Colony Bankcorp
Annual Report 2017

Plain-text annual report

2017 ANNUAL REPORT Member FDIC 229-426-6000 • www.colonybank.com Colony Bankcorp, Inc. P.O. Box 989 • 115 S. Grant St. Fitzgerald, GA 31750 Table of Contents Letter to the Shareholders .............1 Financial Summary .... 2 Total Return Performance ............. 3 Board of Directors ..... 4 Market Presidents ...... 5 Savannah and Tifton Offi ces ............ 6 Consolidated Financial Statements ...7 Colony Bankcorp, Inc. common stock is quoted on the NASDAQ Global Market under the symbol “CBAN.” COLONY BANKCORP, INC. SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS: Colony Bankcorp, Inc. P.O. Box 989 115 South Grant Street Fitzgerald, Georgia 31750 229-426-6000 ANNUAL MEETING Tuesday, May 22, 2018 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 certifi cates; or to consolidate accounts should contact: American Stock Transfer & Trust Company Operations Center 6201 15th Avenue Brooklyn, NY 11219 800-937-5449 www.amstock.com Dear Shareholders, 2017 was a remarkable year for Colony Bankcorp, Inc., the banking industry, and for the U. S. economy, in general. Colony continued to make progress in terms of profitability and credit quality, in particular. Details are summarized below: Profitability: Income available to shareholders was $7.54 million or $.87 per share in 2017 compared to $7.18 million or $.84 per share the prior year, a 5.01% increase. While this increase is positive it does not truly reflect the progress made in 2017. As a result of the Tax Reform Act signed by President Trump on December 22, 2017, FASB accounting standards require public companies to write down deferred tax assets to the new tax rate of 21% compared to the old rate of 35%. Excluding the one-time tax adjustment for Colony Bankcorp, Inc., income available to shareholders would have been $9.581 million or $1.11 per share, a 33.4% increase. In addition, return on average assets would have been .80% and return on equity would have been 10.52%. Non-Performing Assets: • Non-Performing assets decreased from $18.8 million to $11.8 million, a 37.4% reduction. • Foreclosed real estate (OREO) decreased from $6.4 million to $4.3 million, a 33.9% reduction. • Net charge offs were $1,805,785 or .24% of total loans compared to $742,612 or .10% of total loans in 2016. • Credit-related expenses declined 62% from $1.3 million to $500 thousand. • Past due loans of 30 days or more decreased from 1.59% to 1.07%. • Criticized assets to capital and reserves improved from 25.67% to 20.18%. During 2017 Colony was successful in retiring our TARP preferred securities. These securities peeked at approximately $34 million in 2014 and the related expense was a significant drag on the company’s earnings. With these securities retired, the company’s ability to consider strategic opportunities is greatly enhanced. In that regard, during the first quarter 2017, the company reinstated quarterly cash dividends, payable to shareholders, of $.025 per share. The Board of Directors increased the quarterly dividend payout ratio to $.05 per share effective March 30, 2018. Colony management is pursuing several initiatives to improve earnings and operating efficiency. Loans are still our primary product, and with an improving economy, quality loan growth should be attainable. Non-interest income opportunities exist in our payment process contracts as well as other areas. Of particular note related to efficiency, we are closing the Albany/Chehaw office of Colony in May, 2018. While this office achieved some degree of success, the trends indicated our capital could be better deployed elsewhere. Management constantly reassesses the effectiveness of the company’s delivery systems to improve efficiency and earnings potential. The banking industry has now endured the Great Recession and is currently poised to experience better times. For the first time in quite some time, we hear discussion of reduced regulatory oversight from Washington, D. C. While this is mostly just discussion at this point, we believe community banks will see relief in the coming years. In addition, we expect a gradually increasing interest rate environment where depositors will once again be more justly rewarded for their deposits. Last, but not least, the financial health of our borrowers has improved significantly, creating better lending opportunities and reduced credit-related expenses. Overall, the banking environment has improved significantly; thereby improving Colony’s earning capacity as well. Economic trends for Georgia, the Southeast, and the U.S. are quite favorable. Interest rates, while increasing somewhat, remain at historically low levels. Residential construction and mortgage lending have returned to normal volume with reasonable valuations. Of particular note, the Port of Savannah continues to set records in container volume and the positive impact is felt throughout South Georgia and beyond. The impact of the Tax Reform Act is expected to not only boost capital investment, but also increase consumer spending. This in turn should create improved economic opportunities for Colony. In general, our clients are more optimistic about business activity than they have been in some time. Hopefully this optimism is well founded. The board, management and employees of Colony look forward to 2018 and appreciate your continuing support. Edward P. Loomis, Jr. President and Chief Executive Officer Mark H. Massee Chairman of the Board 1 2017 KEY PERFORMANCE INDICATORS Years Ended December 31, 2017 and 2016 Dollar amounts in thousands except per share data 2017 2016 Percent Change Total Assets $1,232,755 $1,210,442 1.84% Total Deposits $1,067,985 $1,044,357 2.26% Loans (Net of Unearned Income) $764,788 $753,922 1.44% Net Income $7,540 $7,180 5.01% Per Share Data: Basic Earnings $0.89 $0.85 4.71% Common Book Value/Share $10.70 $9.96 7.43% KEY TRENDS A Historical Comparative Years Ending Net Income (in thousands) 2017 2016 2015 2014 2013 $7,540 $7,180 $5,998 $4,843 $3,120 Return on Average Shareholders’ Equity Diluted Earnings Per Share 8.28% $0.87 7.17% $0.84 5.90% 5.11% 3.34% $0.71 $0.57 $0.37 RETURN ON AVERAGE ASSETS 2017 0.63% 2016 0.62% NET INTEREST MARGIN 2017 3.46% 2016 3.51% Financial Summary 2 Total Return Performance Colony Bankcorp, inc. nasdaq composite index snl southeast bank index 450 400 350 300 250 200 150 100 50 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 PERIOD ENDING Index 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 Colony Bankcorp, Inc. 100.00 169.44 218.89 264.72 366.67 408.55 NASDAQ Composite Index 100.00 140.12 160.78 171.97 187.22 242.71 SNL Southeast Bank Index 100.00 135.52 152.63 150.24 199.45 246.72 Source: S&P Global Market Intelligence © 2017 3 board of Directors Edward P. Loomis, Jr. President/CEO Colony Bankcorp, Inc. Fitzgerald, Georgia Mark H. Massee Chairman Colony Bankcorp, Inc. President Massee Builders, Inc. Fitzgerald, Georgia Michael Frederick (Freddie) Dwozan, Jr. Vice Chairman Colony Bankcorp, Inc. President/CEO/Owner Medical Center Prescription Shop Eastman, Georgia Terry L. Hester EVP/Chief Financial Officer Colony Bankcorp, Inc. Fitzgerald, Georgia Jonathan W.R. Ross President Ross Construction Co., Inc. Tifton, Georgia Scott L. Downing President SDI Investments Fitzgerald, Georgia Executive Officers 4 Edward P. Loomis, Jr President/CEO Terry L. Hester EVP/Chief Financial Officer J. Stan Cook EVP/Chief Operating Officer Edward L. Bagwell, III EVP/Chief Credit Officer Lee A. Northcutt EVP/Regional Executive Officer M. Edward Hoyle, Jr. EVP/Regional Executive Officer market Presidents Jeffery Alton Market President Thomaston Jon Butler Market President Eastman/Soperton Chip Carroll Market President Quitman Bob Evans Market President Cordele Bill Marsh Market President Tifton Scott Miller Market President Douglas/Broxton Johnny Bryan Market President Sylvester John Roberts Market President Columbus Phil Franklin Market President Albany/Leesburg/Chehaw Kirk Scott Market President Warner Robins/Centerville John Gandy Market President Moultrie Drew Hulsey Market President Savannah/Statesboro Andy Johnson Market President Ashburn Eddie Smith Market President Valdosta Mark Turner Market President Fitzgerald Nic Worthy Market President Rochelle 5 Even More Ways to Serve You Savannah 241 Drayton Street Savannah, GA 31401 (912) 454-2479 Tifton 104 2nd St W Tifton, GA 31794 (229) 386-2265 6 VISIT OUR TWO NEWEST LOCATIONS. Lobby Hours: 9:00 am - 5:00 pm Monday - Friday Closed Saturday - Sunday Lobby Hours: 9:00 am - 4:00 pm Monday - Thursday 9:00 am - 6:00 pm Friday Closed Saturday - Sunday Drive-thru Hours: 8:30 am - 4:00 pm Monday - Thursday 8:30 am - 6:00 pm Friday 8:30 am - 12:00 pm Saturday Closed Sunday MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLC CERTIFIED PUBLIC ACCOUNTANTS 389 Mulberry Street • Post Office Box One • Macon, GA 31202 Telephone (478) 746-6277 • Facsimile (478) 743-6858 mmmcpa.com March 15, 2018 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Colony Bankcorp, Inc. Opinions on the Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Colony Bankcorp, Inc. and subsidiary (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Basis for Opinions The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included under Item 9A, Controls and Procedures, in the Company’s Annual Report on Form 10-K. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 7 Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC We have served as the Company’s auditor since 1995. Macon, Georgia March 15, 2018 8 COLONY BANKCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31 ASSETS Cash and Cash Equivalents Cash and Due from Banks Interest-Bearing Deposits Investment Securities Available for Sale, at Fair Value 2017 2016 $ 23,145,136 $ 28,822,104 34,667,715 46,344,859 354,246,904 323,657,870 Federal Home Loan Bank Stock, at Cost 3,042,900 3,010,000 Loans Allowance for Loan Losses Unearned Interest and Fees 765,283,855 (7,507,508) (495,500) 754,283,563 (8,923,293) (361,042) 757,280,847 744,999,228 Premises and Equipment 27,639,430 27,969,260 Other Real Estate (Net of Allowance of $1,451,492 and $1,878,127 in 2017 and 2016, Respectively) Other Intangible Assets Other Assets Total Assets 4,256,469 6,439,226 44,766 80,515 28,431,150 29,118,555 $1,232,755,317 $1,210,441,617 See accompanying notes which are an integral part of these financial statements. 9 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 2017 2016 $ 190,927,928 877,057,477 $ 159,058,633 885,297,895 1,067,985,405 1,044,356,528 24,229,000 47,500,000 24,229,000 46,000,000 71,729,000 70,229,000 2,718,249 2,468,356 Stockholders’ Equity Preferred Stock, Stated Value $1,000; 10,000,000 Shares Authorized, 0 and 9,360 Shares Issued and Outstanding as of December 31, 2017 and 2016 Common Stock, Par Value $1; 20,000,000 Shares Authorized, 8,439,258 Shares Issued and Outstanding as of December 31, 2017 and 2016 Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss, Net of Tax - 9,360,000 8,439,258 29,145,094 59,230,260 (6,491,949) 8,439,258 29,145,094 51,465,521 (5,022,140) 90,322,663 93,387,733 Total Liabilities and Stockholders’ Equity $1,232,755,317 $1,210,441,617 See accompanying notes which are an integral part of these financial statements. 10 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 U.S. Government Agencies State, County and Municipal Corporate Dividends on Other Investments Interest Expense Deposits Federal Funds Purchased Borrowed Money Net Interest Income Provision for Loan Losses 2017 2016 2015 $38,613,540 3 232,397 6,717,827 115,097 87,387 150,172 $38,942,503 - 124,459 5,263,741 127,379 - 131,007 $39,716,269 14,561 79,735 4,235,207 107,638 - 122,070 45,916,423 44,589,089 44,275,480 4,758,073 2,639 2,112,017 4,781,228 581 1,701,522 4,856,673 26 1,712,548 6,872,729 6,483,331 6,569,247 39,043,694 38,105,758 37,706,233 390,000 1,062,000 865,500 Net Interest Income After Provision for Loan Losses 38,653,694 37,043,758 36,840,733 Noninterest Income Service Charges on Deposits Other Service Charges, Commissions and Fees Mortgage Fee Income Securities Gains (Losses) 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 4,466,997 3,040,262 858,658 - 1,368,648 4,307,214 2,802,651 681,806 385,223 1,376,860 4,268,438 2,627,157 527,187 (11,466) 1,633,205 9,734,565 9,553,754 9,044,521 19,222,594 3,947,941 298,100 893,938 363,519 386,823 349,722 1,192,025 813,592 1,467,411 4,924,163 18,482,693 3,970,244 348,755 791,563 1,143,518 603,654 609,892 1,112,065 737,063 1,136,122 5,137,400 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 33,859,828 34,072,969 33,724,754 Income Before Income Taxes 14,528,431 12,524,543 12,160,500 Income Taxes Net Income Preferred Stock Dividends 6,777,453 7,750,978 210,600 3,851,333 3,787,803 8,673,210 1,493,310 8,372,697 2,375,010 Net Income Available to Common Stockholders $ 7,540,378 $ 7,179,900 $ 5,997,687 Net Income Per Share of Common Stock Basic Diluted Cash Dividends Declared Per Share of Common Stock Weighted Average Shares Outstanding, Basic Weighted Average Shares Outstanding, Diluted $ 0.89 $ 0.87 $ 0.10 8,439,258 8,633,581 $ 0.85 $ 0.84 $ 0.00 8,439,258 8,513,295 $ 0.71 $ 0.71 $ 0.00 8,439,258 8,458,461 See accompanying notes which are an integral part of these financial statements. 11 COLONY BANKCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31 2017 2016 2015 Net Income $ 7,750,978 $ 8,673,210 $ 8,372,697 Other Comprehensive Income (Loss) Gains (Losses) on Securities Arising During the Year Tax Effect Realized (Gains) Losses on Sale of AFS Securities Tax Effect Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects (608,355) 206,841 - - (505,367) 171,825 (385,223) 130,976 610,689 (207,634) 11,466 (3,898) (401,514) (587,789) 410,623 Comprehensive Income $ 7,349,464 $ 8,085,421 $ 8,783,320 See accompanying notes which are an integral part of these financial statements. 12 Y R A I D I S B U S D N A . 