Colony Bankcorp, Inc. Stock

Hello, everyone. Thank you for joining us, and welcome to the Colony Bank Third Quarter 2026 Conference Call.

[Operator Instructions]

I will now hand the conference over to Brantley Collins, Communications Manager. Brantley, please go ahead.

Thanks, Megan. 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 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. Additional cautionary statements related to the First Reliance merger are located in our merger press release, merger investor presentation and SEC filings, all of which are available on our website. I would also like to add that during our call today, we will reference our third quarter earnings release and investor presentation, which were filed yesterday, so please have those available to reference.

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

Thanks, Brantley, and thank you to everyone for joining our third quarter earnings call today. We are pleased to report improved financial performance for the quarter, and our team continues to make progress towards achieving our goals. We previously announced that regulatory and shareholder approvals have been obtained for our partnership with First Reliance, and we are expecting legal close to occur on November 1. Both teams have been working diligently toward ensuring a smooth transition for both the upcoming legal close in November and the scheduled systems conversion and customer integration that will occur in the second quarter of next year. We are proud of the progress both teams have made, and we remain on track with our time line.

We are pleased to have surpassed a 1.25% operating ROA this quarter and believe we are on a good long-term trajectory for continued growth and profitability. However, as we integrate First Reliance, we expect ROA to pull back by 10 to 15 basis points over the next few quarters due to higher expenses associated with operating the combined company on 2 core systems until conversion late in the second quarter of 2027. We still feel good about reaching our ROA target of 1.35% or better, but that will occur after we start to realize the full cost savings, which will begin in the third quarter of next year.

Loan growth for the third quarter was around 2% annualized, and that brings us to about 5.4% year-to-date annualized loan growth. Pricing discipline remains a priority for us, and the rising rate environment has tempered near-term loan growth compared to our long-term target of 8% to 12%. Repricing of loan renewals from lower rates will continue to provide opportunities to capture increased interest income and drive growth in earning asset yields even as near-term net loan growth is softer.

As we look out into next year, given the current economic environment and rate outlook, we think we'll be looking at loan growth around our current level of 5% for the coming year as we continue to prioritize improving profitability.

Margin improved 7 basis points from the prior quarter to 3.59% and reflects continued balance sheet improvement and a healthy weighted average rate on new and renewed loans. As illustrated on Slide 40, our expected base case repricing unlocks substantial value heading into 2027. The spread between our legacy asset yields and current origination rates will allow us to drive meaningful net interest income growth as those loans and investments reprice. Our noninterest income was strong this quarter, expanding over the prior quarter, thanks to disciplined execution and steady growth across our business lines. However, as the rate environment remains relatively elevated, we do expect mortgage origination volumes to moderate. Higher mortgage rates naturally create a cooling effect on home sales and refinance pipelines, and we are proactively managing that business to align with expected production levels.

As we look at the combined company, we expect mortgage production to be softer in the near term compared to our original projections. We are actively rightsizing expenses and operational infrastructure to match expected mortgage volumes while preserving the capacity needed to scale effectively over the long term.

Core deposits remain a strategic priority. While competition across our footprint has increased in this rate environment, our team remains disciplined by prioritizing relationship-driven low-cost operating accounts over high-cost rate-sensitive deposits that compromise our net interest margin. This approach aligns with our current lending posture and lower near-term loan growth expectations. Our focus is on an efficient balance of -- on efficient balance sheet growth to drive earnings improvement over the long term rather than funding growth at the expense of margin.

Treasury yields across the curve have reached multi-decade highs, creating some incremental pressure on our unrealized investment losses and AOCI. The impact today on our portfolio is less pronounced than what we experienced in prior cycles. Our efforts to downsize the bond portfolio and allow duration to shorten have positioned the balance sheet to be more resilient to rate volatility. Even after absorbing these marks this quarter, our tangible book value per share increased from the prior quarter and our TCE ratio held firm.

Yesterday, we also announced the sale-leaseback transaction for 3 of our retail branch locations with a lease agreement to lease back those branches for an initial 15-year term. There will be no closures or customer impacts as part of this transaction and the lease term represents a long-term commitment to those markets and to our customers there. We expect a gain on sale of the assets of approximately $15 million, which we plan to fully offset with a strategic sale of underperforming securities. We plan to redeploy proceeds primarily in loans over the next several quarters, providing liquidity for future growth and improving the position of the balance sheet. While we may be opportunistic in purchasing investments, reinvesting proceeds back into similar duration securities at higher yields is not part of our strategy.

The 2 primary considerations for us to consider a balance sheet restructure have been the ability to improve our net interest rate risk position and to deploy the funds into loans. Derek will provide more detail on the transaction and Slides 17 and 18 in our investor presentation gives an overview. We expect the net outcome will be accretive to tangible book value and to earnings.

Looking ahead to the fourth quarter, our primary focus is on execution. Completing our partnership with First Reliance is a transformative milestone that significantly elevates our scale and competitive positioning across the Southeast. We are executing from a position of financial strength, and we are excited about the significant value this combination will unlock heading into 2027.

With that, I'll turn it over to Derek to go over the financials in more detail.

Thank you, Heath. Operating net income increased to $11.6 million in the third quarter, and operating pre-provision net revenue increased to approximately $16.3 million. Earning asset yields increased for another consecutive quarter, leading to margin expansion of 7 basis points to 3.59%. Net interest income increased approximately $508,000, and the driver behind the increase is the new and renewed weighted average loan rate of 7.26% compared to 7.14% in the previous quarter and shown on Slide 38. Overall cost of funds ticked up slightly to 1.98% from 1.95% in the prior quarter and is representative of the current rate environment and rate outlook. We expect long-term deposit betas to be in line with the previous cycle, although the timing could be slightly different due to the competitive nature and sensitivity of depositors across the combined company's footprint.

Margin is expected to increase in the fourth quarter due to the impacts of purchase accounting and accretion after the close of the merger. We still expect that increase to be largely in line with our initial projections. Heath mentioned repricing in 2027, and we feel that will be a meaningful contributor to net interest income and margin as those dollars reprice. As shown on Slide 40, base case indicates $223 million of fixed rate loans currently at an average rate to date of 5.21% and $76 million of investments at an average of 1.77%. This provides the opportunity to pick up meaningful yield on the repricing of those assets at today's rates.

Operating noninterest income increased $702,000 from the previous quarter to $12.3 million. The quarter-over-quarter increase is primarily attributed to increased deposit-related fees, interchange income and SBA-related income. Slide 19 shows the pretax performance of our business lines. Mortgage production has slowed in the current rate environment and upon entering a seasonally lower period of activity. Marine and RV lending shows a decline in pretax income. However, we allocate funding costs based on market-driven funds transfer pricing, and those costs were higher in the quarter due to market dynamics. Those costs are eliminated on a consolidated basis, but are included in their stand-alone metrics. For marine and RV lending, interest income grew by $190,000 in the quarter and loans outstanding increased about $10 million.

Colony Financial Advisors pretax income slightly decreased quarter-over-quarter due to additional commission income in the second quarter. AUM increased $17 million quarter-over-quarter or about 11% annualized. The SBSL division improvement during the quarter is related to increased gain on sale of SBA loans. Production also increased during the quarter, but the production we are seeing in SBSL is primarily construction type loans that will be sold in the next year.

Additionally, in noninterest income, we received insurance proceeds related to a loss at one of our banking center locations, which is treated as a onetime gain under GAAP. We also sold a small amount of securities for a loss during the quarter. Both of these items are excluded from operating noninterest income. Operating noninterest expenses increased $950,000 in the third quarter. Roughly half the increase was in loan-related expenses for the SBSL division and the other driver was related to performance-based compensation. Overall, our operating net noninterest expense to average assets was 1.53%, up slightly from 1.51% in the second quarter. Our long-term goal on net NIE is still 1.45%, but it will take several quarters to shift back toward that number. After a legal close with First Reliance, we will have elevated expenses until core conversion late in the second quarter of 2027.

We still feel comfortable with our merger-related cost save projections, but we'll not begin to see those until the third quarter of 2027 after the systems conversion. Provision expense totaled $1.65 million and was a slight decrease from the prior quarter. Net charge-offs were slightly lower than last quarter and charge-offs from SBSL were lower in the third quarter by $450,000. Included in the charge-off number for the third quarter is a charge-off related to a legacy TC Federal loan. During the third quarter, we became aware of circumstances related to one loan that existed prior to the merger with Colony. Because the underlying conditions were present as of the merger date, we recognized a $575,000 measurement period adjustment to our credit loss reserve and goodwill. The amount was then charged off at the end of the quarter. And excluding that one item, charge-offs would have been approximately $1.1 million.

Criticized loans and classified loans increased during the quarter and are largely related to one commercial construction loan with one borrower totaling approximately $16 million. Based on recent appraisals, we are adequately collateralized, which should help mitigate our ultimate risk as we manage the credit towards resolution. This downgrade reflects circumstances specific to this individual borrower and is not indicative of any broader systemic trends across our loan portfolio.

The overall levels of criticized and classified loans represent a relatively low level compared to our total loans and below our targeted thresholds. First Reliance also has strong credit quality and when combined, those levels also represent a small percentage of total loans. Heath mentioned loan growth for the quarter. And on a year-to-date basis, loan growth is approximately 5.4% annualized. Looking ahead to repricing in 2027 as lower-yielding fixed rate loans approach maturity, we have the ability to be competitive on pricing while also capturing meaningful yield pickup on those loans and maintaining those loan relationships. As Heath mentioned, looking ahead to next year's loan growth, in the current environment, we are projecting a similar 5% growth as we continue to focus on pricing discipline and profitability.

Total deposits declined $14.5 million during the quarter and is representative of the seasonality of our deposit base. We prioritize growing core relationships over rate-sensitive high-cost deposits and believe this approach enhances our core deposit franchise. This week, the Board declared a quarterly cash dividend of $0.12 per share. TCE at the end of the quarter was 8.99%, which is flat compared to the second quarter. Tangible book value per share increased to $15.16, up from $15.12 in the prior quarter, both slightly impacted by an increased AOCI loss position. We paused stock repurchases during the quarter due to the pending merger with First Reliance. However, we do expect to be active again as appropriate after the close of the merger.

