Colony Bankcorp Q3 Earnings Call Highlights

Key Points

• Third-quarter performance improved: Operating net income reached $11.6 million, while net interest margin expanded 7 basis points to 3.59%. Loan growth was approximately 2% annualized during the quarter, with management targeting about 5% growth next year.
• First Reliance merger is nearing completion: Regulatory and shareholder approvals are complete, with legal closing expected Nov. 1 and systems conversion planned for the second quarter of 2027. Colony expects near-term integration costs and a 10–15 basis-point decline in operating ROA before full cost savings begin in the third quarter of 2027.
• Balance-sheet repositioning will support future growth: Colony plans to generate about $15 million from a branch sale-leaseback and offset the gain by selling roughly $100 million of low-yielding securities, redeploying most proceeds into higher-yielding loans. Credit quality was generally stable, though criticized loans rose due primarily to one adequately collateralized $16 million commercial construction exposure.

Colony Bankcorp NYSE: CBAN reported improved third-quarter results as net interest margin expanded, operating income increased and the company advanced preparations for its merger with First Reliance.

Chief Executive Officer Heath Fountain said regulatory and shareholder approvals for the First Reliance transaction have been received, with legal closing expected Nov. 1. The companies are planning a systems conversion and customer integration in the second quarter of 2027.

“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,” Fountain said.

Margin Expansion and Loan Growth

Operating net income totaled $11.6 million in the third quarter, while operating pre-provision net revenue was approximately $16.3 million, according to Executive Vice President and Chief Financial Officer Derek Shelnutt.

Net interest margin increased 7 basis points from the prior quarter to 3.59%, supported by higher earning-asset yields. Net interest income rose approximately $508,000, as the weighted average rate on new and renewed loans increased to 7.26% from 7.14% in the preceding quarter.

The company’s overall cost of funds increased modestly to 1.98% from 1.95%. Shelnutt said Colony expects margin to rise in the fourth quarter following the First Reliance closing because of purchase accounting and accretion effects.

Third-quarter loan growth was approximately 2% on an annualized basis, bringing year-to-date annualized growth to about 5.4%. Fountain said Colony expects loan growth of roughly 5% next year, below its longer-term 8% to 12% target, as the bank prioritizes pricing discipline and profitability in a higher-rate environment.

Fountain told analysts that the company is seeing some softening in real estate projects and continues to encounter prospective lending opportunities that do not meet its pricing standards. Still, management expects repricing of lower-yielding fixed-rate loans to support profitability.

Colony’s base-case projections include $223 million of fixed-rate loans with an average current yield of 5.21% and $76 million of investments with an average yield of 1.77%, providing opportunities for higher yields as those assets mature or reprice.

First Reliance Integration Outlook

While management expects the First Reliance transaction to increase scale and strengthen its Southeast presence, Fountain said operating return on assets could decline by 10 to 15 basis points over the next several quarters. The company expects elevated expenses while operating on two core systems before conversion in the second quarter of 2027.

Full merger-related cost savings are expected to begin in the third quarter of 2027. Colony continues to target an operating ROA of 1.35% or higher after it begins realizing those savings.

Shelnutt said First Reliance’s third-quarter performance was largely in line with Colony’s expectations and merger projections. He added that increases in medium- and long-term rates since the merger announcement are not expected to have a major effect on projected earnback because First Reliance has shorter-duration loans and investments.

Management also said it expects the combined company’s mortgage business to face softer near-term production amid elevated mortgage rates. Colony is rightsizing mortgage expenses and infrastructure to expected production levels while maintaining capacity for future growth.

Noninterest Income, Expenses and Credit Quality

Operating noninterest income increased $702,000 from the second quarter to $12.3 million, driven primarily by higher deposit-related fees, interchange income and SBA-related income.

The company said mortgage production slowed due to rates and seasonality. Marine and RV lending recorded lower pretax income because of higher market-driven funds transfer pricing, although interest income in that business rose $190,000 and loans outstanding increased about $10 million.

Assets under management at Colony Financial Advisors rose $17 million during the quarter, or about 11% on an annualized basis. The SBA lending division also improved as gains on SBA loan sales increased, while production rose. Management said much of the current SBA production consists of construction loans expected to be sold next year.

Operating noninterest expense rose $950,000 from the prior quarter, with roughly half of the increase tied to loan-related expenses in the SBA division and the remainder largely related to performance-based compensation. Operating net noninterest expense to average assets was 1.53%, compared with 1.51% in the second quarter. Colony’s longer-term target remains 1.45%.

Provision expense totaled $1.65 million, slightly below the prior quarter. The company reported lower net charge-offs, including a $450,000 reduction in SBA division charge-offs. Third-quarter charge-offs included a legacy TC Federal loan, for which Colony recognized a $575,000 measurement-period adjustment to its credit loss reserve and goodwill before charging off the loan.

Criticized and classified loans increased, largely because of a single commercial construction relationship totaling approximately $16 million. Shelnutt said recent appraisals indicate the loan is adequately collateralized and described the issue as borrower-specific rather than indicative of broader portfolio weakness.

Balance Sheet Repositioning and Capital

Colony announced a sale-leaseback transaction involving three retail branches. The properties sold for an aggregate $19.9 million, and the bank will lease the locations back for an initial 15-year term. The transaction will not result in closures or customer impacts, management said.

The company expects a pretax gain of about $15 million on the property sale, which it plans to offset through the sale of underperforming available-for-sale securities. Colony expects to sell approximately $100 million of securities yielding around 2%.

Management plans to redeploy proceeds from the transactions primarily into loans, while retaining some proceeds for liquidity and potentially investing in short- to medium-duration securities. The company’s reinvestment assumption is 5.5%, primarily for loans, and it expects to deploy more than half of the proceeds into lending over the next several quarters.

Shelnutt said the repositioning is intended to improve interest-rate risk, increase liquidity and support future lending. Colony expects the strategy to add a few basis points to margin and ROA, although full realization is not expected until late 2027.

Tangible common equity stood at 8.99% at quarter-end, unchanged from the second quarter. Tangible book value per share increased to $15.16 from $15.12. The board declared a quarterly cash dividend of $0.12 per share.

Colony paused share repurchases during the quarter because of the pending First Reliance merger, but Fountain said the company expects to resume buybacks after closing when appropriate. He said management anticipates both systematic quarterly repurchases and opportunistic activity depending on market conditions.

About Colony Bankcorp (NYSE:CBAN)

Colony Bankcorp, Inc is a bank holding company headquartered in Fitzgerald, Georgia. Through its wholly owned subsidiary, Colony Bank, the company provides banking and financial services to individuals, families, businesses and institutions. Colony Bank has roots dating to 1935 and operates as a community-focused financial institution serving markets across Georgia and neighboring areas.

The bank offers a range of personal and business deposit accounts, consumer and commercial loans, mortgage lending, treasury management and other banking services.

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