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- $ $ - - ) 0 0 0 , 0 6 3 , 9 ( ) 0 0 0 , 0 6 3 , 9 ( ) 0 6 3 , 9 ( ) 0 6 3 , 9 ( n o n o ) s e s s o L ( s n i a G d e z i l a e r n U t e N n i e g n a h C ) s e s s f o o L t e ( N s n , i e a l G a S d r e o z f i l e a l e b r a n l U i a v t e A N s n e i i t i e r g u n c a e h S C s t c e f f E x f a o T t e d N n a , e t l n a e S m r t o s f u j e d l A b a l n i o a v i t A a c s i f e i i s t s i r a u l c c e e R S s t c e f f E x a T d n a s e t n r a e h m S t s d u e j r d r A e f e n r o P i t n a c o i f s i d s n s a e l d c i e v R i D 4 1 0 2 , 1 3 r e b m e c e D , e c n a l a B 4 1 0 2 , 1 3 r e b m e c e D , e c n a l a B k s c e o r a t S h S d e d r e r r e r f e e f r e P r P f o n n o o s i d t p n m e d e i d v e i D R k c o t S d e r r e f e r P f o n e o m i t o p c m n e I d t e e N R e m o c n I t e N 5 1 0 2 , 1 3 r e b m e c e D , e c n a l a B 5 1 0 2 , 1 3 r e b m e c e D , e c n a l a B n o n o ) s e s s o L ( s n i a G d e z i l a e r n U t e N n i e g n a h C ) s e s s f o o L t e ( N s n , i e a l G a S d r e o z f i l e a l e b r a n l U i a v t e A N s n e i i t i e r g u n c a e h S C s t c e f f E x f a o T t e d N n a , e t l n a e S m r t o s f u j e d l A b a l n i o a v i t A a c s i f e i i s t s i r a u l c c e e R S s t c e f f E x a T d n a s e t n r a e h m S t s d u e j r d r A e f e n r o P i t n a c o i f s i d s n s a e l d c i e v R i D k s c e o r a t S h S d e d r e r r e r f e e f r e P r P f o n n o o s i d t p n m e d e i d v e i D R k c o t S d e r r e f e r P f o n e o m i t o p c m n e I d t e e N R 6 1 0 2 , 1 3 r e b m e c e D , e c n a l a B 6 1 0 2 , 1 3 r e b m e c e D , e c n a l a B e m o c n I t e N n o n o ) s e s s o L ( s n i a G d e z i l a e r n U t e N n i e g n a h C ) s e s s f o o L t e ( N s n , i e a l G a S d r e o z f i l e a l e b r a n l U i a v t e A N s n e i i t i e r g u n c a e h S C s t c e f f E x f a o T t e d N n a , e t l n a e S m r t o s f u j e d l A b a l n i o a v i t A a c s i f e i i s t s i r a u l c c e e R S s t c e f f E x a T d n a s e t n r a e h m S t s n u o j d m A m n o o C i t n a c o i f s i d s n s a e l d c i e v R i D s s e e r r a a h h S S n d o e r m r e m f e o r C P n n o o s s d d n n e e d d i i v v i i D D s e r a h S n o d i e t a r r c e i f f e i s r s P a l n c o e R s d t n c e A d i J v C i D T k c o t S n d o e r i t r a e c f e i f r i P s s f a o l c n e o R i t t p c m A e J d C e R T k c o t S d e r r e f e r P f o n e o m i t o p c m n e I d t e e N R 7 1 0 2 , 1 3 r e b m e c e D , e c n a l a B 7 1 0 2 , 1 3 r e b m e c e D , e c n a l a B e m o c n I t e N . s t n e m e t a t s . s t n e m e t a t s l a i c n a n i f l a i c n a n i f e s e h t e s e h t f o f o t r a p t r a p l a r g e t n i l a r g e t n i n a n a e r a h c i h w s e t o n g n i y n a p m o c c a e r a h c i h w s e t o n g n i y n a p m o c c a e e S e e S 13 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 Investing 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 Federal Home Loan Bank Stock 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 Dividends Paid on Common Stock 2017 2016 2015 $ 7,750,978 $ 8,673,210 $ 8,372,697 1,647,813 1,413,362 390,000 2,833,958 - (10,735) (208,329) 333,767 (1,669,424) (90,204) 139,382 21,188 361,005 (367,626) 1,574,249 1,609,339 1,062,000 222,120 (385,223) 80,329 160,682 501,736 (589,408) 176,766 (372,380) (46,284) (252,617) 973,972 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 12,545,135 13,388,491 14,067,287 11,677,144 (7,729,560) (17,409,260) (87,160,178) (109,634,793) (102,336,227) - 25,209,851 28,273,634 54,587,986 - 37,650 (14,459,526) (1,344,898) 3,863,576 - (32,900) 54,868,726 - 89,551 (2,167,126) (3,259,859) 7,529,131 - (279,500) 51,423,541 9,734 28,608 (21,255,018) (3,189,969) 8,154,596 100,300 - (32,831,146) (35,373,579) (56,200,061) (8,240,418) 31,869,295 10,015,500 (8,515,500) (315,900) (9,360,000) (843,934) 7,629,930 25,172,362 10,000,000 (4,000,000) (1,590,746) (8,661,000) - 26,704,254 5,546,508 27,000,000 (27,000,000) (2,487,274) (9,979,000) - 14,609,043 28,550,546 19,784,488 Net Increase (Decrease) in Cash and Cash Equivalents (5,676,968) 6,565,458 (22,348,286) Cash and Cash Equivalents, Beginning 28,822,104 22,256,646 44,604,932 Cash and Cash Equivalents, Ending See accompanying notes which are an integral part of these financial statements. $ 23,145,136 $ 28,822,104 $ 22,256,646 14 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, Columbus, Cordele, Douglas, Eastman, Fitzgerald, Leesburg, Moultrie, Quitman, Rochelle, Savannah, Soperton, Statesboro, 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 2017. Such reclassifications had no effect on previously reported stockholders’ equity or net income. 15 (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, 2017, approximately 87.1 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 in accumulated other comprehensive income (loss), a component of reported, net of deferred taxes, 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. 16 (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. 17 (1) Summary of Significant Accounting Policies (Continued) 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. 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 collectibility 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. 18 (1) Summary of Significant Accounting Policies (Continued) Allowance for Loan Losses (Continued) 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. 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. 19 (1) Summary of Significant Accounting Policies (Continued) 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. Other 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. 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. Advertising Costs The Company expenses the cost of advertising in the periods in which those costs are incurred. 20 (1) Summary of Significant Accounting Policies (Continued) 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 2017, 2016, 2015 and 2014 are subject to examination by the Internal Revenue Service (IRS) and the Georgia Department of Revenue, generally for three years after filing. 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. 21 (1) Summary of Significant Accounting Policies (Continued) 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 $17,088,693 and $15,419,269 as of December 31, 2017 and 2016, 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. 22 (1) Summary of Significant Accounting Policies (Continued) Changes in Accounting Principles and Effects of New Accounting Pronouncements 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 a five-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. ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, 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 2016-01 will be effective for the Company on January 1, 2018. The Company is currently evaluating the impact of the pending adoption of ASU 2016-01 on the consolidated financial statements. ASU 2016-02, Leases (Topic 842). This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. For public business entities, this ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is evaluating the impact of this ASU on its financial statements and disclosures. 23 (1) Summary of Significant Accounting Policies (Continued) Changes in Accounting Principles and Effects of New Accounting Pronouncements (Continued) ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supported forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements. ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016-15 became effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements. ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements. ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows an entity to elect a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (TCJ Act). ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt the provisions of ASU 2018-02 in the fourth quarter of 2017 and, as a result, reclassified $1,068,295 from AOCI to retained earnings as of December 31, 2017. 24 (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 2017 2016 $ 9,746,132 13,399,004 $ 8,509,530 20,312,574 $23,145,136 $28,822,104 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 $1,515,000 and $1,417,000 at December 31, 2017 and 2016, respectively. (3) Investment Securities Investment securities as of December 31, 2017 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Securities Available for Sale U.S. Government Agencies Mortgage-Backed State, County and Municipal Corporate Asset-Backed $354,931,318 4,493,085 2,047,517 992,641 $362,464,561 $258,049 22,835 12,483 - $293,367 $(8,465,948) (23,094) - (21,982) $(8,511,024) $346,723,419 4,492,826 2,060,000 970,659 $354,246,904 The amortized cost and fair value of investment securities as of December 31, 2017, 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. Due in One Year or Less Due After One Year Through Five Years Due After Five Years Through Ten Years Due After Ten Years Securities Available for Sale Amortized Cost $ 301,299 4,668,954 877,788 1,685,202 $ 7,533,243 Fair Value $ 301,605 4,658,344 894,743 1,668,793 $ 7,523,485 Mortgage-Backed Securities 354,931,318 346,723,419 $362,464,561 $354,246,904 25 (3) Investment Securities (Continued) Investment securities as of December 31, 2016 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 $ 326,694,417 4,572,756 $ 75,743 18,350 $ (7,672,786) (30,610) $ 319,097,374 4,560,496 $ 331,267,173 $ 94,093 $ (7,703,396) $ 323,657,870 Proceeds from sales of investments available for sale were $0 in 2017, $25,209,851 in 2016 and $28,273,634 in 2015. Gross realized gains totaled $0 in 2017, $391,976 in 2016 and $207,896 in 2015. Gross realized losses totaled $0 in 2017, $6,753 in 2016 and $196,316 in 2015. Investment securities having a carrying value totaling $175,484,021 and $144,853,885 as of December 31, 2017 and 2016, respectively, were pledged to secure public deposits and for other purposes. Information pertaining to securities with gross unrealized losses at December 31, 2017 and 2016 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows: December 31, 2017 U.S. Government Agencies Mortgage-Backed State, County and Municipal Asset – Backed December 31, 2016 U.S. Government Agencies Mortgage-Backed State, County and Municipal Less Than 12 Months Gross Unrealized Losses Fair Value 12 Months or Greater Gross Unrealized Losses Fair Value Total Gross Unrealized Losses Fair Value $120,139,340 2,598,344 970,659 $(1,655,223) (23,094) (21,982) $190,196,101 $(6,810,725) - - - - $310,335,441 2,598,344 970,659 $(8,465,948) (23,094) (21,982) $123,708,343 $(1,700,299) $190,196,101 $(6,810,725) $313,904,444 $(8,511,024) $174,200,881 3,487,647 $(3,459,564) (30,610) $107,481,698 $(4,213,222) - - $281,682,579 3,487,647 $(7,672,786) (30,610) $177,688,528 $(3,490,174) $107,481,698 $(4,213,222) $285,170,226 $(7,703,396) 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. 26 (3) Investment Securities (Continued) At December 31, 2017, 130 securities have unrealized losses which have depreciated 2.64 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, 2017 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. (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 2017 2016 $ 48,122,263 16,442,581 $ 47,024,878 17,079,579 45,213,960 8,583,446 351,171,668 194,048,945 67,767,655 30,358,362 11,830,447 349,090,031 195,579,967 66,877,197 18,956,028 14,977,309 19,695,241 16,747,861 $765,283,855 $754,283,563 27 (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 from 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. 28 (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. 2017 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 $ 46,468,726 15,868,191 $ 825,607 174,356 $ 827,930 400,034 $ 48,122,263 16,442,581 41,282,295 8,583,446 338,775,805 177,962,870 66,334,906 577,765 - 7,662,637 4,864,893 444,095 3,353,900 - 4,733,226 11,221,182 988,654 45,213,960 8,583,446 351,171,668 194,048,945 67,767,655 18,495,798 14,968,677 52,970 8,632 407,260 - 18,956,028 14,977,309 Total Loans $728,740,714 $14,610,955 $21,932,186 $765,283,855 2016 Commercial and Agricultural Commercial Agricultural Real Estate Commercial Construction Residential Construction Commercial Residential Farmland Consumer and Other Consumer Other $ 44,249,874 16,585,646 $ 1,861,757 192,445 $ 913,247 301,488 $ 47,024,878 17,079,579 28,425,373 11,630,165 327,561,169 178,618,510 65,074,715 1,349,447 - 9,403,077 5,658,526 839,362 583,542 200,282 12,125,785 11,302,931 963,120 30,358,362 11,830,447 349,090,031 195,579,967 66,877,197 19,071,739 16,747,861 225,959 - 397,543 - 19,695,241 16,747,861 Total Loans $707,965,052 $19,530,573 $26,787,938 $754,283,563 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. 29 (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: 2017 Commercial and Agricultural Commercial Agricultural Real Estate Commercial Construction Residential Construction Commercial Residential Farmland Consumer and Other Consumer Other Accruing Loans 30-89 Days Past Due 90 Days or More Past Due Total Accruing Loans Past Due Nonaccrual Loans Current Loans Total Loans $ 328,483 110,482 $ 27,062 119,443 918,997 2,482,276 318,329 246,175 7,158 - - - - - - - - $ 328,483 110,482 $598,305 398,509 $ 47,195,475 15,933,590 $ 48,122,263 16,442,581 27,062 119,443 918,997 2,482,276 318,329 477,043 - 2,172,229 2,829,966 838,577 44,709,855 8,464,003 348,080,442 188,736,703 66,610,749 45,213,960 8,583,446 351,171,668 194,048,945 67,767,655 246,175 7,158 188,073 - 18,521,780 14,970,151 18,956,028 14,977,309 Total Loans $4,558,405 $ - $4,558,405 $7,502,702 $753,222,748 $765,283,855 $ 419,969 33,046 $ 54,001 - 491,468 3,178,833 95,309 - - - - - - - $ 419,969 33,046 $ 634,955 208,522 $ 45,969,954 $ 47,024,878 17,079,579 16,838,011 54,001 - 491,468 3,178,833 95,309 190,494 - 6,360,176 3,944,337 799,556 30,113,867 11,830,447 342,238,387 188,456,797 65,982,332 30,358,362 11,830,447 349,090,031 195,579,967 66,877,197 196,242 - 122 - 196,364 - 212,026 - 19,286,851 16,747,861 19,695,241 16,747,861 $4,468,868 $ 122 $4,468,990 $12,350,066 $737,464,507 $754,283,563 2016 Commercial and Agricultural Commercial Agricultural Real Estate Commercial Construction Residential Construction Commercial Residential Farmland Consumer and Other Consumer Other Total Loans 30 (4) Loans (Continued) Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $205,000, $387,300 and $418,400 for the years ended December 31, 2017, 2016 and 2015, respectively. The following table details impaired loan data as of December 31, 2017: Unpaid Contractual Principal Balance Impaired Balance Related Allowance Average Recorded Investment Interest Income Recognized Interest Income Collected With No Related Allowance Recorded Commercial Agricultural Commercial Construction Residential Construction Commercial Real Estate Residential Real Estate Farmland Consumer With An Allowance Recorded Commercial Agricultural Commercial Construction Residential Construction Commercial Real Estate