Heath mentioned we completed a sale-leaseback transaction this week and on Slide 17 and 18, we provide an overview. The aggregate sales price is $19.9 million with a total first year base rent of $1.65 million, subject to 2% annual escalations. On a GAAP basis under lease accounting, we expect expense to increase by $1.8 million annually, net of the current depreciation expense on those locations. That represents an expense that's less than 1.5% of the combined company's projected expense base. We expect a pretax gain of approximately $15 million, which will be offset with the sale of underperforming available-for-sale securities. The current tax adjusted unrealized losses on AFS securities are recorded in AOCI, but the gain on the building -- or the gain on the sale of the building is not. Therefore, will be accretive to tangible book value with neutral regulatory capital impacts. The purpose of the strategic repositioning is to improve our balance sheet health, improve our interest rate risk profile and give us flexibility while providing liquidity for future loan growth.

We expect to sell approximately $100 million of securities currently yielding around 2%. We expect the redeployment of the proceeds from both the security sale and the building sales to be in a combination of loans, cash or short-to-medium duration securities that provide liquidity and cash flow going forward. Redeployment in loans gives us the opportunity to be competitive on high-quality credit opportunities while realizing a meaningful pickup in yield compared to the securities sold. Our reinvest assumption is 5.5%, and we expect to redeploy more than half the proceeds into loans over the next several quarters while keeping the remainder for liquidity.

We expect this to ultimately result in accretion to margin and ROA of about a few basis points. However, the timing of that full realization will not happen until late next year. We will maintain appropriate on-hand cash but may purchase short-term T-bills to align with loan funding expectations and projections. We will be opportunistic on the purchase of investments that are short to medium duration, but this is secondary to lending and liquidity. Our objective is to unlock liquidity from underperforming securities to position us for future loan growth and improve our interest rate risk profile, not to reinvest back into similar duration bonds simply for the yield pickup. We expect the increased interest income to be greater than the lease expense, leading to increased overall earnings.

First Reliance reported their third quarter results yesterday, and they were largely in line with our expectations and projections. Our projections on the impact of the First Reliance merger remain in line with what we reported at announcement. Of course, since we made that announcement back in June, we've seen increases in medium- and long-term rates. Given the shorter duration of their loans and investments, we do not expect those to have a major impact on our initial projections on earnback. The slight increase we may see on day 1 marks would be offset by higher accretion.

That concludes my overview, and now I'll turn it back over to Heath before we take questions.

Thanks, Derek, and thanks, everyone, again for being on the call today. We're pleased with our performance this quarter, which met our expectations for performance and exceeded external expectations. I'm proud of how our team executed on achieving our desired results from the TC Federal merger, which positions us well for our upcoming merger with First Reliance and demonstrates the strength of our M&A strategy to gain scale and improve operating performance. Further, our expense and pricing discipline set us up well to finish the year strong.

That wraps up our prepared remarks. And with that, I'll call on Megan to open up the floor for questions.

[Operator Instructions]

Your first question comes from the line of David Bishop with Hovde Group.

Heath, noted your comments regarding the expectations for loan growth sort of settling in the 5% range. And it sounds like your origination yields came up. Is that sort of the factor governing the growth? It's just less projects sort of -- you're maintaining your pricing discipline and that's sort of impacting some of the ability for some of these projects to pencil out? I guess are you sort of pricing above the market? Just curious what's sort of leading to that conservatism relative to loan growth versus the longer-term growth rate?

Yes, Dave, good question. And I think it's really a couple of things. One is we are seeing some softening of real estate projects overall just in the higher rate environment. So you are seeing that pull back a little bit. We are seeing, though, plenty of volume to look at, but just isn't meeting our pricing parameters. I think we've seen as rates have gone up, that spread between where we wanted to be and maybe where the competition was has come in some. So I think that's a good thing and should help us with some loan growth going forward.

And then as we talked about, as Derek did, with the repricing and the liquidity pulling some things off of our balance sheet from a lower yield allow us to, I guess, narrow the gap in that pricing we're seeing out there and allow us to generate, but just don't feel like at those 8% to 12% for a little bit, I think it's still going to be a little pullback in that 5% range. And we're okay with that just because we have those levers to see to pull margin up and overall yields up. So just trying to balance that tension between growth and profitability improvement. We think that around that 5% spot puts us in a nice place where we can achieve both.

Got it. And then you mentioned the ability to maintain the margin, and obviously, the restructuring helps here. It looks like looking at the -- I appreciate all the color in the slide deck related to the repricing. It looks like you guys are in a good position to continue to expand the margin into '27. Is that sort of your expectation you see a continued move up irrespective of what purchase accounting accretion does?

Yes. I think our core margin without that accretion will continue to modestly move up just because of the structure of the balance sheet, getting that repricing. I think there's an opportunity there and even where current loan rates are relative to where we'll have stuff roll off, we should -- and even considering some increase in the deposit competition, but we feel pretty good about that core margin. And then on First Reliance and the accretion there, they're running a slightly higher margin than us already anyway. And then the ability to get that reprice, again, that helps us be able to see profitability improvement with maybe less modest loan growth than we've had in the past. And certainly feel like at some point, as we have more clarity on where long-term rates are going, I think we'll get back into the larger levels of loan growth more in that 8% to 12% range that we've -- I think, we've averaged about 12% organic growth over the last 8 years since I've been here at Colony. So we think we'll get back to that. We just don't want to do that at the expense of margin improvement until we get to a healthier margin.

Got it. And then I guess one final question. You noted the increase on the classified loans. Any more details you can share just in terms of that particular borrower? And it sounds like that's a pretty isolated incident, correct?

Yes. Nothing that we see spilling over into other things, just kind of an isolated situation. I think it's a good project still and something that could potentially move forward. Just on some of these deals, you get to a situation where the project and the capital inputs from the borrowers didn't exactly align in the partners. And so I think over the next quarter or 2, we'll work through that and get that resolved. So we feel good about the collateral. We have multiple pieces of collateral on that, but we just got to work through that situation.

Your next question comes from the line of Chris Marinac with Brean Capital.

Heath and Derek, I wanted to ask about the mortgage business real quick and just kind of your thought as a combined company. Does the external mortgage market have any sort of negative implications for the next year? Or can you kind of work around it and continue to grow at the core bank?

Yes. I think in the long term, we love the mortgage business. I think it's a critical part of driving a solid community bank deposit franchise. There are just so many reasons that having a healthy mortgage business is good. Obviously, in the short term, it is a more cyclical and volatile business line, especially when you see rates move pretty quickly, which we've seen over the last several months. Having a larger combined company in mortgage gives you a better ability to ride out these rate challenges, just gives you more operating leverage, more things, more levers you can pull to manage that. And so we're working through that. We love the business in the long term. We've got a great team. The idea is we just have to manage that from an expense base so that it doesn't become a drag during times like this when it's a little tougher, but still be opportunistic for the long term.

Sometimes high rate environments are great recruiting periods for bringing on new LOs as well because they're not leaving behind a big pipeline in other places. So it's just managing that. And I think that it's -- that a larger platform just gives you more levers you can pull on that. And also First Reliance has the third-party origination platform, which is just another lever you can pull to optimize volume and expenses. So we're still very excited about that business and really think it's part of the core long term of how you build a good fee side of your business, but also how you build strong deposit base.

That's helpful. I appreciate it. And then back to kind of your main business on loans and deposits. What do you see as sort of the deposit gathering outlook not just for Colony stand-alone, which still has a really low cost base, but also kind of combined and maybe the new opportunities that the South Carolina team brings you just on core funding in these next several quarters?

Yes. Well, so I think both organizations have just a fantastic deposit base and a very similar deposit base and a really good mix of retail and commercial customers. This lower loan growth period has given us time to really focus on -- and focus our commercial bankers on deposits and deposit relationships. We certainly think that going into South Carolina and those bankers having a larger platform opens up larger lending opportunities. Those also -- that also opens up the ability to go after core operating businesses and their deposits that they may not have been able to go after before. And then I think we have an opportunity to invest as a combined company in more retail deposit growth strategies. Both companies have done a good job of growing retail deposits, but with a wider deposit base and more resources. I think investing in good technology, continue to make the deposit account opening process really smooth and easy.

And then I think another big driver that I think is a long-term driver of deposit growth when you look at the ability to add our wealth platform across South Carolina. I think our wealth team does a good job of using those relationships that they have in and outside the bank to help grow the core deposits of the bank as well. So I think there's a lot of opportunities, new opportunities in South Carolina, but then opportunities as a larger organization with more resources to invest in that consumer and commercial deposit account experience is going to improve on, I think, our treasury and what we call -- we talked about in the past, Chris, our Banking Solutions group, the ability to have a deeper treasury platform to offer merchant services, credit cards from a payment perspective, not a balance perspective. Those are all new tools for those bankers in South Carolina or enhanced tools that are helpful in going out and originating deposit business.

Great. That's good. And then just last quick question for Derek. On the securities portfolio, I think you said 5.50% is your yield assumption. What does that imply for duration? And then also was curious if you still have that same relationship on, let's say, AFS versus held to maturity or if that might change?

Yes. So a couple of things there. On the 5.5% reinvest assumption, that's primarily into loans. So right now, we're looking at lending 5 years or less. And so you're looking at a lower duration compared to ultimately what we're selling out of in the securities book. So that improves our interest rate risk position, and then we'll keep some of that in short-term liquidity just with the expectation of future growth there. I will comment and say that the 5.5% reinvestment assumption is over time. It will take us a couple of quarters to redeploy those net proceeds into loans just as we kind of see deals that we like over the next few quarters. So that's kind of the long-term benchmark on the 5.5%. But the ultimate goal there is ultimately shortening the duration compared to the securities that we're selling out of.

On the HTM AFS mix, we're selling legacy Colony AFS securities. And then next week, we're bringing on First Reliance's investment securities and marking those to market. Our intent is to keep those in AFS. So really, you should see a pretty similar mix on the other side of this that we're selling out of these AFS securities coming up soon, but we're also bringing on the First Reliance side through the merger.

Your next question comes from the line of David Bishop with Hovde Group.

Just a couple of follow-ups. I think you said you're out of the market on share repurchases with the close of the acquisition, you think you start to sort of re-up and get more active on that front?

Yes. Good question, Dave. And we do expect to be active again. One of the things that improved profitability and lower growth allows you to do is have more levers you can pull on capital management. And so I think we have historically been opportunistic and we'll continue to be opportunistic if market situations give us the opportunity in pricing. But I think going forward, what we're also looking to do while we're in a period of really good profitability and a little bit lower growth is to be more systematic with our repurchases over time. And so what I think you can expect to see is some systematic repurchases each quarter and then being more opportunistic if overall macro market moves give us the opportunity to do that.

