Commercial Bancgroup - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered modest growth: net income rose to $9.47M and diluted EPS was $0.77, with total operating revenue up ~4.5% YoY to ~$22.85M as net interest income expanded and efficiency improved to 46.2%.
• Results came in slightly below Wall Street: EPS missed by $0.05 ($0.77 vs $0.82) and operating revenue missed by ~$0.55M ($22.85M vs $23.40M) as noninterest income was softer versus the prior year; YTD noninterest income reflects roll-off of one-time gains in 2024.
• Management guided to resilient NIM with flexibility in the balance sheet; September NIM was ~4.05% and the team expects a sustainable 3.75%–3.80% range, supported by short duration funding and active pricing.
• Balance sheet repositioning continued: deposits fell 8.1% YTD driven by a $126.9M reduction in brokered CDs; capital ratios remain strong (CET1 14.2%, Total RBC 15.2%, leverage 12.0%).
• Strategic tone constructive: loan pipeline healthy into Q4; management expects positive FY loan growth (albeit below budget) and is actively evaluating M&A opportunities in the $500M–$750M bank size cohort.

What Went Well and What Went Wrong

What Went Well

• Efficiency improvement: efficiency ratio improved to 46.2% vs 48.1% YoY; ROA ticked up to 1.69%.
  “Our net interest margin is holding strong… we’ve got so much flexibility in our balance sheet because we’re so short. We can adjust pretty fast to any rates”.
• Top-line resilience: Net interest income increased to $20.22M (vs $19.06M a year ago), supporting operating revenue growth to ~$22.85M.
• Capital strength and discipline: CET1 14.2%, Total RBC 15.2%, leverage 12.0%; tangible book value per share rose to $19.05 (+14.5% YoY).

What Went Wrong

• Slight miss versus Street: EPS ($0.77) and operating revenue (~$22.85M) were below consensus ($0.82 and $23.40M) as noninterest income tracked lower; YTD noninterest income was pressured by prior-year one-time gains rolling off.
• Deposit contraction and mix shift: total deposits declined $158.0M (-8.1%) YTD, led by brokered deposits down $126.9M; non-brokered deposits decreased $31.0M.
• ROE compression and asset quality tick-up: ROE fell to 15.76% (from 17.32% YoY) and NPAs/Assets moved up to 0.26% (+1 bp vs year-end).
  Management noted loan growth will be positive but “we won’t meet budget” due to payoff dynamics earlier in the year.

Transcript

Operator (participant)

Thank you for standing by. At this time, I would like to welcome everyone to the Commercial Bancgroup third quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Terry Lee, President and CEO. You may begin.

Terry Lee (President and CEO)

Good morning. Thank you for joining us today for our first earnings call, as we successfully completed our public company offering on September 30th, 2025, the last day of the third quarter. I'm Terry Lee, President and CEO, and with me today is Adam Robertson, Chairman, Philip Metheny, our Chief Financial Officer, and Richard Sprinkle, our Chief Credit Officer. Before we begin, I must remind everyone that this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. For a discussion of these risks and uncertainties, we encourage you to review our full safe harbor statement and cautionary language, including our earnings press release and in our latest SEC filing.

Also, during the call today, we may discuss certain non-GAAP measures. Reconciliation of those measures to the most directly comparable GAAP measure can be found in our earnings release, which is available on our website and filed with the SEC. We're pleased to report the successful completion of our IPO at CBK became a public company on September 30TH, as mentioned earlier. As each of you are aware, the IPO process is an expansive and very time-consuming process that requires a tremendous amount of human resources commitment, coupled with a lot of professional guidance. Even this time, with all this effort directed toward our IPO, CBK has produced another impressive financial performance quarter. This performance demonstrates the depth of our many talented members that understand our core mission, our values, staying focused to produce strong financial results while at the same time working on a once-in-a-lifetime project.

I would like to just review a few of our financial metrics for the first nine months of 2025. Our net income, $27.1 million. That's a 4.9% increase year to date. Return on assets, 1.60%, 1.9% increase. Return on equity is 15.5%, slight decrease over 2024, an 8.5% decrease. Revenue came in at $66.9 million, a 1.9% increase. Our expenses actually fell to $31.9 million, which was an eight basis points reduction. Earnings per share came in at $2.22 per share, a 6.2% increase. Our tangible book value per share, $19.05, that's a 14.5% increase. Our efficiency ratio held strong at 47.6% through the first nine months of 2025. We experienced moderate loan growth year-over-year due to headwinds from some large payoffs we experienced the first half of 2025. These payoffs were from long-term borrowers selling their business.

The loan portfolio activity remains robust, enabling us to keep pace with the loan payoffs. We anticipate a strong loan closing volume for the fourth quarter of 2025, which will more than offset the payoff volume and provide for a moderate growth for the entire fiscal year in 2025. The asset quality remains very strong. Our loan delinquencies are at historical goals of 1.5%-1%, and our total debt ratio is at 2.19%. Looking ahead, we are confident in our strategy and our direction as we move into the public bank space. With our ability to navigate this new opportunity the public market provides for us to continue to grow our franchise, providing long-term value to our shareholders and providing positive experiences for every customer every day. With that, I will now turn the call over to Philip

Metheny, our CFO, to provide a more detailed review of our third quarter. Philip?