Residential Real Estate Farmland Consumer Total Commercial Agricultural Commercial Construction Residential Construction Commercial Real Estate Residential Real Estate Farmland Consumer $ $ $ $ 598,305 485,132 54,306 - 12.637,057 4,977,769 840,110 188,073 $ 598,305 398,509 54,306 - 12,637,057 4,579,614 838,577 188,073 $19,780,752 $19,294,441 $ - - 493,067 - 5,729,300 108,859 371,376 - $ - - 493,067 - 5,729,300 108,859 371,376 - - - - - - - - - $ 633,528 296,578 141,396 79,295 12,808,414 4,566,041 790,967 186,348 $ 33,283 11,046 3,526 - 559,601 211,318 54,367 8,576 $ 33,868 19,376 3,836 - 549,825 226,684 58,085 9,452 - $19,502,567 $ 881,717 $ 901,126 - - 65,635 - 1,712,557 27,123 21,369 - $ - - 241,063 - 6,599,144 482,228 375,595 - $ - - 22,626 - 228,745 4,261 22,121 - $ - - 32,922 - 237,066 7,446 22,021 - $ 6,702,602 $ 6,702,602 $1,826,684 $ 7,698,030 $ 277,753 $ 299,455 $ 598,305 485,132 547,373 - 18,366,357 5,086,628 1,211,486 188,073 $ 598,305 398,509 547,373 - 18,366,357 4,688,473 1,209,953 188,073 $ - - 65,635 - 1,712,557 27,123 21,369 - $ 633,528 296,578 382,459 79,295 19,407,558 5,048,269 1,166,562 186,348 $ 33,283 11,046 26,152 - 788,346 215,579 76,488 8,576 $ 33,868 19,376 36,758 - 786,891 234,130 80,106 9,452 $26,483,354 $ 25,997,043 $ 1,826,684 $27,200,597 $1,159,470 $1,200,581 31 (4) Loans (Continued) The following table details impaired loan data as of December 31, 2016: Unpaid Contractual Principal Balance Impaired Balance Related Allowance Average Recorded Investment Interest Income Recognized Interest Income Collected With No Related Allowance Recorded Commercial Agricultural Commercial Construction Commercial Real Estate Residential Real Estate Farmland Consumer $ $ 634,955 229,182 190,494 14,357,601 4,261,558 920,666 212,376 $ 634,955 208,522 190,494 14,276,688 3,952,139 799,556 212,026 $20,806,832 $ 20,274,380 $ - - - - - - - - $ 539,099 210,372 697,893 14,274,719 4,553,322 1,016,395 213,309 $ 24,563 8,794 6,630 567,349 73,099 21,526 9,599 $ 27,142 12,412 7,127 560,354 190,373 26,012 12,036 $ 21,505,109 $ 711,560 $ 835,456 With An Allowance Recorded Commercial Agricultural Commercial Construction Commercial Real Estate Residential Real Estate Farmland Consumer Total Commercial Agricultural Commercial Construction Commercial Real Estate Residential Real Estate Farmland Consumer $ - - 72,296 8,557,582 1,475,594 379,851 - $ - - 72,296 8,467,135 1,467,833 379,851 - $ - - 21,135 3,021,943 362,521 29,173 - $ 30,270 - 74,098 8,339,666 1,042,750 384,056 - $ - - 1,532 238,684 27,759 21,098 - $ - - 1,416 235,749 32,260 21,310 - $10,485,323 $ 10,387,115 $ 3,434,772 $ 9,870,840 $ 289,073 $ 290,735 $ 634,955 229,182 262,790 22,915,183 5,737,152 1,300,517 212,376 $ 634,955 208,522 262,790 22,743,823 5,419,972 1,179,407 212,026 $ - - 21,135 3,021,943 362,521 29,173 - $ 569,369 210,372 771,991 22,614,385 5,596,072 1,400,451 213,309 $ 24,563 8,794 8,162 806,033 100,858 42,624 9,599 $ 27,142 12,412 8,543 796,103 222,633 47,322 12,036 $31,292,155 $ 30,661,495 $ 3,434,772 $ 31,375,949 $ 1,000,633 $1,126,191 32 (4) Loans (Continued) The following table details impaired loan data as of December 31, 2015: Unpaid Contractual Principal Balance Impaired Balance Related Allowance Average Recorded Investment Interest Income Recognized Interest Income Collected With No Related Allowance Recorded Commercial Agricultural Commercial Construction Commercial Real Estate Residential Real Estate Farmland Consumer Other $ $ 454,423 195,654 6,887,522 15,569,340 5,429,121 1,104,887 179,908 - $ 454,013 178,021 1,896,938 15,122,486 4,575,547 1,103,353 178,435 - $29,820,855 $23,508,793 $ - - - - - - - - - $ 534,814 163,078 2,867,061 15,430,252 4,715,162 1,339,863 190,566 48,438 $ 17,259 (9,957) 25,788 529,376 175,484 583 13,745 - $ 21,253 10,334 27,007 530,699 159,148 2,076 14,907 - $25,289,234 $ 752,278 $ 765,424 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 $ 122,928 - 76,644 8,969,329 1,083,127 387,968 - - $ 122,928 - 76,644 8,955,503 1,075,367 387,969 - - $ 94,538 - 25,344 1,607,962 308,188 37,386 - - $ 99,749 - 92,200 6,673,087 1,088,380 391,060 - - $ 2,275 - 375 213,693 16,380 20,880 - - $ 2,438 - 375 208,657 15,873 20,954 - - $10,639,996 $10,618,411 $2,073,418 $ 8,344,476 $ 253,603 $ 248,297 $ 577,351 195,654 6,964,166 24,538,669 6,512,248 1,492,855 179,908 - $ 576,941 178,021 1,973,582 24,077,989 5,650,914 1,491,322 178,435 - $ 94,538 - 25,344 1,607,962 308,188 37,386 - - $ 634,563 163,078 2,959,261 22,103,339 5,803,542 1,730,923 190,566 48,438 $ 19,534 (9,957) 26,163 743,069 191,864 21,463 13,745 - $ 23,691 10,334 27,382 739,356 175,021 23,030 14,907 - $40,460,851 $34,127,204 $2,073,418 $33,633,710 $1,005,881 $1,013,721 33 (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. 34 (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, 2017. The following tables present the number of loan contracts restructured during the 12 months ended December 31, 2017, 2016 and 2015. 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 2017 # of Contracts Pre-Modification Post-Modification Commercial Real Estate Residential Real Estate Total Loans 2016 Commercial Real Estate Residential Real Estate Total Loans 2015 Commercial Real Estate Residential Real Estate Total Loans - - - 1 1 2 1 2 3 $ $ - - - $ $ - - - $ 91,280 354,784 $ 91,097 354,784 $ 446,064 $ 445,881 $ 513,868 1,106,345 $ 505,978 1,035,590 $1,620,213 $1,541,568 35 (4) Loans (Continued) Troubled debt restructurings that subsequently defaulted as of December 31 are as follows: 2017 2016 2015 # of Contracts Recorded Investment # of Contracts Recorded Investment # of Contracts Recorded Investment Residential Real Estate Total Loans - - $ $ - - 1 1 $ 89,297 $ 89,297 - - $ $ - - At December 31, 2017, all restructured loans were performing as agreed. During December 2016, a restructured loan totaling $89,297 failed to continue to perform as agreed and was charged off in June 2016. At December 31, 2015, all restructured loans were performing as agreed. (5) Allowance for Loan Losses Changes in the allowance for loan losses for the years ended December 31 are as follows: 2017 2016 2015 Balance, Beginning of Year $8,923,293 $8,603,905 $8,802,316 Provision for Loan Losses Loans Charged Off Recoveries of Loans Previously Charged Off 390,000 (2,915,753) 1,109,968 1,062,000 (2,087,850) 1,345,238 865,500 (2,083,347) 1,019,436 Balance, End of Year $7,507,508 $8,923,293 $8,603,905 36 (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. 2017 Beginning Balance Charge-Offs Recoveries Provision Ending Balance Commercial and Agricultural Commercial Agricultural Real Estate $ 456,197 167,692 $ (299,079) (159,500) $ 136,499 3,963 $ 153,058 173,749 $ 446,675 185,904 Commercial Construction Residential Construction Commercial Residential Farmland 322,725 13,491 5,750,998 1,396,099 722,331 (51,977) - (966,014) (1,048,337) (60,902) 266,459 - 527,150 82,079 16,750 678,808 (13,491) (1,438,175) 538,260 101,352 1,216,015 - 3,873,959 968,101 779,531 Consumer and Other Consumer Other 2016 Commercial and Agricultural Commercial Agricultural Real Estate 80,265 13,495 (329,944) - 74,933 2,135 208,739 (12,300) 33,993 3,330 $ 8,923,293 $(2,915,753) $1,109,968 $ 390,000 $ 7,507,508 $ 855,364 203,091 $ (304,918) (19,258) $ 66,738 $ (160,987) (20,291) 4,150 $ 456,197 167,692 Commercial Construction Residential Construction Commercial Residential Farmland 690,766 19,890 3,850,527 1,990,355 911,692 (25,318) - (992,067) (361,630) (119,576) 814,586 - 206,154 49,660 145,000 (1,157,309) (6,399) 2,686,384 (282,286) (214,785) 322,725 13,491 5,750,998 1,396,099 722,331 Consumer and Other Consumer Other 63,377 18,843 (265,083) - 52,629 6,321 229,342 (11,669) 80,265 13,495 $ 8,603,905 $ (2,087,850) $1,345,238 $ 1,062,000 $ 8,923,293 37 (5) Allowance for Loan Losses (Continued) 2015 Beginning 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 $ 497,561 304,172 $ (454,971) (5,000) $ 52,111 3,600 $760,663 (99,681) $ 855,364 203,091 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 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. During the first quarter of 2016 Company management implemented a change to its allowance for loan loss methodology by expanding the historical loss period from a rolling 8 quarters to 16 quarters. Management believes the longer historical loss period better reflects the current and expected loss behavior of the loan portfolio within the current credit cycle. The transition to a rolling 16 quarter loss period was completed in the first quarter of 2017. As of December 31, 2017, this change in the historical loss period resulted in a decrease to the allowance for loan losses of $114,144. The loss history period used at December 31, 2016 and 2015 was based on the loss rate from the eight quarters ended September 30, 2016 and 2015, respectively. 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. 38 (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. 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. 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 $9,470,621 and $10,786,699 as of December 31, 2017 and 2016, respectively. Specific allowance allocations were made for these loans totaling $1,510,868 and $632,706 as of December 31, 2017 and 2016, respectively. Since these loans are not considered impaired, both the loan balance and related specific allocation are included in the “Collectively Evaluated for Impairment” column of the following tables. At December 31, 2017, there were 149 impaired loans totaling $4,335,524 below the $250,000 review threshold which 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, 2016 and 2015, impaired loans totaling $4,204,156 and $3,744,733, 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. 2017 Commercial and Agricultural Commercial Agricultural Real Estate Commercial Construction Residential Construction Commercial Residential Farmland Consumer and Other Consumer Other Ending Allowance Balance Collectively Evaluated for Impairment Individually Evaluated for Impairment Total Individually Evaluated for Impairment Ending Loan Balance Collectively Evaluated for Impairment Total $ - - $ 446,675 185,904 $ 446,675 185,904 $ 77,599 5,121 $ 48,044,664 16,437,460 $ 48,122,263 16,442,581 65,635 - 1,712,557 27,123 21,369 1,150,380 - 2,161,402 940,978 758,162 1,216,015 - 3,873,959 968,101 779,531 493,067 - 18,010,035 2,040,125 1,035,572 44,720,893 8,583,446 333,161,633 192,008,820 66,732,083 45,213,960 8,583,446 351,171,668 194,048,945 67,767,655 - - 33,993 3,330 33,993 3,330 - - 18,956,028 14,977,309 18,956,028 14,977,309 Total End of Year Balance $1,826,684 $ 5,680,824 $ 7,507,508 $21,661,519 $743,622,336 $765,283,855 39 (5) Allowance for Loan Losses (Continued) 2016 Individually Evaluated for Impairment Ending Allowance Balance Collectively Evaluated for Impairment Total Individually Evaluated for Impairment Ending Loan Balance Collectively Evaluated for Impairment Total Commercial and Agricultural Commercial Agricultural Real Estate Commercial Construction Residential Construction Commercial Residential Farmland Consumer and Other Consumer Other $ - - $ 456,197 167,692 $ 456,197 167,692 $ 6,671 - $ 47,018,207 17,079,579 $ 47,024,878 17,079,579 21,135 - 3,021,943 362,522 29,172 301,590 13,491 2,729,055 1,033,577 693,159 322,725 13,491 5,750,998 1,396,099 722,331 72,296 - 22,422,451 2,911,874 1,044,047 30,286,066 11,830,447 326,667,580 192,668,093 65,833,150 30,358,362 11,830,447 349,090,031 195,579,967 66,877,197 - - 80,265 13,495 80,265 13,495 - - 19,695,241 16,747,861 19,695,241 16,747,861 Total End of Year Balance $ 3,434,772 $ 5,488,521 $ 8,923,293 $ 26,457,339 $ 727,826,224 $ 754,283,563 2015 Commercial and Agricultural Commercial Agricultural Real Estate Commercial Construction Residential Construction Commercial Residential Farmland Consumer and Other Consumer Other $ 94,538 - $ 760,826 203,091 $ 855,364 203,091 $ 122,928 8,445 $ 47,658,761 19,185,052 $ 47,781,689 19,193,497 25,344 - 1,607,962 308,188 37,386 665,422 19,890 2,242,565 1,682,167 874,306 690,766 19,890 3,850,527 1,990,355 911,692 1,622,560 - 23,628,213 3,597,386 1,402,939 38,484,073 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 $ 6,530,487 $ 8,603,905 $ 30,382,471 $ 728,253,124 $ 758,635,595 40 (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 2017 2016 $9,668,722 26,893,354 13,090,366 655,166 68,253 $ 9,668,722 25,239,165 12,461,043 653,939 1,530,359 50,375,861 (22,736,431) 49,553,228 (21,583,968) $27,639,430 $27,969,260 Depreciation charged to operations totaled $1,647,813 in 2017, $1,574,249 in 2016 and $1,657,229 in 2015. Certain Company facilities and equipment are leased under various operating leases. Rental expense approximated $427,000 for 2017, $437,000 for 2016 and $560,000 for 2015. Future minimum rental payments as of December 31, 2017 are as follows: Year Ending December 31 2018 2019 2020 2021 2022 and Thereafter Amount $ 43,320 42,000 42,000 42,000 38,500 $207,820 (7) Other Real Estate Owned The aggregate carrying amount of Other Real Estate Owned (OREO) at December 31, 2017, 2016 and 2015 was $4,256,469, $6,439,226 and $8,839,103, 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 2017, 2016 and 2015 as of December 31: Balance, Beginning of Year $ 6,439,226 $ 8,839,103 $10,401,832 2017 2016 2015 Additions Sales of OREO Loss on Sale Provision for Losses Balance, End of Year 1,724,936 (3,786,567) 212,641 (333,767) 5,664,554 (7,416,293) (146,402) (501,736) 7,536,165 (8,054,675) (591,071) (453,148) $ 4,256,469 $ 6,439,226 $ 8,839,103 41 (7) Other Real Estate Owned (Continued) At December 31, 2017, the Company held $479,352 of residential real estate property as foreclosed property. Also at December 31, 2017, $183,588 of consumer mortgage loans collateralized by residential real estate property was in the process of foreclosure according to local requirements of the applicable jurisdictions. (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, 2015 Core Deposit Intangible Accumulated Amortization Net Core Deposit Intangible $1,056,693 $(940,429) $116,264 Amortization Expense - (35,749) (35,749) Balance, December 31, 2016 $1,056,693 $(976,178) $ 80,515 Amortization Expense - (35,749) (35,749) Balance, December 31, 2017 $1,056,693 $(1,011,927) $ 44,766 Amortization expense related to the core deposit intangible was $35,749, $35,749 and $35,748 for the years ended December 31, 2017, 2016 and 2015. 