COLONY BANKCORP INC Q3 FY2026 earnings call

• Merger Integration: Regulatory and shareholder approvals for the First Reliance merger are obtained; legal close is expected November 1st. Systems conversion and customer integration are scheduled for Q2 2027.
• Profitability & ROA: Surpassed 125 basis point operating ROA this quarter. Management expects ROA to pull back by 10-15 basis points over the next few quarters due to dual-core system expenses, with full cost savings realized after Q2 2027 conversion. Long-term target remains 135+ basis points.
• Loan Growth & Pricing: Annualized loan growth was ~2% in Q3, bringing YTD growth to 5.4%. Near-term guidance is ~5% annualized for next year as management prioritizes pricing discipline and profitability over volume in a high-rate environment. Long-term organic growth target is 8-12%.
• Margin Expansion: Net interest margin expanded 7 basis points to 3.59%, driven by a weighted average loan rate of 7.26% on new/renewed loans. Repricing of fixed-rate loans maturing in 2027 is expected to unlock substantial value.
• Balance Sheet Restructuring: Executed a sales-leaseback transaction for three branches for $19.9 million, expecting a ~$15 million gain. Proceeds will be offset by selling ~$100 million of underperforming AFS securities (yield ~2%) and redeployed primarily into loans at a ~5.5% reinvestment yield assumption to improve asset quality and liquidity.
• Deposit Strategy: Core deposits remain a priority. Management prioritizes low-cost operating accounts over high-cost, rate-sensitive deposits to protect net interest margin, despite increased competition.
• Mortgage Business: Mortgage origination volumes are moderating due to high rates. The combined platform offers better operating leverage and third-party origination capabilities to manage volatility while preserving long-term deposit franchise benefits.

Colony Bankcorp did not provide a breakdown of financial performance by specific product segment (e.g., Mortgage, Marine/RV, SPSL) in terms of absolute revenue contribution percentages. The company reported consolidated Operating Net Income of $11.6 million and Operating Pre-Provision Net Revenue (PPNR) of approximately $16.3 million. Consolidated Net Interest Income increased by approximately $508,000 quarter-over-quarter, while Operating Non-Interest Income rose by $702,000 to $12.3 million. Specific segment trends noted include a decline in pre-tax income for Marine and RV lending due to higher allocated funding costs, a slight decrease in Colony Financial Advisors' pre-tax income, and an improvement in the SPSL Division driven by increased gains on SBA loan sales.

• Loan Growth: Projected annualized loan growth of approximately 5% for the coming year, down from long-term targets of 8-12%, reflecting a strategic focus on pricing discipline and profitability amid a softening real estate market.
• ROA Trajectory: Operating ROA is expected to decline by 10-15 basis points in the near term due to integration expenses but is targeted to reach 135 basis points or better after the completion of core systems conversion in late Q2 2027.
• Margin Outlook: Margin is expected to increase in Q4 due to purchase accounting accretion post-merger close. Continued modest expansion is anticipated through 2027 as lower-yielding fixed-rate loans reprice at current higher market rates.
• Expense Efficiency: Operating non-interest expense to average assets is currently 1.53%; the long-term goal is 1.45%, though elevated expenses are expected until systems conversion in Q2 2027.
• Capital Deployment: Stock repurchases were paused pending the merger but are expected to resume systematically post-close, leveraging improved profitability and lower growth to enhance capital management.

• Integration Execution Risk: Significant operational complexity exists in running two core systems until late Q2 2027, leading to elevated expenses and temporary pressure on ROA during the transition period.
• Credit Quality Deterioration: Criticized and classified loans increased, largely driven by one isolated commercial construction loan (~$16 million). While adequately collateralized, this highlights specific borrower risk, though management asserts no broader systemic trends.
• Legacy Loan Adjustment: A $575,000 charge-off was recognized related to a legacy TC Federal loan where underlying conditions existed at the merger date, impacting the credit loss reserve and goodwill.
• Interest Rate Sensitivity: High treasury yields create pressure on unrealized investment losses (AOCI), though the portfolio has been downsized and shortened in duration to mitigate rate volatility risk.
• Mortgage Volume Volatility: Elevated mortgage rates are cooling home sales and refinance pipelines, requiring proactive right-sizing of expenses to maintain profitability in a cyclical business line.

Q: Analyst David Bishop asked about the rationale behind the conservative 5% loan growth projection versus the long-term 8-12% target, questioning if pricing discipline or market softness is the primary driver.

A: CEO Heath Fountain explained that while there is sufficient volume, many deals do not meet Colony's strict pricing parameters in the current high-rate environment. He emphasized a strategic balance between growth and profitability, noting that lower growth allows for margin expansion via repricing opportunities. The company aims to return to higher growth rates once long-term rate clarity improves and margins are healthier.

Q: Chris Marinac from Brean Capital inquired about the impact of the high-rate environment on the combined mortgage business and the outlook for deposit gathering in South Carolina following the merger.

A: Fountain stated that while mortgages are cyclical, the larger combined platform provides greater operating leverage and access to third-party origination to manage volatility. Regarding deposits, he highlighted that the merger opens opportunities to pursue larger commercial clients and their operating accounts in South Carolina. Additionally, the expanded wealth platform and enhanced treasury services will serve as key drivers for long-term core deposit growth.

Q: Marinac followed up on the securities portfolio strategy, asking about the duration profile of the 5.5% reinvestment assumption and how the mix of HTM vs. AFS securities will change post-transaction.

A: CFO Derek clarified that the 5.5% reinvestment assumption applies primarily to loans with durations of five years or less, which shortens the overall balance sheet duration compared to the low-yielding AFS securities being sold. He confirmed that while legacy Colony AFS securities are being sold, First Reliance’s investment securities will be marked to market and kept in AFS, resulting in a similar asset classification mix post-merger.

Q: Bishop asked when the company plans to resume stock repurchases and what the expectations are for the SPSL (SBA Small Business Lending) division heading into 2027.

A: Fountain indicated that repurchases will become more systematic quarterly post-merger, supplemented by opportunistic buys based on macro conditions, leveraging the company's strong profitability. Regarding SPSL, he noted a successful shift toward traditional real estate-based lending, with production picking up. New sales management and the addition of South Carolina bankers to the SBA group are expected to drive further activity and revenue pipeline growth.