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Colony Bank strives to be a high
performance community hank, providing
shareholders with a fair return on their
investment while improvingthe quality of life in the
communities we serve.
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Our mission can hest be accomplished by applying sound
bankingprinciples in corporate decision-maldngand by
providing our customers a degree of highly personalized,
professional service that is unmatched in the market.
SERVICE I STABfLITY I SUCCESS
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ontents
Table of Contents ........1
Letter to the
Shareholders ............. 2
Financial Summary .... 3
Board of Directors...... 4
West and East
Markets ..................... 4
~■
• -
In Memory ................ 5
Consolidated Financial
Statements ................. Z
Dear Shareholder,
Colony Bankcorp, Inc. once again demonstrated a
trend of improvement in profitability and credit
quality while deleveraging the company. In general,
we operated the company to improve earnings, liquidate
problem assets, and pay down our TARP preferred stockwhich
has a current after-taz~ cost of 9.0%. As we look fornard to
2016, we are committed to the same strategy; however, given
the unproved financial condition of the company, we are also
considering product and market e~cpansion.
Currently we have three fixed asset initiatives underway. In
Tifton, we are opening a new office in the historic downtown
area while simultaneously closing the two smaller, leased
offices we currently occupy. In Statesboro, we purchased and
are renovating a space on the downtown square and will open
a residential mortgage and commercial loan production office.
In Savannah, we have purchased a building in the downtown
historic district and are renovating the 100-year-old structure
to house our downtown office. This will be our third office in
the Savannah MSA, which has been demonstrating impressive
growth trends which should only improve with the completion of
the highly publicized port expansion.
31.31% in spite of the $10,000,000 capital transfer from
Colony Bank to the holding company, Colony Bankcorp, Inc.
This $10,000,000 transfer enabled the holding company
to partially redeem its TARP preferred stock, reducing the
balance from $28,000,000 to $18,021,000. This reduction
will lower the carrying cost of the TARP preferred stock by
almost $900,000 in 2016 alone. The board and management
are committed to further reducing and/or eliminating the
TARP preferred stock through continued balance sheet
management and consistent earnings.
'I`he economic and interest rate environment was relatively
stable throughout 2015, although beginning the year the
consensus opinion seemed to be that the economy was
gaining momentum and the Federal Reserve would be
increasing its base rate several times. Actually, no increase
materialized until December when the base rate was
increased 25%, the first increase of any size in many years.
At the beginning of 2016, consensus opinion once again
called for a year of numerous rate increases because the
Federal Reserve envisioned improving economic activity.
Immediately after the newyear, China's stock market incurred
turmoil, the price of crude oil plummeted, the US markets
During 2oi5 our net income available to shareholders increased
retreated, and the US dollar strengthened. Each of these
23.8% from $4,843,021 or $.57 per share to X5,997,687 or $.71
events, combined with 2016 being an election year, make
per share. Colony Bank's substandard assets to tier one capital
projecting the coming economic/interest rate environment
plus loan loss reserve ratio improved slightly from 32.39% to
difficult. Frankly, a stable interest rate environment would
be preferable as loan demand is moderate to stable, but a
rising rate environment would be a positive if the economic
prosperity the Federal Reserve is predicting comes to central
and south Georgia.
The board, management and staff of Colony Bankcorp, Inc.
strive constantly to develop strategic plans and to implement
those plans to create performance in the marketplace. Thus,
the title for this year's annual report, Turning Plans into
Performance! We hope your plans for 2016 will result in the
achievement of your goals, and we look forward to reporting
to you another successful year for Colony Bankcorp, Inc.
Thankyou foryour continued support,
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B. Gene Waldron
Chairman of the Board
Edward P. Loomis, Jr.
President and
Chief Executive Officer
lnancla
umma
2015 KEY PERFORMANCE INDICATORS
Years Ended Decemher 31, 2015 and 2014
Total Assets
Total Deposits
$1,174,149
$1,146,898
2.38%
$1,011,554
$979,303
3.29%
Loans (Net of Unearned Income)
$758,279
$745,733
1.68%
Net Income
$5,998
$4,843
23.85%
Basic Earnings
Common Book Value/Share
$0.71
$9.18
$0.57
24.56%
$8.42
9.03%
KEY TRENDS
A Historical Comparative
Net Income
(in thousands)
Return on Average
Shareholders' Equity
Diluted Earnings
Per Share
$5,998
$4,843
$3,120
51,206
$1,133
5.90%
5.11%
3.34%
1.25%
1.20%
$0.71
50.57
$0.37
$0.14
$0.13
RETURN ON
AVERAGE ASSETS
2015
0.52%
2014
0.43%
NET INTEREST
MARGIN
2015
3.52%
2014
3.60%
PAGE 3
e~' Market
Cordele
Moultrie
Sylvester
Warner Robins
Centerville
Albany/Leesburg
Columbus
Thomaston
Tifton
Ashburn
Eddie Hoyle
EVP Regional
Executive Officer
~~ Market
Douglas/Broxton
Eastman/Chester/Soperton
Valdosta
Quitman
Savannah
Rochelle/Pitts
Fitzgerald
Lee A. Northcutt
EVP Regional
Executive Officer
PAGE 4
Boardo Director
Edward P. Loomis, Jr.
President/CEO
Colony Bankcorp, Inc.
Fitzgerald, Georgia
B. Gene Waldron
Chairman
Colony Bankcorp, Inc.
President/CEO
Waldron Enterprises, Inc.
Douglas, Georgia
Mark H. Massee
Vice Chairman
Colony Bankcorp, Inc.
President
Massee Builders, Inc.
Mayor of Gtity of Fttxgerald
Fitagerald, Georgia
Jonathan W.R. Ross
President
Ross Construction Co., Inc.
Tifton, Georgia
Scott L. Downing
President
SDI Investments
Fitzgerald, Georgia
Michael Frederick
(Freddie) Dwozan, Jr.
President/CEO/Owner
Medical Center
Prescription Shop
Eastman, Georgia
Terry L. Hester
EVP/CFO
Colony Bankcorp, Inc.
Fitzgerald, Georgia
In Memory of Marion Massee, II I
Mr. Massee always manifested a strong interest in the welfare of this banking
organization, and in the betterment and general welfare of all people
within the communities we serve.
Mr. Massee was instrumental in contributing to the growth of Colony
Bank, as well as the development of Colony Bankcorp, Inc. Marion
served as Chairman of Colony Bankcorp, Inc. from February 6,
1990 until Apri123, 2002 and was a Founder of The Bank of
Fitzgerald which was renamed Colony Bank in 2000. He
also served as a Director Emeritus until he passed away
on April 24, 2015. Marion's counsel and guidance
will be greatly missed.
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In Memory of Thomas "Tommy" Clay Hester
We celebrate the life and legacy of Mr. Hester, Market
President of Colony Savannah from 2011, until his death on
1pri114, 2015. His contributions to our organization played a
significant role in the success of the bank today and greatly influenced
many employees and customers alike.
'qtr. Hester's 45-year career in banking started with Savannah Bank in 1970
and grew to include other banks, such as Atlantic Bank, BankSouth of Savannah,
First Liberty Bank, Coastal Bank and finally Colony Bank. He was deeply
involved in the community serving on the Boards of many organizations,
touching countless lives with landness, loyalty and humor. He will be ,
remembered with honor and respect as a valued member of the
~ ~olony Team.
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MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLC
CERTIFIED PUBLIC ACCOUNTANTS
389 Mulberry Street •Post Office Box Ooe •Macon, GA 31202
Telephone (478) 746-6277 •Facsimile (478) 743-6858
mmmcpa.com
March 10, 2016
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Colony Bankcorp, Inc.
We have audited the accompanying consolidated balance sheets of Colony Bankcorp, Inc. and
Subsidiary as of December 31, 2015 and 2014 and the related consolidated statements of operations,
comprehensive income (loss), changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2015. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Colony Bankcorp, Inc. and Subsidiary as of December 31, 2015 and
2014, and the results of its operations and cash flows for each of the years in the three-year period ended
December 31, 2015 in conformity with accounting principles generally accepted in the United States of
America.
We were not engaged to examine management's assessment of the effectiveness of Colony Bankcorp,
Inc.'s internal control over financial reporting as of December 31, 2015 included under Item 9A, Controls
and Procedures, in Colony Bankcorp, Inc.'s Annual Report on Form 10-K and, accordingly, we do not
express an opinion thereon.
McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC
.,
7
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
ASSETS
Cash and Cash Equivalents
Cash and Due from Banks
Federal Funds Sold
2015
2014
$ 22,256,646
-
$ 24,472,870
20,132,062
22,256,646
44,604,932
Interest-Bearing Deposits 38,615,299
21,206,039
Investment Securities
Available for Sale, at Fair Value
Held to Maturity, at Cost (Fair Value of
$29,923 as of December 31, 2014) -
296,149,299
274,594,586
29,796
Federal Home Loan Bank Stock, at Cost 2,730,500
2,830,800
296,149,299
274,624,382
Loans
Allowance for Loan Losses
Unearned Interest and Fees
Premises and Equipment
Other Real Estate (Net of Allowance of $1,582,101
and $3,319,644 in 2015 and 2014, Respectively)
Other Intangible Assets
Other Assets
Total Assets
758,635,595
(8,603,905)
(356,798)
746,093,809
(8,802,316)
(361,374)
749,674,892
736,930,119
26,453,530
24,960,445
8,839,103
10,401,832
116,264
152,012
29,313,894
31,187,420
$1,174,149,427
$1,146,897,981
See accompanying notes which are an integral part of these financial statements.
8
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-Bearing
Interest-Bearing
Borrowed Money
Subordinated Debentures
Other Borrowed Money
Other Liabilities
Commitments and Contingencies
2015
2014
$ 133,886,271
877,667,965
$ 128,339,763
850,963,711
1,011,554,236
979,303,474
24,229,000
40,000,000
24,229,000
40,000,000
64,229,000
64,229,000
2,909,569
338.195
Stockholders' Equity
Preferred Stock, Stated Value $1,000; Authorized
10,000,000 Shares, Issued 18,021 and 28,000 Shares as of
December 31, 2015 and 2014
Common Stock, Par Value $1; Authorized
20,000,000 Shares, Issued 8,439,258 Shares
as of December 31, 2015 and 2014
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss, Net of Tax
18,021,000
28,000,000
8,439,258
29,145,094
44,285,621
(4,434,351)
8,439,258
29,145,094
38,287,934
(4,844,974
95,456,622
99,027,312
Total Liabilities and Stockholders' Equity
$1,174,149,427
$1,146,897,981
See accompanying notes which are an integral part of these financial statements.
D
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
Interest Income
Loans, Including Fees
Federal Funds Sold
Deposits with Other Banks
Investment Securities
2015
2014
2013
$39,716,269
14,561
79,735
$39,735,615
32,100
41,639
$41,350,195
39,199
26,704
U.S. Government Agencies
State, County and Municipal
Corporate Obligations
Dividends on Other Investments 122,070
4,235,207
107,638
-
4,737,878
99,736
-
] 15,134
3,516,978
123,972
47,275
81,398
Interest Expense
Deposits
Federal Funds Purchased
Borrowed Money
Net Interest Income
44,275,480
44,762,102
45,185,721
4,856,673
26
1,712,548
5,113,024
19
1,685,744
5,821,366
116
1,675,164
6,569,247
6,798,787
7,496,646
37,706,233
37,963,315
37,689,075
Provision for Loan Losses 865,500
1,308,000
4,485,000
Net Interest Income After Provision for Loan Losses 36,840,733
36,655,315
33,204,075
Noninterest Income
Service Charges on Deposits
Other Service Charges, Commissions and Fees
MoRgage Fee Income
Securities Gains (Losses)
Gain on Sale of SBA Loans
Other
Noninterest Expenses
Salaries and Employee Benefits
Occupancy and Equipment
Directors' Fees
Legal and Professional Fees
Foreclosed Property
FDIC Assessment
Advertising
Software
Telephone
ATM/Card Processing
Other
Income Before Income Taxes
4,268,438
2,627,157
527,187
(11,466)
-
1,633,205
4,649,008
2,387,589
419,963
23,735
-
1,644,294
4,690,594
1,725,271
484,396
(363,804)
635,190
1,205,631
9,044,521
9,124,589
8,377,283
17,589,631
3,989,347
358,291
737,731
1,682,783
899,302
624,844
992,593
710,038
1,061,262
5,078,932
17,507,926
4,062,844
392,132
785,683
2,701,436
965,898
652,374
925,489
735,735
905,732
5,344,743
16,691,972
3,794,524
416,972
721,322
3,918,128
1,321,981
508,292
852,475
778,151
685,497
4,928,135
33,724,754
34,979,992
34,617,449
12,160,500
10,799,912
6,963,909
Income Taxes 3,787,803
3,268,287
2,334,864
8,372,697
Net Income
Preferred Stock Dividends 2,375,010
7,531,625
2,688,604
4,629,045
1,508,761
Net Income Available to Common Stockholders $ 5,997,687
$ 4,843,021
$ 3, 120,284
Net Income Per Share of Common Stock $
Basic $
Diluted
Cash Dividends Declared Per Share of Common Stock $
0.71
0.71
0.00
$
$
~
0.57
0.57
$
$
0.37
0.37
0.00
$
O.uu
Weighted Average Shares Outstanding, Basic 8,439,258
Weighted Average Shares Outstanding, Diluted 8,458,~i61
8,439,258
8,439,258
8,439,~SR
~t,439,?58
See accompanying notes which are an integral part of these financial statements.
10
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31
'Vet Income $ 8,372,697
$ 7,531,625
$ 4,629,045
2015
2014
2013
Other Comprehensive Income (Loss)
Gains (Losses) on Securities Arising During the Year
Tax Effect
610,689
(207,630
6,432,906
(2,187,189)
(13,886,854)
4,721,531
Realized Gains (Losses) on Sale of AFS Securities
Tax Effect
11,466
(3,898)
(23,735)
8,070
(2,819)
959
Impairment Loss on Securities
-
Tax Effect -
-
-
366,623
(124,652)
Change in Unrealized Gains (Losses) on Securities
Available for Sale, Net of Reclassification
Adjustment and Tax Effects
410,623
4,230,052
(8,925,212)
Comprehensive Income (Loss)
$ 8,783,320
$11,761,677
$(4,296,167)
See accompanying notes which are an integral part of these financial statements.
'~
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
Preferred
Shares
Issued
Preferred
Stock
Common
Shares
Issued
Common
Stock
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, December 31, 2012
28,000
$27,827,053
8,439,258
$8,439,258
$29,145,094
$30,497,576
$(149,814)
$95,759,167
Change in Net Unrealized Gains (Losses) on
Securities Available for Sale, Net of
Reclassification Adjushnent and Tax Effects
Accretion of Fair Value of Warrant
Dividends on Preferred Shares
Net Income
172,947
(172,947)
(1,508,761)
4,629,045
(8,925,212)
(8,925,212)
-
(1,508,761)
4,629,045
Balance, December 31, 2013
28,000
28,000,000
8,439,258
8,439,258
29,145,094
33,444,913
(9,075,026)
89,954,239
Change in Net Unrealized Gains (Losses) on
Securities Available for Sale, Net of
Reclassification Adjustment and Tax Effects
Dividends on Preferred Shares
Net Income
(2,688,604)
7,531,625
4,230,052
4,230,052
(2,688,604)
7,531,625
Balance, December 31, 2014
28,000
28,000,000
8,439,258
8,439,258
29,145,094
38,287,934
(4,844,974)
99,027,312
Change in Net Unrealized Gains (Losses) on
Securities Available for Sale, Net of
Reclassification Adjustment and Tax Effects
Dividends on Preferred Shares
Redemption of Preferred Stock
Net Income
(9,979)
(9,979,000)
(2,375,010)
8,372,697
410,623
410,623
(2,375,010)
(9,979,000)
8,372,697
Balance, December 31, 2015
18,021
$18,021,000
8,439,258
$8,439,258
$29,145,09-t
$44,285,621 ~(a,434,351)
$95,456,622
See accompanying notes which are an integral part of these financial statements.
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to Net
Cash Provided from Operating Activities
Depreciation
Amortization and Accretion
Provision for Loan Losses
Deferred Income Taxes
Securities (Gains) Losses
(Gain) Loss on Sale of Premises and Equipment
Loss on Sale of Other Real Estate and Repossessions
Provision for Losses on Other Real Estate
Increase in Cash Surrender Value of Life Insurance
Change In
Interest Receivable
Prepaid Expenses
Interest Payable
Accrued Expenses and Accounts Payable
Other
Cash Flows from Invesring Activities
Interest-Bearing Deposits in Other Banks
Purchase of Investment Securities
Available for Sale
Proceeds from Sale of Investment Securities
Available for Sale
Proceeds from Maturities, Calls and Paydowns
of Investment Securities
Available for Sale
Held to Maturity
Proceeds from Sale of Premises and Equipment
Net Loans to Customers
Purchase of Premises and Equipment
Proceeds from Sale of Other Real Estate and Repossessions
Proceeds from Sale of Federal Home Loan Bank Stock
Purchase of Bank-Owned Life Insurance
Cash Flows from Financing Activities
Interest-Bearing Customer Deposits
Noninterest-Bearing Customer Deposits
Proceeds from Other Borrowed Money
Principal Payments on Other Borrowed Money
Dividends Paid on Preferred Stock
Redemption of Preferred Stock
2015
2014
2013
$ 8,372,697
$ 7,531,625
$ 4,629,045
1,657,229
1,797,152
865,500
625,436
11,466
11,047
600,663
453,148
(299,010)
(354,274)
278,637
32,253
(202,343)
217,686
1,595,253
1,312,857
1,308,000
1,932,950
(23,735)
(12,489)
828,411
1,006,827
(590,674)
55,786
(64,633)
(1,099,756)
197,195
788,958
1,527,392
2,667,404
4,485,000
2,178,222
363,804
(677)
1,565,091
1,321,418
(338,712)
285,033
(168,060)
385,285
213,753
(243,543)
14,067, 28 7
14,766,5 75
18, 870,455
(17,409,260)
754,252
(164,950)
(102,336,227)
(56,201,891)
(132,419,073)
28,273,634
13,620,956
72,672,795
51,423,541
9,734
28,608
(21,255,018)
(3,189,969)
8,154,596
100,300
-
36,440,646
12,968
14,376
(3,156,342)
(1,681,115)
7,233,497
333,100
-
48,330,382
11,623
2,500
(19,959,948)
(1,489,579)
8,041,638
200,400
(10,000,000)
(56,200,061)
(2,629,553)
(34,774,212)
26,704,254
5,546,508
27,000,000
(27,000,000)
(2,487,274)
(9,979,000)
(21,305,068)
13,079,062
-
-
16,550,430
(8,705,841)
21,500,000
(16,500,000)
(5,492,749)
-
-
19,784,488
(13,718,755)
12,844,589
Net Increase (Decrease) in Cash and Cash Equivalents
(22,348,286)
(1,581,733)
(3,059,168)
Cash and Cash Equivalents, Beginning
44,604,932
46,186,665
49,245,833
Cash and Cash Equivalents, Ending
$ 22,256,646
~ -4-1.~,O4.9~t?
$ 46,186,665
See accompanying notes which are an integral part of these financial statements.
13
COLONY BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Principles of Consolidation
Colony Bankcorp, Inc. (the Company) is a bank holding company located in Fitzgerald, Georgia. The
consolidated financial statements include the accounts of Colony Bankcorp, Inc. and its wholly-owned
subsidiary, Colony Bank, Fitzgerald, Georgia. All significant intercompany accounts have been
eliminated in consolidation. The accounting and reporting policies of Colony Bankcorp, Inc. conform to
generally accepted accounting principles and practices utilized in the commercial banking industry.
Nature of Operations
The Company provides a full range of retail and commercial banking services for consumers and small- to
medium-size businesses located primarily in central, south and coastal Georgia. Colony Bank is
headquartered in Fitzgerald, Georgia with banking offices in Albany, Ashburn, Broxton, Centerville,
Chester, Columbus, Cordele, Douglas, Eastman, Fitzgerald, Leesburg, Moultrie, Pitts, Quitman, Rochelle,
Savannah, Soperton, Sylvester, Thomaston, Tifton, Valdosta and Warner Robins. Lending and investing
activities are funded primarily by deposits gathered through its retail banking office network.
Use of Estimates
In preparing the financial statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses
for the period. Actual results could differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the determination of the allowance
for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction
of loans.
Reclassifications
In certain instances, amounts reported in prior years' consolidated financial statements and note
disclosures have been reclassified to conform to statement presentations selected for 2015. Such
reclassifications had no effect on previously reported stockholders' equity or net income.
i~
(1) Summary of Significant Accounting Policies (Continued)
Concentrations of Credit Risk
Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain
types of collateral, certain types of industries or certain geographic regions. The Company has a
concentration in real estate loans as well as a geographic concentration that could pose an adverse credit
risk, particularly with the current economic downturn in the real estate market. At December 31, 2015,
approximately 86 percent of the Company's loan portfolio was concentrated in loans secured by real
estate. A substantial portion of borrowers' ability to honor their contractual obligations is dependent upon
the viability of the real estate economic sector. Declining collateral real estate values that secure land
development, construction and speculative real estate loans in the Company's larger MSA markets have
resulted in high loan loss provisions in recent years. In addition, a large portion of the Company's
foreclosed assets are also located in these same geographic markets, making the recovery of the carrying
amount of foreclosed assets susceptible to changes in market conditions. Management continues to
monitor these concentrations and has considered these concentrations in its allowance for loan loss
analysis.
The success of the Company is dependent, to a certain extent, upon the economic conditions in the
geographic markets it serves. Adverse changes in the economic conditions in these geographic markets
would likely have a material adverse effect on the Company's results of operations and financial
condition. The operating results of the Company depend primarily on its net interest income.
Accordingly, operations are subject to risks and uncertainties surrounding the exposure to changes in the
interest rate environment.
At times, the Company may have cash and cash equivalents at financial institutions in excess of federal
deposit insurance limits. The Company places its cash and cash equivalents with high credit quality
financial institutions whose credit rating is monitored by management to minimize credit risk.