Got it. And then good quarter for the SBSL Group. Just curious, expectations heading into the final quarter into 2027.

Yes. So the SBSL group has done a fantastic job. It's a great line of business, Darren Davis that runs that. It's one of the best leaders we have in the company and does a great job there. They've really strategically shifted that business over the last year to more traditional 7(a), more real estate based. And during that transition, we saw a little lighter production. We've seen that production pick back up. As Derek indicated, we are doing a decent amount of construction in some of those originations. So that will build up and some of those sales will come into next year, which is building a nice healthy revenue pipeline as we look at next year.

And then we've also seen -- Darren brought in some new sales management, and they've really done a great job of focusing on our bankers and our legacy markets and not just traditional SBA referral channels. And so it's been top of mind. We've seen some good increase in activity from our markets. And of course, adding South Carolina, that's just another tool that those bankers will have with a full-service SBA group that they haven't had in the past, and we think we should see activity pick up from that as well.

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

Well, thank you again to everyone for being on the call today. Thanks for your support of Colony Bankcorp. We're excited about the opportunities ahead. We're pleased with how things are progressing, and we appreciate you being on the call today. Thank you for your support.

This concludes today's call. Thank you for attending. You may now disconnect.

Thank you for standing by. My name is Prilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Colony Bank Second Quarter 2026 Conference Call. [Operator Instructions]

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

Thanks, Prilla. 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 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.

Additional cautionary statements related to the First Reliance merger are located in our merger press release, merger investor presentation and SEC filings, all of which are available on our website. I would also like to add that during our call today, we will reference our second quarter earnings release and investor presentation, which were both filed yesterday, so please have those available to reference.

Turn the call over to our Chief Executive Officer, Heath Fountain.

Thanks, Brantley, and thank you to everyone for joining our second quarter earnings call today. We are pleased to report continued improvement in our financial performance for the quarter, and I'm proud of our team members for all the work they are doing to help us achieve our objectives.

A major highlight from the quarter was the announcement of our partnership with First Reliance Bank. Integration planning is already well underway with both management teams working closely together to ensure we remain on track for a legal close in the fourth quarter. On the regulatory front, our merger applications have been submitted, and we expect to file the S-4 in the near future.

The second quarter also marked our first full period of performance following the successful TC Federal systems conversion and customer integration in Q1. Our expectation was to achieve a 1.20% operating ROA after fully realizing our targeted cost saves, and we were able to hit that 1.20% operating ROA this quarter. We believe this puts us in a good position to improve on that operating ROA going forward. Operating net income increased over $1.5 million from last quarter. The primary drivers of the increase were continued margin expansion, improved operating noninterest income as well as decreased operating noninterest expense.

Loan growth during the quarter was about 8.5% annualized as we saw an increase in production compared to the first quarter. This brings us up to 7% annualized loan growth year-to-date. The weighted average pricing on new and renewed loans remained steady, actually increasing slightly from the first quarter as we keep pricing discipline a priority. I'm proud of our team's efforts on pricing, which is one of the key factors that drives our continued margin growth.

The lending environment is competitive and a rising rate outlook has resulted in some softening pipeline. While we previously expected loan growth to track towards the lower end of our 8% to 12% target, our commitment to disciplined pricing and strong underwriting standards means near-term growth could land slightly below our 8% threshold. We believe in the short-term that achieving our financial objectives is important and achieving organic growth near the low end of our range helps us achieve our long-term financial goals rather than growing in a way that puts pressure on our financial performance or diminishes the strength of our balance sheet. We saw a slight decline in total deposits this quarter. While this is a normal seasonal trend for us, the deposit landscape across our footprint does remain competitive. We have managed to maintain a steady cost of funds and our team members continue to focus on building deposit-first relationships with a focus on operating accounts and primary consumer account relationships.

Operating noninterest income increased by about $950,000 from the first quarter, which was led by increased revenue from many of our business lines and operating noninterest expense declined more than $500,000. Our SBSL division had improvement on a pretax basis, as shown on Slide 19. However, we still have a lot of opportunity for more improvement and expect that to start to show over the next few quarters. In addition to finding the right partners to grow with through M&A, organic growth is also a key part of our long-term strategy. We operate in some of the best markets in the Southeast, and we'll continue to focus on growth across our existing footprint. Our upcoming merger with First Reliance will add even more markets that are ideally suited for organic growth.

During the quarter, we added several experienced bankers to our team that will help us continue our focus on organic growth. In our Columbus market, we added Colby Cardin as a private banker. In our Douglas market, we added Lee Taylor as Market President. In our Savannah market, we added Phillip Anderson as Market President. And in our Jacksonville MSA, we've recently added Jeff Oody as Regional President with a focus on building core customer relationships in the suburban growth markets west of Jacksonville. These additions represent our commitment to organic growth by building core relationships in existing markets and further expand our market share.

As we work towards reaching our M&A milestones with First Reliance over the next several quarters, our focus remains both on a seamless integration and driving organic growth across our core footprint. The First Reliance team is incredibly excited about our partnership. They see the clear value in what we can build together, and their leadership is fully energized by the operational scale and broader opportunities the combined company brings to both our customers and our team members.

With that, I'll turn it over to Derek to go over the financials in more detail.

Thank you, Heath. Operating net income increased to $11 million in the first quarter and operating pre-provision net revenue increased approximately $2.2 million to over $16 million in the quarter. Earning asset yields continue to increase, driving margin higher quarter-over-quarter to 3.52% last quarter. Net interest income increased approximately $700,000 during the quarter and is attributable to an earning asset yield increase of 6 basis points, driven by loan growth and pricing on both new and renewed loans.

On Slide 36, we show the weighted average rate on new and renewed loans by quarter. That rate for the second quarter was 7.14%, and that's up from 7.11% in the first quarter. To Heath's point earlier, pricing discipline is a key focus of ours, and that will continue to help with us gaining ground on margin. Our overall cost of funds for the second quarter was 1.95%, which is up 1 basis point from the first quarter, so relatively flat overall. We still expect to see modest increases in margin of a few basis points per quarter for the next several quarters. However, the competitive environment for both loans and deposits will really determine how much increase we see and could potentially slow that increase down. If our cost of funds remain stable on the liability side, we still have some upward repricing on the asset side that we will be able to capture to improve margin.

The repricing schedule is shown on Slide 38 in the deck. Operating noninterest income increased to $11.6 million, and that's up from $10.1 million from the same quarter of last year.

On Slide 19, we show pretax income by business line, an improvement in both quarter-over-quarter and compared to the same quarter last year. Colony Financial Advisors pretax income increased in the second quarter, and the second quarter was the first full quarter after our transition from a managed program to a dual program where Colony receives more of the commissions and fees, but also takes on additional related expenses. Assets under management are up almost 15% quarter-over-quarter and are currently at $637 million, and that's up from $555 million in the prior quarter and up from $219 million in the second quarter of last year. Mortgage pretax income improvement was driven by higher production and sales in the second quarter as we enter a period of more seasonal activity. Colony Insurance had a better quarter with more premiums in force and higher revenue.

Pricing on policy premiums has been a challenge for the insurance industry. We've seen that ease some and remain optimistic for continued improvement and positive impact on both customer retention and acquisition. Bank referrals are up year-over-year, and we see that as good potential for increased sales revenue. Our SBSL division improved from the prior quarter on a pretax income basis. However, revenue from gain on sale activity was softer. As Heath mentioned, we expect to see improvement there in the coming quarters. Charge-offs at SBSL were similar to the first quarter, and we're seeing those stabilize with expected improvement on the horizon. There was an outsized BOLI death benefit during the quarter of about $700,000, and that was an adjustment to our operating earnings.

Operating noninterest expenses declined about $550,000 from the prior quarter. This is largely a result of post-merger integration cost savings, and we expect expenses to stay around this level for the third quarter and then increase after legal close with First Reliance. Operating net noninterest expense to average assets was 1.51% in the second quarter, an improvement from the first quarter. We're still targeting a 1.45% or better net NIE for the long-term and getting to that 1.45% will be driven primarily on the income side. We do expect that metric to increase again post legal close with First Reliance and then trend back towards our target later in 2027 after we complete systems conversion and customer integration.

We'll be working to capture as much expense efficiency as possible immediately following the legal close with First Reliance in the fourth quarter. However, there are a lot of our identified cost savings that we will not be able to capture until we get through the systems conversion in mid-2027. Provision expense totaled $1.9 million and was a slight increase from the prior quarter. Net charge-offs were similar to last quarter and were primarily from SBSL.

Criticized loans remained stable and classified loans declined by about 14% or $5.6 million. Loans held for investment increased $51.4 million or about 8.5% annualized. And although we saw growth across several markets in our footprint, the Columbus and Tallahassee markets were the top 2 in terms of loan growth in the second quarter and growth in our Valdosta market has been strong year-to-date. Total deposits declined $76.2 million and included in that reported number was the payoff of about $13.4 million of brokered deposits. It is not unusual for us to see seasonal deposit runoff this time of the year, and some of that was right around the end of the quarter.

If you look at our average balance of total deposits on Page 9 in the earnings release, you can see that the average was stable with a slight increase during the quarter. This week, the Board declared a quarterly cash dividend of $0.12 per share. TCE at the end of the quarter was 8.99% compared to 8.49% in the first quarter. Tangible book value per share also increased to $15.12, and that's up from $14.65 in the prior quarter. We did not purchase any shares in our stock buyback plan during the quarter. However, we view our buyback plan as an important tool to managing capital and look to be consistently buying back shares over time as well as being opportunistic during market pullbacks.

Yesterday, First Reliance also reported their earnings for the quarter. Their release is available on their website. And overall, they had a solid quarter. They reported operating EPS of $0.38, operating ROA of 1.10% and operating earnings of $3.1 million, which is a meaningful improvement compared to the same period last year. They also had a quarter of good loan growth, and that came in a little higher than our forecast. First Reliance has a strong lending team in great markets that will help drive organic loan growth going forward as a combined company. Their results were largely in line with our model or forecast, and so we do not expect any adjustments to the pro forma information we previously released.

That concludes my overview, and now I'll turn it back over to Heath before we take questions.

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

With that, I would like to call on Prilla to open up the line for questions.

[Operator Instructions] Our first question comes from the line of David Bishop with Hovde Group.

