Colony Bankcorp (CBAN) Q3 2025 Earnings Transcript

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DATE

Oct. 23, 2025, 9 a.m. ET

CALL PARTICIPANTS

• President & Chief Executive Officer — T. Heath Fountain
• Chief Financial Officer — Derek C. Shelnutt

TAKEAWAYS

• Net Interest Margin -- Expanded by 5 basis points sequentially, marking a 53 basis point increase since the comparable quarter last year.
• Operating Return on Assets -- Improved to 1.06%, up from 0.81% a year ago, reflecting margin expansion translating to core earnings.
• Annualized Loan Growth Rate -- Achieved 9% annualized in the quarter and approximately 14% annualized year-to-date, with moderation expected to the long-term 8%-12% target.
• Loan Portfolio -- Loans held for investment increased $43.5 million from the prior quarter.
• Net Interest Income -- Rose by $314,000 compared with the prior quarter, driven by loan growth and asset repricing.
• Operating Noninterest Income -- Increased by just over $1 million quarter over quarter, led by $425,000 higher service charge and fee income and $788,000 additional other noninterest income, including a onetime gain from a fintech fund partnership.
• Operating Noninterest Expenses -- Grew by $624,000 sequentially, due to talent investment and business expansion; partially offset by the higher noninterest income.
• Net Noninterest Expense to Average Assets -- Improved by 4 basis points to 1.48% sequentially, with a 1.45% target cited for future quarters.
• Provision for Loan Losses -- Totaled $900,000 in the quarter, reflecting higher charge-offs in the SBA lending division.
• Charge-Offs -- Higher in the SBSL portfolio; management stated, "this quarter represents the peak for charge-offs at SBSL. We do not expect them to increase from here."
• Total Deposits -- Up $28.1 million compared to the prior quarter, with seasonal dynamics noted for municipal funds returning in the next quarter.
• Tangible Common Equity (TCE) Ratio -- Ended at 8%, up from 7.43% a year earlier.
• Tangible Book Value Per Share -- Rose to $14.20 from $12.76 year over year.
• Onetime Merger Costs -- $732,000 of non-recurring expenses related to the pending TC Bancshares merger; the transaction remains on track for fourth quarter completion.
• Wire Fraud Impact -- Recognized a $1.25 million loss this quarter after an insurance coverage dispute, with all other coverage undisputed and recovery efforts ongoing.
• Average Yield on New and Renewed Loans -- Stood at 7.83% for the quarter, providing yield lift compared to loans rolling off.
• Securities Portfolio Action -- Sold investment securities at a pretax loss of around $1 million, generating approximately $75 million in proceeds and a modeled earn-back of less than one year.
• Board Actions -- Declared a quarterly dividend of $0.115 per share during the quarter.
• Mortgage Division -- Experienced slower production and higher expenses from strategic hiring; market conditions and interest rate volatility cited as contributing to the slowdown.
• SBSL (Small Business Specialty Lending) -- Flat pretax income sequentially as charge-offs were offset by reduced expenses; outlook for the division includes relief as rates decline.
• Marine and RV Lending -- Loan balances reached approximately $90 million, up $45 million year over year, with pretax income improving $100,000 quarter over quarter.
• Complementary Business Lines -- Merchant Services and Colony Wealth Advisors reported meaningful pretax income increases; Colony Insurance income increased following a recent acquisition.
• Merger Progress -- Regulatory filings completed, S-4 effective, and shareholder votes scheduled for November; management confirmed alignment with the financial metrics of the announced deal.
• Credit Quality -- Past-due and classified loans improved quarter over quarter, while criticized loans and nonperforming assets increased but remain at "manageable levels" relative to the portfolio.
• Exposure Profile -- No shared national credits or significant NDFI (Non-Depository Financial Institution) exposure; lending remains focused on local, relationship-based credits.
• Government Shutdown -- Identified SBSL as most impacted, but management stated, "we do not expect any material adverse impacts or credit concerns as a result of the shutdown" if resolved promptly.

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RISKS

• Management reported, "While criticized loans and nonperforming assets increased, they currently remain at manageable levels."
• The SBSL division experienced its peak charge-offs this quarter, with leadership noting, "Charge-offs were a little higher this quarter, primarily due to variability in our SBA portfolio."
• A $1.25 million loss was recorded after an insurance coverage dispute regarding a previously disclosed $2.9 million alleged wire fraud event.
• Mortgage division faced slower production and higher costs due to both strategic hires and headwinds that contributed to the lower production during the quarter.