Investment Securities
The Company classifies its investment securities as trading, available for sale or held to maturity.
Securities that are held principally for resale in the near term are classified as trading. Trading securities
are carried at fair value, with realized and unrealized gains and losses included in noninterest income.
Currently, no securities are classified as trading. Securities acquired with both the intent and ability to be
held to maturity are classified as held to maturity and reported at amortized cost. All securities not
classified as trading or held to maturity are considered available for sale. Securities available for sale are
reported at estimated fair value. Unrealized gains and losses on securities available for sale are excluded
from earnings and are reported, net of deferred taxes, in accumulated other comprehensive income (loss),
a component of stockholders' equity. Gains and losses from sales of securities available for sale are
computed using the specific identification method. Securities available for sale includes securities, which
may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in
regulatory capital requirements, or unforeseen changes in market conditions.
l~
(1) Summary of Significant Accounting Policies (Continued)
Investment Securities (Continued)
The Company evaluates each held to maturity and available for sale security in a loss position for other-
than-temporary impairment (OTTI). In estimating other-than-temporary impairment losses, management
considers such factors as the length of time and the extent to which the market value has been below cost,
the financial condition of the issuer and the Company's intent to sell and whether it is more likely than not
that the Company will be required to sell the security before anticipated recovery of the amortized cost
basis. If the Company intends to sell or if it is more likely than not that the Company will be required to
sell the security before recovery, the OTTI write-down is recognized in earnings. If the Company does
not intend to sell the security or it is not more likely than not that it will be required to sell the security
before recovery, the OTTI write-down is separated into an amount representing credit loss, which is
recognized in earnings, and an amount related to all other factors, which is recognized in other
comprehensive income (loss).
Federal Home Loan Bank Stock
Investment in stock of a Federal Home Loan Bank (FHLB) is required for every federally insured
institution that utilizes its services. FHLB stock is considered restricted, as defined in the accounting
standards. The FHLB stock is reported in the consolidated financial statements at cost. Dividend income
is recognized when earned.
Loans
Loans that the Company has the ability and intent to hold for the foreseeable future or until maturity are
recorded at their principal amount outstanding, net of unearned interest and fees. Loan origination fees,
net of certain direct origination costs, are deferred and amortized over the estimated terms of the loans
using the straight-line method. Interest income on loans is recognized using the effective interest method.
A loan is considered to be delinquent when payments have not been made according to contractual terms,
typically evidenced by nonpayment of a monthly installment by the due date.
When management believes there is sufficient doubt as to the collectibility of principal or interest on any
loan or generally when loans are 90 days or more past due, the accrual of applicable interest is
discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of
collection. Interest payments received on nonaccrual loans are either applied against principal or reported
as income, according to management's judgment as to the collectibility of principal. Loans are returned
to an accrual status when factors indicating doubtful collectibility on a timely basis no longer exist.
Loans Modified in a Troubled Debt Restructuring (TDR)
Loans are considered to have been modified in a TDR when, due to a borrower's financial difficulty, the
Company makes certain concessions to the borrower that it would not otherwise consider for new debt
with similar risk characteristics. Modifications may include interest rate reductions, principal or interest
forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure
or repossession of the collateral. Generally, a nonaccrual loan that has been modified in a TDR remains
on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms
of the modified loan. However, performance prior to the modification, or significant events that coincide
with the modification, are included in assessing whether the borrower can meet the new terms and may
result in the loan being returned to accrual status at the time of loan modification or after a shorter
performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan
remains on nonaccrual status. Once a loan is modified in a troubled debt restructuring, it is accounted for
as an impaired loan, regardless of its accrual status, until the loan is paid in full, sold or charged off.
16
(1) Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision
for loan losses charged to earnings. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon
management's periodic review of the collectibiliry of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective, as it requires estimates that are susceptible to significant revisions as more
information becomes available.
The allowance consists of specific, historical and general components. The specific component relates to
loans that are classified as either doubtful, substandard or special mention. For such loans that are also
classified as impaired, an allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan are lower than the carrying value of that loan. The
historical component covers nonclassified loans and is based on historical loss experience adjusted for
qualitative factors. A general component is maintained to cover uncertainties that could affect
management's estimate of probable losses. The general component of the allowance reflects the margin
of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific
and historical losses in the portfolio. General valuation allowances are based on internal and external
qualitative risk factors such as (1) changes in lending policies and procedures, including changes in
underwriting standards and collections, charge offs, and recovery practices, (2) changes in international,
national, regional, and local conditions, (3) changes in the nature and volume of the portfolio and terms of
loans, (4) changes in the experience, depth, and ability of lending management, (5) changes in the volume
and severity of past due loans and other similar conditions, (6) changes in the quality of the organization's
loan review system, (7) changes in the value of underlying collateral for collateral dependent loans, (8)
the existence and effect of any concentrations of credit and changes in the levels of such concentrations,
and (9) the effect of other external factors (i.e. competition, legal and regulatory requirements) on the
level of estimated credit losses.
Loans identified as losses by management, internal loan review and/or Bank examiners are charged off.
A loan is considered impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record and the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of
the collateral if the loan is collateral dependent.
17
(1) Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
A significant portion of the Company's impaired loans are deemed to be collateral dependent.
Management therefore measures impairment on these loans based on the fair value of the collateral.
Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by
the Company or by senior members of the Company's credit administration staff. The decision whether
to obtain an external third-party appraisal usually depends on the type of property being evaluated.
External appraisals are usually obtained on more complex, income producing properties such as hotels,
shopping centers and businesses. Less complex properties such as residential lots, farm land and single
family houses may be evaluated internally by senior credit administration staff. When the Company does
obtain appraisals from external third-parties, the values utilized in the impairment calculation are "as is"
or current market values. The appraisals, whether prepared internally or externally, may utilize a single
valuation approach or a combination of approaches including the comparable sales, income and cost
approach. Appraised amounts used in the impairment calculation are typically discounted 10 percent to
account for selling and marketing costs, if the repayment of the loan is to come from the sale of the
collateral. Although appraisals may not be obtained each year on all impaired loans, the collateral values
used in the impairment calculations are evaluated quarterly by management. Based on management's
knowledge of the collateral and the current real estate market conditions, appraised values may be further
discounted to reflect facts and circumstances known to management since the initial appraisal was
performed.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences
between the comparable sales and income data available. Such adjustments are typically significant and
result in a level 3 classification of the inputs for determining fair value. Because of the high degree of
judgment required in estimating the fair value of collateral underlying impaired loans and because of the
relationship between fair value and general economic conditions, we consider the fair value of impaired
loans to be highly sensitive to changes in market conditions.
Premises and Equipment
Premises and equipment are recorded at acquisition cost net of accumulated depreciation.
Depreciation is charged to operations over the estimated useful lives of the assets. The estimated useful
lives and methods of depreciation are as follows:
Description
Life in Years
Method
Banking Premises
Furniture and Equipment
15-40
5-10
Straight-Line and Accelerated
Straight-Line and Accelerated
Expenditures for major renewals and betterments are capitalized. Maintenance and repairs are charged to
operations as incurred. When property and equipment are retired or sold, the cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is reflected in other income or
expense.
Intangible Assets
Intangible assets consist of core deposit intangibles acquired in connection with a business combination.
The core deposit intangible is initially recognized based on an independent valuation performed as of the
consummation date. The core deposit intangible is amortized by the straight-line method over the average
remaining life of the acquired customer deposits.
18
(1) Summary of Significant Accounting Policies (Continued)
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from
the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not
maintain effective control over the transferred assets through an agreement to repurchase them before
their maturity.
Statement of Cash Flows
For reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing amounts
due from banks, federal funds sold and securities purchased under agreement to resell. Cash flows from
demand deposits, interest-bearing checking accounts, savings accounts, loans and certificates of deposit
are reported net.
Securities Purchased Under Agreement to Resell and Securities Sold Under Agreements to
Repurchase
The Company purchases certain securities under agreements to resell. The amounts advanced under these
agreements represent short-term loans and are reflected as assets in the consolidated balance sheets.
The Company sells securities under agreements to repurchase. These repurchase agreements are treated
as borrowings. The obligations to repurchase securities sold are reflected as a liability and the securities
underlying the agreements are reflected as assets in the consolidated balance sheets.
Advertising Costs
The Company expenses the cost of advertising in the periods in which those costs are incurred.
Income Taxes
The provision for income taxes is based upon income for financial statement purposes, adjusted for
nontaxable income and nondeductible expenses. Deferred income taxes have been provided when
different accounting methods have been used in determining income for income tax purposes and for
financial reporting purposes.
Deferred tax assets and liabilities are recognized based on future tax consequences attributable to
differences arising from the financial statement carrying values of assets and liabilities and their tax basis.
The differences relate primarily to depreciable assets (use of different depreciation methods for financial
statement and income tax purposes) and allowance for loan losses (use of the allowance method for
financial statement purposes and the direct write-off method for tax purposes). In the event of changes in
the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those
changes, with effects included in the income tax provision. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The Company and its subsidiary file a consolidated federal
income tax return. The subsidiary pays its proportional share of federal income taxes to the Company
based on its taxable income.
The Company's federal and state income tax returns for tax years 2015, 2014, 2013 and 2012 are subject
to examination by the Internal Revenue Service (IRS) and the Georgia Department of Revenue, generally
for three years after filing.
19
(1) Summary of Significant Accounting Policies (Continued)
Income Taxes (Continued)
Positions taken in the Company's tax returns may be subject to challenge by the taxing authorities upon
examination. Uncertain tax positions are initially recognized in the consolidated financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities.
Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full
knowledge of the position and all relevant facts. The Company provides for interest and, in some cases,
penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized
beginning in the first period that such interest would begin accruing. Penalties are recognized in the
period that the Company claims the position in the tax return. Interest and penalties on income tax
uncertainties are classified within income tax expense in the consolidated statements of operations.
Other Real Estate
Other real estate generally represents real estate acquired through foreclosure and is initially recorded at
estimated fair value at the date of acquisition less the cost of disposal. Losses from the acquisition of
property in full or partial satisfaction of debt are recorded as loan losses. Properties are evaluated
regularly to ensure the recorded amounts are supported by current fair values, and valuation allowances
are recorded as necessary to reduce the carrying amount to fair value less estimated cost of disposal.
Routine holding costs and gains or losses upon disposition are included in foreclosed property expense.
Bank-Owned Life Insurance
The Company has purchased life insurance on the lives of certain key members of management and
directors. The life insurance policies are recorded at the amount that can be realized under the insurance
contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts
due that are probable at settlement, if applicable. Increases in the cash surrender value are recorded as
other income in the consolidated statements of income. The cash surrender value of the insurance
contracts is recorded in other assets on the consolidated balance sheets in the amount of $14,829,861 and
$14,530,851 as of December 31, 2015 and 2014, respectively.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included
in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities
available for sale, represent equity changes from economic events of the period other than transactions
with owners. Such items are considered components of other comprehensive income (loss). Accounting
standards codification requires the presentation in the consolidated financial statements of net income and
all items of other comprehensive income (loss) as total comprehensive income (loss).
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit,
commercial letters of credit and standby letters of credit. Such financial instruments are recorded on the
consolidated balance sheets when they are funded.
20
(1) Summary of Significant Accounting Policies (Continued)
Changes in Accounting Principles and Effects of New Accounting Pronouncements
Accounting Standards Update (ASU) 2015-05, Intangibles—Goodwill and Other—Internal-Use Software
(Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. ASU
2015-OS provides guidance to customers as to whether a cloud computing arrangement (e.g., software as a
service, platform as a service, infrastructure as a service, and other similar hosting arrangements) includes
a software license and, based on that determination, whether such arrangement should be accounted for
consistent with the acquisition of other software licenses or as a service contract. The amendments may be
applied on either a prospective or retrospective basis and early adoption is permitted. ASU 2015-OS is
effective for public business entities for annual periods, including interim periods within those annual
periods, beginning after December 15, 2015. The adoption of this standard is not expected to have a
material impact on the Company's consolidated financial statements.
ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying
Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01
eliminates the concept of extraordinary items from U.S. Generally Accepted Accounting Principles
(GAAP) and the need for entities to evaluate whether transactions or events are both unusual in nature and
infrequently occurring. However, the ASU does not affect the reporting and disclosure requirements for
an event or transaction that is unusual in nature or that occurs infrequently. The amendments in Update
2015-01 are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015. The Company will adopt the requirements of ASU 2015- Ol upon its effective date
of January 1, 2016, and does not anticipate it having a material impact on the Company's consolidated
financial statements.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09
is to recognize revenues when promised goods or services are transferred to customers in an amount that
reflects the consideration to which an entity is expected to be entitled for those goods or services. ASU
2014-09 defines afive-step process to achieve this core principle and, in doing so, it is possible more
judgment and estimates may be required within the revenue recognition process than required under
existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount
of variable consideration to include in the transaction price and allocating the transaction price to each
performance obligation. ASU 2014-09, as deferred one year by ASU 2015-14, is effective for the
Company in the first quarter of fiscal year 2018. The Company is currently evaluating the impact of the
pending adoption of ASU 2014-09 on the consolidated financial statements.
21
(1) Summary of Significant Accounting Policies (Continued)
Changes in Accounting Principles and Effects of New Accounting Pronouncements (Continued)
ASU 2016-1, "No. 2016-01, Financial Instruments —Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. ASU 2016-1, among other things, (i)
requires equity investments, with certain exceptions, to be measured at fair value with changes in fair
value recognized in net income, (ii) simplifies the impairment assessment of equity investments without
readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii)
eliminates the requirement for public business entities to disclose the methods and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at
amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when
measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present
separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the
liability at fair value in accordance with the fair value option for financial instruments, (vi) requires
separate presentation of financial assets and financial liabilities by measurement category and form of
financial asset on the balance sheet or the accompanying notes to the financial statements and (viii)
clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale. ASU 2016-1 will be effective for the Company on January 1, 2018. The Company is
currently evaluating the impact of the pending adoption of ASU 2016-1 on the consolidated financial
statements.
(2) Cash and Balances Due from Banks
Components of cash and balances due from banks are as follows as of December 31:
Cash on Hand and Cash Items
Noninterest-Bearing Deposits with Other Banks
2015
2014
$ 9,061,678
13,194,968
$ 9,974,663
14,498,207
$22,256,646
$24,472,870
The Company is required to maintain reserve balances in cash or on deposit with the Federal Reserve
Bank based on a percentage of deposits. Reserve balances totaled approximately $1,275,000 and
$1,278,000 at December 31, 2015 and 2014, respectively.
(3) Investment Securities
Investment securities as of December 31, 2015 are summarized as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed
$297,778,875
State, County and Municipal 5,089,137
$62,815
30,542
$(6,791,837)
(20,233)
$291,049,853
5,099,446
$02,868,012
$93,357
$(6,812,070)
$296,149,299
The amortized cost and fair value of investment securities as of December 31, 2015, by contractual
maturity, are shown hereafter. Expected maturities may differ from contractual maturities for certain
investments because issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. This is often the case with mortgage-backed securities, which are disclosed
separately in the table below.
Securities
Available for Sale
Amortized
Cost
Fair
Value
Due in One Year or Less
Due After One Year Through Five Years
770,079
Due After Five Years Through Ten Years
2,492,993
Due After Ten Years 1,495,534
$ 330,531 $ 331,818
773,706
2,517,901
1,476,021
5,089,137
5,099,446
Mortgage-Backed Securities
297,778,875
291,049,853
$302,868,012
$296,149,299
Investment securities as of December 31, 2014 are summarized as follows:
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed
State, County and Municipal
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$278,419,055
3,516,400
$155,902
27,181
$(7,511,288)
(12,664)
$271,063,669
3,530,917
$281,935,455
$183,083
$(7,523,952)
$274,594,586
Securities Held to Maturity
State, County and Municipal $
29,796
$ 127
$
-
$
29,923
23
(3) Investment Securities (Continued)
Proceeds from sales of investments available for sale were $28,273,634 in 2015, $13,620,956 in 2014,
and $72,672,795 in 2013. Gross realized gains totaled $207,896 in 2015, $67,601 in 2014, and $442,124
in 2013. Gross realized losses totaled $196,316 in 2015, $45,666 in 2014, and $805,928 in 2013. In
addition, gross realized losses of $23,046 in 2015 was due to a loss on a maturity for aheld-to-maturity
investment and gross realized gains of $1,800 in 2014 was due to a gain on a call for aheld-to-maturity
investment.
Investment securities having a carrying value totaling $133,754,087 and $135,531,563 as of December
31, 2015 and 2014, respectively, were pledged to secure public deposits and for other purposes.
Information pertaining to securities with gross unrealized losses at December 31, 2015 and 2014
aggregated by investment category and length of time that individual securities have been in a continuous
loss position, follows:
Less Than 12 Months
Gross
Unrealized
Losses
Fair
Value
l2 Months or Greater
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
December 31, 2015
U.S. Government Agencies
Mortgage-Backed
State, County and Municipal
December 31, 2014
U.S. Government Agencies
Mortgage-Backed
State, County and Municipal
$139,765,025 $ (1,270,011) $139,720,125 $(5,521,826) $279,485,150 $(6,791,837)
(20,233)
1,034,613
1,034,613
(20,233)
-
-
$140,799,638 $ (1,290,244) $139,720,125 $(5,521,826) $280,519,763 $(6,812,070)
$66,609,319 $ (396,896) $183,645,552 $(7,114,392) $250,254,871 $(7,511,288)
(12,664)
1,379,547
(12,664)
1,379,547
-
-
$66,609,319 $ (396,896) $185,025,099 $(7,127,056) $251,634,418 $(7,523,952)
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and
more frequently when economic or market concerns warrant such evaluation. Consideration is given to
(1) the length of time and the extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
?4
(3) Investment Securities (Continued)
At December 31, 2015, the debt securities with unrealized losses have depreciated 2.37 percent from the
Company's amortized cost basis. These securities are guaranteed by either the U.S. Government, other
governments or U.S. corporations. In analyzing an issuer's financial condition, management considers
whether the securities are issued by the federal government or its agencies, whether downgrades by bond
rating agencies have occurred and the results of reviews of the issuer's financial condition. The
unrealized losses are largely due to increases in market interest rates over the yields available at the time
the underlying securities were purchased. As management has the ability to hold debt securities until
maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be
other than temporary. However, the Company did own one asset-backed security at December 31, 2015
which was completely written off during prior years. This investment is comprised of one issuance of a
trust preferred security and has no book value. Management evaluates this investment on a quarterly
basis utilizing athird-party valuation model. The results of this model revealed other-than-temporary
impairment and as a result, $366,623 was written off during the year ended December 31, 2013.
(4) Loans
The following table presents the composition of loans, segregated by class of loans, as of December 31:
Commercial and Agricultural
Commercial
Agricultural
Real Estate
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
Consumer and Other
Consumer
Other
Total Loans
2015
2014
$ 47,781,689
19,193,497
$ 50,960,265
16,689,444
40,106,633
9,413,263
346,262,033
197,002,419
61,779,859
51,258,970
11,220,683
332,230,847
203,752,620
49,950,984
20,605,465
16,490,737
22,820,314
7,209,682
$758,635,595
$746,093,809
25
(4) Loans (Continued)
Commercial and agricultural loans are extended to a diverse group of businesses within the Company's
market area. These loans are often underwritten based on the borrower's ability to service the debt ftom
income from the business. Real estate construction loans often require loan funds to be advanced prior to
completion of the project. Due to uncertainties inherent in estimating construction costs, changes in
interest rates and other economic conditions, these loans often pose a higher risk than other types of loans.
Consumer loans are originated at the bank level. These loans are generally smaller loan amounts spread
across many individual borrowers to help minimize risk.
Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the loan portfolio,
management tracks certain credit quality indicators including trends related to (1) the risk grade assigned
to commercial and consumer loans, (2) the level of classified commercial loans, (3) net charge-offs, (4)
nonperforming loans, and (5) the general economic conditions in the Company's geographic markets.
The Company uses a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a
scale of 1 to 8. A description of the general characteristics of the grades is as follows:
• Grades 1 and 2 -Borrowers with these assigned grades range in risk from virtual absence of risk to
minimal risk. Such loans may be secured by Company-issued and controlled certificates of
deposit or properly margined equity securities or bonds. Other loans comprising these grades are
made to companies that have been in existence for a long period of time with many years of
consecutive profits and strong equity, good liquidity, excellent debt service ability and
unblemished past performance, or to exceptionally strong individuals with collateral of
unquestioned value that fully secures the loans. Loans in this category fall into the "pass"
classification.
• Grades 3 and 4 -Loans assigned these "pass" risk grades are made to borrowers with acceptable
credit quality and risk. The risk ranges from loans with no significant weaknesses in repayment
capacity and collateral protection to acceptable loans with one or more risk factors considered to
be more than average.
• Grade 5 -This grade includes "special mention" loans on management's watch list and is intended
to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the
short-term.
• Grade 6 -This grade includes "substandard" loans in accordance with regulatory guidelines. This
category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt
in accordance with the agreed terms. Loans considered to be impaired are assigned this grade, and
these loans often have assigned loss allocations as part of the allowance for loan and lease losses.
Generally, loans on which interest accrual has been stopped would be included in this grade.
• Grades 7 and 8 -These grades correspond to regulatory classification definitions of "doubtful" and
"loss," respectively. In practice, any loan with these grades would be for a very short period of
time, and generally the Company has no loans with these assigned grades. Management manages
the Company's problem loans in such a way that uncollectible loans or uncollectible portions of
loans are charged off immediately with any residual, collectible amounts assigned a risk grade
of 6.
26
(4) Loans (Continued)
The following tables present the loan portfolio by credit quality indicator (risk grade) as of December 31.
Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation
purposes.