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

Yes, Dave, great question. And while they're both important, our team clearly recognizes that deposits are priority one. That's been our major focus, and that will continue to be our major focus. I think that it's important for us to go out and secure the key commercial relationships, but also to have the ancillary consumer business that comes along with those. So that's a priority. We mentioned or I mentioned in the comments about adding a private banker in Columbus. We look to add some private banking resources in other markets as well, and that is primarily a deposit play and looking to grow assets under management for Colony Financial Advisors.

So it's a real focus. We've got a lot of great wins in that area. And I think that's really important, especially in an environment where there's a lot of rate sensitivity on the deposit side. So I would just say going after key deposit relationships is priority one.

Got it. And then you recognized achieving the 1.20% operating ROA target. Just putting aside the benefits from the First Reliance deal, just organically, where would the incremental improvements in terms of profitability come from here? Is it generating more from the fee income platform? It sounds like expenses are probably leveled out. Just curious where the organic improvement comes from a profitability standpoint.

Yes. So definitely, we think we have opportunity to improve margin. I think as we've indicated and as we show in our deck, we still got a lot of asset repricing that is going to be beneficial to us. And so that plus the growth provides opportunity on the asset side. As you mentioned, as we mentioned in the call, on the liability side, we've about hit where we are. On the fee income side, there's a lot of opportunity. I mentioned our SBSL being down a little bit. I think we have a big opportunity there. And I think you'll see that pipeline and those revenues increasing opportunity on -- again, on all the fee income businesses.

This second half of the year is usually better for mortgage than the first half of the year. Of course, as we get to the end of the year, we have the opportunity to add the First Reliance Mortgage and Colony together, which will create some greater opportunity for scale. So we're excited about that. We continue to see assets grow -- assets under management grow with our financial advisers team, and I think we'll see that continue. Of course, insurance, we talked about a lot of good momentum in that area as well. And then in terms of other account generated fees, deposit service charges, debit our merchant, those are all continuing to do well and continuing to grow. So I feel like we're in a position where not all of those things have to hit just right to create improvements in ROA, but I think we'll see continued improvement across the fee side.

And your next question comes from the line of Christopher Marinac with Brean Capital.

I wanted to go back to the First Reliance merger and just better understand kind of how much of their loan growth is going to impact earnings in terms of taking existing clients and doing more with them. Is any of that in your numbers? Or would that be upside as next year comes into focus?

Yes. Chris, that's a good question. We looked at really -- and if you look like at this quarter, the organic loan growth that the First Reliance team had, it was strong and similar to our loan growth. So I think that they have the opportunity even without adding additional capacity for growth at similar levels and within the range of our organic growth forecast of 8% to 12% a year. So there is upside opportunity. I think just given the larger balance sheet of the combined company, larger lending limits will be effective in a number of those larger markets that they're in.

So I think there is upside to what we forecasted. I think we tried to be conservative and -- but I think there is upside to generate assets at a little bit faster level over time than what we projected.

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

Yes. The merchant services is going well. The great thing about that business is it's a lot of recurring revenue, and we just continue to see that build. Our team does a great job with servicing on that. And that's where we get a real advantage, I think, over our competition. There's a lot of moving around in that business. So other providers, the clients see their primary contact change a lot. And with Colony, it's very consistent. So we do have the opportunity that's been an outsourced product at First Reliance, and there's not a lot of customer penetration into that.

So we think that is a big opportunity to grow. And then as well, this has been a great deposit account acquisition tool to us being able to go in. It's really very easy for us. A lot of our prospects are disenfranchised with their current merchant provider, and we're able to go in and start the relationship with that and then continue to grow the relationship, open a deposit account for settlement when we go in with that business. So that's a real positive, both just from the fee income side, but also as a primary deposit relationship acquisition tool. And it's been even better last year, we put our whole banking solutions group together where we have -- it's what I would call the payments group.

It's the group focused on treasury, merchant, card, any way customers get -- commercial customers get money into their account from their customers and out of their account to pay their vendors and their employees. And so as we put that group together, we found it's easier for our bankers to go calling on customers and prospects, have one point of contact internally. And then our advisers in that group are really looking to solve the problems that the customers are having and not just sell a product or service. And so that consultative approach, I think, has shown well. And I look forward to that whole group being able to further support that.

We'll have First Reliance team members become part of that group that are doing treasury services now and -- but being able to serve that already know those customers and then being able to serve more products and service to them. So I think there's a lot of upside opportunity there.

Great. And my last question just goes back to kind of the progress you keep making in towns like Columbus. And I wanted to kind of understand, is the opportunity in Columbus as great as it is in Savannah and perhaps as you've been realizing in Augusta, just using those kind of [indiscernible] examples of footprint expanding.

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

It's an opportunity for us to grow faster than those markets or growing those -- some of those markets are not historically high-growth markets like Savannah or Charleston or in Atlanta, but the market share is heavily shifted due to the M&A over time to some of these regional banks, and there's a real opportunity for us to grow faster than the markets grow in those markets.

And we do have a follow-up question coming from David Bishop with Hovde Group.

Heath, Derek, just wanted to circle back on the loan guidance. Just curious, does that reflect more sort of a cautiousness, you think, in your outlook? Or does that reflect, you think, more borrower behavior in terms of maybe what's happening from a geopolitical standpoint? Just curious maybe what you're seeing out there in terms of demand and how that sort of comports with the outlook.

Yes. Thanks, Dave. I think it's a little bit of both. We're in this place where the expectations have been until recently rates going down. And now we're in a time where the expectation is that rates may go up a little bit. And so I think that's changing the customers' thoughts a little bit, and it's changing their ideas on whether they need to go with floating or fixed rate loans. And so you are seeing just, I think, some more consideration to that as they look at deals going forward and cash flows from expansions or CRE opportunities or things like that.

And then I think a little bit of that as well is our pricing discipline. I've been really proud of what we've been able to do on new and renewed loans with keeping that new and renewed loan rate in the low 7%s. When you look at just our core commercial business out of that, it's probably -- it's around 6.80%. And so -- which is above prime, which is a great place, I think, to be. So it's really a combination of that. I do feel like over the last couple of quarters, as the rate expectations change from down rates to flat or up rates, our spread between some of our competition that has been more aggressive has been narrowing. I feel like competitively, it felt like there were some folks out there sort of betting heavily that rates were going to go down and then they didn't. And so they pulled their pricing up some.

So I feel like we're more competitive on rates now than maybe where we were a couple of quarters ago. But there's just a lot of factors that go into that. And as I mentioned, for us, with the amount of balance sheet repricing that we have that's going to help improve margin and then still getting good pricing and getting growth rates either at the lower end of our range or year-to-date just below it, if we can still get a growth rate up to that point by maintaining pricing, I think that improving margin, improving operating earnings opens up more opportunities for us to reinvest in the business, to reinvest in technology, to reinvest in hiring and deepening our market share in some of our really good markets and invest back in the business. So we're willing to give up a little bit of organic growth to keep getting that higher margin. And I think that's the right thing for us to do at this point.

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

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

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

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

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

Thank you for standing by. My name is J.L, and I will be your conference operator today. At this time, I would like to welcome everyone to the Colony Bank First Quarter 2026 Conference Call. [Operator Instructions] I would now like to turn the conference over to Brantley Collins, Communications Manager. You may begin.

Thanks, J.L. 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 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 first quarter earnings release and investor presentation, which were both filed yesterday, so please have those available to reference. And with that, I will turn the call over to our Chief Executive Officer, Heath Fountain.

Thanks, Brantley, and thank you to everyone for joining our first quarter earnings call today. We're pleased to report a solid start to the year with our first quarter operating performance. This quarter marked a pivotal operational milestone as we successfully finalized our core systems conversion and completed the customer integration following the TC Federal merger. We're proud of our team's execution and are now fully positioned to deliver a premier service experience to our new Colony customers.

Operating income increased $580,000 from the prior quarter as we begin to see the impacts of the combined company post merger. We expect to see this continue to improve post conversion as we begin to realize operational efficiencies and additional cost savings moving into next quarter. With the primary integration milestones behind us, we're confident in our ability to scale toward a 1.20% ROA benchmark in Q2.

Margin continues to expand, and we ended the quarter at 3.48%, which was a little better than our internal projections. This was driven by an acceleration of accretion income on acquired loans from the TC Federal merger. This acceleration was driven by early payoff of loans, several of which were participations that we acquired in the merger. Core margin continues to steadily increase, and Derek will talk more about the projections, but we do expect that margin may be a few basis points lower next quarter without the additional lift of the pull-forward loan accretion.

Loan growth in the first quarter was lower than what we realized in 2025. And we mentioned last quarter that we expected 2026 to trend closer to the 8% end of our 8% to 12% growth target. The payoffs in the first quarter impacted loan growth along with lighter demand, which was driven partially by the volatile rate environment driven by the conflict in the Middle East. We are starting to see more activity in our loan pipeline and are having more discussions with customers about loan opportunities. We still feel that a good growth number for 2026 is around that 8% mark.

Turning to credit quality. We observed a quarter-over-quarter contraction in NPLs and the decline in criticized loans. Our credit team continues to demonstrate efficiency in resolving identified issues, preventing any buildup or stagnant criticized or classified loans. We provided an overview of our credit migration activity on Slide 33, which shows that we are actively resolving problem loans.

The first quarter was a strong quarter for many of our complementary business lines. These are highlighted on Slide 17, and you can see the past quarter showed meaningful improvement on a combined pretax basis compared to the first quarter of last year. Loan production and sales were higher in our mortgage division compared to the same period last year. Pretax income was significantly higher than Q1 2025, driven by more volume and slightly better margins. We believe this sets mortgage up to have a good year, although interest rate fluctuations and housing inventory continue to be challenges that will likely impact mortgage throughout 2026.

Marine and RV lending and merchant services continue to show progress, and we expect that to continue, particularly in marine and RV lending as we head into a period of higher seasonal activity. This past quarter was the best quarter to date for Colony Financial Advisors, and we are proud of the progress the division continues to make. Recruiting has been strong with the addition of several new advisers over the past few quarters. These additions, along with the transition of our broker-dealer relationship from a managed to a dual program where we get a larger revenue share, but also bear the expenses has led to meaningful improvement. This has allowed for higher profitability that will continue to scale as we increase assets under management.

Slide 20 illustrates that growth in AUM, showing us at $555 million at the end of the quarter, up from $198 million at the end of the first quarter in 2025. This represents significant growth since the formation of Colony Financial Advisors in late 2022. Colony Insurance also had their best quarter to date in Q1 for pretax income. Referrals to insurance from the bank were strong in the first quarter, and we feel we have a lot of opportunity to capture more.

