we still were in a really good place in terms of the ability to see assets continue to reprice. I think we indicated we're in over, around 70 to 78, I believe, for new and renewed loans this quarter. We're putting loans on at a good rate. Our overall portfolio yield is only slightly above 6%. We feel good about that. I think Derek mentioned the slide in the investor presentation that breaks down our loan and investment repricing. There's obviously some repricing in the investment portfolio too. What's good about where we sit right now is even if we do get some level of rate cut in the second half of the year, we'll still be repricing assets. It'll be lower than what we did this quarter in terms of new asset generation, but it'll still be significantly higher than where our asset yields are.

We think that still puts us in a really good place to improve margin as we've talked about on the deposit side being growth. We're trying to have a place where we're not going to get much margin improvements from here without a rate change on the liability side. We still have significant opportunity to get improvement in the asset yield side. Again, we've been getting it on both sides, and now it'll just be coming more from the asset side. We do expect that margin expansion, but not at a point as strong as it has been.

Thank you for your time.

Speaker 3

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

Speaker 0

Yeah, thank you, everyone, for being on the call today. Thank you, Greg, for being here with us. We appreciate everyone's support of Colony Bankcorp, Inc., and we look forward to talking to you again soon. Thank you.

Speaker 3

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