2015
Pass
Special Mention
Substandard
Total Loans
Commercial and Agricultural
Commercial
Agricultural
Real Estate
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
Consumer and Other
Consumer
Other
Total Loans
2014
Commercial and Agricultural
$ 44,273,407 $ 1,927,198
17,843
18,970,328
$ 1,581,084
205,326
$ 47,781,689
19,193,497
36,516,165
9,413,263
320,566,237
177,054,188
56,798,365
912,295
-
13,652,416
8,545,942
929,814
2,678,173
-
12,043,380
11,402,289
4,051,680
40,106,633
9,413,263
346,262,033
197,002,419
61,779,859
20,037,996
16,465,593
156,739
636
410,730
24,508
20,605,465
16,490,737
$700,09.5,542
$26,142,883
$ 32,397,170
$758,635,595
Commercial
Agricultural
$ 46,230,110
16,504,404
$ 2,905,361
27,101
$ 1,824,794
157,939
$ 50,960,265
16,689,444
Real Estate
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
Consumer and Other
Consumer
Other
45,063,306
11,220,683
309,828,039
180,549,640
47,548,106
1,740,488
4,455,176
-
11,220,166
10,582,704
414,521
-
11,182,642
12,620,276
1,988,357
51,258,970
11,220,683
332,230,847
203,752,620
49,950,984
22,114,932
7,012,405
248,997
-
456,385
197,277
22,820,314
7,209,682
Total Loans $686,071,625
$27,139,338
$32,882,846
$746,093,809
A loan's risk grade is assigned at the inception of the loan and is based on the financial strength of the
borrower and the type of collateral. Loan risk grades are subject to reassessment at various times
throughout the year as part of the Company's ongoing loan review process. Loans with an assigned risk
grade of 6 or below and an outstanding balance of $250,000 or more are reassessed on a quarterly basis.
During this reassessment process individual reserves may be identified and placed against certain loans
which are not considered impaired.
In assessing the overall economic condition of the markets in which it operates, the Company monitors
the unemployment rates for its major service areas. The unemployment rates are reviewed on a quarterly
basis as part of the allowance for loan loss determination.
27
(4) Loans (Continued)
Loans are considered past due if the required principal and interest payments have not been received as of
the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest
payments become 90 days past due or when, in management's opinion, the borrower may be unable to
meet payment obligations as they become due, as well as when required by regulatory provision. Loans
may be placed on nonaccrual status regardless of whether such loans are considered past due.
The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class
of loans, as of December 31:
2015 Past Due Past Due Loans Past Due
Loans
30-89 Days or More Total Accruing Nonaccrual
Current
Loans
Total Loans
Accruing Loans
90 Days
Commercial and Agricultural
Commercial
Agricultural
Real Estate
~ 490,727 $ -
-
71,416
$ 490,727 $ 576,940 $ 46,714,022 $ 47,781,689
19,193,497
18,944,060
178,021
71,416
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
90,163
-
6,031,257
3,682,509
122,696
-
-
-
-
-
90,163
-
6,031,257
3,682,509
122,696
1,642,666
-
7,564,691
3,163,571
1,103,354
38,373,804
9,413,263
40,106,633
9,413,263
332,666,085 346,262,033
190,156,339 197,002,419
61,779,859
60,553,809
Consumer and Other
Consumer
469,839
Other 636
7,799
-
477,638
636
178,336
100
19,949,491
16,490,001
20,605,465
16,490,737
Total Loans $10,959,243
$7,799 $ 10,967,042
$14,407,679 $733,260,874 $758,635,595
2014
Commercial and Agricultural
Commercial
Agricultural
Real Estate
$ 872,321 $ -
-
-
$ 872,321
-
$ 405,398 $ 49,682,546 $ 50,960,265
16,689,444
16,644,839
44,605
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
141,850
-
2,309,114
5,782,701
281,967
-
-
-
-
-
141,850
-
2,309,114
5,782,701
281,967
3,251,290
-
5,325,047
7,461,507
1,449,226
47,865,830
11,220,683
51,258,970
11,220,683
324,596,686 332,230,847
190,508,412 203,752,620
49,950,984
48,219,791
Consumer and Other
Consumer
Other
313,424
-
6,642
-
320,066
-
201,695
195,497
22,298,553
7,014,185
22,820,314
7,209,682
Total Loans $9,701,377
$6,642
$9,708,019
$18,334,265 $718,051,525 $746,093,809
28
(4) Loans (Continued)
Had nonaccrual loans performed in accordance with their original contractual terms, the Company would
have recognized additional interest income of approximately $418,400, $591,900, and $968,700 for the
years ended December 31, 2015, 2014 and 2013, respectively.
The following table details impaired loan data as of December 31, 2015:
Unpaid
Contractual
Principal
Balance
With No Related Allowance Recorded
Commercial
Agricultural
Commercial Construction
Commercial Real Estate
Residential Real Estate
Farmland
Consumer
Other
$ 454,423
1.95,654
6,887,522
15,569,340
5,429,121
1,104,887
179,908
-
Impaired
Balance
$ 454,013
178,021
1,896,938
15,122,486
4,575,547
1,103,353
178,435
-
$29,820,855 $23,508,793
Interest
Income
Allowance Investment Recognized Collected
Average
Recorded
Interest
Income
Related
-
-
-
-
-
-
-
-
-
$ 534,814 $ 17,259 $ 21,253
10,334
27,007
530,699
159,148
2,076
14,907
-
163,078
2,867,061
15,430,252
4,715,162
1,339,863
190,566
48,438
(9,957)
25,788
529,376
175,484
583
13,745
-
$ 25,289,234 $ 752,278 $ 765,424
With An Allowance Recorded
Commercial
Agricultural
Commercial Conshuction
Commercial Real Estate
Residential Real Estate
Farmland
Consumer
Other
Total
Commercial
Agricultural
Commercial Construction
Commercial Real Estate
Residential Real Estate
Farmland
Consumer
Other
$ 122,928 $ 122,928 $ 94,538 $ 99,749 $ 2,275 $ 2,438
76,644
8,969,329
1,083,127
387,968
76,644
8,955,503
1,075,367
387,969
25,344
1,607,962
308,188
37,386
92,200
6,673,087
1,088,380
391,060
375
213,693
16,380
20,880
375
208,657
15,873
20,954
$10,639,996 $10,618,411 $ 2,073,418 $ 8,344,476 $ 253,603 $ 248,297
$ 577,351 $ 576,941 $ 94,538 $ 634,563 $ 19,534 $ 23,691
-
10,334
27,382
25,344
1,607,962
739,356
175,021
308,188
37,386
23,030
-
14,907
-
-
195,654
6,964,166
24,538,669
6,512,248
1,492,855
179,908
-
163,078
2,959,261
22,103,339
5,803,542
1,730,923
190,566
48,438
178,021
1,973,582
24,077,989
5,650,914
1,491,322
178,435
-
(9,957)
26,163
743,069
191,864
21,463
13,745
-
$40,460,851 $34,127,204 $2,073,418 $33,633,710 $1,005,881 $1,013,721
►~]
(4) Loans (Continued)
The following table details impaired loan data as of December 31, 2014:
Unpaid
Contractual
Principal
Balance
Interest
Average
Income
Recorded
Impaired
Balance Allowance Investment Recognized Collected
Interest
Income
Related
With No Related Allowance Recorded
Commercial
Agricultural
Commercial Construction
Commercial Real Estate
Residential Real Estate
Farmland
Consumer
Other
$ 310,447
50,163
9,573,141
17,129,876
9,136,987
1,450,759
201,695
206,894
$ 308,817 $
44,605
3,463,502
16,227,379
7,600,073
1,449,226
201,695
195,497
38,059,962
29,490,794
-
-
-
-
-
-
-
-
-
(6,029)
13,111
462,355
312,024
$ 679,267 $ 9,248 $ 17,973
3,000
12,833
474,936
306,859
17,273
15,495
10,677
50,959
3,376,033
18,350,015
5,690,573
949,003
211,775
197,519
(8,518)
14,455
5,874
29,505,144
802,520
859,046
With An Allowance Recorded
Commercial
Agricultural
Commercial Construction
Commercial Real Estate
Residential Real Estate
Farmland
Consumer
Other
Total
Commercial
Agricultural
Commercial Construction
Commercial Real Estate
Residential Real Estate
Farmland
Consumer
Other
96,580
96,580
96,580
419,464
(299)
-
207,308
6,135,238
2,072,919
396,048
136,369
6,135,238
2,065,158
396,048
53,947
456,941
414,684
28,962
1,528,817
6,415,086
1,829,102
529,555
375
60,629
84,177
13,077
375
50,468
86,472
12,210
8,908,093
8,829,393
1,051,114
10,722,024
157,959
149,525
407,027
50,163
9,780,449
23,265,114
11,209,906
1,846,807
201,695
206,894
405,397
44,605
3,599,871
22,362,617
9,665,231
1,845,274
201,695
195,497
96,580
-
53,947
456,941
414,684
28,962
-
-
1,098,731
50,959
4,904,850
24,765,101
7,519,675
1,478,558
211,775
197,519
8,949
(6,029)
13,486
522,984
396,201
4,559
14,455
5,874
17,973
3,000
13,208
525,404
393,331
29,483
15,495
10,677
$46,968,055 $38,320,187 $1,051,114 $40,227,168
$960,479 $1,008,571
(4) Loans (Continued)
The following table details impaired loan data as of December 31, 2013:
Unpaid
Contractual
Principal
Balance
Impaired
Balance
Interest
Income
Allowance Investment Recognized Collected
Average
Recorded
Interest
Income
Related
With No Related Allowance Recorded
Commercial
Agricultural
Commercial Construction
Commercial Real Estate
Residential Real Estate
Farmland
Consumer
Other
$ 305,272
-
7,856,411
20,120,403
7,836,718
302,629
313,194
9,146
-
$ 305,272 $ -
-
-
-
-
-
-
-
4,750,157
19,252,946
6,361,592
302,629
307,456
9,146
$ 216,057 $ 24,494 $ 25,193
9,803
4,105,370
13,198,988
4,564,666
1,858,654
252,944
2,287
-
34,908
493,940
224,439
803
18,469
556
-
41,164
503,392
209,330
869
21,109
575
With An Allowance Recorded
Commercial
Agricultural
Commercial Construction
Commercial Real Estate
Residential Real Estate
Farmland
Consumer
Other
Total
Commercial
Agricultural
Commercial Construction
Commercial Real Estate
Residential Real Estate
Farmland
Consumer
Other
36,743,773
31,289,198
-
24,208,769
797,609
801,632
1,452,798
1,452,798
433,714
1,689,125
14,845
20,748
5,922,674
5,874,473
1,949,301
1,326,982
3,471,587
5,874,473
1,849,301
1,326,982
830,546
423,685
526,005
85,500
5,025,176
11,072,314
3,661,706
663,903
(159)
157,536
25,739
44,638
-
148,495
24,414
46,930
16,526,228
13,975,141
2,299,450
22,112,224
242,599
240,587
1,758,070
1,758,070
-
-
13,779,085
25,994,876
9,786,019
1,629,611
313,194
9,146
8,221,744
25,127,419
8,210,893
1,629,611
307,456
9,146
433,714
-
830,546
423,685
526,005
85,500
-
-
1,905,182
9,803
9,130,546
24,271,302
8,226,372
2,522,557
252,944
2,287
39,339
-
34,749
651,476
250,178
45,441
18,469
556
45,941
-
41,164
651,887
233,744
47,799
21,109
575
$53,270,001
$45,264,339 $2,299,450 $46,320,993 ~ 1,040,208 $1,042,219
31
(4) Loans (Continued)
Troubled Debt Restructurings (TDRs) are troubled loans on which the original terms of the loan have
been modified in favor of the borrower due to deterioration in the borrower's financial condition. Each
potential loan modification is reviewed individually and the terms of the loan are modified to meet the
borrower's specific circumstances at a point in time. Not all loan modifications are TDRs. Loan
modifications are reviewed and approved by the Company's senior lending staff, who then determine
whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers
that are evaluated in determining whether a loan is classified as a TDR include:
• Interest rate reductions -Occur when the stated interest rate is reduced to a nonmarket rate or a
rate the borrower would not be able to obtain elsewhere under similar circumstances.
• Amortization or maturity date changes -Result when the amortization period of the loan is
extended beyond what is considered a normal amortization period for loans of similar type with
similar collateral.
• Principal reductions -These are often the result of commercial real estate loan workouts where
two new notes are created. The primary note is underwritten based upon the Company's normal
underwriting standards and is structured so that the projected cash flows are sufficient to repay the
contractual principal and interest of the newly restructured note. The terms of the secondary note
vary by situation and often involve that note being charged off, or the principal and interest
payments being deferred until after the primary note has been repaid. In situations where a portion
of the note is charged off during modification, there is often no specific reserve allocated to those
loans. This is due to the fact that the amount of the charge-off usually represents the excess of the
original loan balance over the collateral value and the Company has determined there is no
additional exposure on those loans.
(4) Loans (Continued)
As discussed in Note 1, Summary of Significant Accounting Policies, once a loan is identified as a TDR,
it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a
customer that has a troubled debt restructured loan as of December 31, 2015. The following tables
present the number of loan contracts restructured during the 12 months ended December 31, 2015, 2014
and 2013. It shows the pre- and post-modification recorded investment as well as the number of contracts
and the recorded investment for those TDRs modified during the previous 12 months which subsequently
defaulted during the period. Loans modified in a troubled debt restructuring are considered to be in
default once the loan becomes 90 days past due. A TDR may cease being classified as impaired if the
loan is subsequently modified at market terms, has performed according to the modified terms for at least
six months, and has not had any prior principal forgiveness on a cumulative basis.
Troubled Debt Restructurings
2015 # of Contracts Pre-Modification Post-Modification
Commercial Real Estate
Residential Real Estate
Total Loans
2014
Farmland
Commercial Construction
Commercial Real Estate
Residential Real Estate
1
2
3
1
1
1
1
$ 513,868
1,106,345
$ 505,978
1,035,590
$1,620,213
$1,541,568
$ 400,778
349,976
1,771,395
49,194
$ 400,778
349,976
1,775,407
49,194
Total Loans 4
$2,571,343
$2,575,355
2013
Commercial
Commercial Construction
Commercial Real Estate
Residential Real Estate 4
1
2
1
$ 83,748
228,633
225,852
1,885,700
$ 81,277
225,959
225,852
1,764,399
Total Loans 8
$2,423,933
$2,297,487
33
(4) Loans (Continued)
Troubled debt restructurings that subsequently defaulted as of December 31 are as follows:
2015
2014
2013
# of
Recorded
Contracts Investment Contracts Investment Contracts Investment
Recorded
Recorded
# of
# of
Commercial -
$ -
Total Loans
-
$ -
-
-
$ -
$ -
1
1
$ 81,277
$ 81,277
At December 31, 2015 and 2014, all restructured loans were performing as agreed. During 2013,
restructured loans totaling $81,277 failed to continue to perform as agreed and were charged off in August
2013.
(5) Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31 are as follows:
2015
2014
2013
Balance, Beginning of Year
$8,802,316
$ 11,805,986 $ 12,736,921
Provision for Loan Losses
Loans Charged Off
Recoveries of Loans Previously Charged Off
865,500
(2,083,347)
1,019,436
1,308,000
(5,104,491)
792,821
4,485,000
(6,227,716)
811,781
Balance, End of Year
$8,603,905
$ 8,802,316 $ 11,805,986
34
(5) Allowance for Loan Losses (Continued)
The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the
years ended December 31. Allocation of a portion of the allowance to one category of loans does not
preclude its availability to absorb losses in other loan categories and periodically may result in
reallocation within the provision categories.
Beginning
2015 Balance
Charge-Offs Recoveries Provision
Ending
Balance
Commercial and Agricultural
Commercial
Agricultural
Real Estate
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
Consumer and Other
Consumer
Other
2014
Commercial and Agricultural
Commercial
Agricultural
Real Estate
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
Consumer and Other
$ 497,561 $ (454,971) $ 52,111
3,600
304,172
(5,000)
X760,663 $ 855,364
203,091
(99,681)
1,222,695
138,092
3,664,777
2,425,327
103,800
(97,698)
-
(275,297)
(929,668)
(40,000)
485,834
-
270,003
109,626
20,000
(920,065)
(118,202)
191,044
385,070
827,892
690,766
19,890
3,850,527
1,990,355
911,692
66,914
378,978
(255,062)
(25,651)
61,976
16,286
189,549
(350,770)
63,377
18,843
$8,802,316
$(2,083,347) $1,019,436
$865,500
$8,603,905
$ 1,017,073 $ (624,944) $ 76,002 $ 29,430
7,586
293,886
2,700
-
$ 497,561
304,172
1,782,179
138,092
4,379,276
3,278,269
311,494
(1,543,099)
-
(1,326,825)
(1,033,966)
(233,580)
485,005
-
90,042
31,127
20,000
498,610
-
522,284
149,897
5,886
1,222,695
138,092
3,664,777
2,425,327
103,800
Consumer
243,253
Other 362,464
(342,077)
-
72,477
15,468
93,261
1,046
66,914
378,978
$11,805,986
$(5,104,491) $792,821 $1,308,000
$8,802,316
35
(5) Allowance for Loan Losses (Continued)
Beginning
2013 Balance
Charge-Offs Recoveries Provision
Ending
Balance
Commercial and Agricultural
Commercial
Agricultural
Real Estate
$ 981,021 $ (120,690) $ 55,829 $ 100,913 $ 1,017,073
293,886
(34,502)
26,013
296,175
6,200
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
1,890,200
138,092
5,162,839
3,405,947
290,526
(2,071,162)
-
(2,872,408)
(706,242)
(20,977)
253,459
-
297,984
64,583
21,762
1,709,682
-
1,790,861
513,981
20,183
1,782,179
138,092
4,379,276
3,278,269
311,494
Consumer and Other
Consumer
Other
227,774
344,347
(397,822)
(3,913)
93,520
18,444
319,781
3,586
243,253
362,464
$12,736,921
$(6,227,716) $811,781 $4,485,000 $11,805,986
The loss history period used at December 31, 2015, 2014 and 2013 was based on the loss rate from the
eight quarters ended September 30, 2015, 2014 and 2013, respectively.
The Company's allowance for loan losses consists of specific valuation allowances established for
probable losses on specific loans and historical valuation allowances for other loans with similar risk
characteristics. Effective with the quarter ended June 30, 2015, the calculation of the amount needed in
the Allowance for Loan Losses changed. Management determined that the segmentation method for the
ASC 450-20 portion of the loan portfolio should be changed to bank call report categories. Prior to this
change, the ASC 450-20 segmentation categorized loans by various non-owner occupied commercial real
estate loan types and risk grades for the remainder of the ASC 450-20 portion of the portfolio. On the
date of change, June 30, 2015, the change in methodology resulted in an increase to the calculated
allowance for loan loss reserve of $1,621,424; however, no additional provisions were required to be
recorded as a result of the change.
During 2014, management changed its methodology for calculating the allowance for loan losses to better
reflect the estimated losses inherent in the portfolio. Specific changes included:
• Reducing the historical loss ratios by including loan loss recoveries in the calculation. Previously,
management included only the loan charge-off amount and did not consider the effect of
subsequent recoveries.
• Reducing the balance of those loans which are guaranteed by government agencies, such as SBA
loans. Previously, the entire balance of such loans was considered in the calculation of the general
reserves; however, beginning in 2014, only the nonguaranteed portion of these loans is subject to
the loss calculation.
36
(5) Allowance for Loan Losses (Continued)
Management feels these changes better align the calculation of the allowance for loan losses with the
direction of the loan portfolio. These changes did not result in a significant change to the recorded
allowance for loan loss balance.
During the third quarter of 2013, management implemented a change to its methodology for calculating
the allowance for loan losses. This change was intended to better reflect the current position of the loan
portfolio. Prior to the third quarter, the allowance for loan loss calculation incorporated a qualitative
factor related to improvements in credit administration. These improvements, which began in 2008,
included organizational changes to credit administration, specifically related to managing past due loans,
grading of loans, recognition of losses and underwriting of new loans. Primary among the organizational
changes was the appointment of experienced lending officers to oversee the lending function, as well as
the appointment of a chief credit officer. Management feels these organizational changes are now fully
implemented, as evidenced by a lower charge-off rate and, therefore, the qualitative factor is no longer
relevant. The removal of this qualitative factor did not result in a significant adjustment to the recorded
allowance for loan loss balance.
The Company determines its individual reserves during its quarterly review of substandard loans. This
process involves reviewing all loans with a risk grade of 6 or greater and an outstanding balance of
$250,000 or more, regardless of the loans impairment classification. Effective March 31, 2013,
management increased the dollar threshold of this review process from $50,000 to $250,000. The
threshold change resulted in loans totaling $4.1 million at December 31, 2013 being removed from the
individual impairment review process and being placed in the collective review process.
Since not all loans in the substandard category are considered impaired, this quarterly review process may
result in the identification of specific reserves on nonimpaired loans. Management considers those loans
graded substandard, but not classified as impaired, to be higher risk loans and, therefore, makes specific
allocations to the allowance for those loans if warranted. The total of such loans is $11,155,813 and
$9,356,253 as of December 31, 2015 and 2014, respectively. Specific allowance allocations were made
for these loans totaling $276,731 and $747,982 as of December 31, 2015 and 2014, respectively. Since
these loans are not considered impaired, both the loan balance and related specific allocation are included
in the "Collectively Evaluated far Impairment" column of the following tables.
37
(5) Allowance for Loan Losses (Continued)
At December 31, 2015, impaired loans totaling $3,744,733 were below the $250,000 review threshold and
were not individually reviewed for impairment. Those loans were subject to the Bank's general loan loss
reserve methodology and are included in the "Collectively Evaluated for Impairment" column of the
following tables. Likewise, at December 31, 2014 and 2013, impaired loans totaling $3,885,411 and
$2,821,199, respectively, were below the $250,000 review threshold and were subject to the Bank's
general loan loss reserve methodology and are included in the "Collectively Evaluated for Impairment"
column of the following tables.