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 Tax Cuts and Jobs Act (the "TCJ Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate to 21 percent. As a result of the enactment of the TCJ Act we have remeasured our deferred tax assets and liabilities based upon the new U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. Notwithstanding the foregoing, we are still analyzing certain aspects of the new law and refining our calculations, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. Nonetheless, we recognized additional income tax expense of $2,040,946 in the fourth quarter of 2017 related to the remeasurement of our deferred tax assets and liabilities. 42 (9) Income Taxes (Continued) The components of income tax expense for the years ended December 31 are as follows: 2017 2016 2015 Current Federal Expense Deferred Federal Expense Deferred Tax Expense from Tax Rate Changes $3,943,495 793,012 2,040,946 $3,629,213 222,120 - $3,162,367 625,436 - Federal Income Tax Expense Current State Income Tax Expense 6,777,453 3,851,333 3,787,803 - - - Federal and State Income Tax Expense $6,777,453 $3,851,333 $3,787,803 The federal income tax expense of $6,777,453 in 2017, $3,851,333 in 2016 and $3,787,803 in 2015 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: 2017 2016 2015 Statutory Federal Income Taxes Tax-Exempt Interest Income from Cash Value Life Insurance, net of premiums Meal and Entertainment Disallowance Other Tax Expense from Tax Rate Changes $4,954,199 (102,345) (198,730) 14,354 69,029 2,040,946 $4,283,394 (109,759) (182,532) 16,813 (156,583) - $4,134,570 (83,903) (232,988) 21,600 (51,476) - Actual Federal Income Taxes $6,777,453 $3,851,333 $3,787,803 43 (9) Income Taxes (Continued) Deferred taxes, which are included in Other Assets, 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 Tax Liabilities Premises and Equipment Other Deferred Tax Assets (Liabilities) on Unrealized Securities Gains (Losses) Net Deferred Tax Assets (10) Deposits 2017 2016 $1,576,577 304,813 161,000 210,000 76,058 237,591 $3,033,920 688,162 280,704 340,000 167,666 379,304 $2,566,039 4,889,756 (995,190) (2,585) (1,553,460) (4,185) (997,775) (1,557,645) 1,725,708 2,587,163 $3,293,972 $5,919,274 The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $475,161 and $413,563 as of December 31, 2017 and 2016, respectively. Components of interest-bearing deposits as of December 31 are as follows: Interest-Bearing Demand Savings Time, $250,000 and Over Other Time 2017 2016 $458,717,332 78,172,441 38,919,469 301,248,235 $448,003,985 70,066,140 32,168,191 335,059,579 $877,057,477 $885,297,895 At December 31, 2017 and 2016, the Company had brokered deposits of $46,328,995 and $49,303,139, 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 jumbo certificates of deposit, each with a minimum denomination of $250,000 was $38,919,469 and $32,168,191 as of December 31, 2017 and December 31, 2016, respectively. 44 (10) Deposits (Continued) As of December 31, 2017, the scheduled maturities of certificates of deposit are as follows: Year 2018 2019 2020 2021 2022 and Thereafter Amount $255,574,623 41,210,289 22,116,817 11,206,127 10,059,848 $340,167,704 (11) Other Borrowed Money Other borrowed money at December 31 is summarized as follows: Federal Home Loan Bank Advances Other Borrowings 2017 2016 $46,000,000 1,500,000 $47,500,000 $46,000,000 - $46,000,000 Advances from the Federal Home Loan Bank (FHLB) have maturities ranging from 2018 to 2026 and interest rates ranging from 0.98 percent to 3.51 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, 2017, the book value of those loans pledged is $109,771,074. At December 31, 2017, the Company had remaining credit availability from the FHLB of $252,395,250. The Company may be required to pledge additional qualifying collateral in order to utilize the full amount of the remaining credit line. The Company borrowed $5,000,000 during the first quarter of 2017 as a short term loan to be paid off within one year with an interest rate of prime plus 0.75 percent, currently 5.25 percent. The Company paid down $3,500,000 during November 2017. The remaining amount was paid off during January 2018. As of December 31, 2017, the balance of $1,500,000 is included in Other Borrowings. The aggregate stated maturities of other borrowed money at December 31, 2017 are as follows: Year 2018 2019 2020 2021 2022 2023 and Thereafter Amount $ 4,000,000 5,000,000 2,500,000 - 27,000,000 9,000,000 $47,500,000 45 (11) Other Borrowed Money (Continued) At December 31, 2017, $13,000,000 of FHLB advances are subject to fixed rates of interest, while the remaining $33,000,000 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, 2017. 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, 2017, 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) Description Date 3-Month Amount Libor Rate Added Points (In Thousands) Total Interest Rate 5-Year Maturity Call Option Colony Bankcorp Statutory Trust III Colony Bankcorp Capital Trust I Colony Bankcorp Capital Trust II Colony Bankcorp Capital Trust III 6/17/2004 4/13/2006 3/12/2007 9/14/2007 $4,640 5,155 9,279 5,155 1.60042 1.69465 1.69465 1.37796 2.68 1.50 1.65 1.40 4.28042 3.19465 3.34465 2.77796 6/14/2034 4/13/2036 3/12/2037 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. (13) Preferred Stock At December 31, 2016, 9,360 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock) was outstanding with private investors. On March 31, 2017 the Company redeemed these 9,360 shares of Preferred Stock at the stated rate of $1,000 per share. Previously, the Company redeemed 8,661 shares in 2016 and 9,979 shares in 2015, all at the stated rate of $1,000 per share. As a result, there is no outstanding Preferred Stock as of December 31, 2017. While outstanding, the Preferred Stock qualified as Tier I Capital and was nonvoting, other than class voting rights on certain matters that could adversely affect the Preferred Stock. The Preferred Stock paid cumulative cash dividends on a quarterly basis at a rate of 9 percent per annum for the years 2017, 2016 and 2015. The Company issued a warrant (the Warrant) to private investors for the purchase of up to 500,000 shares of the Company’s outstanding common stock. The Warrant originated in 2009 through transactions with the United States Department of the Treasury in conjunction with the issuance of the Preferred Stock. 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. 46 (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 2017, 2016 and 2015, the Company made total contributions of $686,580, $408,303 and $385,453 to the Plan, respectively. (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. At December 31, 2017 and 2016, the following financial instruments were outstanding whose contract amounts represent credit risk: Commitments to Extend Credit Standby Letters of Credit Contract Amount 2017 2016 $ 96,374,000 1,536,000 $ 71,359,000 1,551,000 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. 47 (15) Commitments and Contingencies (Continued) 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 In the event of a participant’s death before age 65, over a specified number of years, beginning at 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 $766,667 and $825,599 as of December 31, 2017 and 2016, respectively. Benefit payments under the contracts were $110,080 in 2017 and $135,885 in 2016. Provisions charged to operations totaled $55,572 in 2017, $57,125 in 2016 and $196,869 in 2015. 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 $233,064 in 2017, $165,128 in 2016 and $174,675 in 2015. In addition death benefits recognized as income totaled $137,058 in 2015. (17) Supplemental Cash Flow Information Cash payments for the following were made during the years ended December 31: Interest Expense Income Taxes 2017 2016 2015 $ 6,851,541 $ 6,529,615 $ 6,536,994 $ 4,000,000 $ 3,365,000 $ 4,738,000 Noncash financing and investing activities for the years ended December 31 are as follows: Acquisitions of Real Estate Through Loan Foreclosures 2017 2016 2015 $ 1,724,936 $ 5,664,554 $ 7,536,165 Change in Unrealized Gain (Loss) on AFS Investment Securities $ (608,355) $ (890,590) $ 622,155 48 (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 2017 2016 $1,025,543 $ 1,816,609 1,050,393 (1,106,606) (224,693) 2,379,026 (3,170,092) - $ 744,637 $ 1,025,543 (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. Generally accepted accounting principles related to Fair Value Measurements define fair value, establish a framework for measuring fair value, establish a three-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. Level 2 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. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance. 49 (19) Fair Value of Financial Instruments and Fair Value Measurements (Continued) 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 Level 2. If a comparable is not available, the investment securities are classified as Level 3. 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 Level 3. 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 Level 2. 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 Level 2. 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 Level 2 due to their expected maturities. 50 (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: 2017 Assets Cash and Short-Term Investments Investment Securities Available for Sale Federal Home Loan Bank Stock Loans, Net Bank-Owned Life Insurance Liabilities Deposits Subordinated Debentures Other Borrowed Money 2016 Assets Cash and Short-Term Investments Investment Securities Available for Sale Federal Home Loan Bank Stock Loans, Net Bank-Owned Life Insurance Liabilities Deposits Subordinated Debentures Other Borrowed Money Carrying Amount Estimated Fair Value 1 Level 2 3 (in Thousands) $ 57,813 354,247 3,043 757,281 17,089 $ 57,813 354,247 3,043 757,163 17,089 $ 57,813 - 3,043 - 17,089 $ - 346,950 - 752,287 - $ - 7,297 - 4,876 - 1,067,985 24,229 47,500 1,068,392 24,229 47,626 727,818 - - 340,574 24,229 47,626 - - - $ 75,167 323,658 3,010 744,999 15,419 $ 75,167 323,658 3,010 745,240 15,419 $ 75,167 - 3,010 - 15,419 $ - 323,082 - 738,288 - $ - 576 - 6,952 - 1,044,357 24,229 46,000 1,045,726 24,229 46,232 677,129 - - 368,597 24,229 46,232 - - - 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 Significant assets and liabilities that are not considered financial 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. instruments. 51 (19) Fair Value of Financial Instruments and Fair Value Measurements (Continued) 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. 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 level 3 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. 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, 2017 and 2016, 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, 2017 and 2016. Those impaired loans and other real estate properties are shown net of the related specific reserves and valuation allowances. 52 (19) Fair Value of Financial Instruments and Fair Value Measurements (Continued) Assets (Continued) 2017 Total Fair Value Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Recurring Securities Available for Sale U.S. Government Agencies Mortgage-Backed State, County and Municipal Corporate Asset-Backed Nonrecurring Impaired Loans Other Real Estate 2016 Recurring Securities Available for Sale U.S. Government Agencies Mortgage-Backed State, County and Municipal Nonrecurring Impaired Loans Other Real Estate Liabilities $346,723,419 4,492,826 2,060,000 970,659 $354,246,904 $ 4,875,918 $ 2,014,904 $319,097,374 4,560,496 $323,657,870 $ 6,952,343 $ 2,505,188 $ $ $ $ $ $ $ $ - - - - - - - - - - - - $341,701,288 4,277,460 - 970,659 $ 5,022,131 215,366 2,060,000 - $346,949,407 $ 7,297,497 $ $ - - $ 4,875,918 $ 2,014,904 $319,097,374 3,984,112 $ - 576,384 $323,081,486 $ 576,384 $ $ - - $ 6,952,343 $ 2,505,188 The Company did not identify any liabilities that are required to be presented at fair value. 53 (19) Fair Value of Financial Instruments and Fair Value Measurements (Continued) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) 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, 2017 and 2016. These tables are comprised primarily of collateral dependent impaired loans and other real estate owned: December 31, 2017 Valuation Techniques Unobservable Inputs Range Weighted Avg Real Estate Commercial Construction $427,433 Sales Comparison Residential Real Estate 81,736 Sales Comparison Adjustment for Differences Between the Comparable Sales (16.00)% - 1,975.00% 979.50% Management Adjustments for Age of Appraisals and/or Current Market Conditions 0.00% - 10.00% 5.00% Adjustment for Differences Between the Comparable Sales (43.30)% - 83.30% 20.00% Management Adjustments for Age of Appraisals and/or Current Market Conditions 0.00% - 25.00% 12.50% Commercial Real Estate 4,016,742 Income Approach Management Adjustments for Age of Appraisals and/or Current Market Conditions 0.00% - 10.00% 5.00% Farmland 350,007 Sales Comparison Other Real Estate Owned 2,014,904 Sales Comparison Capitalization Rate 10.75% Adjustment for Differences Between the Comparable Sales (71.00)% - 88.70% 8.85% Management Adjustments for Age of Appraisals and/or Current Market Conditions 10.00% - 75.00% 42.50% Adjustment for Differences Between the Comparable Sales (22.74)% - 15.00% (3.87)% Management Adjustments for Age of Appraisals and/or Current Market Conditions 5.44% - 87.24% 24.44% Income Approach Capitalization Rate 10.00% 54 (19) Fair Value of Financial Instruments and Fair Value Measurements (Continued) Fair Value Measurements using Significant Unobservable Inputs (Level 3) (Continued) December 31, 2016 Valuation Techniques Unobservable Inputs Range Weighted Avg Real Estate Commercial Construction $ 51,161 Sales Comparison Adjustment for Differences Between the Comparable Sales (5.00)% - 99.00% 47.00% Management Adjustments for Age of Appraisals and/or Current Market Conditions 0.00% - 10.00% 5.00% Residential Real Estate 1,105,312 Sales Comparison Adjustment for Differences Between the Comparable Sales (22.00)% - 0.00% (11.00)% Commercial Real Estate 5,445,192 Sales Comparison Management Adjustments for Age of Appraisals and/or Current Market Conditions 0.00% - 40.00% 20.00% Adjustment for Differences Between the Comparable Sales (14.08)% - 24.62% 5.27% Management Adjustments for Age of Appraisals and/or Current Market Conditions 0.00% - 100.00% 50.00% Income Approach Capitalization Rate 10.67% Farmland 350,678 Sales Comparison Other Real Estate Owned 2,505,188 Sales Comparison Adjustment for Differences Between the Comparable Sales (27.00)% - 15.00% (6.00)% Management Adjustments for Age of Appraisals and/or Current Market Conditions 10.00% - 75.00% 42.50% Adjustment for Differences Between the Comparable Sales (50.80)% - 316.00% 132.60% Management Adjustments for Age of Appraisals and/or Current Market Conditions 6.25% - 76.92% 36.31% Income Approach Discount Rate 12.50% 55 (19) Fair Value of Financial Instruments and Fair Value Measurements (Continued) Fair Value 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, 2017, 2016 and 2015: Available for Sale Securities 2016 2017 2015 Balance, Beginning $ 576,384 $ 930,311 $ 948,390 Transfers into Level 3 Transfers out of Level 3 Securities Purchased During the Year Securities Matured During the Year Loss on OTTI Impairment Included in Noninterest Income Unrealized Gains(Losses) Included in Other Comprehensive Income 7,069,649 (360,000) (330,000) - - - - - 11,464 (23,927) (18,079) Balance, Ending $ 7,297,497 $ 576,384 $ 930,311 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. There were no transfers of securities between level 1 and level 2 or level 3 for the years ended December 31, 2017, 2016 or 2015. The following table presents quantitative information about recurring level 3 fair value measurements as of December 31, 2017 and 2016: December 31, 2017 Fair Value Valuation Techniques Unobservable Inputs Range (Weighted Avg) State, County and Municipal $ 215,366 Discounted Cash Flow Discount Rate N/A* or Yield U. S. Government Agencies 5,022,131 Fundamental Analysis Discount Rate N/A* Mortgage - Backed Corporate 2,060,000 Option Pricing or Yield Discount Rate or Yield N/A* December 31, 2016 State, County and Municipal $ 576,384 Discounted Cash Flow Discount Rate N/A* or Yield * The Company relies on a third-party pricing service to value its securities. The details of the unobservable inputs and other adjustments used by the third-party pricing service were not readily available to the Company. 