Items in force and premiums in force are shown on Slide 21. The premium rate increases in 2025 presented some challenges last year, but there have been recent rate reductions that we think will drive additional policy volume as we go throughout this year. Our SBSL division had a lighter quarter driven by lower sales revenue and variability in charge-offs. The loan pipeline has shown positive improvement and with a shift towards real estate secured loans versus the small dollar loans, we see this as an opportunity for steady volume and improved revenues.

Past dues for SBSL were down about 30% and nonaccruals were down around 24% during the quarter. We're likely to see more variability in charge-offs this year. And while some quarters could be around these same levels, we are not seeing anything to indicate significant increases.

Also during the quarter, we added a National Sales Manager, John Kay in SBSL and look forward to seeing the expertise he will bring to the division. We've been without a person in that role for a little while, and we believe we found the right person to help us lead our sales team.

Last month, we announced that the Kroll Bond Rating Agency affirmed the credit ratings for both the company and the bank with a stable outlook. This independent validation reflects the disciplined execution of our long-term strategy. We believe these ratings serve as a confirmation of our capital strength and the overall stability of our platform.

As industry consolidation accelerates, we are seeing significant M&A-related disruptions across our footprint. This environment creates a unique tailwind for us, and our team is focused on capturing high-quality customer relationships that are seeking the stability and high-touch service that our model provides. We are well positioned to capitalize on these market shifts to drive organic growth, and we are seeing positive growth tied directly to this disruption.

We remain encouraged by the M&A landscape. Our recent integration success has enhanced our capacity at scale, and we are actively evaluating opportunities that align with our strategic and cultural criteria. We feel very good about our current position and are confident in our ability to execute another accretive transaction as the right opportunities emerge.

We're proud of our overall performance in the quarter, and our team has done a great job through our post-merger systems conversion as well as continuing to execute on many of our strategic objectives. We believe this leaves us well positioned to provide consistent execution as we continue on the path of building a sustainable, high-performing independent bank.

With that, I'll turn it over to Derek to go over the financials in more detail.

Thank you, Heath. Operating net income increased to $9.5 million in the first quarter and operating pre-provision net revenue increased approximately $1.3 million to $13.9 million in the quarter. Net interest income increased approximately $3.3 million during the quarter and is reflective of a full quarter post-merger, and that's in addition to continued repricing benefits from both sides of the balance sheet. Net interest margin increased 16 basis points to 3.48% with the interest-earning assets component increasing 13 basis points to 5.33% and interest-bearing liabilities decreasing 3 basis points to 2.28%.

Our overall cost of funds remained relatively stable, decreasing 2 basis points quarter-over-quarter to 1.94% and we expect that our cost of funds will remain around this level unless we see changes to short-term interest rates. Heath mentioned the accelerated accretion income in the first quarter, and that drove margin above our initial forecast. From a core margin perspective, so excluding the accelerated accretion, we are around 3.41%. Our projections indicate modest increases in margin of a few basis points each quarter and we should see margin trend closer to the core margin in the second quarter under our base case assumptions, which means we are likely to see margin a few basis points lower in the second quarter.

Operating noninterest income in the first quarter was $10.7 million. The first quarter is shorter in the number of days and is seasonally lighter for us in terms of activity in our complementary business lines. Compared to the same quarter last year, operating noninterest income increased $1.7 million from $9 million in the first quarter of '25.

On Slide 17, we illustrate pretax income by business line. Mortgage pretax income was $222,000 compared with $31,000 in the first quarter of last year. Slide 19 overviews production and sales volume by quarter with the first quarter of 2026 showing meaningful increases in both production and sales compared to Q1 of last year. We're seeing a good start to the year and expect a better mortgage trend this year compared to what we saw in 2025. Over the past several quarters, we've recruited MLOs in key markets and adjusted our products to meet customers' needs and drive increased profitability.

Heath mentioned the growth in Colony Financial Advisors and on a pretax income basis, this was their best quarter to date. The AUM growth has been solid, and we see lots of potential to grow that organically in several key markets, and that's in addition to also recruiting new advisers.

Colony Insurance had a great start to the year in the first quarter. Heath mentioned challenges on pricing last year and how those have recently been scaled back. We believe these changes will help both customer retention and new customer acquisition and in turn, drive better profitability for that division. SBSL pretax income decreased to $95,000 in the quarter. This was driven by lower revenue and higher charge-offs.

Slide 18 shows the production and sales volume by quarter. Seasonally, the first quarter is lighter, but we're starting to see a stronger loan pipeline in both volume and credit quality. Charge-offs with SBSL have variability, and we may see similar levels next quarter with a trend toward improvement in the following quarters.

Also during the quarter, approximately $30 million of portfolio mortgages were sold for a gain of about $110,000. We mentioned this on last quarter's call and noted the increase in the held-for-sale classification at the end of the year. We do not anticipate any other pool sales in the near term.

Operating noninterest expenses were $26 million in the quarter. This includes the cost and personnel expenses that were needed to get us through the systems conversion and customer integration following the merger. Now we are positioned to begin seeing additional cost savings beginning in the second quarter. However, this is expected to be offset by seasonally higher activity in our business lines that will drive some higher variable expenses. But we expect that to be outpaced by additional revenue, which should generate positive operating leverage across our business lines.

Operating net noninterest expense to average assets was 1.68% for the quarter, and this is reflective of seasonally lower activity in our business line as well as the additional expenses through systems conversion. We expect this to trend towards our target of 1.45% over the next several quarters. And merger-related expenses in the quarter were approximately $1.6 million.

Provision expense totaled $1.75 million and was a slight increase of $100,000 for the prior quarter. Net charge-offs by type on Slide 32. And while there was a slight increase in core bank loan charge-offs, it only represents $315,000 or about 5 basis points of average loans. Both nonperforming loans and classified loans decreased quarter-over-quarter. The allowance for credit losses was 0.90% of total loans and 122% of nonperforming loans. As you may remember from last quarter call, a large percentage of the increase in classified and criticized loans starting in the fourth quarter was a result of the TC Federal merger.

Loans held for investment increased $32.2 million or around 5.4% annualized. There were early payoffs on acquired TC Federal loans and a portion of those were related to legacy participation loans. And then the weighted average rate on new and renewed loans is shown on Slide 34, and that was 7.11% for the quarter. Total deposits declined slightly during the quarter by $19 million and was a result of repositioning of municipal funds after year-end tax collection. Municipal deposit balances declined approximately $30 million in the first quarter.

Our deposit pipeline still see many opportunities to develop strong customer deposit relationships across our footprint. We've developed a deposit strategy to target customer relationships as well as take advantage of M&A disruption in our markets. Deposits remain a key focus in our strategic growth plan.

Total share repurchases during the quarter were about 89,000 at an average price of $19.78. This week, the Board also declared a quarterly cash dividend of $0.12 per share. Our AOCI slightly improved quarter-over-quarter despite an increase to interest rates along the curve. This reflects the continued strengthening of our balance sheet health. TCE at the end of the quarter was 8.49%, an increase from 8.30% in the prior quarter and tangible book value per share also increased to $14.65, up from $14.31 at the end of the year and $13.46 a year ago. That concludes my overview. And now I will turn it back over to Heath before we take questions.

Thanks, Derek, and thanks again, everyone, for being on the call today. We're very pleased with our performance this quarter. That wraps up our prepared comments. And with that, I will call on J.L. to open up the line for any questions we have.

[Operator Instructions]

Your first question comes from the line of David Bishop of Hovde Group.

I'm just curious from the Small Business SBSL segment, is that sort of the key driver of this sort of recent uptick in the loan loss provisioning level this quarter and last? And is this something we should maybe get used to a run rate close to -- closer to $2 million per quarter? You see -- I think you said last quarter, you're trying to migrate away from maybe the Express and Lightning type credits. Do you see maybe some of the credit headwinds sort of abating the latter half of the year as we sort of roll off the books?

Yes, Dave, I think what I would expect to see is volumes pick back up and the overall profitability of that division and revenues get back closer to levels we saw in the middle of last year. On the provisioning and charge-off levels, I think going forward, where our allowance is, we're going to generally see backfilling any charge-offs. And then I think in future quarters, we should see a little more loan growth than we saw this quarter. So we'll keep up with that. So somewhere around the current level, maybe down a little, up a little, just depending on the charge-off activity. So even though it's small in relative dollars, we're replenishing those reserves.

Got it. And then I think I heard you say, Heath, at the start of the call, I feel good about the loan pipeline replenishing here. Still talking about 8% loan growth rate. I'm just curious where you're seeing the best opportunity to grow the portfolio and where you're seeing current pricing?

Yes. No. So Derek mentioned, start off with pricing, we were around 7 -- a little over 7% for the quarter. Of course, prime around 6.75%. It's looking like that will be stable. We are seeing more competitive pricing out there. And so I would expect our yields to come down a little bit as volume goes up there. We are committed to good solid pricing. We think that's important. Relationship pricing, we will look to be as competitive as we can be there, but just kind of measuring and monitoring that growth versus pricing because we like what we're seeing in terms of continuing to improve our margin and our asset yields.

So -- but it is competitive out there. I think we're seeing it geographically across the board. And I would say there's -- it would look like our current portfolio. So obviously, commercial real estate, we're seeing good opportunities there, but also on the commercial business side, C&I, we're seeing good opportunities there as well. So I think we'd see it track similar to the breakdown of our portfolio today, and we are seeing it pretty good across our footprint.

Got it. And then one final question, I guess, I'll before I hop in the queue. The insurance group, you recognize their contribution here. Do you think pricing and conditions can improve that market, you can continue to see an uptick in pretax profitability there this year?

Yes. I do think we will -- last year, we've added the LOB agency to that team. And we got through that integration at a time where we were seeing rate increases and it was a tougher environment. We're now starting to see some rate decreases. Plus we also had the time to integrate a better sales platform, better sales training, better integration of working with the bankers to get referrals. So we've seen a big uptick in those referrals, and we expect to continue to see that grow. So I think we'll continue to see good things out of the insurance group.

Your next question comes from the line of Christopher Marinac of Brean Research.

Can you talk a little bit about the Merchant Services business and how that can not only further grow, but also impact deposits and pricing for the overall spread business going forward?

Yes, Chris, that's a great question. And we see this as a really good deposit acquisition part of our business. So we have taken our Merchant, our Treasury and our Credit Card group and moved that all into what we call banking solutions. And because of doing that, we've made it simpler for how we interact with the customers. We made it simpler for how we interact with the bankers. And there's a ton of opportunity to lead with the right product.