Individually
Evaluated for Evaluated for
2015 Impairment Impairment
Ending Allowance Balance
Collectively
Total
Ending Loan Balance
Collectively
Individually
Evaluated for Evaluated for
Impairment Impairment
Total
Commercial and Agricultural
Commercial
Agricultural
Real Estate
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
Consumer and Other
Consumer
Other
$ 94,538
-
$ 760,826 $ 855,364 $ 122,928 $ 47,658,761 $ 47,781,689
19,193,497
19,185,052
203,091
203,091
8,445
25,344
665,422
-
1,607,962
308,188
37,386
19,890
2,242,565
1,682,167
874,306
690,766
19,890
3,850,527
],990,355
911,692
1,622,560
38,484,073
-
23,628,213
3,597,386
1,402,939
9,413,263
322,633,820
193,405,033
60,376,920
40,106,633
9,413,263
346,262,033
197,002,419
61,779,859
-
-
63,377
18,843
63,377
18,843
-
-
20,605,465
16,490,737
20,605,465
16,490,737
Total End of Year Balance
$2,073,418
X6,530,487
$8,603,905
~30,382,d71 $728,253,124 $758,635,595
;ti
(5) Allowance for Loan Losses (Continued)
Ending Allowance Balance
Individually
Collectively
Evaluated for Evaluated for
2014 Impairment Impairment
Total
Ending Loan Balance
Collectively
Individually
Evaluated for Evaluated for
Impairment Impairment
Total
Commercial and Agricultural
Commercial
Agricultural
Real Estate
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
$ 96,580
-
$ 400,981 $ 497,561
304,172
304,172
$ 96,580 $ 50,863,685 $ 50,960,265
16,689,444
16,689,444
-
53,947
-
456,941
414,684
28,962
1,168,748
138,092
3,207,836
2,010,643
74,838
1,222,695
138,092
3,664,777
2,425,327
103,800
3,384,377
-
21,693,061
7,559,965
1,700,793
47,874,593
11,220,683
310,537,786
196,192,655
48,250,191
51,258,970
11,220,683
332,230,847
203,752,620
49,950,984
Consumer and Other
-
Consumer
Other -
66,914
378,978
66,914
378,978
-
-
22,820,314
7,209,682
22,820,314
7,209,682
Total End of Year Balance $1,051,114
X7,751,202
58,802,316
$34,434,776 $711,659,033 $746,093,809
2013
Commercial and Agricultural
Commercial
Agricultural
$ 433,714
-
$ 583,359 $ 1,017,073 $ 1,542,058 $ 46,565,390 $ 48,107,448
10,665,938
10,665,938
293,886
293,886
-
Real Estate
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
830,546
-
423,685
526,005
85,500
951,633
138,092
3,955,591
2,752,264
225,994
1,782,179
138,092
4,379,276
3,278,269
311,494
7,971,298
-
24,757,942
6,545,490
1,617,206
44,767,485
6,549,260
317,025,596
199,712,437
45,417,220
52,738,783
6,549,260
341,783,538
206,257,927
47,034,426
Consumer and Other
Consumer
-
Other -
243,253
362,464
243,253
362,464
-
9,146
25,675,560
12,396,436
25,675,560
12,405,582
Total End of 1'car Balance $2,299,450
$9,506,536
$11,805,986 $42,443,140 $708,775,322 $751,218,462
39
(6) Premises and Equipment
Premises and equipment are comprised of the following as of December 31:
Land
Building
Furniture, Fixtures and Equipment
Leasehold Improvements
Construction in Progress
Accumulated Depreciation
2015
2014
$ 9,696,723
23,927,467
12,154,375
993,618
1,170,050
$ 8,270,678
23,894,943
12,243,988
990,626
14,090
47,942,233
(21,488,703)
45,414,325
(20,453,880)
$ 26,453,530
$ 24,960,445
Depreciation charged to operations totaled $1,657,229 in 2015, $1,595,253 in 2014 and $1,527,392 in
2013.
Certain Company facilities and equipment are leased under various operating leases. Rental expense
approximated $560,000 for 2015, $613,000 for 2014 and $490,000 for 2013.
Future minimum rental payments as of December 31, 2015 are as follows:
Year Ending December 31
Amount
$ 91,703
2016
2017 38,500
$130,203
(7) Other Real Estate Owned
The aggregate carrying amount of Other Real Estate Owned (OREO) at December 31, 2015, 2014 and
2013 was $8,839,103, $10,401,832 and $15,502,462, respectively. All of the Company's other real estate
owned represents properties acquired through foreclosure or deed in lieu of foreclosure. The following
table details the change in OREO during 2015, 2014 and 2013 as of December 31:
2015
2014
2013
Balance, Beginning of Year
$10,401,832
$15,502,462
$15,940,693
Additions
Sales of OREO
Loss on Sale
Provision for Losses
Balance, End of Year
7,536,165
(8,054,675)
(591,071)
(453,148)
3,852,848
(7,102,13 6)
(844,515)
(1,006,827)
10,251,006
(7,804,080)
(1,563,739)
(1,321,418)
$ 8,839,103
$10,401,83?
$15,502,462
At December 31, 2015, the Company held $1,033,000 of residential real estate property as foreclosed
property. Also at December 31, 2015, $159,372 of consumer mortgage loans collateralized by residential
real estate property was in the process of foreclosure according to local requirements of the applicable
jurisdictions.
-~o
(8) Other Intangible Assets
The following is an analysis of the core deposit intangible activity for the years ended December 31:
Core Deposit Intangible
Balance, December 31, 2013
Amortization Expense
Core
Deposit
Intangible
Accumulated
Amortization
Net Core
Deposit
Intangible
$1,056,693
$(868,932)
$187,761
-
(35,749)
(35,749)
Balance, December 31, 2014
1,056,693
(904,681)
152,012
Amortization Expense
-
(35,748)
(35,748)
Balance, December 31, 2015
$1,056,693
$(940,429)
$116,264
Amortization expense related to the core deposit intangible was $35,748, $35,749 and $35,749 for the
years ended December 31, 2015, 2014 and 2013. Amortizations expense will continue at an annual rate
of approximately $35,749 through the first quarter of 2019, at which point the core deposit will be fully
amortized.
(9) Income Taxes
The components of income tax expense for the years ended December 31 are as follows:
2015
2014
2013
Current Federal Expense
$3,162,367
Deferred Federal Expense 625,436
$1,335,337
1,932,950
$ 156,642
2,178,222
Federal Income Tax Expense
Current State Income Tax Expense
3,787,803
3,268,287
2,334,864
Federal and State Income Tax Expense $3,787,803
$3,268,287
$2,334,864
The federal income tax expense of $3,787,803 in 2015, $3,268,287 in 2014 and $2,334,864 in 2013 is
different than the income taxes computed by applying the federal statutory rates to income before income
taxes. The reasons for the differences are as follows:
Statutory Federal Income Taxes
Tax-Exempt Interest
Premiums on Officers' Life Insurance
Meal and Entertainment Disallowance
Other
2015
2014
2013
$4,134,570
(83,903)
(232,988)
21,600
(51,476)
$3,671,971
(74,138)
(186,712)
14,044
(156,878)
$2,367,729
(104,307)
(111,749)
15,319
167,872
Actual Federal Income Taxes
$3,787,803
$3,268,287
$2,334,864
41
(9) Income Taxes (Continued)
Deferred taxes in the accompanying consolidated balance sheets as of December 31 include the following:
Deferred Tax Assets
Allowance for Loan Losses
Other Real Estate
Deferred Compensation
Investments
Goodwill
Other
Deferred Tag Liabilities
Premises and Equipment
Other
Deferred Tax Assets (Liabilities) on
Unrealized Securities Gains (Losses)
2015
2014
$2,925,328
537,914
308,128
340,000
212,190
418,165
$2,992,787
1,178,278
287,365
340,000
256,714
427,924
4,741,725
5,483,068
(1,183,309)
(4,185)
(1,299,216)
(4,185)
(1,187,494)
(1,303,401)
2,284,362
2,495,896
Net Deferred Tax Assets $5,838,593
$6,675,563
The deferred tax assets are included in Other Assets in the consolidated balance sheets. As discussed in
Note 1, certain positions taken in the Company's tax returns may be subject to challenge by the taxing
authorities. An analysis of activity related to unrecognized taxes as of December 31 follows.
2015
2014
2013
Balance, Beginning
$ -
$ 42,327
$ 38,676
Positions Taken During the Current Year
Reductions Resulting from Lapse of
Statutes of Limitation
-
7,247
42,327
(3,596)
Balance, Ending $
-
$
-
$ 42,327
The net decrease of $42,327 is included in income tax expense for the year ended December 31, 2014.
(10) Deposits
The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $272,110 and
$511,387 as of December 31, 2015 and 2014, respectively.
Components of interest-bearing deposits as of December 31 are as follows:
2015
2014
$412,959,430
Interest-Bearing Demand
64,976,174
Savings
202,800,899
Time, $100,000 and Over
Other Time 196,931,462
$363,501,727
59,215,257
210,502,901
217,743,826
$877,667,965
$850,963,711
At December 31, 2015 and December 31, 2014, the Company had brokered deposits of $25,576,524 and
$26,298,267, respectively. All of these brokered deposits represent Certificate of Deposit Account
Registry Service (CDARS) reciprocal deposits. The CDARS deposits are ones in which customers placed
core deposits into the CDARS program for FDIC insurance coverage and the Company receives
reciprocal brokered deposits in a like amount. The aggregate amount of short-term jumbo certificates of
deposit, each with a minimum denomination of $100,000 was $141,900,102 and $140,832,026 as of
December 31, 2015 and December 31, 2014, respectively. The aggregate amount of jumbo certificates of
deposit, each with a minimum denomination of $250,000 was $31,755,483 and $35,750,272 as of
December 31, 2015 and December 31, 2014, respectively.
As of December 31, 2015, the scheduled maturities of certificates of deposit are as follows:
Year
Amount
2016
2017
2018
2019
$287,422,547
55,668,788
32,350,483
10,102,321
2020 and Thereafter 14,188,222
$399,732,361
(11) Other Borrowed Money
Other borrowed money at December 31 is summarized as follows:
2015
2014
Federal Home Loan Bank Advances $40,000,000 $ 40,000,000
Advances from the Federal Home Loan Bank (FHLB) have maturities ranging from 2018 to 2022 and
interest rates ranging from 1.47 percent to 4.75 percent. As collateral on the outstanding FHLB advances,
the Company has provided a blanket lien on its portfolio of qualifying residential first mortgage loans and
commercial loans. At December 31, 2015, the book value of those loans pledged is $100,412,458. At
December 31, 2015, the Company had remaining credit availability from the FHLB of $128,817,500.
The Company may be required to pledge additional qualifying collateral in order to utilize the full amount
of the remaining credit line.
43
(I1) Other Borrowed Money (Continued)
The aggregate stated maturities of other borrowed money at December 31, 2015 are as follows:
Year
2018
2019
2020
2021 and Thereafter
Amount
$ 2,500,000
8,000,000
29,500,000
$40,000,000
At December 31, 2015, $13,000,000 of FHLB advances are subject to fixed rates of interest, while the
remaining $27,000,000 is subject to floating interest rates which will convert to fixed rates of interests in
the next few years.
The Company also has available federal funds lines of credit with various financial institutions totaling
$43,500,000, of which there were none outstanding at December 31, 2015.
The Company has the ability to borrow funds from the Federal Reserve Bank (FRB) of Atlanta utilizing
the discount window. The discount window is an instrument of monetary policy that allows eligible
institutions to borrow money from the FRB on a short-term basis to meet temporary liquidity shortages
caused by internal or external disruptions. At December 31, 2015, the Company had borrowing capacity
available under this arrangement, with no outstanding balances. The Company would be required to
pledge certain available-for-sale investment securities as collateral under this agreement.
(12) Subordinated Debentures (Trust Preferred Securities)
Total
Description
Date
3-Month
Amount Libor Rate Points
Added Interest
Rate
Maturity Call Option
5-Year
(]n Thousands)
Colony Bankcorp Statutory Trust 11I
Colony Bankcorp Capital Trust I
Colony Bankcorp Capital Trust II
Colony Bankcorp Capital Trust III
6/17/2004 $4,640
5,155
4/13/2006
9,279
3/12/2007
5,155
9/l4/2007
0.52575
0.60670
0.60310
0.32190
2.68
1.50
1.65
1.40
3.20575 6/14/2034
2.10670 4/13/2036
2.25310 3/12/2037
1.72190 9/14/2037
6/17/2009
4/13/2011
3/12/2012
9/14/2012
The Trust Preferred Securities are recorded as subordinated debentures on the consolidated balance
sheets, and subject to certain limitations, qualify as Tier 1 Capital for regulatory capital purposes. The
proceeds from these offerings were used to fund certain acquisitions, pay off holding company debt and
inject capital into the Bank subsidiary.
The Trust Preferred Securities pay interest quarterly.
Quarterly interest payments on the Trust Preferred Securities were suspended from February 13, 2012
until November 17, 2014, at which time the Company reinstated the interest payments and paid
$1,069,695 of interest payments in arrears.
44
(13) Preferred Stock
The Company had 18,021 shares and 28,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock,
Series A (the Preferred Stock) issued and outstanding with private investors as of December 31, 2015 and
2014, respectively. The Company redeemed 9,979 shares of Preferred Stock at $1,000 per share during
2015. The Company also had a warrant (the Warrant) to purchase up to 500,000 shares of the Company's
common stock outstanding with private investors. Both the Preferred Stock and the Warrant originated in
2009 through transactions with the United States Department of the Treasury and were subsequently sold
to the public through an auction process during 2013.
The Preferred Stock qualifies as Tier 1 capital and is nonvoting, other than class voting rights on certain
matters that could adversely affect the Preferred Stock. The Preferred Stock may be redeemed by the
Company at the liquidation preference of $1,000 per share, plus any accrued and unpaid dividends. The
Warrant may be exercised on or before January 9, 2019 at an exercise price of $8.40 per share. No voting
rights may be exercised with respect to the shares of the Warrant until the Warrant has been exercised.
The Preferred Stock requires a cumulative cash dividend be paid quarterly at a rate of 9 percent per
annum. Prior to January 9, 2014, the annual dividend rate for the Preferred Stock was 5 percent. Unpaid
dividends on the Preferred Stock must be declared and set aside for the benefit of the holders of the
Preferred Stock before any dividend may be declared on common stock. On February 13, 2012, the
Company announced the suspension of dividends on Preferred Stock. On November 17, 2014, the
Company reinstated dividend payments on the Preferred Stock and paid $5,492,749 of accumulated
dividends in arrears to the holders of the Preferred Stock.
(14) Employee Benefit Plan
The Company offers a defined contribution 401(k) Profit Sharing Plan (the Plan) which covers
substantially all employees who meet certain age and service requirements. The Plan allows employees to
make voluntary pre-tax salary deferrals to the Plan. The Company, at its discretion, may elect to make an
annual contribution to the Plan equal to a percentage of each participating employee's salary. Such
discretionary contributions must be approved by the Company's board of directors. Employees are fully
vested in the Company contributions after six years of service. In 2015 and 2014, the Company made
total contributions of $385,453 and $401,497 to the Plan. The Company made no discretionary
contributions in 2013.
(15) Commitments and Contingencies
Credit-Related Financial Instruments. The Company is a party to credit-related financial instruments
with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby letters of credit and
commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual amount of these commitments.
The Company follows the same credit policies in making commitments as it does for on-balance sheet
instruments.
45
(15) Commitments and Contingencies (Continued)
At December 31, 2015 and 2014, the following financial instruments were outstanding whose contract
amounts represent credit risk:
Commitments to Extend Credit
Standby Letters of Credit
Contract Amount
2015
2014
$67,889,000
1,588,212
$68,742,000
1,762,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The commitments for equity lines of credit may
expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent
future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is
based on management's credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection
agreements are commitments for possible future extensions of credit to existing customers. These lines of
credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn
upon to the total extent to which the Company is committed.
Standby and performance letters of credit are conditional lending commitments issued by the Company to
guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to
support public and private borrowing arrangements. Essentially all letters of credit issued have expiration
dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Legal Contingencies. In the ordinary course of business, there are various legal proceedings pending
against Colony and its subsidiary. The aggregate liabilities, if any, arising from such proceedings would
not, in the opinion of management, have a material adverse effect on Colony's consolidated financial
position.
(16) Deferred Compensation Plan
Colony Bank, the wholly-owned subsidiary, has deferred compensation plans covering certain former
directors and certain officers choosing to participate through individual deferred compensation contracts.
In accordance with terms of the contracts, the Bank is committed to pay the participant's deferred
compensation over a specified number of years, beginning at age 65. In the event of a participant's death
before age 65, payments are made to the participant's named beneficiary over a specified number of
years, beginning on the first day of the month following the death of the participant.
Liabilities accrued under the plans totaled $906,259 and $845,192 as of December 31, 2015 and 2014,
respectively. Benefit payments under the contracts were $131,652 in 2015 and $112,605 in 2014.
Provisions charged to operations totaled $196,869 in 2015, $69,653 in 2014 and $75,777 in 2013.
The Company has purchased life insurance policies on the plans' participants and uses the cash flow from
these policies to partially fund the plan. Fee income recognized with these plans totaled $174,675 in
2015, $167,911 in 2014 and $164,073 in 2013. In addition death benefits recognized as income totaled
$137,058 in 2015.
46
(17) Supplemental Cash Flow Information
Cash payments for the following were made during the years ended December 31:
Interest Expense
Income Taxes
2015
2014
2013
$ 6,536,994
$7,898,543 $ 7,111,361
$ 4,738,000 $ 113,000 $ 173,883
Noncash financing and investing activities for the years ended December 31 are as follows:
Acquisitions of Real Estate
Through Loan Foreclosures
2015
2014
2013
$ 7,536,165
$ 3,852,848 $ 10,251,006
Change in Unrealized Gain (Loss) on AFS Investment
Securities
$ 622,155
$ 6,409,171 $(13,523,050)
(18) Related Party Transactions
The following table reflects the activity and aggregate balance of direct and indirect loans to directors,
executive officers or principal holders of equity securities of the Company. All such loans were made on
substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than a normal risk of collectibility.
A summary of activity of related party loans is shown below:
Balance, Beginning
New Loans
Repayments
Transactions Due to Changes in Directors
Balance, Ending
2015
2014
$ 3,233,949
$ 4,064,588
4,900,932
(6,065,098)
(253,174)
6,406,713
(7,237,352)
$ 1,816,609
$ 3,233,949
47
(19) Fair Value of Financial Instruments and Fair Value Measurements
Generally accepted accounting standards in the U.S. require disclosure of fair value information about
financial instruments, whether or not recognized on the face of the balance sheet, for which it is
practicable to estimate that value. The assumptions used in the estimation of the fair value of Colony
Bankcorp, Inc. and Subsidiary's financial instruments are detailed hereafter. Where quoted prices are not
available, fair values are based on estimates using discounted cash flows and other valuation techniques.
The use of discounted cash flows can be significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The following disclosures should not be considered a
surrogate of the liquidation value of the Company, but rather agood-faith estimate of the increase or•
decrease in value of financial instruments held by the Company since purchase, origination or issuance.
Cash and Short-Term Investments -For cash, due from banks, bank-owned deposits and federal
funds sold, the carrying amount is a reasonable estimate of fair value and is classified Level 1.
Investment Securities -Fair values for investment securities are based on quoted market prices where
available and classified as Level 1. If quoted market prices are not available, estimated fair values are
based on quoted market prices of comparable instruments and classified as Leve12. If a comparable is
not available, the investment securities are classified as Leve13.
Federal Home Loan Bank Stock -The fair value of Federal Home Loan Bank stock approximates
carrying value and is classified as Level 1.
Loans -The fair value of fixed rate loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar credit ratings. For
variable rate loans, the carrying amount is a reasonable estimate of fair value. Most loans are classified
as Level 2, but impaired loans with a related allowance are classified as Leve13.
Bank-Owned Life Insurance - The carrying value of bank-owned life insurance policies
approximates fair value and is classified as Level 1.
Deposit Liabilities -The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date and is classified as Level 1. The fair
value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using
the rates currently offered for deposits of similar remaining maturities and is classified as Leve12.
Subordinated Debentures —The fair value of subordinated debentures is estimated by discounting the
future cash flows using the current rates at which similar advances would be obtained. Subordinated
debentures are classified as Leve12.
Other Borrowed Money -The fair value of other borrowed money is calculated by discounting
contractual cash flows using an estimated interest rate based on current rates available to the Company
for debt of similar remaining maturities and collateral terms. Other borrowed money is classified as
Leve12 due to their expected maturities.
48
(19) Fair Value of Financial Instruments and Fair Value Measurements (Continued)
The carrying amount and estimated fair values of the Company's financial instruments as of December 31
are as follows:
F~II~~
Assets
Carrying
Estimated
Amount Fair Value
1
Level
2
3
(in Thousands)
Cash and Short-Term Investments
Investment Securities Available for Sale
Federal Home Loan Bank Stock
Loans, Net
Bank-Owned Life Insurance
$ 60,872
296,149
2,731
749,675
14,830
$ 60,872 $ 60,872 $ -
$ -
296,149
2,731
750,412
14,830
-
2,731
-
14,830
295,219
-
741,867
-
930
-
8,545
-
Liabilities
Deposits
Subordinated Debentures
Other Borrowed Money
2014
Assets
Cash and Short-Term Investments
Investment Securities Available for Sale
Investment Securities Held to Maturity
Federal Home Loan Bank Stock
Loans, Net
Bank-Owned Life Insurance
Liabilities
Deposits
Subordinated Debentures
Other Borrowed Money
1,011,554
24,229
40,000
1,013,111
24,229
40,421
611,822
-
-
401,289
24,229
40,421
-
-
-
$ 65,811
274,595
30
2,831
736,930
14,531
$ 65,811
274,595
30
2,831
738,948
14,531
$ 65,811 $ -
$ -
-
-
2,831
-
14,531
273,647
30
-
731,170
-
948
-
-
7,778
-
979,303
24,229
40,000
980,874
24,229
41,962
551,057
-
-
429,817
24,229
41,962
-
-
-
Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's financial instruments,
fair value estimates are based on many judgments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and liabilities that are not considered financial
instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
-~v
(19) Fair Value of Financial Instruments and Fair Value Measurements (Continued)
Fair Value Measurements
Generally accepted accounting principles related to Fair Value Measurements define fair value, establish
a framework for measuring fair value, establish athree-level valuation hierarchy for disclosure of fair
value measurement and enhance disclosure requirements for fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the
measurement date. The three levels are defined as follows:
• Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Leve12 inputs to the valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument.
