Colony Bankcorp (CBAN) 10-K 2014 FY Annual report

EXHIBIT NO. 13

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

www.mmmcpa.com

March 10, 2015

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Colony Bankcorp, Inc.

We have audited the accompanying consolidated balance sheets of Colony Bankcorp, Inc. and Subsidiary as of December 31, 2014 and 2013 and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2014.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Colony Bankcorp, Inc. and Subsidiary as of December 31, 2014 and 2013, and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine management’s assessment of the effectiveness of Colony Bankcorp, Inc.’s internal control over financial reporting as of December 31, 2014 included under Item 9A, Controls and Procedures, in Colony Bankcorp, Inc.’s Annual Report on Form 10-K and, accordingly, we do not express an opinion thereon.

McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

ASSETS

	2014			2013
Cash and Cash Equivalents
Cash and Due from Banks	$	24,472,870		$	25,691,605
Federal Funds Sold		20,132,062			20,495,060
		44,604,932			46,186,665
Interest-Bearing Deposits		21,206,039			21,960,291
Investment Securities
Available for Sale, at Fair Value		274,594,586			263,257,890
Held to Maturity, at Cost (Fair Value of $29,923 and $37,309 as of December 31, 2014 and 2013, Respectively)		29,796			37,062
		274,624,382			263,294,952
Federal Home Loan Bank Stock, at Cost		2,830,800			3,163,900
Loans		746,093,809			751,218,462
Allowance for Loan Losses		(8,802,316	)		(11,805,986	)
Unearned Interest and Fees		(361,374	)		(360,522	)
		736,930,119			739,051,954
Premises and Equipment		24,960,445			24,876,469
Other Real Estate (Net of Allowance of $3,319,644 and $3,985,920 in 2014 and 2013, Respectively)		10,401,832			15,502,462
Other Intangible Assets		152,012			187,761
Other Assets		31,187,420			34,326,432
Total Assets	$	1,146,897,981		$	1,148,550,886

See accompanying notes which are an integral part of these financial statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

LIABILITIES AND STOCKHOLDERS’ EQUITY

	2014			2013
Deposits
Noninterest-Bearing	$	128,339,763		$	115,260,701
Interest-Bearing		850,963,711			872,268,779
		979,303,474			987,529,480
Borrowed Money
Subordinated Debentures		24,229,000			24,229,000
Other Borrowed Money		40,000,000			40,000,000
		64,229,000			64,229,000
Other Liabilities		4,338,195			6,838,167
Commitments and Contingencies
Stockholders’ Equity
Preferred Stock, Stated Value $1,000; Authorized 10,000,000 Shares, Issued 28,000 Shares		28,000,000			28,000,000
Common Stock, Par Value $1; Authorized 20,000,000 Shares, Issued 8,439,258 Shares as of December 31, 2014 and 2013		8,439,258			8,439,258
Paid-In Capital		29,145,094			29,145,094
Retained Earnings		38,287,934			33,444,913
Accumulated Other Comprehensive Loss, Net of Tax		(4,844,974	)		(9,075,026	)
		99,027,312			89,954,239
Total Liabilities and Stockholders’ Equity	$	1,146,897,981		$	1,148,550,886

See accompanying notes which are an integral part of these financial statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