56 (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. 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, 2017, 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, 2017, 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 was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets, with subsequent increases of 0.625% each year until reaching its final level of 2.5% on January 1, 2019. The following table summarizes regulatory capital information as of December 31, 2017 and December 31, 2016 on a consolidated basis and for the subsidiary, as defined. Regulatory capital ratios for December 31, 2017 and 2016 were calculated in accordance with the Basel III rules. 57 (20) Regulatory Capital Matters (Continued) The following table summarizes regulatory capital information as of December 31, 2017 and 2016 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 $127,786 127,470 15.56% $65,718 65,628 15.54 8.00% 8.00 N/A $82,036 N/A 10.00% 120,279 119,963 14.64 14.62 49,289 49,221 96,779 119,963 11.78 14.62 36,967 36,916 6.00 6.00 4.50 4.50 N/A 65,628 N/A 53,323 120,279 119,963 9.89 9.88 48,635 48,566 4.00 4.00 N/A 60,708 N/A 8.00 N/A 6.50 N/A 5.00 $130,785 127,646 16.64% $ 62,880 62,796 16.26 8.00% 8.00 N/A $78,495 N/A 10.00% 121,862 118,723 15.50 15.12 47,160 47,097 89,002 118,723 11.32 15.12 35,370 35,323 6.00 6.00 4.50 4.50 N/A 62,796 N/A 51,022 121,862 118,723 10.29 10.04 47,368 47,290 4.00 4.00 N/A 59,113 N/A 8.00 N/A 6.50 N/A 5.00 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 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 58 (20) Regulatory Capital Matters (Continued) In 2017, the Bank obtained approval of its regulators and paid a $8,725,000 dividend to the Company. The dividend was utilized to redeem 9,360 shares of Preferred Stock. In 2016, the Bank obtained approval of its regulators and paid a $9,100,000 dividend to the Company. The dividend was utilized to redeem 8,661 shares of Preferred Stock. 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. 59 (21) Financial Information of Colony Bankcorp, Inc. (Parent Only) The parent company’s balance sheets as of December 31, 2017 and 2016 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 2017 2016 $ 910,239 1,099,626 114,235,955 24,458 $ 2,307,008 1,074,884 114,478,277 20,990 $116,270,278 $117,881,159 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Other Borrowed Money Dividends Payable Other Subordinated Debt Stockholders’ Equity Preferred Stock, Stated Value $1,000; 10,000,000 Shares Authorized, 0 and 9,360 Shares Issued and Outstanding as of December 31, 2017 and 2016 Common Stock, Par Value $1; 20,000,000 Shares Authorized, 8,439,258 Shares Issued and Outstanding as of December 31, 2017 and 2016 Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss, Net of Tax $ 1,500,000 $ - 218,615 - 105,300 159,126 $ 1,718,615 $ 264,426 24,229,000 24,229,000 - 9,360,000 8,439,258 29,145,094 59,230,260 (6,491,949) 8,439,258 29,145,094 51,465,521 (5,022,140) 90,322,663 93,387,733 Total Liabilities and Stockholders’ Equity $116,270,278 $117,881,159 60 (21) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued) COLONY BANKCORP, INC. (PARENT ONLY) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 Income Dividends from Subsidiary Management Fees Other Expenses Interest Salaries and Employee Benefits Other 2017 2016 2015 $ 8,746,882 601,080 97,103 $ 9,118,104 601,080 103,612 $10,015,147 581,334 112,876 $9,445,065 $ 9,822,796 $10,709,357 900,113 917,259 604,166 601,567 840,130 554,434 503,286 811,150 666,872 2,421,538 1,996,131 1,981,308 Income Before Taxes and Equity in Undistributed Earnings of Subsidiary 7,023,527 7,826,665 8,728,049 Income Tax Benefits 568,258 457,934 444,764 Income Before Equity in Undistributed Earnings of Subsidiary 7,591,785 8,284,599 9,172,813 Dividends Received in Excess of Earnings of Subsidiary - - (800,116) Equity in Undistributed Earnings of Subsidiary Net Income Preferred Stock Dividends Net Income Available to Common Stockholders 159,193 388,611 - 7,750,978 210,600 8,673,210 1,493,310 8,372,697 2,375,010 $ 7,540,378 $ 7,179,900 $ 5,997,687 61 (21) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued) COLONY BANKCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31 2017 2016 2015 Net Income $7,750,978 $8,673,210 $8,372,697 Other Comprehensive Income (Loss) Gains (Losses) on Securities Arising During the Year Tax Effect Realized (Gains) Losses on Sale of AFS Securities Tax Effect Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects (608,355) 206,841 - - (505,367) 171,825 (385,223) 130,976 610,689 (207,634) 11,466 (3,898) (401,514) (587,789) 410,623 Comprehensive Income $7,349,464 $8,085,421 $8,783,320 62 (21) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued) COLONY BANKCORP, INC. (PARENT ONLY) 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 Depreciation and Amortization Equity in Undistributed Earnings of Subsidiary Dividends Received in Excess of Earnings of Subsidiary Change in Interest Payable Other Cash Flows from Investing Activities Purchases of Premises and Equipment Cash Flows from Financing Activities Proceeds from Other Borrowed Money Principal Payments on Other Borrowed Dividends Paid on Common Stock Dividends Paid on Preferred Stock Redemption of Preferred Stock 2017 2016 2015 $ 7,750,978 $ 8,673,210 $ 8,372,697 70,183 66,476 73,999 (159,193) (388,611) - - 17,887 38,135 - 5,367 108,288 800,116 23,072 1,555,482 7,717,990 8,464,730 10,825,366 (94,925) (6,836) (8,884) 5,000,000 (3,500,000) (843,934) (315,900) (9,360,000) - - - (1,590,746) (8,661,000) - - - (2,487,274) (9,979,000) (9,019,834) (10,251,746) (12,466,274) Increase (Decrease) in Cash (1,396,769) (1,793,852) (1,649,792) Cash, Beginning 2,307,008 4,100,860 5,750,652 Cash, Ending $ 910,239 $ 2,307,008 $ 4,100,860 63 (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 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, 2017, 2016 and 2015: Numerator Net Income Available to Common Stockholders Denominator Weighted Average Number of Common Shares 2017 2016 2015 $ 7,540,378 $ 7,179,900 $ 5,997,687 Outstanding for Basic Earnings Per Common Share 8,439,258 8,439,258 8,439,258 Dilutive Effect of Potential Common Stock Stock Warrants Weighted-Average Number of Shares Outstanding for 194,323 74,037 19,203 Diluted Earnings Per Common Share 8,633,581 8,513,295 8,458,461 Earnings Per Share - Basic $ 0.89 $ 0.85 $ 0.71 Earnings Per Share - Diluted $ 0.87 $ 0.84 $ 0.71 (23) Accumulated Other Comprehensive Income (Loss) Changes in accumulated other comprehensive income (loss) for unrealized gains and losses securities available for sale for the years ended December 31, 2017, 2016 and 2015 are as follows: 2017 2016 2015 Beginning Balance $ (5,022,140) $ (4,434,351) $ (4,844,974) Other Comprehensive Income Before Reclassification Amounts Reclassified from Accumulated Other Comprehensive Income TCJ Act (401,514) (333,542) 403,055 - (1,068,295) (254,247) - (587,789) 7,568 - 410,623 Net Current Period Other Comprehensive Income (1,469,809) Ending Balance $ (6,491,949) $ (5,022,140) $ (4,434,351) 64 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; 65 • 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; and • 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. 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 country. 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 2018 will be directed toward further reduction of problem assets. As we look forward to 2018 we are committed to improving earnings and reducing problem assets. Given the improved condition of the company we are also considering product and market expansion. In January 2017, the Company opened its third office in Savannah. Currently, the Company is performing due diligence on a property for a new office in Statesboro. While the Company has improved earnings, reduced problem assets and maintained strong capital levels, we have reinstated dividend payments beginning first quarter 2017. The Company’s board of directors suspended the payment of dividends in the third quarter of 2009. 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. 66 Tax Cuts and Jobs Act On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted. The TCJ Act made broad changes to the U.S. tax code, including, but not limited to, a reduction of the U.S. federal corporate tax rate to 21 percent. As a result of the enactment of the TCJ Act, we have remeasured our deferred tax assets and liabilities based upon the new U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. We recognized additional income tax expense of $2,040,946 in the fourth quarter of 2017 related to the remeasurement of our deferred tax assets and liabilities. Currently, we are still analyzing certain aspects of the new law and refining our calculations, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. The table below illustrates the effect the additional tax expense resulting from the TCJ Act had on our results of operations for the year ended December 31, 2017. Net Income Earnings Per Share Return on Average Assets (1) Return on Average Equity (1) 2017 As Reported $ 7,751 $ 0.89 0.63% 8.28% TCJ Act Impact $ (2,041) $ (0.27) (0.19) (2.24) 2017 Adjusted (Non-GAAP) $ 9,792 $ 1.16 0.80% 10.52% (1) Computed using Net Income Available to Common Stockholders. Non-GAAP Financial Measures Our accounting and reporting policies conform to generally accepted accounting principles (GAAP) in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the fully-taxable equivalent measures: tax-equivalent net interest income, tax-equivalent net interest margin and tax- equivalent net interest spread, which include the effects of taxable-equivalent adjustments using a federal income tax rate of 34% to increase tax-exempt interest income to a tax-equivalent basis. Tax-equivalent adjustments are reported in Notes 1 and 2 to the Average Balances with Average Yields and Rates table under Rate/Volume Analysis. Tangible book value per common share is also a non-GAAP measure used in the selected Financial Data Section. Tax-equivalent net interest income, net interest margin and net interest spread. Net interest income on a tax- equivalent basis is a non-GAAP measure that adjusts for the tax-favored status of net interest income from loans and investments. We believe this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin on a tax-equivalent basis is net interest income on a tax-equivalent basis divided by average interest-earning assets on a tax-equivalent basis. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread on a tax-equivalent basis is the difference in the average yield on average interest-earning assets on a tax equivalent basis and the average rate paid on average interest-bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread. 67 Non-GAAP Financial Measures (Continued) These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements, and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently. A reconciliation of these performance measures to GAAP performance measures is included in the tables below. Non-GAAP Performance Measures Reconciliation 2017 Years Ended December 31, 2014 2015 2016 (Dollars in Thousands, except per share data) 2013 Interest Income Reconciliation Interest Income – Taxable Equivalent Tax Equivalent Adjustment Interest Income (GAAP) Net Interest Income Reconciliation Net Interest Income – Taxable Equivalent Tax Equivalent Adjustment Net Interest Income (GAAP) Net Interest Margin Reconciliation Net Interest Margin – Taxable Equivalent Tax Equivalent Adjustment Net Interest Margin (GAAP) Interest Rate Spread Reconciliation Interest Rate Spread – Taxable Equivalent Tax Equivalent Adjustment Interest Rate Spread (GAAP) Selected Financial Data Tangible Book Value Per Common Share Effect of Other Intangible Assets Book Value Per Common Share (GAAP) $ 46,079 (163) $ 45,916 $ 44,762 (173) $ 44,589 $ 44,407 (132) $ 44,275 $ 44,879 (117) $ 44,762 $ 45,356 (170) $ 45,186 $ 39,206 (163) $ 39,043 $ 38,279 (173) $ 38,106 $ 37,838 (132) $ 37,706 $ 38,080 (117) $ 37,963 $ 37,859 (170) $ 37,689 3.46% (0.02) 3.44% 3.34% (0.02) 3.32% 3.51% (.02) 3.49% 3.40% (.02) 3.38% 3.52% (.01) 3.51% 3.41% (.01) 3.40% 3.60% (.01) 3.59% 3.49% (.01) 3.48% 3.61% (.02) 3.59% 3.50% (.02) 3.48% $ 10.69 0.01 $ 10.70 $ 9.95 0.01 $ 9.96 $ 9.16 0.02 $ 9.18 $ $ 8.40 0.02 8.42 $ 7.32 0.02 $ 7.34 68 The Company Colony Bankcorp, Inc. (“Colony” or the “Company”) is a bank holding company headquartered in Fitzgerald, Georgia that provides, through its wholly-owned subsidiary Colony Bank (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, 2017 and 2016, and results of operations for each of the years in the three-year period ended December 31, 2017. 