• Level 3 inputs to the valuation methodology are unobservable and represent the Company's own
assumptions about the assumptions that market participants would use in pricing the assets or
liabilities.
Following is a description of the valuation methodologies used for instruments measured at fair value on a
recurring and nonrecurring basis, as well as the general classification of such instruments pursuant to the
valuation hierarchy:
Assets
Securities -Where quoted prices are available in an active market, securities are classified within Level 1
of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for
identical assets. If quoted market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics, or discounted cash flow. Examples of
such instruments, which would generally be classified within level 2 of the valuation hierarchy, include
certain collateralized mortgage and debt obligations and certain high-yield debt securities. In certain
cases where there is limited activity or less transparency around inputs to the valuation, securities are
classified within level 3 of the valuation hierarchy. When measuring fair value, the valuation techniques
available under the market approach, income approach and/or cost approach are used. The Company's
evaluations are based on market data and the Company employs combinations of these approaches for its
valuation methods depending on the asset class.
~n
(19) Fair Value of Financial Instruments and Fair Value Measurements (Continued)
Fair Value Measurements (Continued)
Assets (Continued)
Impaired Loans -Impaired loans are those loans which the Company has measured impairment generally
based on the fair value of the loan's collateral. Fair value is generally determined based upon independent
third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.
These assets are included as level 3 fair values, based upon the lowest level of input that is significant to
the fair value measurements.
Other Real Estate -Other real estate owned assets are adjusted to fair value less estimated selling costs
upon transfer of the loans to other real estate owned. Typically, an external, third-party appraisal is
performed on the collateral upon transfer into the other real estate owned account to determine the asset's
fair value. Subsequent adjustments to the collateral's value may be based upon either updated third-party
appraisals or management's knowledge of the collateral and the current real estate market conditions.
Appraised amounts used in determining the asset's fair value, whether internally or externally prepared,
are discounted 10 percent to account for selling and marketing costs. Adjustments are routinely made in
the appraisal process by the appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are typically significant and result in a level3 classification of the inputs
for determining fair value. Because of the high degree of judgment required in estimating the fair value
of other real estate owned assets and because of the relationship between fair value and general economic
conditions, we consider the fair value of other real estate owned assets to be highly sensitive to changes in
market conditions.
st
(19) Fair Value of Financial Instruments and Fair Value Measurements (Continued)
Fair Value Measurements (Continued)
Assets (Continued)
Assets and Liabilities Measured at Fair value on a Recurring and Nonrecurring Basis -The following
table presents the recorded amount of the Company's assets measured at fair value on a recurring and
nonrecurring basis as of December 31, 2015 and 2014, aggregated by the level in the fair value hierarchy
within which those measurements fall. The table below includes only impaired loans with a specific
reserve and only other real estate properties with a valuation allowance at December 31, 2014. Those
impaired loans and other real estate properties are shown net of the related specific reserves and valuation
allowances.
2015
Total Fair
Value
Fair Value Measurements at Renortin~ Date Usin
Quoted Prices
in Active
Markets for
Identical Assets
(Level l)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Leve13)
Recurring
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed
State, County and Municipal
$291,049,853
5,099,446
$
-
-
$291,049,853
4,169,135
$
-
930,311
$296,149,299
$
-
$295,218,988
$ 930,311
Nonrecurring
Impaired Loans
$ 8,544,993
Other Real Estate
$ 2,535,884
$
$
-
-
$
$
-
-
$ 8,544,993
$ 2,535,884
2014
Recurring
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed
State, County and Municipal
Nonrecurring
Impaired Loans
$271,063,669
3,530,917
$274,594,586
$ 7,778,279
Other Real Estate
$ 6,128,365
Liabilities
$
$
$
$
-
-
-
-
-
$271,063,669
2,582,527
$
-
948,390
$273,646,196
$ 948,390
$
$
-
-
$ 7,778,279
$ 6,128,365
The Company did not identify any liabilities that are required to be presented at fair value.
52
(19) Fair Value of Financial lnstrumcnts and Fair Value Measurements (Continued)
Fair Value Measurements (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Leve13)
The following tables present quantitative information about the significant unobservable inputs used in
the fair value measurements for assets in level 3 of the fair value hierarchy measured on a nonrecurring
basis at December 31, 2015 and 2014. These tables are comprised primarily of collateral dependent
impaired loans and other real estate owned:
December 31,
2015
Valuation
Techniques
Unobservable
Inputs
Range
(Weighted Avg)
Commercial
$ 28,390 Sales Comparison
Adjustment for Differences
Between the Comparable Sales
(31.77)% - 34.00%
(1.12%)
Management Adjustments for Age 0.00% - 10.00%
of Appraisals and/or Current
Market Conditions
(5.00%)
Income Approach
Capitalization Rate
11.00°/~
Real Estate
Commercial Construction
51,300 Sales Comparison
Adjustment for Differences
Between the Comparable Sales
(5.00)'%. - 99.00°/~
(17.00'%)
Residential Real Estate
767,179 Sales Comparison
Commercial Real Estate
7,347,541
Sales Comparison
Management Adjustments for Age 0.00% - 10.00'%
of Appraisals and/or Current
Market Conditions
(5.00%)
Adjustment for Differences
Between the Comparable Sales
(22.00)% - 10.80%
(5.60)%
Management Adjustments for Age 0.00% - 25.00%
of Appraisals and/or Current
Market Conditions
(12.50%)
Adjustment for Differences
Between the Comparable Sales
(31.77)% - 34.00%
(1.12%)
Management Adjustments for Age 0.00% - 10.00%
of Appraisals and/or Current
Market Conditions
(5.00%)
Farmland
35(1,583
Sales Comparison
Adjustment for Differences
Between the Comparable Sales
(27.00)% - 15.00%
(6.00)%
Income Approach
Capitalization Rate
10.25%
Management Adjustments for Age 10.00% - 75.00%
of Appraisals and/or Current
Market Conditions
(42.50%)
Other Real Estate Owned
2,535,884
Sales Comparison
Adjustment for Differences
Between the Comparable Sales
(50.80)% - 142.90%
(46.05%)
Management Adjustments for Age 15.53% - 72.75°/a
of Appraisals and/or Current
Market Conditions
(43.37%)
Income Approach
Discount Rate
12.50%
53
(19) Fair Value of Financial Instruments and Fair Value Measurements (Continued)
Fair Value Measurements (Continued)
Fair Value Measurements using Significant Unobservable Inputs (Level 3) (Continued)
December 31,
-~' '
Valuation
Techniques
Unobservable
Inputs
Range
(Weighted Avg)
Impaired Loans
Commercial Construction
$ 82,422
Sales Comparison
Residential Real Estate
1,650,474
Sales Comparison
Adjustment for Differences
Between the Comparable Sales
(22.00)% - 38.10%
(8.05%)
Management Adjustments for Age 0.00% - 10.00%
of Appraisals and/or Current
Market Conditions
(5.00%)
Adjustment for Differences
Between the Comparable Sales
(2.30)% - 191.70%
(94.70%)
Management Adjustments for Age 0.00% - 10.00°i~,
of Appraisals and/or Current
Market Conditions
(5.00%)
Income Approach
Capitalization Rate
13.75%
Commercial Real Estate
5,678,297
Sales Comparison
Adjustment for Differences
Between the Comparable Sales
0.00% - 0.00%
(0.00%)
Management Adjustments for Age 0.00% - 90.00%
of Appraisals and/or Current
Market Conditions
(45.00%)
Income Approach
Capitalization Rate
11.00%
Farmland
367,086 Sales Comparison
Other Real Estate Owned
6,128,365
Sales Comparison
Adjustment for Differences
Between the Comparable Sales
(830)% - 252.50%
(122.10%)
Management Adjustments for Age 10.00% - 50.00%
of Appraisals and/or Current
Market Conditions
(30.00%)
Adjustment for Differences
Between the Comparable Sales
(40.00)% - 45.00%
(2.50%)
Management Adjustments for Age 0.33% - 6936%
of Appraisals and/or Current
Market Conditions
(31.88%)
Income Approach
Discount Rate
Capitalization Rate
9.00%
10.00%
54
(19) Fair Value of Financial Instruments and Fair Value Measurements (Continued)
Fair Value Measurements (Continued)
Frri~~ 1 'nlue Measurements Using Significant Unobservable Inputs (Level 3) (Continued)
The following table presents a reconciliation and statement of income classification of gains and losses
for all assets measured at fair value on a recurring basis using significant unobservable inputs (level 3) for
the years ended December 31, 2015, 2014 and 2013:
Available for Sale Securities
2014
2015
2013
Balance, Beginning
$ 948,390
$ 941,265 $ 1,138,238
Transfers into Leve13
Transfers out of Leve13
Securities Purchased During the Year
Securities Called During the Year
Loss on OTTI Impairment Included
in Noninterest Income
Unrealized Gains(Losses) Included in Other
Comprehensive Income
-
-
-
(41,908)
-
(366,623)
(18,079)
7,125
211,558
Balance, Ending
$ 930,311 $ 948,390 $ 941,265
The Company's policy is to recognize transfers in and transfers out of levels 1, 2 and 3 as of the end of a
reporting period. During the year ended December 31, 2013, the Company had transfers out of level 3
and into level 2. The transfers out of level3 were the result of increased market activity for these types of
securities, as well as more current credit ratings on these securities. There were no transfers of securities
between level 1 and level2 for the years ended December 31, 2015, 2014 or 2013.
The following table presents quantitative information about recurring level 3 fair value measurements as
of December 31, 2015 and 2014:
December 31, 2015
Fair Value
Valuation
Techniques
Unobservable
Inputs
Range
(Weighted Avg)
State, County and Municipal
$ 930,311
Discounted Cash Flow Discount Rate
N/A*
or Yield
December 31, 2014
State, County and Municipal
$ 948,390
Discounted Cash Flow Discount Rate
N/A*
or Yield
* The Company relies on a third-party pricing service to value its municipal securities. The details of the unobservable inputs and other
adjustments used by the third-party pricing service were not readily available to the Company.
55
(20) Regulatory Capital Matters
The amount of dividends payable to the parent company from the subsidiary bank is limited by various
banking regulatory agencies. Upon approval by regulatory authorities, the Bank may pay cash dividends
to the parent company in excess of regulatory limitations. Additionally, the Company suspended the
payment of dividends to its stockholders in the third quarter of 2009.
The Company is subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly,
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to
maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. As of December 31, 2015, the interim final Basel III rules (Basel III) require the
Company to also maintain minimum amounts and ratios of common equity Tier 1 capital to risk weighted
assets. These amounts and ratios as defined in regulations are presented hereafter. Management believes,
as of December 31, 2015, the Company meets all capital adequacy requirements to which it is subject
under the regulatory framework for prompt corrective action. In the opinion of management, there are no
conditions or events since prior notification of capital adequacy from the regulators that have changed the
institution's category.
The Basel III rules also require the implementation of a new capital conservation buffer comprised of
common equity Tier 1 capital. The capital conservation buffer will be phased in beginning January 1,
2016 at 0.625% of risk-weighted assets and increase each subsequent year by 0.625% until reaching its
final level of 2.5% on January 1, 2019.
The following table summarizes regulatory capital information as of December 31, 2015 and December
31, 2014 on a consolidated basis and for the subsidiary, as defined. Regulatory capital ratios for
December 31, 2015 were calculated in accordance with the Basel III rules, whereas the December 31,
2014 regulatory ratios were calculated in accordance with the Basel I rules.
(20) Regulatory Capital Matters (Continued)
The following table summarizes regulatory capital information as of December 31, 2015 and 2014 on a
consolidated basis and for its wholly-owned subsidiary, as defined:
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(In Thousands)
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$131,948
126,939
16.60% $63,602
63,500
15.99
8.00%
8.00
N/A
$79,375
N/A
10.00%
123,344
l 18,335
15.51
14.91
47,702
47,625
6.00
6.00
N/A
63,500
N/A
8.00
81,823
118,335
10.29
14.91
35,776
35,719
4.50
4.50
N/A
51,594
N/A
6.50
123,344
118,335
10.69
10.27
46,149
46,074
4.00
4.00
N/A
57,592
N/A
5.00
$136,022
127,833
17.95% $ 60,639
60,542
16.89
8.00%
8.00
N/A
$75,678
N/A
10.00%
127,220
119,031
16.78
15.73
30,320
30,271
4.00
4.00
N/A
45,407
N/A
6.00
127,220
119,031
11.18
10.50
45,509
45,364
4.00
4.00
N/A
56,705
N/A
5.00
As of December 31, 2015
Total Capital
to Risk-Weighted Assets
Consolidated
Colony Bank
Tier I Capital
to Risk-Weighted Assets
Consolidated
Colony Bank
Common Equity Tier 1 Capital
to Risk-Weighted Assets
Consolidated
Colony Bank
Tier I Capital
to Average Assets
Consolidated
Colony Bank
As of December 31, 20l 4
Total Capital
to Risk-Weighted Assets
Consolidated
Colony Bank
Tier I Capital
to Risk-Weighted Assets
Consolidated
Colony Bank
Tier I Capital
to Average Assets
Consolidated
Colony Bank
In 2015, the Bank obtained approval of its regulators and paid a $10,000,000 dividend to the Company.
The dividend was utilized to redeem 9,979 shares of Preferred Stock. Effective October 22, 2014, the
Board Resolution (BR) the Bank had been operating under was lifted. The BR required that, prior to
declaring or paying any cash dividend to the Company, the Bank must obtain written consent of its
regulators. In November 2014, the Bank paid a $12,000,000 dividend to the Company. This dividend
was utilized to bring the interest payments of the Trust Preferred Securities and the dividend payments of
the Preferred Stock to a current status and to fund holding company operations for the coming year.
5~
(21) Financial Information of Colony Bankcorp, Inc. (Parent Only)
The parent company's balance sheets as of December 31, 2015 and 2014 and the related statements of
operations and comprehensive income (loss) and cash flows for each of the years in the three-year period
then ended are as follows:
COLONY BANKCORP, INC. (PARENT ONLY)
BALANCE SHEETS
DECEMBER 31
ASSETS
Cash
Premises and Equipment, Net
Investment in Subsidiary, at Equity
Other
Total Assets
2015
2(11-~
$ 4,100,860
1,134,524
114,677,455
170,801
$ 5,750,652
1,199,639
115,066,948
1,708,380
~ 120,083,640
$123,725,619
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividends Payable
Other
Subordinated Debt
Stockholders' Equity
Preferred Stock, Stated Value $1,000; Authorized
10,000,000 Shares, Issued 18,021 and 28,000 Shares as of
December 31, 2015 and 2014
Common Stock, Par Value $1; Authorized
20,000,000 Shares, Issued 8,439,258
Shares as of December 31, 2015 and 2014
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss, Net of Tax
$ 202,736
195,282
$ 315,000
154,307
398,018
469,307
24,229,000
24,229,000
18,021,000
111 111
8,439,258
29,145,094
44,285,621
(4,434,351)
8,439,258
29,145,094
38,287,934
(4,844,974)
95,456,622
99,027,312
Total Liabilities and Stockholders' Equity
$120,083,640
$123,725,619
58
(21) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued)
COLONY BANKCORP, INC. (PARENT ONLi~
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
Income
Dividends from Subsidiary
Management Fees
Other
Expenses
Interest
Amortization
Salaries and Employee Benefits
Other
2015
2014
2013
$10,015,147
581,334
112,876
$12,015,572
581,334
100,269
$ 1,515,549
581,334
96,953
$10,709,357
$12,697,175
2,193,836
503,286
-
811,150
666,872
517,381
938
782,152
538,847
516,641
2,250
748,149
543,139
1,981,308
1,839,318
1,810,179
Income Before Taxes and Equity in
Undistributed Earnings of Subsidiary
8,728,049
10,857,857
383,657
Income Tax Benefits
444,764
396,738
406,518
Income Before Equity in
Undistributed Earnings of Subsidiary
9,172,813
11,254,595
790,175
Dividends Received in Excess of
Earnings of Subsidiary
(800,116)
(3,722,970)
-
Equity in Undistributed
Earnings of Subsidiary
Net Income
Preferred Stock Dividends
Net Income Available
to Common Stockholders
-
3,838,870
8,372,697
2,375,010
7,531,625
2,688,604
4,629,045
1,508,761
$ 5,997,687 $4,843,021
$ 3,120,284
59
(21) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued)
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31
2015
?01~
2013
Net income
X8,372,697
$ 7.531,625
$ 4,629,045
Other Comprehensive Income (Loss)
Gains (Losses) on Securities Arising During the Year
Tax Effect
610,689
(207,634)
6,432,906
(2,187,189)
(13,886,854)
4,721,531
Realized Gains (Losses) on Sale of AFS Securities
Tax Effect
11,466
(3,898)
(23,735)
8,070
(2,819)
959
Impairment Loss on Securities
Tax Effect
-
-
-
-
366,623
(124,652)
Change in Unrealized Gains (Losses) on Securities
Available for Sale, Net of Reclassification
Adjustment and Tax Effects
410,623
4,230,052
(8,925,212)
Comprehensive Income (Loss)
$8,783,320 $11,761,677 $(4,296,167)
60
(21) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued)
COLONY BANKCORP, INC. (PARENT ONLI~
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and Amortization
Equity in Undistributed
Earnings of Subsidiary
Change in Interest Payable
Other
Cash Flows from Investing Activities
Purchases of Premises and Equipment
Cash Flows from Financing Activities
Dividends Paid on Preferred Stock
Redemption of Preferred Stock
2015
2014
2013
58,372,697
$ 7,531,625
$ 4,629,045
73,999
75,347
80,711
800,116
23,072
1,555,482
3,722,970
(1,069,695)
(437,115)
(3,838,870)
516,641
(390,962)
10,825,366
9,823,132
996,565
(8,884)
(2,020)
(68,708)
(2,487,274)
(9,979,000)
(5,492,749)
-
(12,466,274)
(5,492,749)
-
-
-
Increase (Decrease) in Cash
(1,649,792)
4,328,363
927,857
Cash, Beginning
Cash, Ending
5,750,652
1,422,289
494,432
$4,100,860
$ 5,750,652
$ 1,422,289
61
(22) Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding during each period. Diluted earnings per share
reflects the potential dilution of restricted stock and common stock warrants. Net income available to
common stockholders represents net income after preferred stock dividends. The following table presents
earnings per share for the years ended December 31, 2015, 2014 and 2013:
2015
2014
2013
Numerator
Net Income Available to Common Stockholders $ 5,997,687 $ 4,843,021 $ 3,120,284
Denominator
Weighted Average Number of Common Shares
Outstanding for Basic Earnings Per Common Share
Dilutive Effect of Potential Common Stock
Restricted Stock
Stock Warrants
Weighted-Average Number of Shares Outstanding for
Diluted Earnings Per Common Share
8,439,258
8,439,258
8,439,258
19,203
-
-
8,458,461
8,439,258
8,439,258
Earnings Per Share -Basic
$
0.71 $
0.57 $
0.37
Earnings Per Share -Diluted
$
0.71 $
0.57 $
0.37
For the years ended December 31, 2014 and 2013, respectively, the Company has excluded 500,000
shares of common stock equivalents because the strike price of the common stock equivalents would
cause them to have an anti-dilutive effect.
r,,
Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Factors that Could Affect Future Results
Certain statements contained in this Annual Report that are not statements of historical fact constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995
(the Act), notwithstanding that such statements are not specifically identified. In addition, certain
statements may be contained in the Company's future filings with the SEC, in press releases, and in oral
and written statements made by or with the approval of the Company that are not statements of historical
fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-
looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or
loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii)
statements of plans and objectives of Colony Bankcorp, Inc. or its management or Board of Directors,
including those relating to products or services; (iii) statements of future economic performance; and (iv)
statements of assumptions underlying such statements. Words such as "believes," "anticipates,"
"expects," "intends," "targeted" and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ
materially from those in such statements. Factors that could cause actual results to differ from those
discussed in the forward-looking statements include, but are not limited to:
• Local and regional economic conditions and the impact they may have on the Company and its
customers and the Company's assessment of that impact.
• Changes in estimates of future reserve requirements based upon the periodic review thereof under
relevant regulatory and accounting requirements.
• The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate
policies of the Federal Reserve Board.
• Inflation, interest rate, market and monetary fluctuations.
• Political instability.
• Acts of war or terrorism.
• The timely development and acceptance of new products and services and perceived overall value
of these products and services by users.
• Changes in consumer spending, borrowings and savings habits.
• Technological changes.
• Acquisitions and integration of acquired businesses.
• The ability to increase market share and control expenses.
63
• The effect of changes in laws and regulations (including laws and regulations concerning taxes,
banking, securities and insurance) with which the Company and its subsidiaries must comply.
• The effect of changes in accounting policies and practices, as may be adopted by the regulatory
agencies, as well as the Financial Accounting Standards Board and other accounting standard
setters.
• Changes in the Company's organization, compensation and benefit plans.
• The costs and effects of litigation and of unexpected or adverse outcomes in such litigation.
• Greater than expected costs or difficulties related to the integration of new lines of business.
• The Company's success at managing the risks involved in the foregoing items.
Forward-looking statements speak only as of the date on which such statements are made. The Company
undertakes no obligation to update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made, or to reflect the occurrence of unanticipated events.
The Company
Colony Bankcorp, Inc. (Colony) is a bank holding company headquartered in Fitzgerald, Georgia that
provides, through its wholly-owned subsidiary (collectively referred to as the Company), a broad array of
products and services throughout central, south and coastal Georgia markets. The Company offers
commercial, consumer and mortgage banking services.
Overview
The following discussion and analysis presents the more significant factors affecting the Company's
financial condition as of December 31, 2015 and 2014, and results of operations for each of the years in
the three-year period ended December 31, 2015. This discussion and analysis should be read in
conjunction with the Company's consolidated financial statements, notes thereto and other financial
information appearing elsewhere in this report.
Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments
by an amount equal to the taxes that would be paid if the income were fully taxable based on a 34 percent
federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.
Dollar amounts in tables are stated in thousands, except for per share amounts.
64
Results of Operations
The Company's results of operations are determined by its ability to effectively manage interest income
and expense, to minimize loan and investment losses, to generate noninterest income and to control
noninterest expense. Since market forces and economic conditions beyond the control of the Company
determine interest rates, the ability to generate net interest income is dependent upon the Company's
ability to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on
interest-bearing liabilities. Thus, the key performance for net interest income is the interest margin or net
yield, which is taxable-equivalent net interest income divided by average interest-earning assets. Net
income available to common shareholders totaled $6.00 million, or $0.71 per diluted common share in
2015, compared to $4.84 million, or $0.57 per diluted common share in 2014 and to $3.12 million, or
$0.37 per diluted common share in 2013.
Selected income statement data, returns on average assets and average equity and dividends per share for
the comparable periods were as follows:
2015
2014
Variance Variance
2014
2013
$
°io
$
Variance
°io
Variance
Taxable-equivalent net interest incorre $ 37,838 $ 38,080 $ (242) (0.64)% $ 38,080 $ 37,859 $ 221
0.58%
Taxable-equivalent adjustment
132 117
15
12.82
117
170
(53) (31.18)
Net interest income
Provision for loan losses
Noninterest income
37,706
37,963
(257) (0.68)
37,963
37,689
274
0.73
866
9,045
1,308
9,125
(442) (33.79)
(80) (0.88)
1,308
9,125
4,485
8,377
Noninterest e~ense 33,724
34,980
(1,256) (3.59)
34,980
34,617
(3,177) (70.84)
748
363
8.93
1.05
Income before income taxes
$ 12,161 $ 10,800 S 1,361
12.60
Income Taxes 3,788
3,268
520 15.91
$ 10,800 $ 6,964 $ 3,836
933
2,335
3,268
55.08
39.96
Net income
$ 8.i73 5
x,532 S 3-41
11.17
$ 7.~~~
~ -l_(~~~)
ti
~.')I1;
b'.,I°u
Preferred stock dividends
S ~.i7~
~
'_,689 $ (314) (11.68)
$ 2,689 $ 1,509 $ 1,180
78.20%
Net income available to
corruran shareholders
Net income available to
comrrwn shareholders:
Basic
Diluted
:,~~~~tt 5 -~.R-I~ 5 l.lc~
23.~•~~„
~S
4.s~a3 $ 3.1~n
~ 1,723
;;,,~~~~
$ 0.71 $ 0.57
$ 0.71 $ 0.57
$ 0.14 24.56% $ 0.57
$ 0.14 24.56% $ 0.57
$ 0.37
$ 0.20
$ 0.37
$ 0.20
54.05%
54.05%
Return on average assets (1)
0.52%
0.43%
0.09% 20.93%
Retum on average coirffr~on equity (1)
5.90%
5.11%
0.79% 15.46%
0.43%
5.11%
0.28%
3.34%
0.15% 53.57%
1.77% 52.99%
(1) Computed using net income available to common shareholders.
65
Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and
securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund
those assets. Net interest income is the Company's largest source of revenue, representing 80.65 percent
of total revenue during 2015, 80.62 percent during 2014 and 81.82 percent during 2013.
Net interest margin is the taxable-equivalent net interest income as a percentage of average interest-
earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets
and interest-bearing liabilities impact net interest income and net interest margin.
The Federal Reserve Board influences the general market rates of interest, including the deposit and loan
rates offered by many financial institutions. The Company's loan portfolio is significantly affected by
changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers
with strong credit is currently 3.50 percent. The rate increased 25 basis points in fourth quarter of 2015
for the first time in several years. The federal funds rate moves similar to prime rate with interest rates
currently at 0.50 percent. We anticipate the Federal Reserves interest rate to remain flat most of 2016.
The following table presents the changes in taxable-equivalent net interest income and identifies the
changes due to differences in the average volume of interest-earning assets and interest-bearing liabilities
and the changes due to changes in the average interest rate on those assets and liabilities. The changes in
net interest income due to changes in both average volume and average interest rate have been allocated
to the average volume change or the average interest rate change in proportion to the absolute amounts of
the change in each. The Company's consolidated average balance sheets along with an analysis of
taxable-equivalent net interest earnings are presented in the Quantitative and Qualitative Disclosures
About Market Risk included elsewhere in this report.
66
Rate/Volume Analysis
The rate/volume analysis presented hereafter illustrates the change from year to year for each component
of the taxable equivalent net interest income separated into the amount generated through volume changes
and the amount generated by changes in the yields/rates.
Interest Income
Loans, Net-Taxable
Investment Securities
Taxable
Tax Exempt
Total Investment Securities
Interest-BearingDeposits in
Other Banks
Federal Funds Sold
Other Interest -Earning Assets
Total Interest Income
Interest E~ense
Interest-Bearing Demand and
Savings Deposits
Time Deposits
Total Interest E~ense
On Deposits
Other Interest-Bearing Liabilities
Subordinated Debentures
Other Debt
Total Interest Expense
Net Interest Income (Loss)
Changes From
2014 to 2015 (a)
Changes From
2013 to 2014 (a)
tiolumc
Rate
Total
V<,lume
Rate
Total
`~+
83l X (831) `f+
-
$ (175) $ (1,484) $ (1,659)
(89)
(12)
(101)
(396)
(3)
(399)
35
(16)
(6)
743
3
(1)
13
(1,215)
(485)
(15)
(500)
38
(17)
7
(472)
122
(~~)
100
1,044
1,166
(4) (26)
1,040
1,140
18
(3)
15
(9)
(72)
43
(405)
34
(477)
t z6
(2-1111
(29)
(113)
y7
(3~3)
100
(263)
(37)
(508)
63
(771)
(114)
(142)
(256) (163)
(545)
(70K)
-
-
(15)
41
(15)
-11
-
(91
1
18
9
(114)
(2311)
$ 857 $ (1,099) `I; (242)
(116)
~I~~)
I ~~~~
ti
(526)
(698)
121 $ 221
b
(a) Changes in net interest income for the periods, based on either changes in average balances or
changes in average rates for interest-earning assets and interest-bearing liabilities, are shown on this
table. During each year there are numerous and simultaneous balance and rate changes; therefore, it
is not possible to precisely allocate the changes between balances and rates. For the purpose of this
table, changes that are not exclusively due to balance changes or rate changes have been attributed to
rates.
67
The Company maintains about 18 percent of its loan portfolio in adjustable rate loans that reprice with
prime rate changes, while the bulk of its other loans mature within 3 years. The liabilities to fund assets
are primarily in short term certificates of deposit that mature within one year. The Federal Reserve rates
have remained flat since 2008 until the increase in the fourth quarter of 2015. We have seen the net
interest margin change to 3.52 percent for 2015, compared to 3.60 percent for 2014 and 3.61 percent for
2013. We have seen our net interest margin reach a low of 3.43 percent for first quarter 2015 to a high of
3.63 percent for fourth quarter 2015.
Taxable-equivalent net interest income for 2015 decreased by $242 thousand, or 0.64 percent, compared
to 2014 while taxable-equivalent net interest income for 2014 increased by $221 thousand, or 0.58
percent, compared to 2013. The average volume of interest-earning assets during 2015 increased $16.95
million compared to 2014 while over the same period the net interest margin dropped to 3.52 percent from
3.60 percent. The average volume of interest-earning assets during 2014 increased $9.42 million
compared to 2013 while over the same period the net interest margin decreased to 3.60 percent from 3.61
percent. The change in the net interest margin in 2015 and 2014 was primarily driven by reduction in the
cost of funds and a higher level of low yielding assets. The increase in average interest-earning assets in
2015 was in loans and interest-bearing deposits. The increase in average interest-earning assets in 2014
was in securities and interest-bearing deposits.
The average volume of loans increased $15.47 million in 2015 compared to 2014, and decreased $3.14
million in 2014 compared to 2013. The average yield on loans decreased 11 basis points in 2015
compared to 2014 and decreased 20 basis points in 2014 compared to 2013. The average volume of
deposits increased $17.29 million in 2015 compared to 2014. The average volume of deposits increased
$5.75 million while other borrowings decreased $331 thousand in 2014 compared to 2013. Demand
deposits made up $10.09 million of the increase in average deposits in 2015 and demand deposits made
up $5.79 million of the increase in average deposits in 2014.
Accordingly, the ratio of average interest-bearing deposits to total average deposits was 86.8 in 2015, 87.6
percent in 2014 and 88.2 percent in 2013. This deposit mix, combined with a general decrease in interest
rates, had the effect of (i) decreasing the average cost of total deposits by 3 basis points in 2015 compared
to 2014 and decreasing the average cost of total deposits by 8 basis points in 2014 compared to 2013, and
(ii) mitigating a portion of the impact of decreasing yields on interest-earning assets on the Company's
net interest income.
The Company's net interest spread, which represents the difference between the average rate earned on
interest-earning assets and the average rate paid on interest-bearing liabilities, was 3.41 percent in 2015
compared to 3.49 percent in 2014 and 3.50 percent in 2013. The net interest spread, as well as the net
interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as
well as the impact from the competitive environment. A discussion of the effects of changing interest
rates on net interest income is set forth in Quantitative and Qualitative Disclosures About Interest Rate
Sensitivity included elsewhere in this report.
68
Provision for Loan Losses
The provision for loan losses is determined by management as the amount to be added to the allowance
for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in
management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. The
provision for loan losses totaled $866 thousand in 2015 compared to $1.31 million in 2014 and $4.49
million in 2013. See the section captioned "Allowance for Loan Losses" elsewhere in this discussion for
further analysis of the provision for loan losses.
Noninterest Income
The components of noninterest income were as follows:
2015
2014
Variance Variance
2014
2013
Variance
Variance
$
%
$
Service Charges on Deposit Accounts $ 4,269 $ 4,649 $ (380)
239
Other Charges, Commissions and Fees
2,627
2,388
(8.17)% $ 4,649 $ 4,691 $ (42)
663
10.01
1,725
2,388
(0.90)%
38.43
Mortgage Fee Income
Securities Gains (Losses)
Gain on Sale of SBA Loans
527
(11)
-
420
24
-
107
25.48
(35) (145.83)
-
-
420
24
-
Other 1,633
1,644
(11)
(0.67)
1,644
484
(364)
635
1,206
(64) (13.22)
388
106.59
(635) (100.00)
438
36.32
Total $ 9,045
~ ~), I ~~
X (80)
(0.88)% $ 9, I ~~ $ R.377
~ 748
8.93%
Other Charges, Commissions and Fees. Significant amounts impacting the comparable periods was
primarily attributed to ATM and debit card interchange fees which increased $251 thousand in 2015
compared to 2014 and $701 thousand in 2014 compared to 2013.
Mortgage Fee Income. The increase in mortgage fee income in 2015 compared to the same period in
2014 is due to a slight increase in the volume of mortgage loans. The volume of mortgage loans has been
sluggish in 2014 compared to the same period in 2013 which contributed to a slight decrease in mortgage
fee income.
Securities Gains (Losses). The decrease in 2015 is attributable to the loss on sale of securities compared
to 2014 with a gain on sale of securities.
Other. The Bank did not have any significant changes for 2015 compared to 2014. Significant amounts
impacting the comparable periods was primarily attributed to the income for bank owned life insurance
which increased $217 thousand in 2014 compared to 2013.
.•
Noninterest Expense
The components of noninterest expense were as follows:
2015
2014
Variance Variance
2014
2013
~ ariance Variance
$
°io
~
°io
Salaries and Employee Benefits $ 17,590 $ 17,508 $ 82
0.47% $ 17,508 $ 16,692 $ 816
4.89%
Occupancy and Equipment
3,989
4,063
(74) (1.82)
4,063
3,795
268
7.06
Directors' Fees
Legal and Professional Fees
358
738
392
786
(34) (8.67)
(48) (6.11)
392
786
Foreclosed Property
FDIC Assessment
Advertising
Software
Telephone
ATM/Card Processing
1,683
2,701
(1,018) (37.69)
2,701
899
625
993
710
1,061
966
652
925
736
906
(67) (6.94)
(27) (4.14)
68
7.35
(26) (3.53)
155
17.11
966
652
925
736
906
417
721
3,918
1,322
508
853
778
685
Other 5,078
5,345
(267) (5.00)
5,345
4,928
(25)
(6.00)
65
9.02
(1,21'n
(31.06)
(356) (26.93)
144
28.35
72
8.44
(42)
(5.40)
221
417
32.26
8.46
Total
$ 33,724 $ 34,980 $ (1,256) (3.59)% $ 34,980 $ 34,617 $ 363
1.05%
Salaries and Employee Benefits. Salary and employee benefits remained flat in 2015, while the increase
in 2014 is primarily attributable to the Company reinstating their contribution to the profit sharing plan in
the amount of $401,497 and the remainder of the increase is due to merit pay increases.
Foreclosed Property. The decrease in foreclosed property and repossession expense for 2015 and 2014 is
primarily attributable to the decrease in the volume of OREO.
~o
Sources and Uses of Funds
The following table illustrates, during the years presented, the mix of the Company's funding sources and
the assets in which those funds are invested as a percentage of the Company's average total assets for the
period indicated. Average assets totaled $1.15 billion in 2015 compared to $1.13 billion in 2014 and
$1.12 billion in 2013.
Sources of Funds:
Deposits
Noninterest-Bearing
Interes t-Bearing
Federal Funds Purchased
and Repurchase Agreements
Subordinated Debentures
and Other Borrowed Money
Other Noninterest-Bearing
Liabilities
Equity Capital
2015
2014
2013
$ 128,541
11.2
847,811 73.9%
$ 118,452
840,608
10.5%
74.5%
$ 112,667
840,646
10.1
75.2%
3 -%
2
34
-
64,229
5.6%
64,229
5.7%
64,528
5.8%
4,690
101,710
0.4%
8.9%
10,010
94,751
0.9%
8.4%
6,838
93,358
0.6%
8.3%
Total
$ 1, 146,984
100.0'%,
S I.12R.n52
1 n0.0% S I.1 1 ti.(171
1
Uses of Funds:
Loans (Net of Allowance)
Investment Securities
Federal Funds Sold
Interest-Bearing Deposits
Other Interest-Earning Assets
Other Noninterest-Earning Assets
$ 748,366 65.3%
278,978 243%
0.5%
2.6%
0.2%
7.1%
6,056
29,815
2,754
81,015
$ 730,643
284,474
12,551
16,193
2,906
81,285
64.8%
25.2%
1.1%
1.4%
03%
7.2%
$ 731,280 65.4%
24.7%
1.3%
0.9%
0.3%
7.4%
275,689
14,969
9,625
3,275
83,233
Total
$ 1,146,981
100.0'%,
~ l.l~~.O~?
II)(1.0'~~;~
5 1.115,1)71
1~.~/o
Deposits continue to be the Company's primary source of funding. Over the comparable periods, the
relative mix of deposits continues to be high in interest-bearing deposits. Interest-bearing deposits totaled
86.8 percent of total average deposits in 2015 compared to 87.6 percent 2014 and 88.2 percent in 2013.
The Company primarily invests funds in loans and securities. Loans continue to be the largest component
of the Company's mix of invested assets. Loan demand increased in 2015 as total loans were $758.6
million at December 31, 2015, up 1.68 percent, compared to loans of $746.1 million at December 31,
2014, while total loans at December 31, 2014, were down 0.68 percent, compared to loans of $751.2
million at December 31, 2013. See additional discussion regarding the Company's loan portfolio in the
section captioned "Loans" on the following page. The majority of funds provided by deposits have been
invested in loans.
71
Commercial and Agricultural
Commercial
Agricultural
Real Fs tate
Commercial Construction
Residential Construction
Corrur~ercial
Residential
Farmland
Loans
The following table presents the composition of the Company's loan portfolio as of December 31 for the
past five years.
2015
2014
2013
2012
2011
$ 47,782 $ 50,960 $ 48,107 $ 55,684 $ 48,986
8,422
19,193
16,689
10,666
6,211
40,107
9,413
346,262
197,002
61,780
51,259
11,221
332,231
203,753
49,951
52,739
6,549
341,783
206,258
47,034
53,808
5,852
334,386
203,845
49,057
58,546
3,530
315,281
193,638
48,225
30,449
9,244
716,321
Consumer and Other
20,60.5
Consumer
Other 16,492
758,636
22,820
7,210
746,094
25,676
12,406
751,218
29,778
8,429
747,050
Unearned Interest and Fees
Allowances for Loan Losses
(357)
(8,604)
(362)
(8,802)
(360)
(11,806)
(234)
(12,737)
(57)
(15,650)
Loans
~ 7-19,675 $ 736,930 $ 739,052 $ 734,079 $ 700,614
The following table presents total loans as of December 31, 2015 according to maturity distribution
and/or repricing opportunity on adjustable rate loans.
Maturity and Repricing Opporh~nit~~
One Year or Less
$ 290,353
257,129
After One Year through Three Years
After Three Years through Five Years
150,904
Over Five Years 60,250
$ 758,636
Overview. Loans totaled $758.6 million at December 31, 2015, up 1.68 percent from December 31, 2014
loans of $746.1 million. The majority of the Company's loan portfolio is comprised of the real estate
loans. Commercial and residential real estate which is primarily 1-4 family residential properties and
nonfarm nonresidential properties, made up 71.61 percent and 71.84 percent of total loans, real estate
construction loans made up 6.53 percent and 8.37 percent while commercial and agricultural loans made
up 8.83 percent and 9.07 percent of total loans at December 31, 2015 and December 31, 2014,
respectively.
,,
Loan Origination/Risk Management. In accordance with the Company's decentralized banking model,
loan decisions are made at the local bank level. The Company utilizes both an Executive Loan
Committee and a Director Loan Committee to assist lenders with the decision making and underwriting
process of larger loan requests. Due to the diverse economic markets served by the Company, evaluation
and underwriting criterion may vary slightly by market. Overall, loans are extended after a review of the
borrower's repayment ability, collateral adequacy, and overall credit worthiness.
Commercial purpose, commercial real estate, and agricultural loans are underwritten similarly to how
other loans are underwritten throughout the Company. The properties securing the Company's
commercial real estate portfolio are diverse in terms of type and geographic location. In addition, the
Company restricts total loans to $10 million per borrower, subject to exception, approval by the Director
Loan Committee. This diversity helps reduce the company's exposure to adverse economic events that
affect any single market or industry. Management monitors and evaluates commercial real estate loans
monthly based on collateral, geography, and risk grade criteria. The Company also utilizes information
provided by third-party agencies to provide additional insight and guidance about economic conditions
and trends affecting the markets it serves.
The Company extends loans to builders and developers that are secured by non-owner occupied
properties. In such cases, the Company reviews the overall economic conditions and trends for each
market to determine the desirability of loans to be extended for residential construction and development.
Sources of repayment for these types of loans may be pre-committed permanent loans from approved
long-term lenders, sales of developed property or an interim mini-perm loan commitment from the
Company until permanent financing is obtained. In some cases, loans are extended for residential loan
construction for speculative purposes and are based on the perceived present and future demand for
housing in a particular market served by the Company. These loans are monitored by on-site inspections
and are considered to have higher risks than other real estate loans due to their ultimate repayment being
sensitive to interest rate changes, general economic conditions and trends, the demand for the properties,
and the availability of long-term financing.
The Company originates consumer loans at the bank level. Due to the diverse economic markets served
by the Company, underwriting criterion may vary slightly by market. The Company is committed to
serving the borrowing needs of all markets served and, in some cases, adjusts certain evaluation methods
to meet the overall credit demographics of each market. Consumer loans represent relatively small loan
amounts that are spread across many individual borrowers to help minimize risk. Additionally, consumer
trends and outlook reports are reviewed by management on a regular basis.
The Company utilizes an independent third party company for loan review and validation of the credit
risk program on an ongoing quarterly basis. Results of these reviews are presented to management and
the audit committee. The loan review process complements and reinforces the risk identification and
assessment decisions made by lenders and credit personnel, as well as the Company's policies and
procedures.
Commercial and Agricultural. Commercial and agricultural loans at December 31, 2015 decreased 1.0
percent to $67.0 million from December 31, 2014 at $67.6 million. The Company's commercial and
agricultural loans are a diverse group of loans to small, medium and large businesses. The purpose of
these loans varies from supporting seasonal working capital needs to term financing of equipment. While
some short-term loans may be made on an unsecured basis, most are secured by the assets being financed
with collateral margins that are consistent with the Company's loan policy guidelines.
73
Real Estate. Commercial and residential construction loans decreased by $12.96 million, or 20.74
percent, at December 31, 2015 to $49.52 million from $62.48 million at December 31, 2014. This
decrease is due to completion of construction and the new loans transferring to the commercial real estate
category. Therefore, commercial real estate increased $14.03 million, or 4.22 percent, at December 31,
2015 to $346.26 million from $332.23 million at December 31, 2014.
Other. Other loans at December 31, 2015 increased 128.74 percent to $16.49 million from $7.21 million
at December 31, 2014. This increase is attributable to a new $10 million loan acquired in 2015.
Industry Concentrations. As of December 31, 2015 and December 31, 2014, there were no concentrations
of loans within any single industry in excess of 10 percent of total loans, as segregated by Standard
Industrial Classification code ("SIC code"). The SIC code is a federally designed standard industrial
numbering system used by the Company to categorize loans by the borrower's type of business. The
Company has established industry-specific guidelines with respect to maximum loans permitted for each
industry with which the Company does business.
Collateral Concentrations. Concentrations of credit risk can exist in relation to individual borrowers or
groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions.