Philip Metheny (CFO)

Thank you, Terry. I would like to provide to highlight our financial metrics for the third quarter 2025 compared to the third quarter 2024. Net income for 2025 was $9.5 million compared to $9.2 million for 2024, for a 3.3% increase. Revenue, we had $22.9 million for a 4.6% increase over the prior year. Our expenses were maintained flat at $10.6 million compared to $10.5 million in the prior year for the third quarter, for just a minor increase of 1%. Earnings per share for the third quarter of 2025 was $0.77 a share, 4% increase over the prior year. Tangible book per share was $19.05, a 14.5% increase over the prior year. Our efficiency ratio remains strong at 46.19% compared to 48.13%, a 4% decrease from the prior year.

ROA for the third quarter of 2025 was 1.69 compared to 1.65 for 2024, a 2.4% increase from the prior year. ROE was 15.76%, a 9% decrease from the prior year.

Terry.

Terry Lee (President and CEO)

This concludes our prepared remarks. I'll ask the operator to open the call for any questions that the listeners may have.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Brett Rabattin with Hovde Group. Please go ahead.

Brett Rabatin (MD, Head of Equity Research)

Hey, guys. Good morning.

Terry Lee (President and CEO)

Morning.

Philip Metheny (CFO)

Morning.

Brett Rabatin (MD, Head of Equity Research)

Wanted to start off just, you know, Terry, we've talked about the loan pipeline being strong. You said fourth quarter you expected some solid loan growth. Can you maybe just give us any idea of the magnitude in 4Q and then just what you're growing and what the outlook is, and maybe what payoffs activity you experienced during 3Q?

Terry Lee (President and CEO)

We didn't have a lot of payoff experience during the third quarter. I think we had one at the very start that concluded. Maybe it actually started, some of it was paid off in the second quarter and finished up in the third quarter. Our loan activity has been really brisk. Our pipeline is really full for fourth quarter closings. We feel confident that we will end the year in a positive from where we started last year. One of the things is one of the customers that paid us off, they all, at the end of every year, drew up a huge line of credit to the tune of about $30 million for distributions to a doctor's group. As a result of that, every year we would have a huge run-up in our outstandings on loans, and then it worked its way down through the first quarter.

We're not going to have that this year. Even not having that, we're still going to end the year positive in loan growth over where we were last year. We won't meet budget, but we'll have a nice loan growth for year-end. That's assuming, of course, the attorneys get everything done, we get everything closed, and those types of things. The pipeline looks good and we've got a lot of closings lined up.

Brett Rabatin (MD, Head of Equity Research)

Okay. Great. I know you guys are slightly asset sensitive, you know, and the Fed's possibly going to cut one or two times here at the end of the year. Any thoughts on the margin in 4Q and just, you know, what you guys are seeing on loan and deposit pricing that might either help or hinder the margin?

Terry Lee (President and CEO)

I think we're more neutral as far as our asset situation right now. We just finished our board report yesterday and we were, for the month of September, to make sure I get my months right here, for the month of September, we were $4.05 in our net interest margin. Our net interest margin is holding strong, a quarter of a basis point. We just got so much flexibility in our balance sheet because we're so short. We can adjust pretty fast to any rates, be it up or down. We just got a lot of flexibility. I think, again, if you look at our historical trends in earnings that we provided through this IPO process, you saw our earnings increase in every rate environment to the extreme that most of us have experienced in our entire lives.

We just got flexibility the way that we manage our balance sheet more to our balance sheet to manage more following the loan portfolio. To do that, we kind of match things up with the loan portfolio and that keeps our spread pretty good. If I'm telling what our spread is going to be, it's going to be $3.75-$3.80 as standard. Right now, it's a little bit over $4. I don't anticipate that changing at all. Deposit pricing, no, we're probably like every other banker. We feel like we probably pay more for some CDs than we should. We're paying like $3.85, I think, right now is the highest CD we've got, but it's only for seven or nine months. Again, keeping that pricing really short in an environment that we're going to see decrease.

We're just, I think we're just in a good spot right now from a balance sheet perspective to react to whatever we need to do and maintain our earnings going forward.

Brett Rabatin (MD, Head of Equity Research)

Okay. That's helpful. The last one I wanted to ask was just around M&A. We saw an acquisition in West Tennessee yesterday. I was just curious, I know you're excited about the environment for possibly adding additional bank size scale to your franchise. Any thoughts on how you see the M&A climate environment for you? I know you're looking at deals, but any thoughts on what you're seeing out there?

Terry Lee (President and CEO)

I really think it's good. I've been able to attend a few meetings where CEOs are at and just general conversation. It's just a positive buzz for us. I think everybody now will begin to recognize us as kind of the only buyer that's in the marketplace for that $500 million-$750 million size bank. We've got a ton of relationships already built throughout the state. I've got a network of CEOs that I talk with constantly, getting a lot of very positive feedback for the opportunities that even they see, even the ones not interested in selling right now, that they see that we've got available to us. There are several that we're kind of looking a little bit at now. Nothing that I can announce officially or seriously, but we never stop looking and we never stop asking.

That's the key to it, don't ever stop looking and don't ever stop asking. Sometimes ones that you don't even anticipate show up on your doorstep.

Brett Rabatin (MD, Head of Equity Research)

Okay, that's really helpful. Congrats on the strong profitability in the quarter.

Terry Lee (President and CEO)

We're really happy with it.

Operator (participant)

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. If there are no further questions at this time, I will now turn the call back over to Adam Robertson, Chairman of the Board, for closing remarks.

Adam Robertson (Chairman of the Board)

On behalf of the Board of Directors, I'd like to thank you for joining us today and your interest in Commercial Bancgroup. Our focus remains on quality growth, maintaining solid asset quality, and driving consistent earnings performance, even in a challenging rate environment. The Board remains confident in our management team and pursuing opportunities that enhance shareholder value, all while preserving the principles that define our community banking model. I look forward to speaking with you again in the next quarter.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.