Colony Bankcorp, Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights:

• TC Federal Merger: Closed in Dec, systems conversion in Q1, customer integration upcoming. Financial targets for the deal on track or better than expected.
• ROA: Achieved 1% operating ROA in 2025, targeting 1.20% ROA quarterly starting Q2 2026, full year 2026.
• Loan Growth: Core loan growth 10.5% in 2025, outlook positive but closer to 8% end of 8%-12% long-term target due to increased lending competition.
• Mortgage Activity: Executed $10M portfolio mortgage pool sale, expecting to sell $30M in Q1 2026 to manage 1-4 family portfolio concentration.
• Expenses: Operating expenses higher due to TC Federal integration, but expecting cost savings post systems conversion in Q1, realized in Q2.
• Charge-offs: From SBSL and marketplace loans, but low overall portfolio credit quality.
• Financial Advisers: Transitioned from managed to dual employee model, added 2 financial advisers. Colony Insurance outlook improving.
• Dividend and Awards: Dividend increased, named American Bankers 2025 Best Banks to Work for.
• M&A: Ongoing activity, expecting another transaction in 2026, focusing on Georgia and contiguous states.

Segment Performance:

• Net Interest Income: Increased approximately $3.2 million compared to prior quarter, driven by improved earning asset yields, reduced cost of funds, and addition of TC Federal. Net interest margin rose 15 basis points to 3.32%, loan yields at 6.19%, and cost of funds at 1.96%.
• Noninterest Income: Fourth quarter noninterest income was $11.1 million, with mortgage and SBSL contributing. A $108,000 gain from a portfolio mortgage pool sale of ~$10 million.
• Operating Expenses: Higher in fourth quarter due to TC Federal integration, but expecting cost savings post systems conversion.
• Charge-offs: Lower in fourth quarter but from SBSL and marketplace loans, which represent about 5% of total loan portfolio. Bank net charge-offs remain at low levels.
• Deposits: Up for quarter, organic flat year-over-year excluding TC Federal acquisition.

Guidance:

• Target 1.20% ROA quarterly starting Q2 2026, full year 2026.
• Loan growth outlook positive but closer to 8% end of 8%-12% target.
• Margin to increase mid-single digits each quarter in 2026.
• Noninterest income expected slightly better in 2026.
• Cost savings from TC Federal expected post systems conversion in Q1, realized in Q2.

Risks:

• Increased competition in lending affecting growth.
• Impact of rate cuts on interest-bearing deposits, losing some price-sensitive accounts.
• Short-term charge-off trend from SBSL and marketplace loans, though they represent only 5% of portfolio.
• Integration risks from TC Federal merger.

Q: 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?

A: 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.

Q: 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?

A: 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.