Colony Bankcorp (NYSE:CBAN) reported improved second-quarter operating performance, with management highlighting margin expansion, lower operating expenses and progress toward its planned merger with First Reliance Bank.
Chief Executive Officer Heath Fountain said the quarter included the first full period following the TC Federal systems conversion and customer integration completed in the first quarter. Fountain said the company reached its goal of a 1.20% operating return on assets after realizing targeted cost savings from that transaction.
Loan Growth Remains Positive, but Management Signals Discipline
Fountain said loan growth during the quarter was about 8.5% annualized, bringing year-to-date annualized loan growth to approximately 7%. He said production improved from the first quarter, and the weighted average pricing on new and renewed loans increased slightly from the prior quarter.
Derek Shelnutt, executive vice president and chief financial officer, said the weighted average rate on new and renewed loans was 7.14% in the second quarter, up from 7.11% in the first quarter. He said pricing discipline remains a focus and is helping the company gain ground on margin.
Still, Fountain said the lending environment remains competitive and that a shifting rate outlook has led to some softening in the pipeline. While management previously expected loan growth to track toward the lower end of its 8% to 12% target range, Fountain said near-term growth could come in slightly below the 8% threshold as the company prioritizes pricing and underwriting discipline.
“We believe in the short term that achieving our financial objectives is important,” Fountain said, adding that the company does not want to grow in a way that pressures financial performance or weakens the balance sheet.
Margin Expands as Funding Costs Stay Stable
Shelnutt said earning asset yields continued to rise, pushing the net interest margin to 3.52% in the quarter. Net interest income increased by approximately $700,000, which he attributed to a six-basis-point increase in earning asset yields, loan growth and pricing on new and renewed loans.
The company’s overall cost of funds was 1.95%, up one basis point from the first quarter. Shelnutt said Colony still expects modest margin increases of a few basis points per quarter over the next several quarters, though the pace will depend on competition for both loans and deposits.
Total deposits declined by $76.2 million during the quarter, including the payoff of about $13.4 million of brokered deposits. Shelnutt said the company often sees seasonal deposit runoff at this time of year and noted that average total deposits were stable with a slight increase during the quarter.
In response to an analyst question, Fountain said deposit generation is “priority one” for Colony. He said the company is focused on commercial relationships, related consumer accounts, private banking resources and deposit-first relationships.
Fee Businesses Contribute to Non-Interest Income Growth
Operating non-interest income increased to $11.6 million, up from $10.1 million in the same quarter last year, Shelnutt said. Fountain said operating non-interest income increased by about $950,000 from the first quarter, supported by higher revenue from several business lines.
Shelnutt said Colony Financial Advisors improved pre-tax income in the second quarter, which was the first full quarter after the company transitioned from a managed program to a dual program. Assets under management rose nearly 15% quarter over quarter to $637 million, up from $555 million in the prior quarter and $219 million in the second quarter of last year.
Mortgage pre-tax income improved on higher production and sales as seasonal activity increased. Colony Insurance also had a stronger quarter, helped by more premiums in force and higher revenue. Shelnutt said pricing on policy premiums has been challenging for the insurance industry but has eased somewhat.
Management also cited improvement in the company’s SBSL division on a pre-tax basis, though Shelnutt said gain-on-sale revenue was softer. Fountain said the division still has “a lot of opportunity for more improvement” and expects that to begin showing over the next few quarters.
Expenses Decline After TC Federal Integration
Operating non-interest expenses declined by about $550,000 from the prior quarter, which Shelnutt attributed largely to post-merger integration cost savings. He said expenses are expected to remain around the current level in the third quarter before increasing after the legal close of the First Reliance merger.
Operating net non-interest expense to average assets was 1.51% in the second quarter, an improvement from the first quarter. Shelnutt said Colony continues to target 1.45% or better over the long term, though that metric is expected to rise after First Reliance closes and then trend back toward the target later in 2027 after systems conversion and customer integration.
Provision expense totaled $1.9 million, slightly higher than the prior quarter. Net charge-offs were similar to the first quarter and were primarily from SBSL, Shelnutt said. Criticized loans were stable, while classified loans declined by about 14%, or $5.6 million.
The company’s board declared a quarterly cash dividend of $0.12 per share. Tangible common equity was 8.99% at quarter-end, compared with 8.49% in the first quarter, and tangible book value per share increased to $15.12 from $14.65. Colony did not repurchase shares during the quarter.
First Reliance Merger Planning Advances
Fountain said integration planning for the First Reliance partnership is underway, with both management teams working toward a legal close in the fourth quarter. He said merger applications have been submitted and the company expects to file the S-4 in the near future.
Shelnutt said First Reliance reported operating earnings of $3.1 million, operating earnings per share of $0.38 and operating ROA of 1.10% for the quarter. He said First Reliance’s results were largely in line with Colony’s model forecast and that Colony does not expect adjustments to previously released pro forma information.
In the question-and-answer session, Fountain said the combined company could benefit from larger lending limits in First Reliance’s markets, creating potential upside to previously forecast loan growth. He also said First Reliance offers opportunities in merchant services, an area where Colony has built recurring revenue and used the product as a deposit account acquisition tool.
Fountain said Colony continues to add experienced bankers to support organic growth, including hires in Columbus, Douglas, Savannah and the Jacksonville metropolitan area. He said markets such as Columbus offer opportunities to gain share amid disruption from larger bank mergers and regional bank concentration.
About Colony Bankcorp (NYSE:CBAN)
Colony Bankcorp, Inc is a bank holding company headquartered in Baxley, Georgia, that operates through its primary subsidiary, The Colony Bank. The company’s core focus is on delivering community banking services tailored to individuals, small businesses and agricultural customers throughout Georgia and Florida. Colony Bankcorp’s structure supports a full suite of deposit and lending solutions designed to meet the needs of local markets.
The company offers a range of deposit products, including personal and business checking accounts, savings and money market accounts, and certificates of deposit.