And so we find Merchant Services to be one where in that field, there's a lot of turnover with other companies. There's a lot of ambiguity into the rates charged. So we find that customers really are happy to meet with us on our first call and turn over their merchant statements to us and give us an opportunity. And of course, when we do that, if we're able to win that business, we establish a deposit relationship for settling there, and then we just continue to work on that relationship to bring over deposit business.

So it's really a great customer acquisition tool to bring in core commercial small business deposit relationships, and we're seeing really good success. And then as you see that just incrementally grow, that's very much a recurring revenue business. So we just keep building that, and we don't really have to add much level of expense there as we grow. So we're excited about that business. They're doing a great job in the banking solutions team altogether, how that's integrated and made it simpler for us. It leads to a quicker time to win a relationship. And so we're very pleased with how that group has performed.

Great. And my follow-up was about just loan pricing in general. With the loan yields this quarter, I know TC impacted that to some extent. But is there opportunity for that loan yield to rise with the repricing and the details that you had repeated again this morning?

Yes, I think so. I mean if you look at our new and renewed loan rate in the past quarter at 7.11% relative to where our overall loan yields are, I think that we could see some incremental increases there. I don't expect anything drastic. I mean, obviously, that depends on the level of growth that we see. And as Heath mentioned earlier, we're starting to see some competition there on loan pricing. So that will have some impact there as well.

But I do think that we have the possibility to see that continue to kind of chug along and increase over time outside of the impact of any accelerated accretion that will see the impact overall loan yield.

And Chris, if you think about it, even if we pull back a little bit on our new and renewed rate yield, there's still a delta there between where our portfolio yields. I think for the quarter, it was 6.35%. Now some of that is some of that accelerated accretion. But even if we pull back some, there's opportunity to be originating new and renewed above our current yield and then plus the amortization that's running off any payoffs that we get that are at those lower yields that were -- previously that are starting to renew and amortize. So we feel like that place on the asset side, there's really -- we should see continued improvement there.

Great. And last one for me just has to do with the overall expense efficiency in general. I mean, should we continue to see that progress as this year plays out? And any, I guess, just general goals on next year?

Yes. Very much so. We're very focused on that. And again, we look at that from the standpoint of our net NIE, which was 1.68%, and we should start seeing that trend towards that 1.45%. We'll have merger expenses or additional staffing and contract expenses from TC that were in Q1 that will have rolled off many of them, the staffing side is done and most of the contract expenses are done now or will be done during the quarter. And so you'll see improvement there.

Where we will see -- we expect some of the variable expenses in our business lines to increase a little bit as we go through Q2 and Q3, which are seasonally higher plus the return of SBSL. And I just point out, we saw year-over-year increases in our complementary lines really in the quarter that our SBSL was down a little bit, and it's a significant driver. So as it returns, to a higher level of revenues, mortgage improvement for seasonality. You can look on our mortgage slide and see how that Q1 is always a light quarter, but a much more profitable this quarter. So we'll see that net NIE start to improve in the second quarter, both from the revenue side on the complementary lines, but also from the expense side in the core bank.

And we have a follow-up question from David Bishop of Hovde Group.

Maybe just curious, now that you have TC Federal behind. From an acquisition perspective, just curious what might be in your target sights here? There's been a lot of consolidation within your markets. Just curious where you're focusing your efforts these days on potential acquisitions?

Yes. Thanks, Dave. Good question. And we do believe we're in a place we've gotten the TC Federal integration complete, and we are actively having conversations. It's an area of focus for our team, but particularly for me. And so we're out being very active throughout our footprint.

On Slide 14, we laid out kind of our target area, which is really Georgia and the contiguous states. So we're out in -- both in Georgia and in these other states actively having conversations with other management teams that we think will be a good fit. The TC merger, I think, just shows how a good cultural fit is important. It made the integration much easier both from the team member side, but also from the customer side. And so our focus is really on strategic deals where we can have alignment with the other bank's management team, and they view it as an opportunity to continue their investment and see that the combined company can be more profitable, have more scale and also have additional products and services and larger lending limit to be able to grow better as a combined company than either could on their own.

And we think those opportunities are out there. It takes time in developing relationships and it's something that we're spending our time on and particularly my time. And we are at the place now where we feel good about being able to start the process with another one. So hopefully, we'll keep having good success there like we have with this last one and just keep the momentum going forward.

There are no further questions at this time. That's concluding our Q&A session. I will now turn the conference back over to Heath Fountain, CEO, for closing remarks.

Thanks, J.L., and thanks again, everyone, for being on the call today and for your support of Colony Bancorp. We're excited about the opportunities ahead and appreciate you being on the call today.

This concludes today's conference call. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to the Colony Bank Fourth Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded on Thursday, January 29, 2026. I would now like to turn the conference over to Brantley Collins. Please go ahead.

Thanks, Danny. 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 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 fourth quarter earnings release and investor presentation, which were both filed yesterday. So please have those available to reference.

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

Thanks, Brantley, and thank you to everyone for joining our fourth quarter earnings call today. We are pleased to report our fourth quarter with strong operating performance. Our team has done a great job of delivering results and executing on our strategic initiatives. We're really excited about the legal close of the TC Federal merger, which occurred at the beginning of December, and we're on track to complete the systems conversion during the first quarter. Both teams have done a great job to get us to this point, and we're looking forward to the upcoming customer integration.

We're also pleased to report that our financial targets for the deal are on track or better than expected, as Derek will discuss later on the call. Operating earnings continued to improve with an increase in operating net income of $675,000 compared to the third quarter. This was driven by continued increase in our net interest margin as well as a strong quarter in terms of noninterest income.

As we mentioned early last year, our projections indicated achieving a 1% ROA latter half of the year and maintaining 1% or better going forward. We were able to hit that target in the second quarter and maintain it through the rest of '25. I'm proud of our team's accomplishments in being able to do this and report that we've achieved a 1% operating ROA for the 2025 fiscal year. We now set our sights on our next goal of a 1.20% ROA and believe that we can achieve that on a quarterly basis starting in the second quarter of 2026 once we get the full benefit of the TC Federal merger and expect to hit the 120 mark for the full year of 2026.

In 2025, we saw core loan growth of 10.5%, excluding the impact of the TC Federal acquisition. Our outlook on loan growth for 2026 remains positive and our pipelines remain strong, but we are seeing a trend where we think we'll be closer to the 8% end of our 8% to 12% long-term target. We've seen an increased competition in lending across our footprint. However, we remain focused on growing core customer relationships. This strategy has allowed us to maintain a disciplined approach to pricing and credit while still achieving our growth goals.

With expected loan growth and repricing opportunities, we project margin to increase at a modest pace throughout 2026 around mid-single digits each quarter. In addition, we feel good about the outlook on the noninterest income side and expect it to be slightly better in 2026 as we continue to see improvement in our lines of business and fee income. Deposits were up for the quarter and organically flat year-over-year, excluding the acquisition of TC Federal. We are driving deposit account growth and our team is focused on building the deposit first and relationship banking culture.

At the same time, we're also focused on improving margin and have moved our interest-bearing accounts aggressively during the recent rate cuts this cycle, which has caused us to lose some non-relationship price-sensitive accounts. We carefully monitor this and believe we can grow the right kinds of deposit relationships. And as rates stabilize, we will become more competitive for interest-bearing deposits as well.

In the fourth quarter, we executed a portfolio mortgage pool sale of around $10 million with a gain of a little over $100,000. Our loans held for sale balance also increased quarter-over-quarter, and we're expecting to sell another $30 million of portfolio mortgage loans in the first quarter of this year. There's a couple of reasons why we're doing this. First, the secondary market for non-agency loans has improved, and we're now able to push some previous quarter's mortgage production into the secondary market. Second, with the addition of TC Federal, we knew we'd be expanding our 1-4 family portfolio. So to manage that concentration, we feel it's prudent to trim some mortgage loan exposure.

Operating expenses were higher in the fourth quarter as we have not yet realized all of the expected cost saves from the TC Federal acquisition. As we complete the systems conversion in the first quarter, we anticipate a majority of those remaining cost savings to occur after the conversion and be realized in the second quarter and going forward. Charge-offs were lower in the fourth quarter, but still elevated slightly compared to earlier quarters. Charge-offs have primarily come from our SBSL division, and we provide a breakdown of the net charge-offs on Slide 34 in our investor presentation. We saw some charge-offs from our marketplace loan partners in the fourth quarter, but do not expect that to be a long-term trend.

SBSL and marketplace loans only represent about 5% of our total loan portfolio. And as you can see on that slide, bank net charge-offs remain at low levels and gives us confidence in the credit quality of our overall portfolio. We also outlined the yields in those categories, and it's important to note that both of these third-party marketplace loans and SBA loans provide higher yields, which offset charge-offs and provide for a nice risk-adjusted return.

Additionally, of course, on the SBA loans, we've also generated significant gain on sale income on the guaranteed portion of those. Our performance in complementary lines of business are highlighted on Slide 19 on a pretax basis. SBSL and mortgage finished the year with a strong fourth quarter, and we continue to see improvement in Marine/RV-Lending as well as Merchant Services. We welcome the addition of 2 new proven financial advisers -- financial advisers to the Colony team in the fourth quarter, Glenn Ware in LaGrange and Tim Owens in Macon, and they have been successfully transitioning their client base to Colony.

With the addition of Tim and Glenn, we've also begun the transition of our relationship with our broker-dealer, Ameriprise from a managed program to a dual employee model, where our financial advisers are employed by Colony and where we receive the majority of the revenue, but also bear the full expense load. As we more than doubled our assets under management from about $200 million at the end of 2024 to over $460 million at the end of 2025, we believe this transition will be beneficial for the long term and offers more flexibility for our advisers while maintaining the relationship with our broker-dealer.

Overall, this structure will provide increased income opportunities going forward. Some of the related expenses to that occurred in the fourth quarter, and we expect to be fully transitioned by the end of the first quarter of this year. The building out of this platform is an important piece of our long-term strategy, and we are actively recruiting to continue to grow this line of business.

Slide 23 illustrates the year-over-year improvement with Colony Insurance and shows significant increases in Items and Premium in Force. Bank referrals to insurance increased 20% in 2025. We've been in a very hard insurance market the last couple of years, facing significant rate increases from our carriers for our customers, which has had an impact on retention rates, but we are starting to see the market soften some and believe we will see improvements to retention and production in 2026.