	2014		2013			2012
Interest Income
Loans, Including Fees	$	39,735,615	$	41,350,195		$	41,963,113
Federal Funds Sold		32,100		39,199			99,273
Deposits with Other Banks		41,639		26,704			42,903
Investment Securities
U.S. Government Agencies		4,737,878		3,516,978			4,824,423
State, County and Municipal		99,736		123,972			206,483
Corporate Obligations		-		47,275			76,029
Dividends on Other Investments		115,134		81,398			77,203
		44,762,102		45,185,721			47,289,427
Interest Expense
Deposits		5,113,024		5,821,366			8,737,281
Federal Funds Purchased		19		116			-
Borrowed Money		1,685,744		1,675,164			2,279,469
		6,798,787		7,496,646			11,016,750
Net Interest Income		37,963,315		37,689,075			36,272,677
Provision for Loan Losses		1,308,000		4,485,000			6,784,767
Net Interest Income After Provision for Loan Losses		36,655,315		33,204,075			29,487,910
Noninterest Income
Service Charges on Deposits		4,567,716		4,690,599			3,572,897
Other Service Charges, Commissions and Fees		2,468,881		1,725,271			1,514,898
Mortgage Fee Income		419,963		484,396			400,009
Securities Gains (Losses)		23,735		(363,804	)		2,837,464
Gain on Sale of SBA Loans		-		635,190			305,924
Other		1,644,294		1,205,631			1,102,077
		9,124,589		8,377,283			9,733,269
Noninterest Expenses
Salaries and Employee Benefits		17,507,926		16,691,972			15,564,893
Occupancy and Equipment		4,062,844		3,794,524			3,878,268
Directors’ Fees		392,132		416,972			465,220
Legal and Professional Fees		785,683		721,322			1,085,881
Foreclosed Property		2,701,436		3,918,128			5,613,316
FDIC Assessment		965,898		1,321,981			1,497,974
Advertising		652,374		508,292			422,718
Software		925,489		852,475			789,226
Telephone		735,735		778,151			744,930
ATM/Card Processing		865,519		641,228			511,186
Other		5,384,956		4,972,404			4,805,418
		34,979,992		34,617,449			35,379,030
Income Before Income Taxes		10,799,912		6,963,909			3,842,149
Income Taxes		3,268,287		2,334,864			1,200,851
Net Income		7,531,625		4,629,045			2,641,298
Preferred Stock Dividends		2,688,604		1,508,761			1,435,385
Net Income Available to Common Stockholders	$	4,843,021	$	3,120,284		$	1,205,913
Net Income Per Share of Common Stock, Basic and Diluted	$	0.57	$	0.37		$	0.14
Cash Dividends Declared Per Share of Common Stock	$	0.00	$	0.00		$	0.00
Weighted Average Shares Outstanding, Basic and Diluted		8,439,258		8,439,258			8,439,258

See accompanying notes which are an integral part of these financial statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31

	2014			2013			2012
Net Income	$	7,531,625		$	4,629,045		$	2,641,298
Other Comprehensive Income (Loss)
Gains (Losses) on Securities Arising During the Year		6,432,906			(13,886,854	)		(283,076	)
Tax Effect		(2,187,189	)		4,721,531			96,246
Realized Gains (Losses) on Sale of AFS Securities		(23,735	)		(2,819	)		(2,897,032	)
Tax Effect		8,070			959			984,991
Impairment Loss on Securities		-			366,623			59,568
Tax Effect		-			(124,652	)		(20,253	)
Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects		4,230,052			(8,925,212	)		(2,059,556	)
Comprehensive Income (Loss)	$	11,761,677		$	(4,296,167	)	$	581,742

See accompanying notes which are an integral part of these financial statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

	Preferred Stock		Shares Issued		Common Stock		Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2011	$	27,662,476		8,439,258	$	8,439,258	$	29,145,094	$	29,456,240		$	1,909,742		$	96,612,810
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects													(2,059,556	)		(2,059,556	)
Accretion of Fair Value of Warrant		164,577								(164,577	)					-
Dividends on Preferred Shares										(1,435,385	)					(1,435,385	)
Net Income										2,641,298						2,641,298
Balance, December 31, 2012		27,827,053		8,439,258		8,439,258		29,145,094		30,497,576			(149,814	)		95,759,167
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects													(8,925,212	)		(8,925,212	)
Accretion of Fair Value of Warrant		172,947								(172,947	)					-
Dividends on Preferred Shares										(1,508,761	)					(1,508,761	)
Net Income										4,629,045						4,629,045
Balance, December 31, 2013		28,000,000		8,439,258		8,439,258		29,145,094		33,444,913			(9,075,026	)		89,954,239
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects													4,230,052			4,230,052
Dividends on Preferred Shares										(2,688,604	)					(2,688,604	)
Net Income										7,531,625						7,531,625
Balance, December 31, 2014	$	28,000,000		8,439,258	$	8,439,258	$	29,145,094	$	38,287,934		$	(4,844,974	)	$	99,027,312

See accompanying notes which are an integral part of these financial statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