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. 69 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 $7.54 million, or $0.87 per diluted shares in 2017, compared to $7.18 million, or $0.84 per diluted common share in 2016 and compared to $6.00 million, or $0.71 per diluted common share in 2015. Selected income statement data, returns on average assets and average equity and dividends per share for the comparable periods were as follows: 2017 2016 Variance Variance 2016 2015 Variance Variance $ % $ % Taxable-equivalent net interest income $ 39,206 $ 38,279 $ 927 2.42% $ 38,279 $ 37,838 $ 441 1.17% Taxable-equivalent adjustment 163 173 (10) (5.78) 173 132 41 31.06 Net interest income Provision for loan losses Noninterest income Noninterest expense 39,043 390 9,735 33,860 38,106 1,062 9,553 34,073 937 2.46 (672) (63.28) 182 1.91 (213) (0.63) 38,106 1,062 9,553 34,073 37,706 866 9,045 33,724 400 196 508 349 1.06 22.63 5.62 1.03 Income before income taxes $ 14,528 $ 12,524 $ 2,004 16.00% $ 12,524 $ 12,161 $ 363 2.98% Income Taxes 6,777 3,851 2,926 75.98 3,851 3,788 63 1.66 Net income $ 7,751 $ 8,673 $ (922) (10.63)% $ 8,673 $ 8,373 $ 300 3.58% Preferred stock dividends $ 211 $ 1,493 $ (1,282) (85.87)% $ 1,493 $ 2,375 $ (882) (37.14)% Net income available to common shareholders Net income available to common shareholders: Basic Diluted $ 7,540 $ 7,180 $ 360 5.01% $ 7,180 $ 5,998 $ 1,182 19.71% $ 0.89 $ 0.87 $ 0.85 $ 0.04 4.71% $ 0.85 $ 0.71 $ 0.84 $ 0.03 3.57% $ 0.84 $ 0.71 $ 0.14 $ 0.13 19.72% 18.31% Return on average assets (1) 0.63% 0.62% 0.01% 1.61% 0.62% 0.52% 0.10% 19.23% Return on average common equity (1) 8.28% 7.17% 1.11% 15.48% 7.17% 5.90% 1.27% 21.53% (1) Computed using net income available to common shareholders. 70 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 80.04 percent of total revenue during 2017, 79.96 percent of total revenue during 2016, and 80.65 percent of total revenue during 2015. 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 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 4.50 percent. The Federal Reserve Board sets general market rates of interest, including the deposit and loan rates offered by many financial institutions. For the first time in several years, the prime interest rate increased by 25 basis points in the fourth quarter of 2015, followed by a similar 25-point increase in the fourth quarter of 2016. During 2017, the prime interest rate increased overall by 75 basis points. Given that the federal funds rate moves in accordance with the movement of the prime interest rate, we anticipate that the federal funds rate will also increase from its current 1.5 percent. 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 Rate/Volume Analysis. 71 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-Bearing Deposits in Other Banks Federal Funds Sold Other Interest - Earning Assets Total Interest Income Interest Expense Interest-Bearing Demand and Savings Deposits Time Deposits Total Interest Expense On Deposits Other Interest-Bearing Liabilities Subordinated Debentures Other Debt Federal Funds Purchased Total Interest Expense Net Interest Income (Loss) Changes From 2016 to 2017 (a) Changes From 2015 to 2016 (a) Volume Rate Total Volume Rate Total $ 72 $ (407) $ (335) $ 221 $ (951) $ (730) 769 (5) 764 (12) - 12 836 174 (240) (66) 770 (9) 761 120 - 7 481 28 15 43 - 231 4 169 667 $ 126 54 (2) 221 260 $ $ 1,539 (14) 1,525 108 - 19 1,317 202 (225) (23) 126 285 2 390 927 381 12 393 (18) (15) 4 585 137 (271) (134) - 74 - (60) 645 $ 669 (15) 654 62 - 5 (230) 62 (4) 58 98 (183) 1 (26) (204) $ $ 1,050 (3) 1,047 44 (15) 9 355 199 (275) (76) 98 (109) 1 (86) 441 (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. 72 The Company maintains about 22.6 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 non-maturing core deposits and short term certificates of deposit that mature within one year. The Federal Reserve rates have remained flat since 2008 until the 25 basis point increase in the fourth quarter of 2015 and 2016 followed by the 75 basis point increase during 2017. We have seen the net interest margin change to 3.46 percent for 2017, compared to 3.51 percent for 2016 and 3.52 percent for 2015. We have seen our net interest margin reach a low of 3.35 percent in first quarter of 2017 to a high of 3.50 percent in the third and fourth quarters 2017. Taxable-equivalent net interest income for 2017 increased by $927 thousand, or 2.42 percent, compared to 2016 while taxable-equivalent net interest income for 2016 increased by $441 thousand, or 1.17 percent compared to 2015. The average volume of interest-earning assets during 2017 increased $42.73 million compared to 2016 while over the same period the net interest margin dropped to 3.46 percent from 3.51 percent. The average volume of interest-earning assets during 2016 increased $16.41 million compared to 2015 while over the same period the net interest margin dropped to 3.51 percent from 3.52 percent. The change in the net interest margin in 2017 was primarily driven by a higher level of low yielding assets offset by an increase in the cost of funds. The change in the net interest margin in 2016 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 2017 was primarily in investments. The increase in average interest-earning assets in 2016 was in loans, investments and other interest-earning assets. The average volume of loans increased $1.41 million in 2017 compared to 2016 and increased $4.20 million in 2016 compared to 2015. The average yield on loans decreased 5 basis points in 2017 compared to 2016 and decreased 13 basis points in 2016 compared to 2015. The average volume of deposits increased $36.78 million in 2017 compared to 2016. The average volume of deposits increased $17.35 million in 2016 compared to 2015. Demand deposits made up $18.59 million of the increase in average deposits in 2017 compared to $11.80 million of the increase in average deposits in 2016. Accordingly, the ratio of average interest-bearing deposits to total average deposits was 84.6 percent in 2017, 85.9 percent in 2016 and 86.8 percent in 2015. This deposit mix, combined with a general decrease in interest rates, had the effect of (i) decreasing the average cost of total deposits by 2 basis points in 2017 compared to 2016 and decreasing the average cost of total deposits by 2 basis points in 2016 compared to 2015, 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 3.34 percent in 2017 compared to 3.40 percent in 2016 and 3.41 percent in 2015. 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 Market Risk and Interest Rate Sensitivity included elsewhere in this report. 73 Rate/Volume Analysis (Continued) AVERAGE BALANCE SHEETS Assets Interest-Earning Assets Loans, Net of Unearned Income (1) Investment Securities Taxable Tax-Exempt (2) Total Investment Securities Interest-Bearing Deposits Federal Funds Sold Other Interest-Earning Assets Total Interest-Earning Assets Noninterest-Earning Assets Cash Allowance for Loan Losses Other Assets Total Noninterest-Earning Assets Average Balances 2017 Income/ Expense 2016 2015 Yields/ Rates Average Balances Income/ Yields/ Expense Rates Average Balances Income/ Yields/ Expense Rates $ 762,554 $ 38,749 5.08% $ 761,149 $ 39,084 5.13% $ 756,953 $ 39,814 5.26% 344,790 2,310 347,100 20,920 - 3,126 6,867 81 6,948 232 - 1.99 3.51 2.00 1.11 - 150 4.80 301,357 2,440 303,797 23,167 - 2,854 5,328 95 5,423 124 - 131 1,133,700 46,079 4.06% 1,090,967 44,762 1.77 3.89 1.79 0.54 - 4.59 4.10 276,807 2,171 278,978 29,815 6,056 2,754 4,278 98 4,376 80 15 122 1,074,556 44,407 1.55 4.51 1.57 0.27 0.25 4.43 4.13 20,587 (8,442) 54,786 66,931 19,208 (9,372) 63,060 72,896 19,049 (8,587) 61,966 72,428 Total Assets $ 1,200,631 $ 1,163,863 $ 1,146,984 Liabilities and Stockholders' Equity Interest-Bearing Liabilities Interest-Bearing Demand and Savings $ 517,974 $ 1,896 0.37% $ 469,740 $ 1,694 0.36% $ 430,731 $ 1,495 0.35% Other Time Total Interest-Bearing Deposits Other Interest-Bearing Liabilities Other Borrowed Money Subordinated Debentures Federal Funds Purchased and Repurchase Agreements Total Other Interest-Bearing Liabilities Total Interest-Bearing Liabilities Noninterest-Bearing Liabilities and Stockholders' Equity Demand Deposits Other Liabilities Stockholders' Equity Total Noninterest-Bearing Liabilities and Stockholders' Equity Total Liabilities and 353,587 871,561 51,388 24,229 2,862 4,758 1,385 727 0.81 0.55 2.70 3.00 383,628 853,368 42,470 24,229 3,087 4,781 1,100 601 0.80 0.56 2.59 2.48 417,080 847,811 40,000 24,229 3,362 4,857 1,209 503 0.81 0.57 3.02 2.08 178 3 1.69 35 1 2.86 3 - - 75,795 947,356 2,115 6,873 2.79 0.73 66,734 920,102 1,702 6,483 2.55 0.70 64,232 912,043 1,712 6,569 2.67 0.72 158,924 3,306 91,045 253,275 140,338 3,309 100,114 243,761 128,541 4,690 101,710 234,941 Stockholders' Equity $ 1,200,631 $ 1,163,863 $ 1,146,984 Interest Rate Spread Net Interest Income Net Interest Margin $ 39,206 3.34% 3.46% $ 38,279 3.40% 3.51% $ 37,838 3.41% 3.52% (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 $135, $141 and $99 for 2017, 2016 and 2015, respectively, are included in interest on loans. The adjustments are based on a federal tax rate of 34 percent. (2) Taxable-equivalent adjustments totaling $28, $32 and $33 for 2017, 2016 and 2015, 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. 74 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 $390 thousand in 2017 compared to $1.06 million in 2016 and $866 thousand in 2015. 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: 2017 2016 Variance Variance 2016 2015 Variance Variance $ % $ % Service Charges on Deposit Accounts $ 4,467 $ 4,307 $ 160 3.71% $ 4,307 $ 4,269 $ 38 0.89% Other Charges, Commissions and Fees 3,040 2,803 Mortgage Fee Income Securities Gains (Losses) 859 - 682 385 237 177 8.46 25.95 (385) (100.00) 2,803 2,627 682 385 527 (11) 176 155 396 6.70 29.41 3,600.00 Other Total 1,369 1,377 (8) (0.58) 1,377 1,633 (256) (15.68) $ 9,735 $ 9,554 $ 181 1.89% $ 9,554 $ 9,045 $ 509 5.63% Other Charges, Commissions and Fees. Significant amounts impacting the comparable periods was primarily attributed to ATM and debit card interchange fees which increased $209 thousand in 2017 compared to 2016 and $184 thousand in 2016 compared to 2015. Mortgage Fee Income. The increase in mortgage fee income in 2017 compared to the same period in 2016 is due to an increase in the volume of mortgage loans. Securities Gains (Losses). The decrease in 2017 is attributable to no sale of securities in 2017 compared to a gain on sale of securities in 2016. Other. The Bank did not have any significant changes for 2017 compared to 2016. Significant amounts impacting the comparable periods was primarily attributed to having income from the sale of a tax credit of $66 thousand and life insurance benefits of $137 that did not occur in 2016 when compared to 2015. 75 Noninterest Expense The components of noninterest expense were as follows: 2017 2016 Variance Variance 2016 2015 Variance Variance $ % $ % Salaries and Employee Benefits $ 19,223 $ 18,483 $ 740 4.00% $ 18,483 $ 17,590 $ 893 5.08% Occupancy and Equipment 3,948 Directors' Fees Legal and Professional Fees Foreclosed Property FDIC Assessment Advertising Software Telephone ATM/Card Processing Other Total 298 894 363 387 350 1,192 814 1,467 4,924 3,970 349 792 1,143 604 610 1,112 737 1,136 5,137 (22) (51) (0.55) (14.61) 102 12.88 (780) (68.24) (217) (35.93) (260) (42.62) 80 77 7.19 10.45 331 29.14 (213) (4.15) 3,970 349 792 1,143 604 610 1,112 737 1,136 5,137 3,989 358 738 1,683 899 625 993 710 1,061 5,078 (19) (0.48) (9) (2.51) 54 7.32 (540) (32.09) (295) (32.81) (15) (2.40) 119 11.98 27 75 59 3.80 7.07 1.16 $ 33,860 $ 34,073 $ (213) (0.63)% $ 34,073 $ 33,724 $ 349 1.03% Salaries and Employee Benefits. The increase in salary and employee benefits for 2017 and 2016 is due to merit pay increases. Foreclosed Property. The decrease in foreclosed property and repossession expense for 2017 and 2016 is primarily attributable to the decrease in the volume of OREO. Advertising. The decrease in advertising expense for 2017 is due to management changing its approach to advertising by decreasing its television ads. ATM/Card Processing. The increase is proportional to the Bank’s increase in deposits and to ATM and debit card interchange fees. 76 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 $1.20 billion in 2017 compared to $1.16 billion in 2016 and $1.15 billion in 2015. Sources of Funds: Deposits: Noninterest-Bearing Interest-Bearing Federal Funds Purchased and Repurchase Agreements Subordinated Debentures and Other Borrowed Money Other Noninterest-Bearing Liabilities Equity Capital 2017 2016 2015 $ 158,924 871,561 13.24% 72.59% $ 140,338 853,368 12.1% 73.3% $ 128,541 847,811 11.2% 73.9% 178 0.01% 35 - % 3 - % 75,617 6.30% 66,699 5.7% 64,229 5.6% 3,306 91,045 0.28% 7.58% 3,309 100,114 0.3% 8.6% 4,690 101,710 0.4% 8.9% Total $ 1,200,631 100.00% $ 1,163,863 100.0% $ 1,146,984 100.0% Uses of Funds: Loans (Net of Allowance) Investment Securities Federal Funds Sold Interest-Bearing Deposits Other Interest-Earning Assets Other Noninterest-Earning Assets $ 754,112 347,100 - 20,920 3,126 75,373 62.81% 28.91% - % 1.74% 0.26% 6.28% $ 751,777 303,797 - 23,167 2,854 82,268 64.6% 26.1% - % 2.0% 0.2% 7.1% $ 748,366 278,978 6,056 29,815 2,754 81,015 65.3% 24.3% 0.5% 2.6% 0.2% 7.1% Total $ 1,200,631 100.00% $ 1,163,863 100.0% $ 1,146,984 100.0% 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 84.6 percent of total average deposits in 2017 compared to 85.9 percent in 2016 and 86.8 percent in 2015. 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 2017 as total loans were $765.3 million at December 31, 2017, up 1.46 percent, compared to loans of $754.3 million at December 31, 2016, which went down 0.57 percent, compared to loans of $758.6 million at December 31, 2015. 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 and securities. 