SUMMARY

Colony Bankcorp (NYSE:CBAN) delivered quarter over quarter and year-over-year improvements in net interest margin, operating ROA, and tangible book value, with tangible capital strengthening notably. The company achieved double-digit annualized loan growth year-to-date but expects a further moderation toward an 8%-12% long-term target as customer demand softens. Noninterest income growth, especially from wealth, insurance, and merchant services, outpaced higher operating costs incurred from strategic investments, resulting in improved efficiency metrics. The bank reported higher charge-offs in the SBSL portfolio, elevated nonperforming assets, and a disputed insurance recovery on alleged wire fraud, but management expressed confidence that these risk factors are contained and either at a peak or being actively managed. The pending merger with TC Bancshares and TC Federal Bank remains on schedule, with regulatory clearance and integration planning well underway, and the company maintains readiness to capitalize on emerging opportunities in M&A and market disruption.

• The September Fed rate cut is expected to support further, albeit moderate, net interest margin expansion in the fourth quarter as higher-yielding asset repricing continues.
• Management stated the SBSL charge-offs should "not increase from here," and a declining rate environment may bring loan portfolio relief.
• Liquidity was opportunistically increased through a $75 million securities sale, targeting improved future yields and an earn-back period of less than a year.
• Integration of newly acquired talent and recently acquired insurance operations contributed to growing, diversified noninterest income streams.

INDUSTRY GLOSSARY

• SBSL (Small Business Specialty Lending): Colony Bank's division focused on lending partially or fully guaranteed by government programs, such as SBA loans.
• NDFI (Non-Depository Financial Institution): Financial entities, such as finance companies, that are not banks or credit unions and thus do not accept deposits.
• Shared National Credits: Large syndicated loans shared by three or more federally supervised institutions, typically a source of systemic credit risk in the banking sector.
• Tangible Common Equity (TCE) Ratio: A measure of a bank’s core equity capital compared to its tangible assets, excluding intangible assets such as goodwill.

Full Conference Call Transcript

T. 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 disciplined 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 of this year, but for the year, still around a 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% 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. Noninterest income remained solid despite a little slowdown in our SBSL and mortgage divisions. On an operating basis, noninterest 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, Colony 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 noninterest income and our operating net NIE to average assets improved quarter-over-quarter by 4 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 nonperforming 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 a 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 reviewed our portfolio to identify customers who may be affected. And at this time, we do 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 SBSL 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 Bancshares 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 S-4 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 planned for the first quarter of next year. Coordination between our 2 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 announcement. 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 will be a good strategic fit with Colony.

We also expect that a 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 Homebuilder Finance, who was recently inducted into the Homebuilders 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 homebuilding 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.

Derek Shelnutt: Thank you, Heath. Operating net income increased $252,000 from the prior quarter. This increase is attributed to higher net interest income and operating noninterest income, offset some by increased provision and operating noninterest 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. Net 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 5 basis points from the prior quarter, which was a little slowdown 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 are anticipating that to be in the single digits going forward.

Third quarter operating noninterest income increased just over $1 million. 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 noninterest income increased $788,000, driven by increased interchange fee income, improved income from wealth insurance and merchant services as well as a onetime 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 SBSL 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 noninterest 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 noninterest income more than offset the increase in noninterest expense. Our operating net noninterest expense to average assets improved 4 basis points from the prior quarter to 1.48%. On a go-forward basis, we still target a net NIE to assets of around 1.45%. Fourth quarter expenses will likely include at least 1 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. Onetime merger-related costs during the quarter were $732,000, and that was an adjustment to operating income. Also during the quarter, in our 10-Q last quarter, we disclosed a wire fraud incident where the company was the target and losses totaled $2.9 million. Upon recent new information, a portion of that loss that we believe 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 we'll continue to pursue all avenues for recovery. Any recovery will be recognized as nonoperating 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 a declining rate environment 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 criticized, 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 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 from 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. And 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 collected, which is consistent with the historical seasonality 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 pretax 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 1 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 $0.115 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 pretax profit for our complementary business lines. 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. SBSL was flat compared to pretax income in the prior quarter. The increased charge-offs were offset with decreased expenses. And as we see prime rate 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. Pretax 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 pool loan sales, which could provide a good source of noninterest income.

Pretax income for both the 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 the outlook of these 2 lines of business. Colony Insurance closed on the OE 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.

T. Fountain: 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.

Operator: [Operator Instructions] 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?

T. Fountain: All right. Well, I 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 help out as we see things, and we scrub 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 the SBSL team and the government guaranteed loans and what -- that there could be a potential impact there just as if it drags out longer.

But we think if we get a resolution within the next little bit, it shouldn't have too much of an impact on Q4. So we feel pretty good about where that is overall at this time.

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

Derek Shelnutt: Yes, absolutely. 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 fourth 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 pickup 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 both on the cost of fund side and the asset repricing side. But ultimately, going forward, we expect a modest growth in the single-digit range, but a little bit higher than what we saw this past quarter as we take advantage of some of those Fed rate cuts.

Operator: Any NDFI loan exposure as well?

T. Fountain: 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, 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.

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

T. Fountain: 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 happened in Q4 with TC and continued improvement in our margins. So we're very excited about where Colony is headed, and we appreciate you being on the call today. Thank you.

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

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