Yesterday, the Board declared an increase to our quarterly dividend to $0.12 per share, which is an increase of $0.02 on an annualized basis. Dividends are important to many of our shareholders, and we're proud to increase the dividend for another consecutive year. I'd also like to recognize that Colony Bank has been named one of American Bankers 2025 Best Banks to Work for. This is a tremendous accomplishment and reflects our commitment to culture and to our team members. I'm grateful for everything our team members do to support each other and the customers we serve. Colony was the only bank headquartered in Georgia to be recognized on this list in 2025.

We continue to see opportunities to capitalize on the increased M&A activity in the industry and across our footprint. This includes opportunity for new customer acquisition, new talent acquisition and expanded fee income as we develop deeper customer relationships across our existing markets. As I mentioned earlier, our team is focused on the integration and core conversion with TC Federal in the first quarter. At the same time, we continue to see an increased level of activity from an M&A perspective, and we are actively having conversations with potential M&A targets. We're at a place where we feel comfortable moving forward with another opportunity, and we believe that given the level of conversations and activity we see in the industry, we'll have the opportunity to announce another transaction at some point in 2026.

Slide 14 in our investor presentation lays out our approach to M&A opportunities. The strong momentum exiting 2025 positions us well as we enter 2026. We remain optimistic about the opportunities ahead and are focused on continuing to enhance performance through disciplined execution and ongoing improvement.

With that, I'm going to turn it over to Derek to go over the financials in more detail.

Thank you, Heath. From an operating income perspective, we saw net income increase $675,000 in the fourth quarter, driven by the completion of the TC Federal acquisition as of December 1 as well as continued increase in margin and solid results from many of our complementary lines of business. Operating pre-provision net revenue improved again in the fourth quarter and was a significant improvement over the fourth quarter of 2024. We continue to see positive improvement in our core earnings.

Net interest income increased approximately $3.2 million compared to the prior quarter and was a product of continued improvement in earning asset yields, a reduction in cost of funds and the addition of TC Federal in December. Net interest margin increased 15 basis points to 3.32% in the quarter. Loan yields increased to 6.19%, up from 6.15% in the previous quarter and reflects continued positive loan repricing, the addition of 1 month of TC Federal loans and the related accretion income, which was slightly offset by the reset on variable rate loans due to the short-term rate cuts.

The impact of the short-term rate cuts was captured in our overall cost of funds, which decreased to 1.96% for the quarter, and that is down from 2.03% in the third quarter. The short-term rate cuts from the Fed helped drive those fund costs lower in addition to the seasonal inflow of the lower cost deposits that we typically see later in the year. We may see some slight variability in accretion income depending on the timing of payoffs and paydowns from the acquired TCF loans.

Going forward, as we receive payoffs of acquired loans that were marked to fair value, we are then able to deploy those funds at current market rates, resulting in minimal impact to overall interest income. We're still projecting a modest increase in net interest margin each quarter throughout 2026 as we continue to see repricing of cash flows from lower earning assets.

Fourth quarter operating noninterest income was $11.1 million, reflective of a good quarter from many of our complementary business lines, particularly mortgage and SBSL. Slide 19 gives an overview of the pretax performance of our complementary lines with a noticeable improvement overall from the third quarter. Mortgage-related noninterest revenue increased $270,000 from the prior quarter. And as Heath mentioned, we did have a $108,000 gain from a sale of portfolio mortgage pool of about $10 million during the quarter. Marine/RV-Lending continues to improve on a quarterly basis in addition to improvement in our Merchant Services division.

Heath also mentioned the conversion with Colony Financial advisers from a managed program to a dual program, along with the addition of 2 financial advisers. There are some upfront expenses associated with that strategy. And although we will see expenses increase with that change, the dual program will allow us to receive a larger share of dealer commissions, which will outweigh the increase in expense and ultimately improve the earnings power of that division, leading to increased net income.

Typically, the fourth quarter is a lower volume quarter for Colony Insurance based on the timing of policy renewals and seasonality. We expect this to revert back to normal in the first quarter and improve into the rest of 2026. Operating noninterest expenses were $24.4 million, and the increase is attributable to the TC Federal acquisition. We're still carrying some TC Federal-related expenses until the systems conversion in mid-first quarter and then expect those expenses to drop off for the second quarter of 2026. This led to a higher net noninterest expense to average assets of 1.58% for the quarter and a little higher than our historical average. We expect that to be closer to our target of 1.45% in the second quarter as we capture the remaining cost savings for the merger.

The focus of disciplined expense management relative to our growth and earnings remains a priority for us as we continue to execute on our strategic initiatives that improve operating efficiency across the organization. Merger-related expenses totaled $1.3 billion for the quarter and were an adjustment to operating earnings. Provision expense totaled $1.65 million for the quarter. That's an increase from $900,000 in the prior quarter. Net charge-offs for the quarter were $1.6 million, a slight decrease from the prior quarter.

Charge-offs were primarily driven by SBA loans as well as some marketplace loans from our third-party partners. As Heath mentioned, SBA and marketplace loans represent about 5% of the portfolio. Slide 34 shows a breakout of charge-offs between those product types and the bank portfolio. And in addition, Slide 34 also provides a breakout of loan yields in those categories.

As we look forward to 2026 in regards to SBA charge-offs, we feel that we will see improvement compared to the trends that we saw in 2025. That expectation is supported by the underlying collateral of classified SBA loans. Classified and criticized loans increased from the prior quarter and 68% of that increase came from TC Federal for criticized loans and 93% for classified loans. Nonperforming loans increased quarter-over-quarter. $6 million of the $9 million increase in nonperforming loans was due to the acquisition of TC Federal and any anticipated losses were captured through acquisition accounting.

We early adopted the new CECL-related accounting standard, and this resulted in no CECL double count as part of the acquisition. The credit quality of TC Federal's loans were reflected in the adjustment to the allowance for credit losses as part of the purchase accounting. Loans held for investment increased in the quarter due to acquired loans from the TC Federal merger. Organic loan growth for the quarter was flat, but was due to fourth quarter payoffs of both Colony loans as well as some legacy TC Federal loan payoffs in December. There was also $50 million in mortgage loans reclassified from held for investment to held for sale as we continue to market those loans for a pool sale. Organic loan growth for 2025 was around 10.5%, and we anticipate organic loan growth for 2026 to be slightly less towards the lower end of our 8% to 12% target.

Slide 35 shows the weighted average rate on new and renewed loans of 7.33%, a decrease from the previous quarter due to rate cuts and changes in the rate environment. We expect to see that yield fall closer to the prime rate. However, that still leaves room for loan yields to improve from loan repricing. Fixed rate loan roll-off for 2026 is below 6% and noted on Slide 28.

Slide 35 highlights loans acquired through the TCF merger as of the acquisition date and also notes the early adoption of the new accounting standard related to CECL. Total deposits increased from the prior quarter, also a result of the merger. Excluding acquired deposits, total deposit growth was around $24.3 million in the fourth quarter and flat for the overall year. As Heath mentioned, when the Fed started cutting rates in 2024, we began to lower our higher cost deposit rates aggressively, and that continued with the rate cuts in 2025. This is reflected in our cost of funds, which was 1.96% last quarter compared to a high of 2.32% in the third quarter of 2024.

We believe we have a lot of opportunity in both current markets as well as the legacy TC Federal markets to continue to develop core customer relationships that will drive deposit growth. We acquired the TC Federal investments during the quarter, which were marked at fair value. A small portion was sold at the acquisition date and did not generate an earnings gain or loss. We didn't sell any other securities during the quarter. We'll continue to evaluate the need for future sales based on market conditions and balance sheet needs. The fair value of the portfolio improved quarter-over-quarter and resulted in a positive impact to AOCI of around $2.5 million. Total share repurchases during the quarter were 47,000 at an average price of $16.50.

And as Heath mentioned, this week, the Board declared an increase to our quarterly dividend of $0.12 per share. Our TCE ratio at the end of the quarter was 8.30% compared to 8% even in the prior quarter. Tangible book value per share increased to $14.31 from $14.24 in the prior quarter due to better AOCI position, favorable purchase accounting and the early adoption of the new accounting standard that removes the CECL double count.

Slide 16 illustrates some of the highlights from the merger with TC Federal. We're on track to achieve our projected cost savings, and we'll see more impact from that in the second quarter. The deal economics remain strong and forecasts are better compared to what we projected in our earlier modeling. Tangible book value dilution was less than expected, and our original forecast for earn-back was less than 3 years. We now expect that earn-back to be less than 2.5 years. We've also provided projections on expected 2026 base case earnings impact from the accounting treatment on acquired assets and liabilities.

That concludes my overview, and now I'll turn it back over to Heath before we take questions.

Thanks, Derek. And again, thanks for everyone to be on the call today. We're really pleased with the quarter we had and the performance, both for the quarter and the overall year. This wraps up our prepared remarks. And with that, I'll call on Danny to open up the line for any questions.

[Operator Instructions] Your first question comes from Christopher Marinac of Janney.

Thank you for all the details in the presentation and in the press release. I wanted to look at the small business lending line and just sort of think out loud with you about -- does that business become a higher risk-adjusted business for you and perhaps you have a little higher charge-off going forward, but it has a better return. Is that how we should think about that? And then do you see that business being a bigger contributor as the next year or 2 unfold?

Yes. Great question, Chris. And I think if you look at the way that business operates, it's certainly higher risk lending and the team we have has done a great job. Going back a couple of years, we have the opportunity to do some higher volume of higher risk but higher return loans that have both high yields and low cost to originate with the Flash and Lightning programs. And then with some changes, those went down.

So I think a lot sort of depends on the opportunities that the programs may have and change. I think the general, I guess, bread and butter kind of 7(a) and the little USDA business kind of remains constant, not a super higher than normal, but the opportunity potentially with -- like we took advantage of with the Lightning and Flash programs that had a higher return, but also a higher loss rate. So it kind of depends and could vary. I mean the challenge with that business is that the income is not as steady, but it's such a good ROE contributor that it's a really great business to have and be in. I don't know that we'll go back to the level it was a couple of years ago when it was -- we were originating all those small dollar loans, but we expect it to improve sort of from the run rate we had this year.

Great. And as you look at M&A as a line of business these next several quarters and years ahead, do you think that you'll have competition for some of the banks you're looking at? Or do you think they're more negotiated transactions where you can kind of pick and choose really where you want to be in various markets and various companies?