77 Loans The following table presents the composition of the Company’s loan portfolio as of December 31 for the past five years. Commercial and Agricultural Commercial Agricultural Real Estate Commercial Construction Residential Construction Commercial Residential Farmland Consumer and Other Consumer Other Unearned Interest and Fees Allowances for Loan Losses 2017 2016 2015 2014 2013 $ 48,122 16,443 $ 47,025 17,080 $ 47,782 19,193 $ 50,960 16,689 $ 48,107 10,666 45,214 8,583 351,172 194,049 67,768 18,956 14,977 765,284 (495) (7,508) 30,358 11,830 349,090 195,580 66,877 19,695 16,748 754,283 (361) (8,923) 40,107 9,413 346,262 197,002 61,780 20,605 16,492 758,636 (357) (8,604) 51,259 11,221 332,231 203,753 49,951 22,820 7,210 746,094 (362) (8,802) 52,739 6,549 341,783 206,258 47,034 25,676 12,406 751,218 (360) (11,806) Loans $ 757,281 $ 744,999 $ 749,675 $ 736,930 $ 739,052 The following table presents total loans as of December 31, 2017 according to maturity distribution and/or repricing opportunity on adjustable rate loans. Maturity and Repricing Opportunity One Year or Less After One Year through Three Years After Three Years through Five Years Over Five Years $279,145 270,161 169,049 46,929 $765,284 Overview. Loans totaled $765.3 million at December 31, 2017 up 1.46 percent from 754.3 million at December 31, 2016. 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 71.24 percent and 72.21 percent of total loans, real estate construction loans made up 7.03 percent and 5.59 percent while commercial and agricultural loans made up 8.44 percent and 8.50 percent of total loans at December 31, 2017 and December 31, 2016, respectively. 78 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 and 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, 2017 increased 0.78 percent to $64.6 million from December 31, 2016 at $64.1 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. 79 Real Estate. Commercial and residential construction loans increased by $11.6 million, or 27.49 percent, at December 31, 2017 to $53.8 million from $42.2 million at December 31, 2016. This increase is partially due to new commercial construction loans being financed during the year that were not completed by the end of the year. Commercial real estate increased $2.1 million or 0.6 percent at December 31, 2017 to $351.17 million from $349.09 million at December 31, 2016. Other. Other loans at December 31, 2017 decreased 10.6 percent to $14.98 million from $16.75 million in December 31, 2016. Industry Concentrations. As of December 31, 2017 and December 31, 2016, 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, 2017, approximately 87 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 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. 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, 2017 and December 31, 2016. December 31, 2017 Period End Balances December 31, 2016 Period End Balances Number of Relationships Committed Outstanding Number of Relationships Committed Outstanding Large Credit Relationships: $10 million or greater $5 million to $9.9 million 1 15 $ 11,541 98,718 $ 8,718 89,556 - 14 $ - 96,807 $ - 86,712 80 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, 2017. 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. Due in One Year or Less After One, but Within Three Years After Three, but Within Five Years After Five Years Total Loans with fixed interest rates Loans with floating interest rates $200,340 78,805 $232,129 38,032 $ 115,366 53,683 $ 44,363 2,566 $ 592,198 173,086 Total $279,145 $270,161 $169,049 $46,929 $765,284 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. 81 Nonperforming Assets and Potential Problem Loans Year-end nonperforming assets and accruing past due loans were as follows: 2017 2016 2015 2014 2013 Loans Accounted for on Nonaccrual Loans Accruing Past Due 90 Days or More Other Real Estate Foreclosed Securities Accounted for on Nonaccrual $ 7,503 $ 12,350 - 4,256 - - 6,439 - Total Nonperforming Assets $ 11,759 $ 18,789 $ 14,408 8 8,839 - $ 23,255 $ 7,106 4,197 - 9,908 1,103 941 $ 23,255 $18,334 7 10,402 - $28,743 $ 9,655 8,237 173 8,375 1,449 854 $28,743 $ 24,114 4 15,502 - $ 39,620 $ 17,323 5,926 335 12,441 1,629 1,966 $ 39,620 $ 3,376 4,375 - 9,182 800 1,056 $ 18,789 2.47% 1.55% 3.03% 1.98% 3.80% 2.51% 5.17% 3.45% 1.64% 1.90% 2.46% 3.21% 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 of: Total Loans Supplemental Data: Trouble Debt Restructured Loans $ 2,630 3,309 - 3,796 839 1,185 $ 11,759 1.53% 0.95% 0.98% In Compliance with Modified Terms $ 18,363 $ 17,992 $ 19,375 $19,229 $ 20,715 Trouble Debt Restructured Loans Past Due 30-89 Days Accruing Past Due Loans: 30-89 Days Past Due 90 or More Days Past Due 131 4,558 - 319 4,469 - Total Accruing Past Due Loans $ 4,558 $ 4,469 344 757 435 10,959 8 $ 10,967 9,701 7 $ 9,708 9,366 4 $ 9,370 Allowance for Loan Losses ALLL as a Percentage of: Total Loans Nonperforming Loans $ 7,508 $ 8,923 $ 8,604 $ 8,802 $ 11,806 0.98% 100.06% 1.18% 72.25% 1.13% 59.68% 1.18% 47.99% 1.57% 48.95% Nonperforming assets include nonaccrual loans, loans past due 90 days or more, foreclosed real estate and nonaccrual securities. Nonperforming assets at December 31, 2017 decreased 37.42 percent from December 31, 2016. 82 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. is charged to current year Once interest accruals are discontinued, accrued but uncollected interest 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. 83 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. During the first quarter of 2016 Company management implemented a change to its allowance for loan loss methodology by expanding the historical loss period from a rolling 8 quarters to 16 quarters. Management believes the longer historical loss period better reflects the current and expected loss behavior of the loan portfolio within the current credit cycle. The transition to a rolling 16 quarter loss period was complete in the first quarter of 2017. As of December 31, 2017, this change in the historical loss period resulted in a decrease to the allowance for loan losses of $114,144. The loss history period used at December 31, 2016 and 2015 was based on the loss rate from the eight quarters ended September 30, 2016 and 2015, respectively. 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. 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 and/or 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. 84 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. 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. 2017 2016 2015 2014 2013 Reserve %* Reserve %* Reserve %* Reserve %* Reserve %* Commercial and Agricultural $ Commercial Agricultural 447 186 6% 2% $ 456 168 6% 2% $ 855 203 $ 6% 3% 497 304 7% 2% $ 1,017 294 6% 2% Real Estate Commercial Construction Residential Construction Commercial Residential Farmland Consumer and Other Consumer Other 1,216 - 3,874 968 780 6% 1% 46% 25% 9% 323 13 5,751 1,396 722 4% 2% 46% 26% 9% 691 20 3,851 1,990 912 5% 1% 46% 26% 8% 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% 34 3 7,508 $ 3% 2% 100% 80 14 8,923 $ 3% 2% 100% 63 19 8,604 $ 3% 2% 100% 67 379 8,802 $ 3% 1% 100% 243 362 11,806 $ 3% 2% 100% * Percentage represents the loan balance in each category expressed as a percentage of total end of period loans. 85 The following table presents an analysis of the Company’s loan loss experience for the periods indicated. 2017 2016 2015 2014 2013 Allowance for Loan Losses at Beginning of Year $ 8,923 $ 8,604 $ 8,802 $ 11,806 $12,737 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 Net Charge-Offs Provision for Loans Losses 299 159 52 - 966 1,048 61 330 - 305 19 25 - 992 362 120 265 - 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 $ 2,915 $ 2,088 $ 2,083 $ 5,104 $ 6,228 137 4 266 - 527 82 17 75 2 67 4 814 - 206 50 145 53 6 1,110 1,805 1,345 743 390 1,062 52 3 486 - 270 110 20 62 16 1,019 1,064 866 76 3 485 - 90 31 20 72 15 792 56 6 253 - 298 65 22 94 18 812 4,312 1,308 5,416 4,485 Allowance for Loan Losses at End of Year $ 7,508 $ 8,923 $ 8,604 $ 8,802 $11,806 Ratio of Net Charge-Offs to Average Loans 0.24% 0.10% 0.14% 0.58% 0.73% The allowance for loan losses decreased from $8.92 million, or 1.18 percent of total loans at December 31, 2016 to $7.51 million, or 0.98 percent of total loans at December 31, 2017. 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 2017 was the increase in the net charge-offs in 2017 to $1.81 million from $743 thousand in 2016, or an increase of $1.06 million. Significant changes in the allowance during 2016 was the reduction in the net charge-offs in 2016 to $743 thousand from $1.06 million in 2015. 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. 86 Investment Portfolio The following table presents carrying values of investment securities held by the Company as of December 31, 2017, 2016 and 2015. State, County and Municipal Mortgage-Backed Securities Corporate Asset-Backed Total Investment Securities and Mortgage-Backed Securities 2017 2016 2015 $ 4,493 346,723 2,060 971 $ 4,561 319,097 - - $ 5,099 291,050 - - $354,247 $323,658 $296,149 The following table represents expected maturities and weighted-average yields of investment securities held by the Company as of December 31, 2017. (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 Yield After 5 Years But Within 10 Years Amount Yield After 10 Years Amount Yield $ 29,606 2.78% $ 204,342 1.79% $ 98,304 2.57% $ 14,471 2.96% 517 - - 3.03 - - 3,037 2,060 971 2.09 4.03 3.12 679 - - 3.10 - - 260 - - 4.03 - - Mortgage-Backed Securities Obligations of State and Political Subdivisions Corporate Asset-Backed Total Investment Portfolio $ 30,123 2.78% $ 210,410 1.82% $ 98,983 2.57% $ 14,731 2.98% 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, 2017, 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 2.00 percent in 2017 compared to 1.79 percent in 2016 and 1.57 percent in 2015. The increase in the average yield from 2016 to 2017 was primarily attributed to the purchase of new securities which have a higher yield. The increase in the average yield from 2015 to 2016 was primarily attributed to the adjustment in amortization resulting from the deceleration of prepayment speeds. 87 Deposits The following table presents the average amount outstanding and the average rate paid on deposits by the Company for the years 2017, 2016 and 2015. 2017 2016 2015 Average Amount Average Rate Average Amount Average Rate Average Amount Average Rate $ 158,924 $ 140,338 $ 128,541 517,974 353,587 0.37% 0.81% 469,740 383,628 0.36% 0.80% 430,731 417,080 0.35% 0.81% Noninterest-Bearing Demand Deposits Interest-Bearing Demand and Savings Time Deposits Total Deposits $ 1,030,485 0.46% $ 993,706 0.48% $ 976,352 0.50% The following table presents the maturities of the Company’s time deposits as of December 31, 2017. Months to Maturity 3 or Less Over 3 through 6 Over 6 through 12 Over 12 Months Time Deposits $250,000 or Greater Time Deposits Less Than $250,000 $ 4,166 7,316 20,670 6,767 $67,962 62,163 93,298 77,825 Total $72,128 69,479 113,968 84,592 $38,919 $301,248 $340,167 Average deposits increased $36.78 million in 2017 compared to 2016 and increased $17.35 million in 2016 compared to 2015. The increase in 2017 included $48.23 million, or 10.27 percent in interest-bearing demand and savings deposits while, at the same time noninterest bearing deposits increased $18.59 million, or 13.24 percent and time deposits decreased $30.04 million, or 7.83 percent. The increase in 2016 included $39.01 million, or 9.06 percent in interest-bearing demand and savings deposits while, at the same time noninterest bearing deposits increased $11.80 million, or 9.18 percent and time deposits decreased $33.45 million, or 8.02 percent. Accordingly, the ratio of average noninterest-bearing deposits to total average deposits was 15.42 percent in 2017, 14.12 percent in 2016 and 13.17 percent in 2015. The general decrease in market rates in 2017 had the effect of (i) decreasing the average cost of interest-bearing deposits by 2 basis points in 2017 compared to 2016 and (ii) mitigating a portion of the impact of decreasing yields on interest- earning assets in the Company’s net interest income in 2017. The general decrease in market rates in 2016 had the effect of (i) decreasing the average cost of interest-bearing deposits by 2 basis points in 2016 compared to 2015 and (ii) mitigating a portion of the impact of decreasing yields on interest-earning assets in the Company’s net interest income in 2016. 88 Total average interest-bearing deposits increased $18.19 million, or 2.13 percent in 2017 compared to 2016 and increased $5.56 million, or 0.66 percent in 2016 compared to 2015. This increase was primarily attributable to the increase in interest-bearing demand and savings accounts in 2017 and in 2016 as well. The Company supplements deposit sources with brokered deposits. As of December 31, 2017, the Company had $46.33 million, or 4.34 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, 2017. 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 $10 million in 1-4 residential home equity and construction loans, $28 million in commercial real estate construction loans, $18 million in commercial/industrial loans and $40 million in the overdraft privilege program. Contractual Obligations: Subordinated Debentures Federal Home Loan Bank Advances Other Borrowings Operating Leases Deposits with Stated Maturity Dates Other Commitments: Loan Commitments Standby Letters of Credit Payments Due by Period Total $ 24,229 46,000 1,500 208 340,168 Less Than 1 Year $ - 2,500 1,500 43 255,575 1 – 3 Years 3 – 5 Years More Than 5 Years $ - 5,000 - 42 41,210 $ - 29,500 - 123 43,266 $ 24,229 9,000 - - 117 412,105 259,618 46,252 72,889 33,346 96,374 1,536 96,374 1,536 97,910 97,910 - - - - - - - - - Total Contractual Obligations and Other Commitments $510,015 $357,528 $46,252 $72,889 $33,346 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. 89 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. 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, 2017 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, 2017 are included in the preceding table. Capital and Liquidity At December 31, 2017, shareholders’ equity totaled $90.32 million compared to $93.39 million at December 31, 2016. In addition to net income of $7.75 million, other significant changes in shareholders’ equity during 2017 included $210.6 thousand of dividends declared on preferred stock, $843.9 thousand of dividends declared on common stock and $9.36 million redemption of preferred stock. The accumulated other comprehensive loss component of stockholders’ equity totaled $(6.49) million at December 31, 2017 compared to $(5.02) million at December 31, 2016. 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, 2017 was 14.64 percent and total Tier 1 and 2 risk-based capital was 15.56 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, 2017 was 11.78, which exceeds the regulatory minimum of 4.50 percent. The Company’s Tier 1 leverage ratio as of December 31, 2017 was 9.89 percent, which exceeds the required ratio standard of 4 percent. For 2017, average capital was $91.05 million, representing 7.58 percent of average assets for the year. This compares to 8.60 percent for 2016. 