The Company has a concentration in real estate loans as well as a geographic concentration that could
pose an adverse credit risk, particularly with the current economic downturn in the real estate market. At
December 31, 2015, approximately 86 percent of the Company's loan portfolio was concentrated in loans
secured by real estate. A substantial portion of borrowers' ability to honor their contractual obligations is
dependent upon the viability of the real estate economic sector. In addition, a large poRion of the
Company's foreclosed assets are also located in these same geographic markets, making the recovery of
the carrying amount of foreclosed assets susceptible to changes in market conditions. Management
continues to monitor these concentrations and has considered these concentrations in its allowance for
loan loss analysis.
Large Credit Relationships. The Company is currently in eighteen counties in central, south and coastal
Georgia and includes metropolitan markets in Dougherty, Lowndes, Houston, Chatham and Muscogee
counties. As a result, the Company originates and maintains large credit relationships with several
commercial customers in the ordinary course of business. The Company considers large credit
relationships to be those with commitments equal to or in excess of $5.0 million prior to any portion being
sold. Large relationships also include loan participations purchased if the credit relationship with the
agent is equal to or in excess of $5.0 million. In addition to the Company's normal policies and
procedures related to the origination of large credits, the Company's Executive Loan Committee and
Director Loan Committee must approve all new and renewed credit facilities which are part of large credit
relationships. The following table provides additional information on the Company's large credit
relationships outstanding at December 31, 2015 and December 31, 2014.
December 31, 2015
Period End Balances
December 31, 2014
Period End Balances
Number of
Number of
Relationships Committed Outstanding Relationships Committed Outstanding
Large Credit Relationships:
$5 million to $9.9 million
16
$ 108,432
$ 99,126
14
$ 93,931
$ 86,305
74
Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table presents the
maturity distribution of the Company's loans at December 31, 2015. The table also presents the portion of
loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in
accordance with changes in an interest rate index such as the prime rate.
After One,
but Within
Due in One
Year or Less Three Years
After Three,
but Within
Five Years
After Five
Years
Total
Loans with fixed interest rates
Loans with floating interest rates
~ 202,561
87,792
$ 245,237
11,892
$ 116,964
33,940
~ 58,622
1,628
$ 623,384
135,252
Total $ 290,353
$ 257,129
$ 150,904
~ 60,250
$ 758,636
The Company may renew loans at maturity when requested by a customer whose financial strength
appears to support such renewal or when such renewal appears to be in the Company's best interest. In
such instances, the Company generally requires payment of accrued interest and may adjust the rate of
interest, require a principal reduction or modify other terms of the loan at the time of renewal.
75
Nonperforming Assets and Potential Problem Loans
Year-end nonperforming assets and accruing past due loans were as follows:
2015
2014
2013
2012
2011
Loans Accounted for on Nonaccrual
Loans Accruing Past Due 90 Days or More
Other Real Estate Foreclosed
Securities Accounted for on Nonaccrual -
$ 14,408
S
8,839
Total Nonperforming Assets $ 23,255
$18,334
7
10,402
-
$28,743
$24,114
4
15,502
-
$39,620
$29,851
4
15,941
366
$46,162
$38,822
15
20,445
426
$59,708
Nonperforming Assets by Segment
Construction and Land Development
1-4 Family Residential
Multifamily Residential
Nonfarm Residential
Farmland
Commercial and Consumer
Total Nonperforming Assets
Nonperforming Assets as a Percentage of:
Total Loans and Foreclosed Assets
Total Assets
Nonperforming Loans as a Percentage o£
7,106
4,197
-
9,908
1,103
941
$ 23,255
9,655
8,237
173
8,375
1,449
854
$28,743
17,323
5,926
335
12,441
1,629
1,966
$39,620
23,832
7,153
627
10,421
2,413
1,716
$46, l 62
35,467
4,589
744
15,353
676
2,879
$59,708
3.03%
1.98%
3.80%
2.51%
5.17%
3.45%
6.05%
4.05%
8.10%
4.99%
Total Loans
1.90%
2.46%
3.21%
4.00%
5.42%
Supplemental Data:
Trouble Debt Restructured Loans
In Compliance with Modified Terms
$ 19,375
$19,229
$20,715
$24,870
$29,839
Trouble Debt Restructured Loans
Past Due 30-89 Days
Accruing Past Due Loans:
30-89 Days Past Due
90 or More Days Past Due
Total Accruing Past Due Loans
Allowance for Loan Losses
ALLL as a Percentage of:
Total Loans
Nonperforming Loans
344
757
435
1,377
611
10,959
8
$ 10,967
9,701
7
14,911
4
$9,708 $ 9,370 $ 14,915
9,366
4
7,161
15
$ 7,176
$ 8,604
$8,802 $ 11,806 $ 12,737
$ 15,650
1.13%
59.68%
1.18%
47.99%
1.57%
48.95%
1.70%
42.66%
2.18%
40.30%
Nonperforming assets include nonaccrual loans, loans past due 90 days or more, foreclosed real estate and
nonaccrual securities. Nonperforming assets at December 31, 2015 decreased 19.09 percent from
December 31, 2014.
76
Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due
and/or management deems the collectibility of the principal and/or interest to be in question, as well as
when required by regulatory requirements. Loans to a customer whose financial condition has deteriorated
are considered for nonaccrual status whether or not the loan is 90 days or more past due. For consumer
loans, collectibility and loss are generally determined before the loan reaches 90 days past due.
Accordingly, losses on consumer loans are recorded at the time they are determined. Consumer loans that
are 90 days or more past due are generally either in liquidation/payment status or bankruptcy awaiting
confirmation of a plan. Once interest accruals are discontinued, accrued but uncollected interest is charged
to current year operations. Subsequent receipts on nonaccrual loans are recorded as a reduction of
principal, and interest income is recorded only after principal recovery is reasonably assured.
Classification of a loan as nonaccrual does not preclude the ultimate collection of loan principal or
interest.
Troubled debt restructured loans are loans on which, due to deterioration in the borrower's financial
condition, the original terms have been modified in favor of the borrower or either principal or interest has
been forgiven.
Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed
assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-
downs occurring at foreclosure are charged against the allowance for loan losses. On an ongoing basis,
properties are appraised as required by market indications and applicable regulations. Write-downs are
provided for subsequent declines in value and are included in other non-interest expense along with other
expenses related to maintaining the properties.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to
expense, which represents management's best estimate of probable losses that have been incurred within
the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for
estimated loan losses and risks inherent in the loan portfolio. The allowance for loan losses includes
allowance allocations calculated in accordance with current U.S. accounting standards. The level of the
allowance reflects management's continuing evaluation of industry concentrations, specific credit risks,
loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions
and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated
for specific credits; however, the entire allowance is available for any credit that, in management's
judgment, should be charged off. While management utilizes its best judgment and information available,
the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company's
control, including the performance of the Company's loan portfolio, the economy, changes in interest
rates and the view of the regulatory authorities toward loan classifications.
The Company's allowance for loan losses consists of specific valuation allowances established for
probable losses on specific loans and historical valuation allowances for other loans with similar risk
characteristics. Effective with the quarter ended June 30, 2015, the calculation of the amount needed in
the Allowance for Loan Losses changed. Management determined that the segmentation method for the
ASC 450-20 portion of the loan portfolio should be changed to bank call report categories. Prior to this
change, the ASC 450-20 segmentation categorized loans by various non-owner occupied commercial real
estate loan types and risk grades for the remainder of the ASC 450-20 portion of the portfolio. On the
date of change, June 30, 2015, the change in methodology resulted in an increase to the calculated
allowance for loan loss reserve of $1,621,424; however, no additional provisions were required to be
recorded as a result of the change.
77
The allowances established for probable losses on specific loans are the result of management's quarterly
review of substandard loans with an outstanding balance of $250,000 or more. This review process
usually involves regional credit officers along with local lending officers reviewing the loans for
impairment. Specific valuation allowances are determined after considering the borrower's financial
condition, collateral deficiencies, and economic conditions affecting the borrower's industry, among other
things. In the case of collateral dependent loans, collateral shortfall is most often based upon local market
real estate value estimates. This review process is performed at the subsidiary bank level and is reviewed
at the parent Company level.
Once the loan becomes impaired, it is removed from the pool of loans covered by the general reserve and
reviewed individually for exposure as described above. In cases where the individual review reveals no
exposure, no reserve is recorded for that loan, either through an individual reserve or through a general
reserve. If, however, the individual review of the loan does indicate some exposure, management often
charges off this exposure, rather than recording a specific reserve. In these instances, a loan which
becomes nonperforming could actually reduce the allowance for loan losses. Those loans deemed
uncollectible are transferred to our problem loan department for workout, foreclosure andlor liquidation.
The problem loan department obtains a current appraisal on the property in order to record the fair market
value (less selling expenses) when the property is foreclosed on and moved into other real estate.
The allowances established for the remainder of the loan portfolio are based on historical loss factors,
adjusted for certain qualitative factors, which are applied to groups of loans with similar risk
characteristics. Loans are segregated into fifteen separate groups based on call codes. Most of the
Company's charge-offs during the past two years have been real estate dependent loans. The historical
loss ratios applied to these groups of loans are updated quarterly based on actual charge-off experience.
The historical loss ratios are further adjusted by qualitative factors.
Management evaluates the adequacy of the allowance for each of these components on a quarterly basis.
Peer comparisons, industry comparisons, and regulatory guidelines are also used in the determination of
the general valuation allowance. Loans identified as losses by management, internal loan review, and/or
bank examiners are charged off. Additional information about the Company's allowance for loan losses
is provided in the Notes to the Consolidated Financial Statements for Allowance for Loan Losses.
78
The following table sets forth the breakdown of the allowance for loan losses by loan category for the
periods indicated. The allocation of the allowance to each category is subjective and is not necessarily
indicative of future losses and does not restrict the use of the allowance to absorb losses in any other
category.
2015
2014
2013
2012
2011
Reser~
%* Reserve
°/a* Reserve
%* Reserve
%* Reserve
%"'
Commercial and Agricultural
Comrt~ercial
Agricultural
$ 855
203
6% $ 497
304
3%
7%
2%
1,017
294
6%
2%
981 7%
296 1%
1,071 7%
297 1%
Real Estate
CocrnT~ercial Construction
Residential Construction
Con~nercial
Residential
Farmland
691
5%
1%
2U
3,851
46%
1,990 26%
8%
912
1,223
138
3,665
2,425
104
7%
1%
45%
27%
7%
1,782
138
4,380
3,278
312
7%
1%
46%
27%
6%
1,890 7%
138 1%
5,163 45%
3,406 27%
291 7%
3,123 8%
138 1%
6,448 44%
3,695 27%
365 7%
Consumer and Other
Consumer
63
Other 19
205 4%
243
308 1%
362
$ 8,604 100% $ 8,802 100% $ 11,806 100% $ 12,737 100% $ 15,650 100%
228 4%
344 1%
3%
2%
3%
2%
3%
1%
67
379
* Percentage represents the loan balance in each category expressed as a percentage of total end of period loans.
T
The following table presents an analysis of the Company's loan loss experience for the periods indicated.
2015
2014
2013
2012
2011
Allowance for Loan Losses at Beginning of Year $ 8,802 $ 11,806
$12,737
$15,650
$28,280
Charge-Offs
Commercial
Agricultural
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
Consumer
Other
Recoveries
Commercial
Agricultural
Commercial Construction
Residential Construction
Commercial
Residential
Farmland
Consumer
Other
455
5
98
-
275
930
40
255
25
625
-
1,543
-
1,327
1,034
233
342
-
121
34
2,071
-
2,873
706
21
398
4
653
3
4,106
-
4,326
961
225
169
I1
842
455
6,957
1
12,492
1,705
60
223
115
2,083
5,104
6,228
10,454
22,850
52
3
486
270
110
20
62
16
76
3
485
90
31
20
72
15
1,019
792
56
6
253
298
65
22
94
18
8l2
140
-
209
233
47
5
82
40
128
454
557
528
149
1
145
8
756
1,970
Net Charge-Offs
1,064
4,312
5,416
9,698
20,880
Provision for Loans Losses
866
1,308
4,485
6,785
8,250
Allowance for Loan Losses at End of Year
$ 8,604 $ 8,802
$11,806
$12,737
$15,650
Ratio of Net Charge-Offs to Average Loans
0.14%
0.58%
0.73%
1.34°/,
2.74%
The allowance for loan losses decreased from $8.80 million, or 1.18 percent of total loans at December
31, 2014 to $8.60 million, or 1.13 percent of total loans at December 31, 2015. This decrease is
consistent with the decrease in the Company's level of nonperforming loans from $18.34 million at
December 31, 2014 to $14.42 million at December 31, 2015. The provision for loan losses reflects loan
quality trends, including the level of net charge-offs or recoveries, among other factors. Significant
changes in the allowance during 2015 was the reduction in the net charge-offs in 2015 to $1.06 million
from $4.31 million in 2014, or a reduction of $3.25 million. Significant changes in the allowance during
2014 was the reduction in the provision for loan losses in 2014 to $1.31 million from $4.49 million in
2013. The Company believes that collection efforts have reduced impaired loans and the reduction in net
charge-offs runs parallel with the improvement in the substandard assets. As we begin to see stabilization
in the economy and the housing and real estate market, we expect continued improvement in our
substandard assets, including net charge-offs. There were no charge-offs or recoveries related to foreign
loans during any of the periods presented.
E~
Investment Portfolio
The following table presents carrying values of investment securities held by the Company as of
December 31, 2015, 2014 and 2013.
2015
2014
2013
Obligations of States and Political Subdivisions
$ 5,099
$ 3,560
$ 3,947
Mortgage-Backed Securities
Total Investment Securities and
Mortgage-Backed Securities
291,050
271,064
259,348
$296,149
$274,624
$263,295
The following table represents expected maturities and weighted-average yields of investment securities
held by the Company as of December 31, 2015. (Mortgage-backed securities are based on the average
life at the projected speed, while State and Political Subdivisions reflect anticipated calls being exercised.)
Within 1 Year
After 1 Year But
Within 5 Years
Amount
Yield
Amount
Yeld
After 5 Years But
Within 10 Years
Amount
After 10 Years
Yield Amount
Yield
Mortgage-Backed Securities $ 4,831 (0.46)% $227,139 1.65% $ 57,457 2.25% $ 1,623 3.07%
Obligations of State and
Political Subdivisions 332 3.67
2,311 2.47
2,218 2.47
238 '4.03
Total Investment Portfolio $ 5,163 (0.19)'% $229,450 1.66% $ 59,675 2.26% $ 1,861 3.20%
Securities are classified as held to maturity and carried at amortized cost when management has the
positive intent and ability to hold them to maturity. Securities are classified as available for sale when
they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized
holding gains and losses reported in other comprehensive income. The Company has 100 percent of its
portfolio classified as available for sale.
At December 31, 2015, there were no holdings of any one issuer, other than the U.S. government and its
agencies, in an amount greater than 10 percent of the Company's stockholders' equity.
The average yield of the securities portfolio was 1.57 percent in 2015 compared to 1.71 percent in 2014
and 1.36 percent in 2013. The decrease in the average yield from 2014 to 2015 was primarily attributed
to the adjustment in amortization resulting from the acceleration of prepayment speeds. The increase in
the average yield from 2013 to 2014 was primarily attributed to the adjustment in amortization resulting
from the deceleration of prepayment speeds.
81
Deposits
The following table presents the average amount outstanding and the average rate paid on deposits by the
Company for the years 2015, 2014 and 2013.
2015
2014
2013
Average
Amount
Average
Rate
Average
Amount
Average
Rate
Average
Amount
Average
Rate
$ 128,541
$ 118,452
$ 112,667
Noninterest-Bearing
Demand Deposits
Interest-Bearing
Demand and Savings
430,731
Tithe Deposits 417,080
0.35'%
0.81'%
394,615
445,993
0.35%
0.83%
366,974
473,672
0.36%
0.95%
Total Deposits $ 976,352
0.50% $ 959,060
0.53°/a $ 953,313
0.61%
The following table presents the maturities of the Company's time deposits as of December 31, 2015.
Months to Maturity
3 or Less
Over 3 through 6
Over 6 through 12
Over 12 Months
Time
Deposits
$100,000
or Greater
Time
Deposits
Less Than
$100,000
Total
$ 40,318
29,983
71,599
60,901
$ 47,891
34,779
62,852
51,409
$ 88,209
64,762
134,451
112,310
$ 202,801
$ 196,931
$ 399,732
Average deposits increased $17.29 million in 2015 compared to 2014 and increased $5.75 million in 2014
compared to 2013. The increase in 2015 included $36.12 million, or 9.15 percent in interest-bearing
demand and savings deposits while, at the same time noninterest bearing deposits increased $10.09
million, or 8.52 percent and time deposits decreased $28.91 million, or 6.48 percent. The increase in
2014 included $27.64 million, or 7.53 percent in interest-bearing demand and savings deposits while, at
the same time, noninterest bearing deposits increased $5.79 million, or 5.13 percent and time deposits
decreased $27.68 million, or 5.84 percent. Accordingly, the ratio of average noninterest-bearing deposits
to total average deposits was 13.17 percent in 2015, 12.35 percent in 2014 and 11.82 percent in 2013.
The general decrease in market rates in 2015 had the effect of (i) decreasing the average cost of interest-
bearing deposits by 3 basis points in 2015 compared to 2014 and (ii) mitigating a portion of the impact of
decreasing yields on interest-earning assets in the Company's net interest income in 2015. The general
decrease in market rates in 2014 had the effect of (i) decreasing the average cost of interest-bearing
deposits by 8 basis points in 2014 compared to 2013 and (ii) mitigating a portion of the impact of
decreasing yields on interest-earning assets in the Company's net interest income in 2014.
82
Total average interest-bearing deposits increased $7.20 million, or 0.86 percent in 2015 compared to 2014
and decreased $38 thousand, or 0.01 percent in 2014 compared to 2013. This increase was primarily
attributable to the increase in interest-bearing demand and savings accounts in 2015. While in 2014, the
decrease was primarily attributable to the decrease in time deposit accounts.
The Company supplements deposit sources with brokered deposits. As of December 31, 2015, the
Company had $25.6 million, or 2.53 percent of total deposits, in brokered certificates of deposit attracted
by external third parties. Additional information is provided in the Notes to Consolidated Financial
Statements for Deposits.
Off-Balance-Sheet Arrangements, Commitments, Guarantees, and Contractual Obligations
The following table summarizes the Company's contractual obligations and other commitments to make
future payments as of December 31, 2015. Payments for borrowings do not include interest. Payments
related to leases are based on actual payments specified in the underlying contracts. Loan commitments
and standby letters of credit are presented at contractual amounts; however, since many of these
commitments are expected to expire unused or only partially used, the total amounts of these
commitments do not necessarily reflect future cash requirements. The off-balance-sheet arrangements for
loan commitments consist of approximately $8 million in 1-4 residential home equity and construction
loans, $3 million in commercial real estate construction loans, $18 million in commerciaUindustrial loans
and $38 million in the overdraft privilege program.
Payments Due by Period
More than
1 Year but
Less Than
3 Years
1 Year or
Less
3 Years or
More but
Less Than 5 5 Years
Years
or More
Total
Contractual Obligations:
Subordinated Debentures
Federal Home Loan Bank Advances
Operating Leases
Deposits with Stated Maturity Dates
$
$ -
$ -
-
92
287,423
2,500
38
88,019
10,500
-
23,574
$ 24,229 $ 24,229
40,00(1
130
399,732
27,000
-
716
287,515
90,557
34,074
51,945
464,091
Other Commitments:
67,889
Loan Commitments
Standby Letters of Credit 1,588
Total Contractual Obligations and
69,477
-
-
-
-
-
-
-
-
-
67,889
1,588
69,477
Other Commitments ~ 356,992
$ 90,557
$ 34,074
$ 51,945 $ 533,568
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments
which are not reflected in the consolidated financial statements. These instruments include commitments
to extend credit, standby letters of credit, performance letters of credit, guarantees and liability for assets
held in trust.
Such financial instruments are recorded in the financial statements when funds are disbursed or the
instruments become payable. The Company uses the same credit policies for these off-balance sheet
financial instruments as they do for instruments that are recorded in the consolidated financial statements.
83
Loan Commitments. The Company enters into contractual commitments to extend credit, normally with
fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all
of the Company's commitments to extend credit are contingent upon customers maintaining specific
credit standards at the time of loan funding. The Company minimizes its exposure to loss under these
commitments by subjecting them to credit approval and monitoring procedures. Management assesses the
credit risk associated with certain commitments to extend credit in determining the level of the allowance
for loan losses. Loan commitments outstanding at December 31, 2015 are included in the preceding table.
Standby Letters of Credit. Letters of credit are written conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. In the event the customer does not perform in
accordance with the terms of the agreement with the third party, the Company would be required to fund
the commitment. The maximum potential amount of future payments the Company could be required to
make is represented by the contractual amount of the commitment. If the commitment is funded, the
Company would be entitled to seek recovery from the customer. The Company's policies generally
require that standby letters of credit arrangements contain security and debt covenants similar to those
contained in loan agreements. Standby letters of credit outstanding at December 31, 2015 are included in
the preceding table.
Capital and Liquidity
At December 31, 2015, shareholders' equity totaled $95.46 million compared to $99.03 million at
December 31, 2014. In addition to net income of $8.37 million, other significant changes in shareholders'
equity during 2015 included $2.37 million of dividends declared on preferred stock and $9.98 million
redemption of preferred stock. The accumulated other comprehensive loss component of stockholders'
equity totaled $(4.43) million at December 31, 2015 compared to $(4.84) million at December 31, 2014.
This fluctuation was mostly related to the after-tax effect of changes in the fair value of securities
available for sale. Under regulatory requirements, the unrealized gain or loss on securities available for
sale does not increase or reduce regulatory capital and is not included in the calculation of risk-based
capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital
guidelines designed to measure Tier 1 and total capital and take into consideration the risk inherent in
both on-balance sheet and off-balance sheet items. Tier 1 capital consists of common stock and qualifying
preferred stockholders' equity less goodwill and disallowed deferred tax assets. Tier 2 capital consists of
certain convertible, subordinated and other qualifying debt and the allowance for loan losses up to 1.25
percent of risk-weighted assets. The Company has no Tier 2 capital other than the allowance for loan
losses.