Yes. So our hope is in as many cases as possible for us to have the opportunity to do negotiated or what I would call limited marketing type deals where much like on the TC Federal, where the seller is looking for a buyer with alignment to what they're doing, where it's more of a partnership than just a true sale. And I think just based on the conversations we have and what we're seeing in the market, there'll be opportunity to do that.

At the same time, there are bid situations that come up. Some of those look attractive to us. But I think our ability to execute on those will be fewer and further between because just from a pricing perspective, I think we're going to price those not as aggressively maybe as some others. So we may hit on some if the competition happens to be lighter because of capacity or market or whatever it may be. But I think the real opportunity and the way I would describe it is I think we're going to have opportunity to do plenty of M&A over the next several years. Our job is to make sure that it's the best possible deals that we can do for our shareholders, for our team for the combined companies.

And so that means as many as we can be involved in being more of a limited process where they see the value and the upside partnering with Colony. And I think there'll be other opportunities to do that. And I think that's what Greg and the TC team saw. But that means more work on our part hitting the streets and getting out there and having conversations and being involved in things and just courting other bank management teams.

Sounds good. And just last question for me just has to do with sort of new hires within your footprint on the lending and deposit side. How does the flow of that? And what would be the outlook in general?

Yes. So a couple of things there. I don't see us being on a very aggressive hiring spree in terms of trying to add a certain number over the next period of time. I think that our current team can -- with the opportunities we have, there is plenty of opportunity for organic growth with our current team. That being said, we will be opportunistic for hires within our footprint, particularly as it comes to displacement from other M&A activity. And so I think there's going to be opportunities for that. But I would say they would be more in the one-off areas than big massive teams or looking to hire large numbers across our footprint, more in the handful, I think, type area.

Your next question comes from David Bishop of Hovde Group.

A quick question. I think Heath or Derek, you touched on the organic growth profile maybe slipping a little bit towards the lower end of the longer-term guidance. And obviously, the Southeast, the regional economy remains very strong, always very healthy pricing competition. Maybe just talk about some of the puts and takes in terms of the growth you saw this quarter on an organic basis and what you are seeing in terms of the competitive environment on the commercial side?

Yes. So it's definitely getting more competitive. I think that what we've been trying to do and what we've been able to do is price things from a relationship perspective, be willing to be disciplined on that, walk away from deals that don't hit return objectives for us, be very focused on relationships. And so that's limited the growth a little bit, but it was important and continues to be important for us to expand our margin and our profitability.

And so we're just balancing those needs, I think, Dave, and trying to make sure that we continue to see margin improvement. We continue to price things attractive -- where it's attractive. But also, I think, reflective in our outlook and guidance and like what Derek talked about and what we think we're going to see loan yields come into, we're going to need to be a little more competitive on that front in order to get the kind of growth that we want from a pricing perspective, just given where the market is and where competition is.

So we'll see that. I think Derek indicated coming down off of the [ 7.33 yield ] closer to where prime is on lending. And I think that's sort of what it's going to take. I think as rates settle out and they get more stable, I think the competitive range of pricing is going to narrow again, it's pretty wide right now, and we see some pricing where we just aren't going to price things. And so -- but I think as expectations for rate cuts kind of stabilizes and I think the market thinks will get maybe one more cut now, that's more stable. I think that range of pricing that we see out there narrows in as well. And so I think that, that will help.

I also think another big positive is not just the economic environment is good in the Southeast, but also because of the M&A, I think we'll see some turnover of assets from some of the larger banks that are going through M&A. But at the same time, you've got a lot of banks wanting to participate in that. For us, if we can stay in that 8% to 12% and also see margin improvement, we think that's the sweet spot to where we'll drive the most value for our shareholders. If we have to start doing things that are going to stop the margin improvement to result in higher growth, we just don't see that as the right trade-off for the long-term benefit of our shareholders. So that's what we're trying to balance, and I think our team is doing a really good job of that, but it's just a constant push and pull.

Got it. Appreciate that color. Maybe sort of staying on the converse of that topic. Obviously, there's the puts on the loan side. On the funding side, I think, Heath, Derek, you mentioned that some opportunities, obviously, to grow some core relationships there. What is your sense that you can organically fund loan growth with deposits this year? And what sort of trends are you seeing on deposit pricing given the aggressiveness you've had this quarter?

Yes. And I'll share some thoughts and then, Derek, if you want to chime in anything else. But I think you'll see similar, Dave, like I was talking about with the rates on the deposits. We've been very aggressive trying to get the full amount of each rate cut out of our funding -- underlying funding and sometimes more than that with the rate cuts and I think others have been doing that, but I think some others have been trailing and lagging.

So I think, again, as we -- let's say, we're going to get more and more rate cut, I think you'll see the competition start to narrow their -- the range of the competition from market to above market will be slimmer. And so that will allow us to be more aggressive at a time when that spread from conservative to aggressive is less, which is better timing for us from a margin perspective. Our team is focused primarily on the noninterest-bearing and interest-bearing DDA that doesn't carry a high interest balance. And so that's where we're out trying to generate most of the relationships. But as those rates stabilize, our ability to use interest-bearing DDAs as a sweetener to go get relationships or to get our foot in the door with relationships. I think we'll be able to use that more in the future.

And so I think our deposit pipelines continue to grow. We have a lot of effort and focus on that. Our incentive for our bankers is based largely on that and less on lending than it has been historically. So we're getting the right kinds of behavior that we want to see from our bankers. And as that's picking up steam, our banking solutions group, which is how we've combined our treasury, our merchant services, our credit cards, all our payment functions together, they're picking up traction. We're getting good business development out of that area, and we think there's opportunity there.

In the meantime, as that's picking up steam, we've got a little time where we're continuing to see the roll-off in our investment portfolio, and we start to get that down to levels that we want it to be in the long term. So we can have some switching of assets on the balance sheet from investments to loans while deposit generation starts to pick up. We feel confident, we can bring that all together at the right time and grow organically deposits to fund loans over the next few years. That may not match up each quarter, but we think deposit generation is going to continue to be something that we find the ability to improve quarter after quarter.

I agree. And then on the funding front, we have about $65 million base case investments rolling off in 2026, and that's coming off at a [ 3.10 yield ]. So that's going to be able to reprice upwards coupled with the deposit growth. But as Heath mentioned, on the loan and deposit side, we're seeing a little bit more competition with the banks. The spreads are kind of coming together a little bit, but that ultimately translates back to our kind of forecast and projection of that modest margin increase throughout 2026.

And I assume that incorporates, Derek, the impact of purchase accounting accretion, correct?

That is correct.

Okay. Got it. And then finally, circling back to M&A, Heath, I appreciate the Slide 14. Just -- as you are obviously getting bigger in size, approaching the $4 billion to $5 billion asset range, do you get the sense that maybe the ideal target is moving close to that $6 billion to $1.2 billion range as opposed to the under $600 million range? And any -- would you look to seek to potentially go over state lines like in the South Carolina and Alabama and such? Just curious from a geographic perspective.

Yes. Dave, great question. And from a geographic perspective, let me tackle that one first. Basically, we look at it as Georgia and the contiguous states. South Carolina, given that we operate 2 markets, Savannah and Augusta that are right on the South Carolina line. We already do a lot of business in South Carolina. We would love to see the ability to expand that way. In Tennessee, we are right at the border of Tennessee. And so any opportunity to move in that direction will be a natural expansion. Alabama, same thing. We operate markets right along the Georgia, Alabama line and do business in that state. So we'd like there's opportunity there as well as in Florida, we operate in North Florida, and we'd love to see opportunities there.

Of course, saying all that, the sheer numbers of bank opportunities are much higher in Georgia than they are in those other states. So the number of opportunities is going to drive some of that. And I'd say same thing with size. We would love to do more sizable transaction just because it's going to drive more meaningful financial metrics. However, when you move up in size, the chances of more competition comes into play. And so it's just a -- I think if you just look at the numbers game, Dave, certainly, $1 billion and below or really even maybe $750 million and below. The numbers would tell you more likelihood at those sizes. But we continue to have conversations with banks above that and look for opportunities there as well, and we are prepared to execute on what opportunities may come about. And there's just so many factors in M&A that are timing that you can't control that's on the side of a seller and you've got to be willing to move and execute based on that.

The good news is in this environment, if you have an opportunity to do a smaller deal, and you don't have a larger deal pending, you can get that one in, get it done. Approvals are happening quickly, and we would not be opposed to lining up more than one at the same time. I think our team can handle that. I think from a regulatory perspective, we're in an environment where you can do a very close succession of deals. And so that gives you greater, I think, flexibility to create value by doing a smaller deal, whereas maybe a couple of years ago, we would have looked at that and said, well, we better not do that smaller deal because it may put you out of the game for 18 months.

And so I think this environment sets up nicely the ability to execute on some opportunities that I think will be great in building a great deposit franchise and great earnings and the ability to grow organically.

That's great color. And I got one final -- I promise last question. Derek, you said that net operating expense ratio, you're trying to get back to that mid-140s by second quarter or so. And then maybe just some thoughts on the effective tax rate. I know that can bounce around. I don't know if that's changed with the merger.

Yes. Great question, Dave. Yes, we try to -- we think we'll be able to get back to that 145 later in the year. We still have a lot of the expenses from TCF that we're carrying. And then after the first quarter, typically seasonality in our noninterest income business lines will increase. And with the addition of -- we have the [indiscernible] coming. And so there are several components we think that will drive getting us back to that number. So I think we feel pretty comfortable about moving back towards that rate later in the year after we get the systems conversion behind us.

And then on the tax rate, right now, we don't expect any changes from the prior year just with the merger and everything. We still expect to be around that 21-ish percent effective tax rate.

There are no further questions at this time. I will now turn the call back over to Heath Fountain. Please continue.

All right. Well, thank you, everybody, for being on the call. Thank you for the questions today, and thanks for all your support of Colony Bankcorp. We appreciate it, and that concludes our call for today.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to the Colony Bank Third Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 23, 2025. I would now like to turn the conference over to Brantley Collins, Communications Manager. Please go ahead.

Thanks, Joelle. Before we get started, I would like to go through our standard disclosures. Certain statements that 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 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 third quarter earnings release and investor presentation, which were both filed yesterday. So please have those available to reference. And with that, I will turn the call over to our Chief Executive Officer, Heath 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.

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.

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 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?

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.

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

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.

Any NDFI loan exposure as well?

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.

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

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.

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