90 For 2017, the Company did not have any material commitments for capital expenditures. The Company reinstated payment of common stock dividends in 2017 with a cash dividend of $844 thousand. The Company did not pay any common stock dividends in 2016. The Company suspended common stock dividend payments beginning in the third quarter of 2009 for capital retention purposes. The Company declared dividends of $211 thousand and $1,493 million on preferred stock during 2017 and 2016, respectively. On November 17, 2014 the Company reinstated dividend payments after being on deferral since February 12, 2012, 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 asset/liability 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, 2017, the available for sale bond portfolio totaled $354.2 million. At December 31, 2016, the available for sale bond portfolio totaled $323.7 million. Only marketable investment grade bonds are purchased. Although most of the Bank’s bond portfolio is 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 71.6 percent as of December 31, 2017 and 72.2 percent as of December 31, 2016. 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, 2017 and December 31, 2016 were 68.6 percent and 69.2 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, 2017 and December 31, 2016, the Bank had $38.9 million and $32.2 million, respectively, in certificates of deposit of $250,000 or more. These larger deposits represented 3.6 percent and 3.1 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. 91 The Company supplemented deposit sources with brokered deposits. As of December 31, 2017, the Company had $46.3 million or 4.3 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, 2017, the Company had $13.5 million, or 1.3 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. 92 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 the Consolidated Financial Statements. 93 Market Risk and 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 asset/liability model for interest rate risk analysis. We are generally focusing our investment activities on securities with terms or average lives in the 3 ½ - 5 ½ year range. Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either reduced current market values or reduced current and potential net income. Colony’s most significant market risk is interest rate risk. This risk arises primarily from Colony’s extension of loans and acceptance of deposits. Managing interest rate risk is a primary goal of the asset liability management function. Colony attempts to achieve stability in net interest income while limiting volatility arising from changes in interest rates. Colony seeks to achieve this goal by balancing the maturity and repricing characteristics of assets and liabilities. Colony manages its exposure to fluctuations in interest rates through policies established by ALCO and approved by the Board of Directors. ALCO meets at least quarterly and has responsibility for developing asset liability management policies, reviewing the interest rate sensitivity of Colony, and developing and implementing strategies to improve balance sheet structure and interest rate risk positioning. 94 Colony measures the sensitivity of net interest income to changes in market interest rates through the utilization of Asset/Liability simulation modeling. On at least a quarterly basis, the following twenty-four month time period is simulated to determine a baseline net interest income forecast and the sensitivity of this forecast to changes in interest rates. These simulations include all of Colony’s earning assets and liabilities. Forecasted balance sheet changes, primarily reflecting loan and deposit growth and forecasts, are included in the periods modeled. Projected rates for loans and deposits are based on management’s outlook and local market conditions. The magnitude and velocity of rate changes among the various asset and liability groups exhibit different characteristics for each possible interest rate scenario; additionally, customer loan and deposit preferences can vary in response to changing interest rates. Simulation modeling enables Colony to capture the expected effect of these differences. Assumptions utilized in the model are updated on an ongoing basis and are reviewed and approved by the ALCO Committee of the Board of Directors. Colony has modeled its baseline net interest income forecast assuming a flat interest rate environment with the federal funds rate at the Federal Reserve's current targeted range of 1.25% to 1.50% and the current prime rate of 4.50%. Colony has modeled the impact of a gradual increase in short-term rates of 100 and 200 basis points and a decline of 100 basis points to determine the sensitivity of net interest income for the next twelve months. As illustrated in the table below, the net interest income sensitivity model indicates that, compared with a net interest income forecast assuming stable rates, net interest income is projected to increase by 0.58% and increase by 0.27% if interest rates increased by 100 and 200 basis points, respectively. Net interest income is projected to decline by 2.57% if interest rates decreased by 100 basis points. These changes were within Colony’s policy limit of a maximum 15% negative change. Twelve Month Net Interest Income Sensitivity Estimated Change in Net Interest Income As of December 31, Change in Short-term Interest Rates (in basis points) +200 +100 Flat -100 2017 0.27% 0.58% -% -2.57% 2016 3.35% 1.88% - % -3.67% The measured interest rate sensitivity indicates an asset sensitive position over the next year, which could serve to improve net interest income in a rising interest rate environment. The actual realized change in net interest income would depend on several factors, some of which could serve to reduce or eliminate the asset sensitivity noted above. These factors include a higher than projected level of deposit customer migration to higher cost deposits, such as certificates of deposit, which would increase total interest expense and serve to reduce the realized level of asset sensitivity. Another factor which could impact the realized interest rate sensitivity in a rising rate environment is the repricing behavior of interest bearing non-maturity deposits. Assumptions for repricing are expressed as a beta relative to the change in the prime rate. For instance, a 25% beta would correspond to a deposit rate that would increase 0.25% for every 1% increase in the prime rate. Projected betas for interest bearing non-maturity deposit repricing are a key component of determining the Company's interest rate risk position. Should realized betas be higher than projected betas, the expected benefit from higher interest rates would be reduced. 95 The net interest income simulation model is the primary tool utilized to evaluate potential interest rate risks over a shorter term time horizon. Colony also evaluates potential longer term interest rate risk through modeling and evaluation of economic value of equity (EVE). This EVE modeling allows Colony to capture longer-term repricing risk and options risk embedded in the balance sheet. Simulation modeling is utilized to measure the economic value of equity and its sensitivity to immediate changes in interest rates. These simulations value only the current balance sheet and do not incorporate growth assumptions used in the net interest income simulation. The economic value of equity is the net fair value of assets and liabilities derived from the present value of future cash flows discounted at current market interest rates. From this baseline valuation, Colony evaluates changes in the value of each of these items in various interest rate scenarios to determine the net impact on the economic value of equity. Key assumptions utilized in the model, namely loan prepayments, deposit pricing betas, and non-maturity deposit durations have a significant impact on the results of the EVE simulations. As illustrated in the table below, the economic value of equity model indicates that, compared with a valuation assuming stable rates, EVE is projected to increase by 7.93% and 13.13%, assuming an immediate and sustained increase in interest rates of 100 and 200 basis points, respectively. The primary reason for the increase in asset sensitivity from the prior year is a more aggressive assumption regarding non-maturity deposit durations. Assuming an immediate 100 basis point decline in rates, EVE is projected to decrease by 11.73%. These changes were within Colony’s policy except in the -100 basis point change, which limits the maximum negative change in EVE to 10% of the base EVE. We believe this projection outside of policy is mitigated by the unlikely reduction in interest rates due to the current rate environment. Economic Value of Equity Sensitivity Immediate Change in Interest Rates (in basis points) +200 +100 -100 Estimated Change in EVE As of December 31, 2017 13.13% 7.93% -11.73% 2016 16.27% 9.59% -12.44% Colony is also subject to market risk in certain of its fee income business lines. Financial management services revenues, which include trust, brokerage, and asset management fees, can be affected by risk in the securities markets, primarily the equity securities market. A significant portion of the fees in this unit are determined based upon a percentage of asset values. Weaker securities markets and lower equity values have an adverse impact on the fees generated by these operations. Trading account assets, maintained to facilitate brokerage customer activity, are also subject to market risk. This risk is not considered significant, as trading activities are limited and subject to risk policy limits. Mortgage banking income is also subject to market risk. Mortgage loan originations are sensitive to levels of mortgage interest rates and therefore, mortgage banking income could be negatively impacted during a period of rising interest rates. The extension of commitments to customers to fund mortgage loans also subjects Colony to market risk. This risk is primarily created by the time period between making the commitment and closing and delivering the loan. Colony seeks to minimize this exposure by utilizing various risk management tools, the primary of which are forward sales commitments and best efforts commitments. 96 The following table is an analysis of the Company’s interest rate-sensitivity position at December 31, 2017. 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 Other Interest- Earning Assets $ 34,668 302 142,947 3,043 $ - 2,883 135,950 - $ 34,668 3,185 278,897 3,043 $ - 215,082 438,962 - $ - 135,980 46,929 - $34,668 354,247 764,788 3,043 Total Interest-Earning Assets $180,960 $138,833 $319,793 $654,044 $182,909 $1,156,746 INTEREST-BEARING LIABILITIES: Interest-Bearing Demand Deposits (1) Savings (1) Time Deposits Other Borrowings Subordinated Debentures 458,717 78,172 72,128 4,000 24,229 - - 183,447 - - 458,717 78,172 255,575 4,000 24,229 - - 84,476 34,500 - - - 117 9,000 - 458,717 78,172 340,168 47,500 24,229 Total Interest-Bearing Liabilities 637,246 183,447 820,693 118,976 9,117 948,786 Interest Rate-Sensitivity Gap (456,286) (44,614) (500,900) 535,068 173,792 $ 207,960 Cumulative Interest-Sensitivity Gap $(456,286) $(500,900) $(500,900) $ 34,168 $207,960 Interest Rate-Sensitivity Gap as a Percentage of Interest-Earning Assets Cumulative Interest Rate-Sensitivity as a Percentage of Interest-Earning Assets (39.44)% (3.86)% (43.30)% 46.26% 15.02% (39.44)% (43.30)% (43.30)% 2.96% 17.98% (1) Interest-bearing Demand and Savings Accounts for repricing purposes are considered to reprice within 3 months or less. 97 The foregoing table indicates that we had a one year negative gap of $500.9 million, or 43.30 percent of total interest-earning assets at December 31, 2017. In theory, this would indicate that at December 31, 2017, $500.9 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. 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, 2017 indicates a one year gap of 1.10 percent. The analysis reflects slight net interest margin compression in both a declining and increasing interest rate environment. Given that interest rates have shown a gradual increase with the Federal Reserve actions since 2015, the Company is anticipating interest rates to increase in the future though we believe that interest rates will increase modestly in 2018. 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 Asset/Liability 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, 2017. Net Interest Income – Earnings at Risk Equity at Risk Rate Shock +/- 100 bp +/- 200 bp +/- 300 bp +/- 400 bp +/- 100 bp +/- 200 bp +/- 300 bp +/- 400 bp Policy Limit +/- 10% +/- 15% +/- 20% +/- 25% +/- 10% +/- 20% +/- 30% +/- 40% Immediate Shock (-) decrease bp Immediate Shock (+) increase bp -2.80% -7.96 -11.08 -12.45 -11.73 -26.41 -34.15 -35.09 0.79% 0.27 0.13 -1.24 7.93 13.13 15.81 17.08 98 Return on Assets and Stockholder’s Equity The following table presents selected financial ratios for each of the periods indicated. Return on Average Assets(1) Return on Average Equity(1) Equity to Assets Years Ended December 31 2016 2017 2015 0.63% 8.28% 7.33% 0.62% 7.17% 7.72% 0.52% 5.90% 8.13% Common Stock Dividends Declared $0.10 $0.00 $0.00 (1) Computed using net income available to common shareholders. 99 100 Table of Contents Letter to the Shareholders .............1 Financial Summary .... 2 Total Return Performance ............. 3 Board of Directors ..... 4 Market Presidents ...... 5 Savannah and Tifton Offi ces ............ 6 Consolidated Financial Statements ...7 Colony Bankcorp, Inc. common stock is quoted on the NASDAQ Global Market under the symbol “CBAN.” COLONY BANKCORP, INC. SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS: Colony Bankcorp, Inc. P.O. Box 989 115 South Grant Street Fitzgerald, Georgia 31750 229-426-6000 ANNUAL MEETING Tuesday, May 22, 2018 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 certifi cates; or to consolidate accounts should contact: American Stock Transfer & Trust Company Operations Center 6201 15th Avenue Brooklyn, NY 11219 800-937-5449 www.amstock.com 2017 ANNUAL REPORT Member FDIC Colony Bankcorp, Inc. P.O. Box 989 • 115 S. Grant St. Fitzgerald, GA 31750 229-426-6000 • www.colonybank.com 

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