Using the capital requirements presently in effect, the Tier 1 ratio as of December 31, 2015 was 15.51
percent and total Tier 1 and 2 risk-based capital was 16.60 percent. Both of these measures compare
favorably with the regulatory minimum of 6 percent for Tier 1 and 8 percent for total risk-based capital.
The Company's common equity Tier 1 ratio as of December 31, 2015 was 10.29, which exceeds the
regulatory minimum of 4.50 percent. The Company's Tier 1 leverage ratio as of December 31, 2015 was
10.69 percent, which exceeds the required ratio standard of 4 percent.
For 2015, average capital was $101.7 million, representing 8.87 percent of average assets for the year.
This compares to 8.40 percent for 2014.
For 2015, the Company did not have any material commitments for capital expenditures.
The Company did not pay any common stock dividends in 2015 or 2014. The Company suspended
common stock dividend payments beginning in the third quarter of 2009 for capital retention purposes.
84
The Company declared dividends of $2,375 and $2,689 on preferred stock during 2015 and 2014,
respectively. On November 17, 2014 the Company reinstated dividend payments on the Preferred Stock
and paid $5.5 million of accumulated dividends in arrears to the holders of the Preferred Stock.
Additional information is provided in the Notes to the Consolidated Financial Statements for Preferred
Stock.
The Company, primarily through the actions of its subsidiary bank, engages in liquidity management to
ensure adequate cash flow for deposit withdrawals, credit commitments and repayments of borrowed
funds. Needs are met through loan repayments, net interest and fee income and the sale or maturity of
existing assets. In addition, liquidity is continuously provided through the acquisition of new deposits,
the renewal of maturing deposits and external borrowings.
Management monitors deposit flow and evaluates alternate pricing structures to retain and grow deposits.
To the extent needed to fund loan demand, traditional local deposit funding sources are supplemented by
the use of FHLB borrowings, brokered deposits and other wholesale deposit sources outside the
immediate market area. Internal policies have been updated to monitor the use of various core and non-
core funding sources, and to balance ready access with risk and cost. Through various assedliability
management strategies, a balance is maintained among goals of liquidity, safety and earnings potential.
Internal policies that are consistent with regulatory liquidity guidelines are monitored and enforced by the
Bank.
The investment portfolio provides a ready means to raise cash if liquidity needs arise. As of
December 31, 2015, the available for sale bond portfolio totaled $296.2 million. At December 31, 2014,
the available for sale bond portfolio totaled $274.6 million. Only marketable investment grade bonds are
purchased. Although most of the Banks' bond portfolios are encumbered as pledges to secure various
public funds deposits, repurchase agreements, and for other purposes, management can restructure and
free up investment securities for sale if required to meet liquidity needs.
Management continually monitors the relationship of loans to deposits as it primarily determines the
Company's liquidity posture. Colony had ratios of loans to deposits of 75.0 percent as of December 31,
2015 and 76.2 percent as of December 31, 2014. Management employs alternative funding sources when
deposit balances will not meet loan demands. The ratios of loans to all funding sources (excluding
Subordinated Debentures) at December 31, 2015 and December 31, 2014 were 72.1 percent and 73.2
percent, respectively. Management continues to emphasize programs to generate local core deposits as
our Company's primary funding sources. The stability of the Banks' core deposit base is an important
factor in Colony's liquidity position. A heavy percentage of the deposit base is comprised of accounts of
individuals and small businesses with comprehensive banking relationships and limited volatility. At
December 31, 2015 and December 31, 2014, the Bank had $203 million and $211 million, respectively, in
certificates of deposit of $100,000 or more. These larger deposits represented 20.1 percent and 21.5
percent of respective total deposits. Management seeks to monitor and control the use of these larger
certificates, which tend to be more volatile in nature, to ensure an adequate supply of funds as needed.
Relative interest costs to attract local core relationships are compared to market rates of interest on
various external deposit sources to help minimize the Company's~overall cost of funds.
s,
The Company supplemented deposit sources with brokered deposits. As of December 31, 2015, the
Company had $25.6 million, or 2.53 percent of total deposits, in CDARS. Additional information is
provided in the Notes to the Consolidated Financial Statements regarding these brokered deposits.
Additionally, the Company uses external deposit listing services to obtain out-of-market certificates of
deposit at competitive interest rates when funding is needed. The deposits obtained from listing services
are often referred to as wholesale or Internet CDs. As of December 31, 2015, the Company had $27.2
million, or 2.69 percent of total deposits, in Internet certificates of deposit obtained through deposit listing
services.
To plan for contingent sources of funding not satisfied by both local and out-of-market deposit balances,
Colony and its subsidiary have established multiple borrowing sources to augment their funds
management. The Company has borrowing capacity through membership of the Federal Home Loan
Bank program. The bank has also established overnight borrowing for Federal Funds Purchased through
various correspondent banks. Management believes the various funding sources discussed above are
adequate to meet the Company's liquidity needs in the future without any material adverse impact on
operating results.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The
liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible
outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial
institution to meet its current financial obligations is a function of balance sheet structure, the ability to
liquidate assets, and the availability of alternative sources of funds. The Company seeks to ensure its
funding needs are met by maintaining a level of liquid funds through asset/liability management.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will
mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, securities
available for sale and federal funds sold and securities purchased under resale agreements.
Liability liquidity is provided by access to funding sources which include core deposits. Should the need
arise, the Company also maintains relationships with the Federal Home Loan Bank, Federal Reserve
Bank, two correspondent banks and repurchase agreement lines that can provide funds on short notice.
Since Colony is a bank holding Company and does not conduct operations, its primary sources of
liquidity are dividends up streamed from the subsidiary bank and borrowings from outside sources.
The liquidity position of the Company is continuously monitored and adjustments are made to the balance
between sources and uses of funds as deemed appropriate. Management is not aware of any events that
are reasonably likely to have a material adverse effect on the Company's liquidity, capital resources or
operations. In addition, management is not aware of any regulatory recommendations regarding liquidity,
which if implemented, would have a material adverse effect on the Company.
Impact of Inflation and Changing Prices
The Company's financial statements included herein have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP). GAAP presently requires the Company to
measure financial position and operating results primarily in terms of historic dollars. Changes in the
relative value of money due to inflation or recession are generally not considered. The primary effect of
inflation on the operations of the Company is reflected in increased operating costs, though given recent
economic conditions, the Company has not experienced any material effects of inflation during the last
three fiscal years. In management's opinion, changes in interest rates affect the financial condition of a
financial institution to a far greater degree than changes in the inflation rate. While interest rates are
greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in
~: .
the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond
the control of the Company, including changes in the expected rate of inflation, the influence of general
and local economic conditions and the monetary and fiscal policies of the United States government, its
agencies and various other governmental regulatory authorities, among other things, as further discussed
in the next section.
Regulatory and Economic Policies
The Company's business and earnings are affected by general and local economic conditions and by the
monetary and fiscal policies of the United States government, its agencies and various other governmental
regulatory authorities, among other things. The Federal Reserve Board regulates the supply of money in
order to influence general economic conditions. Among the instruments of monetary policy available to
the Federal Reserve Board are (i) conducting open market operations in United States government
obligations, (ii) changing the discount rate on financial institution borrowings, (iii) imposing or changing
reserve requirements against financial institution deposits, and (iv) restricting certain borrowings and
imposing or changing reserve requirements against certain borrowings by financial institutions and their
affiliates. These methods are used in varying degrees and combinations to affect directly the availability
of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that
reason alone, the policies of the Federal Reserve Board have a material effect on the earnings of the
Company.
Governmental policies have had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future; however, the Company cannot accurately predict
the nature, timing or extent of any effect such policies may have on its future business and earnings.
Recently Issued Accounting Pronouncements
See Note 1 -Summary of Significant Accounting Policies under the section headed Changes in
Accounting Principles and Effects of New Accounting Pronouncements included in the Notes to
Consolidated Financial Statements.
~~
Quantitative and Quatitadve Disclosures About Market Risk
AVERAGE BALANCE SHEETS
2015
2014
2013
Average
Income/ Yields/
Average
Income/
Yields/
Average
Income/
Yields/
Balances
Expense
Rates
Balances
Expense
Rates
Balances
Expense
Rates
Assets
Interest-Earning Assets
Loans, Net of Unearned Income (I)
5756,953
539,814
5.26% $741,484
$39,814
537%
$744,627
$41,473
5.57%
Investment Securities
Taxable
Tax-Exempt (2)
276,807
4,278
1.55
282,056
4,763
1.69
272,818
3,597
2,171
98
4.51
2,418
113
4.67
2,871
139
Total Investment Securities 278,978
4,376
1.57
284,474
4,876
1.71
275,689
3,736
Interest-Bearing Deposits
29,815
Federal Funds Sold 6,056
SO
15
0.27
0.25
Other Interest-Earning Assets
2,754
122
4.43
16,193
12,551
2,906
42
32
115
Total interest-Earning Assets
1,074,556
44,407
4.13
1,057,608
44,879
0.26
0.25
3.96
4.24
9,625
14,969
3,275
27
39
81
1,048,185
45,356
1.32
4.84
1.36
0.28
0.26
2.47
4.33
Noninterest-Earning Assets
Cash
Allowance for Loan Losses
Other Assets
Total Noninterest-Earning Assets
19,049
(8,587)
61.966
72,428
9,698
(10,841)
71,587
70,444
19,401
(13,347)
63.832
69,886
Total Assets $1,146,984
$1,128,052
$1.118,071
Liabilities and Stockholders' Equity
Interest-Bearing Liabilities
Interest-Bearing Demand and Savings
5430,731
S1,495
0.35%
$394,615
$1,398
0.35%
$366,974
$1,335
036%
Other Time
417,080
3,362
0.81
445,993
3,715
0.83
Total Interest-Bearing Deposits
847,811
4,857
0.57
840,608
5,113
0.61
473,672
840,646
4,486
5,821
40,000
24,229
1,209
503
3.02
2.08
40,000
24,229
1,168
518
2.92
2.14
40,299
24,229
1,159
517
3
-
-
2
-
-
34
-
-
0.95
0.69
2.88
2.13
Other Interest-Bearing Liabilities
Other Borrowed Money
Subordinated Debentures
Federal Funds Purchased and
Repurchase Agreements
Total Other Interest-Bearing
Liabilities
64,232
1,712
2.67
64,231
1,686
2.62
64,562
1,676
2.6
Total Interest-Bearing Liabilities
912,043
6,569
0.72
904,839
6 799
0.75
905,208
7 497
0.83
Noninterest-Bearing Liabilities and
Stockholders' Equity
Demand Deposits
Other Liabilities
3tcekhofders' Equity
128,541
4,690
101,710
Total Noninterest-Bearing
Liabilities and Stockholders'
Equity Z34,94I
Total Liabilities and
118,452
10,010
94,751
223,213
112,667
6,838
93,358
212,863
Stockholders' Equity
51,146,984
$1,128,052
$1.118,071
Interest Rate Spread
3A1 %
Net Interest Income S~7,R3R
53K,oR0
Net Interest Margin 3.52'%
3.49°~b
3.60%
~+7,ti5y
;.?0°~
3.61 °
(1) The average balance of loans includes the average balance of nonaccrual loans. Income on such loans is recognized and recorded on the
cash basis. Taxable equivalent adjustments totaling $99, $79 and $123 for 2015, 2014 and 2013, respectively, are included in interest on
loans. The adjustments are based on a federal tax rate of 34 percent.
(2) Taxable-equivalent adjustments totaling $33, $38 and $47 for 2015, 2014 and 2013 respectively, are included in tax-exempt interest on
investment securities. The adjustments are based on a federal tax rate of 34 percent with appropriate reductions for the effect of
disallowed interest expense incurred in carrying tax-exempt obligations.
88
Colony Bankcorp, Inc. and Subsidiaries
Interest Rate Sensitivity
Our financial performance is impacted by, among other factors, interest rate risk and credit risk. We do
not utilize derivatives to mitigate our credit risk, relying instead on an extensive loan review process and
our allowance for loan losses.
Interest rate risk is the change in value due to changes in interest rates. The Company is exposed only to
U.S. dollar interest rate changes and, accordingly, the Company manages exposure by considering the
possible changes in the net interest margin. The Company does not have any trading instruments nor does
it classify any portion of its investment portfolio as held for trading. The Company does not engage in any
hedging activity or utilize any derivatives. The Company has no exposure to foreign currency exchange
rate risk, commodity price risk and other market risks. Interest rate risk is addressed by our Asset &
Liability Management Committee (ALCO) which includes senior management representatives. The
ALCO monitors interest rate risk by analyzing the potential impact to the net portfolio of equity value and
net interest income from potential changes to interest rates and considers the impact of alternative
strategies or changes in balance sheet structure.
Interest rates play a major part in the net interest income of financial institutions. The repricing of interest
earnings assets and interest-bearing liabilities can influence the changes in net interest income. The
timing of repriced assets and liabilities is Gap management and our Company has established its policy to
maintain a Gap ratio in the one-year time horizon of .80 to 1.20.
Our exposure to interest rate risk is reviewed at least quarterly by our Board of Directors and the ALCO.
Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in
net portfolio value in the event of assumed changes in interest rates. In order to reduce the exposure to
interest rate fluctuations, we have implemented strategies to more closely match our balance sheet
composition. The Company has engaged FTN Financial to run a quarterly assetlliability model for interest
rate risk analysis. We are generally focusing our investment activities on securities with terms or average
lives in the 3 '/2 - 5 '/2 year range.
s~,
The following table is an analysis of the Company's interest rate-sensitivity position at December 31,
2015. The interest-bearing rate-sensitivity gap, which is the difference between interest-earning assets
and interest-bearing liabilities by repricing period, is based upon maturity or first repricing opportunity,
along with a cumulative interest rate-sensitivity gap. It is important to note that the table indicates a
position at a specific point in time and may not be reflective of positions at other times during the year or
in subsequent periods. Major changes in the gap position can be, and are, made promptly as market
outlooks change.
Assets and Liabilities Repricing Within
3 Months
or Less
4 to 12
Months
1 Year
1 to 5
Years
Over 5
Years
Total
INTEREST-EARNING ASSETS:
Interest-Bearing Deposits
-
Investment Securities
Loans, Net of Unearned Income
177,355
Other Interest- Earning Assets 2,731
$ 38,615
$ -
$ 38,615 $ -
S -
1,695
112,820
-
1,695
290,175
2,731
225,241
407,854
-
69,213
60,250
-
$ 38,615
296,149
758,279
2,731
Total Interest-Earning Assets 5218,701
$114,515 S 333,216 $633,095
$129,463 $1,095,774
INTEREST-BEARING LIABILITIES:
Interest-Bearing Demand Deposits (1)
Savings (1)
Time Deposits
Other Borrowings
Subordinated Debentures 24,229
412,959
64,976
88,209
-
-
-
199,213
-
-
412,959
64,976
287,422
-
24,229
-
-
111,594
13,000
-
-
-
716
27,000
-
412,959
64,976
399,732
40,000
24,229
Total Interest-Bearing Liabilities 590,373
199,213
789,586
124,594
27,716
941,896
Interest Rate-Sensitivity Gap
(371,672)
(84,698)
(456,370)
~I18,~111
101,747 $ 153,878
Cumulative Interest-Sensitivity Gap $(371,672)
$(456,370) $(456,370) $ 52,131
$153,878
Interest Rate-Sensitivity Gap as a
Percentage of Interest-Earning Assets (33.92)%
(7.73)%
(41.65)% -t6.~t 1'7,.
9.29%
Cumulative Interest Rate-Sensitivity
as a Percentage of Interest-Earning
Assets (33.92)%
(41.65)%
(41.65)%
4.76%
14.04%
(1) Interest-bearing Demand and Savings Accounts for repricing purposes are considered to reprice within 3 months or less.
The foregoing table indicates that we had a one year negative gap of $456.4 million, or 41.65 percent of
total interest-earning assets at December 31, 2015. In theory, this would indicate that at December 31,
2015, $456.4 million more in liabilities than assets would reprice if there were a change in interest rates
over the next 365 days. Thus, if interest rates were to decline, the gap would indicate a resulting increase
in net interest margin. However, changes in the mix of interest-earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition,
the interest rate spread between an asset and our supporting liability can vary significantly while the
timing of repricing of both the assets and our supporting liability can remain the same, thus impacting net
interest income. This characteristic is referred to as a basis risk and, generally, relates to the repricing
characteristics of short-term funding sources such as certificates of deposits.
90
Gap analysis has certain limitations. Measuring the volume of repricing or maturing assets and liabilities
does not always measure the full impact on the portfolio value of equity or net interest income. Gap
analysis does not account for rate caps on products; dynamic changes such as increasing prepay speeds as
interest rates decrease, basis risk, or the benefit of non-rate funding sources. The majority of our loan
portfolio reprices quickly and completely following changes in market rates, while non-term deposit rates
in general move slowly and usually incorporate only a fraction of the change in rates. Products
categorized as nonrate sensitive, such as our noninterest-bearing demand deposits, in the gap analysis
behave like long term fixed rate funding sources. Both of these factors tend to make our actual behavior
more asset sensitive than is indicated in the gap analysis. In fact, we experience higher net interest
income when rates rise, opposite what is indicated by the gap analysis. Therefore, management uses gap
analysis, net interest margin analysis and market value of portfolio equity as our primary interest rate risk
management tools.
The Company has established its one year gap to be 80 percent to 120 percent. The most recent analysis
as of December 31, 2015 indicates a one year gap of 95 percent. The analysis reflects slight net interest
margin compression in both a declining and increasing interest rate environment. Given that interest rates
have basically "bottomed-out" with the recent Federal Reserve action, the Company is anticipating
interest rates to increase in the future though we believe that interest rates will remain flat most of 2016.
The Company is focusing on areas to minimize margin compression in the future by minimizing longer
term fixed rate loans, shortening on the yield curve with investments, securing longer term FHLB
advances, securing certificates of deposit for longer terms and focusing on reduction of nonperforming
assets.
The Company utilizes FTN Financial AsseULiability Management Analysis for a more dynamic analysis
of balance sheet structure. The Company has established policies for rate shock per basis point (bp) for
earnings at risk for net interest income and for equity at risk. The following table shows the policy limits
with the rate shock for earnings at risk and equity at risk as of December 31, 2015.
Net Interest Income —
Earnings at Risk
Equity at Risk
Rate
Shock
Policy
Limit
Immediate Shock
(-) decrease by
Immediate Shock
(+) increase by
+/- 100 by
+/- 200 by
+/- 300 by
+/- 400 by
+/- 100 by
+/- 200 by
+/- 300 by
+/- 400 by
+/- 10%
+/- 15%
+/- 20%
+/- 25%
+/- 10%
+/- 20%
+/- 30%
+/- 40%
-0.98%
-7.47%
-9.98%
-11.96%
-7.47%
-24.66%
-27.76%
-28.27%
0.23%
-0.27%
-1.26%
-2.55%
8.85%
13.64%
16.28%
24.02%
91
Return on Assets and Stockholder's Equity
The following table presents selected financial ratios for each of the periods indicated.
Years Ended December 31
2015
2014
2013
Return on Average Assets(1)
0.52%
0.43%
0.28%
Return on Average Equity(1)
5.90%
5.11%
3.34%
Equity to Assets
8.13%
8.63%
7.83%
Common Stock Dividends Declared
$0.00
$0.00
$0.00
(1) Computed using net income available to common shareholders.
Future Outlook
During the recent financial crisis, the financial industry experienced tremendous adversities as a result of
the collapse of the real estate markets across the country. Colony, like most banking companies, has been
affected by these economic challenges that started with a rapid stall of real estate sales and developments
throughout the county. While much has been accomplished in addressing problem assets the past several
years, there is still work to be done in bringing our problem assets to an acceptable level. A focus in 2016
will be directed toward further reduction of problem assets.
As we look forward to 2016 we are committed to improving earnings, reducing problem assets and
redeeming TARP preferred stock. Given the improved condition of the company we are also considering
product and market expansion. We currently have three initiatives for market expansion in 2016. We are
opening a new office in Tifton, while simultaneously closing two smaller leased offices that we currently
occupy. In Statesboro, we are renovating space to open a residential mortgage and commercial loan
production office. In Savannah, we are renovating a 100 year old structure to house our downtown office.
This will be our third office in the Savannah market which has been demonstrating impressive growth
trends. Also to be more efficient with our operations, we will be closing two offices in smaller rural
markets.
We continue to explore opportunities to improve core non-interest income. Revenue enhancement
initiatives to accomplish this include new product lines and services. The Company will also invest in
new technology with implementation of a new loan platform which will offer much efficiency with our
"back-office" operations.
In addition, we continue to make efforts to attract and retain top talent to improve business operations. To
that end, the Company entered into Retention Agreements with members of management in the first
quarter of 2015. The Company expects that these agreements will facilitate the retention of key
individuals responsible for maintaining current operations and spearheading future product and market
expansion.
92
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i
i
Colony Bankcorp, Inc. common stock is quoted
on the NASDAQ Global Market under the
symbol "CBAN."
COLONY B~AIVKCORP, INC.
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS:
Colony Bankcorp,Inc.
P.O. Box 989
115 South Grant Street
Fitzgerald, Georgia 31750
229-426-6000
ANNUAL MEETING
'hiesday, May 24, 2016 at 2:00 p.m.
Colony Bankcorp, Inc.
115 South Grant Street
Fitzgerald, Georgia 31750
INDEPENDENT AUDITORS:
McNair, McLemore, Middlebrooks & Co., LLC
P.O. Box One
Macon, Georgia 31202
SHAREHOLDER SERVICES:
Shareholders who want to change the name,
address or ownership of stock; to report
lost, stolen or destroyed certificates; or to
consolidate accounts should contact:
American Stock Transfer &Trust Company
Operarions Center
62oi i5thAvenue
Brooklyn, NY 11219
800-937-5449
www.amstock.com
Member FDIC LENDER
C'~~
.:::: ~:
r s ~,;~'
~~~ ~~1~
Colony Bankcorp, Inc.
P.O. Box 989.115 S. Grant St.
Fitzgerald, GA 31750
229-426-6000 • www.colonybank.com