Colony Bankcorp Q1 2026 Earnings Call - Post-Merger Integration Milestones and Margin Expansion

JL, Conference Operator: Thank you for standing by. My name is JL, 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. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. I would now like to turn the conference over to Brantley Collins, Communications Manager. You may begin.

Brantley Collins, Communications Manager, Colony Bankcorp: 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 conditions, 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. Please have those available to reference. With that, I will turn the call over to our Chief Executive Officer, Heath Fountain.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: 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 the operational efficiencies and additional cost savings moving into the 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 end 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%-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 but 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 a 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 pre-tax 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. Pre-tax 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 advisors 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 pre-tax 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 that indicates significant increases. Also, during the quarter, we added 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 to scale, and we are actively evaluating opportunities that align with our strategic 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’s 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.

Derek, Chief Financial Officer, Colony Bankcorp: 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 remains relatively stable, decreasing 2 basis points quarter-over-quarter to 1.94%. We expect that our cost of funds will remain around this level unless we see changes to short-term interest rates. Heath mentioned 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 a 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 non-interest 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 non-interest income increased $1.7 million from $9 million in the first quarter of 2025. On slide 17, we illustrate pre-tax income by business line. Mortgage pre-tax 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 pre-tax 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 advisors. 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 pre-tax 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 non-interest 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. We expect that to be outpaced by additional revenue, which should generate positive operating leverage across our business lines. Operating net non-interest expense to average assets was 1.68% for the quarter, and this is reflective of seasonally lower activity in our business lines, 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.

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 are on slide 32, and while there was a slight increase in core bank loan charge-offs, it only represents $315,000 or about five basis points of average loans. Both non-performing loans and classified loans decreased quarter-over-quarter. The allowance for credit losses was 0.90% of total loans and 122% of non-performing 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.

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 signals 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.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: 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 JL to open up the line for any questions we have.

JL, Conference Operator: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you’d like to withdraw your question, simply press star one again. Your first question comes from the line of David Bishop of Hovde Group. Your line is open.

Hey, good morning, Heath and Derek.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Morning, Dave.

Morning.

JL, Conference Operator: Guys, 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? Is this something we should maybe get used to run rate closer to this, closer to $2 million per quarter? 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 here the latter half of the year as these sort of roll off the books?

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Yeah, David, I think what I would expect to see is volumes pick back up and the overall profitability of that division and revenues to get back closer to levels we saw middle of last year. On the provisioning and charge-off levels, I think going forward, at where our allowance is. We’re going to generally see backfilling any charge-offs. I think in future quarters, we should see a little more loan growth than we saw this quarter. We’ll keep up with that. Somewhere around the current level, maybe down a little, up a little, just depending on the charge-off activity. Because even though it’s small in relative dollars, we’re replenishing those reserves.

JL, Conference Operator: Got it. Then, I think I heard you say, Heath, at the start of the call, feel good about the loan pipeline sort of replenishing here. Still targeting that 8% loan growth rate. I’m just curious where you’re seeing the best opportunity to grow the portfolio and where you’re seeing that current pricing. Thanks.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Yeah. Derek mentioned, start off with pricing. We were a little over 7% for the quarter. Of course, prime around 6.75, and it’s looking like that’ll 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 yield. It is competitive out there. I think we’re seeing it geographically across the board, and I would say it would look like our current portfolio.

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. I think we’d see a track similar to the breakdown of our portfolio today. We are seeing it pretty good across our footprint.

JL, Conference Operator: Got it. One final question, I guess, before I hop in the queue. The insurance group, you recognized their contribution here. Do you think pricing and conditions have improved that market? You continue to see an uptick in pre-tax profitability there this year? Thanks.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Yeah. I do think we will. Last year, we added the Ellerbee Agency to that team, and we got through that integration at a time where you were seeing rate increases, and it was a tougher environment. We’re now starting to see some rate decreases. Plus, we’ve 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. I think we’ll continue to see good things out of the insurance group.

JL, Conference Operator: Great. I’ll hop back in the queue.

JL, Conference Operator: Your next question comes from the line of Christopher Marinac of Brean Capital. Your line is open.

Christopher Marinac, Analyst, Brean Capital: Hey, good morning. Heath and Derek, can you tell 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?

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Yeah, Chris, that’s a great question. We see this as a really good deposit acquisition part of our business. We have taken our merchant, our treasury, and our credit card group and lumped that all into what we call banking solutions. 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. There’s a ton of opportunity to lead with the right product. 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. We find that customers really are happy to meet with us on a first call and turnover their merchant statements to us and give us an opportunity.

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. It’s really a great customer acquisition tool to bring in core commercial small business deposit relationships, and we’re seeing really good success. As you see that just incrementally grow, that’s very much a recurring revenue business. We just keep building that, and we don’t really have to add much level of expense there as we grow. We’re excited about that business. They’re doing a great job. The Banking Solutions team altogether, how that’s integrated and made it simpler for us, it leads to a quicker

Derek, Chief Financial Officer, Colony Bankcorp: A quicker time to win a relationship. We’re very pleased with how that group has performed.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Great. 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’ve repeated again this morning?

Derek, Chief Financial Officer, Colony Bankcorp: Yeah, I think so. If you look at our new and renewed loan rate 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. Obviously, that depends on the level of growth that we see. As Heath mentioned earlier, we’re starting to see some competition there on loan pricing. That will have some impact there as well. I do think that we have the possibility to see that continue to kind of chug along and increase over time, outside of the impacts of any accelerated accretion that we see the impact of overall loan yield on.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: 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 accelerated accretion. Even if we pull back some, there’s opportunity to be originating new and renewed above our current yield. Then plus, the amortization that’s running off any payoffs that we get that are at those lower yields that were booked previously that are starting to renew and amortize. We feel like that place on the asset side, we should see continued improvement there.

Christopher Marinac, Analyst, Brean Capital: Great. Last one for me just has to do with overall expense efficiency in general. Should we continue to see that progress as this year plays out, and any, I guess, just general goals on next year?

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Yeah. Very much so. We’re very focused on that. Again, we look at that from the standpoint of our net NIE, which was 168, and we should start seeing that trend towards that 145. We’ll have merger expenses or additional staffing and contract expenses from TC that we’re in Q1 that’ll 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. You’ll see improvement there. Where we expect some of the variable expenses in our business lines increase a little bit as we go through Q2 and Q3, which are seasonally higher, plus the return of SBSL. I’d just point out, we saw year-over-year increases in our complementary lines, really in a quarter that our SBSL was down a little bit, and it’s a significant driver.

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 much more profitable this quarter. 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 and the core bank.

Christopher Marinac, Analyst, Brean Capital: Sounds good. Thank you both for your feedback this morning, and thanks for hosting the call.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Thank you, Chris.

JL, Conference Operator: We have a follow-up question from David Bishop of Hovde Group. Your line is open.

JL, Conference Operator: Yeah. Heath, maybe just curious, you got 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. Thanks.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Yeah. Thanks, David. Good question. We do believe we’re at a place, we’ve gotten the TC Federal integration complete. We are out actively having conversations. It’s an area of focus for our team, but particularly for me. We’re out being very active throughout our footprint. On slide 14, we lay out kind of our target area, which is really Georgia and the contiguous states. We’re out 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.

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 limits to be able to grow better as a combined company than either could on their own. 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. We are at the place now where we feel good about being able to start the process with another one. Hopefully, we’ll keep having good success there, like we have with this last one, and just keep the momentum going forward.

JL, Conference Operator: Got it. Sounds great. Appreciate the color.

JL, Conference Operator: There are no further questions at this time. Thus concluding our Q&A session. I will now turn the conference back over to Heath Fountain, CEO, for closing remarks.

Heath Fountain, Chief Executive Officer, Colony Bankcorp: Thanks, JL. Thanks again, everyone, for being on the call today and for your support of Colony Bankcorp. We’re excited about the opportunities ahead and appreciate you being on the call today.

JL, Conference Operator: This concludes today’s conference call. You may now disconnect.