	2014			2013			2012
Cash Flows from Operating Activities
Net Income	$	7,531,625		$	4,629,045		$	2,641,298
Adjustments to Reconcile Net Income to Net Cash Provided from Operating Activities
Depreciation		1,595,253			1,527,392			1,676,820
Amortization and Accretion		1,312,857			2,667,404			4,180,158
Provision for Loan Losses		1,308,000			4,485,000			6,784,767
Deferred Income Taxes		1,932,950			2,178,222			1,204,439
Securities (Gains) Losses		(23,735	)		363,804			(2,837,464	)
(Gain) Loss on Sale of Premises and Equipment		(12,489	)		(677	)		1,148
Loss on Sale of Other Real Estate and Repossessions		828,411			1,565,091			1,839,196
Provision for Losses on Other Real Estate		1,006,827			1,321,418			2,702,709
Increase in Cash Surrender Value of Life Insurance		(590,674	)		(338,712	)		(185,341	)
Change In
Interest Receivable		55,786			285,033			250,755
Prepaid Expenses		(64,633	)		(168,060	)		1,741,834
Interest Payable		(1,099,756	)		385,285			74,637
Accrued Expenses and Accounts Payable		197,195			213,753			(95,972	)
Other		788,958			(243,543	)		2,827,648
		14,766,575			18,870,455			22,806,632
Cash Flows from Investing Activities
Interest-Bearing Deposits in Other Banks		754,252			(164,950	)		7,161,969
Purchase of Investment Securities
Available for Sale		(56,201,891	)		(132,419,073	)		(250,445,594	)
Proceeds from Sale of Investment Securities
Available for Sale		13,620,956			72,672,795			227,690,806
Proceeds from Maturities, Calls and Paydowns of Investment Securities
Available for Sale		36,440,646			48,330,382			54,006,594
Held to Maturity		12,968			11,623			14,019
Proceeds from Sale of Premises and Equipment		14,376			2,500			1,500
Net Loans to Customers		(3,156,342	)		(19,959,948	)		(50,126,252	)
Purchase of Premises and Equipment		(1,681,115	)		(1,489,579	)		(845,338	)
Proceeds from Sale of Other Real Estate and Repossessions		7,233,497			8,041,638			9,876,136
Proceeds from Sale of Federal Home Loan Bank Stock		333,100			200,400			2,033,900
Purchase of Bank-Owned Life Insurance		-			(10,000,000	)		-
		(2,629,553	)		(34,774,212	)		(632,260	)
Cash Flows from Financing Activities
Interest-Bearing Customer Deposits		(21,305,068	)		16,550,430			(49,998,012	)
Noninterest-Bearing Customer Deposits		13,079,062			(8,705,841	)		29,697,631
Proceeds from Other Borrowed Money		-			21,500,000			5,000,000
Principal Payments on Other Borrowed Money		-			(16,500,000	)		(41,000,000	)
Dividends Paid on Preferred Stock		(5,492,749	)		-			-
		(13,718,755	)		12,844,589			(56,300,381	)
Net Increase (Decrease) in Cash and Cash Equivalents		(1,581,733	)		(3,059,168	)		(34,126,009	)
Cash and Cash Equivalents, Beginning		46,186,665			49,245,833			83,371,842
Cash and Cash Equivalents, Ending	$	44,604,932		$	46,186,665		$	49,245,833

See accompanying notes which are an integral part of these financial statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Principles of Consolidation

Colony Bankcorp, Inc. (the Company) is a bank holding company located in Fitzgerald, Georgia. The consolidated financial statements include the accounts of Colony Bankcorp, Inc. and its wholly-owned subsidiary, Colony Bank, Fitzgerald, Georgia.  All significant intercompany accounts have been eliminated in consolidation.  The accounting and reporting policies of Colony Bankcorp, Inc. conform to generally accepted accounting principles and practices utilized in the commercial banking industry.

Nature of Operations

The Company provides a full range of retail and commercial banking services for consumers and small- to medium-size businesses located primarily in central, south and coastal Georgia. Colony Bank is headquartered in Fitzgerald, Georgia with banking offices in Albany, Ashburn, Broxton, Centerville, Chester, Columbus, Cordele, Douglas, Eastman, Fitzgerald, Leesburg, Moultrie, Pitts, Quitman, Rochelle, Savannah, Soperton, Sylvester, Thomaston, Tifton, Valdosta and Warner Robins.  Lending and investing activities are funded primarily by deposits gathered through its retail banking office network.

Use of Estimates

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements and note disclosures have been reclassified to conform to statement presentations selected for 2014.  Such reclassifications had no effect on previously reported stockholders’ equity or net income.

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(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, 2014, 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.  The downturn of the housing and real estate market that began in 2007 resulted in an increase of problem loans secured by real estate, of which most are centered in the Company’s larger MSA markets.  Declining collateral real estate values that secure land development, construction and speculative real estate loans in the Company’s larger MSA markets have resulted in high loan loss provisions in recent years.  In addition, a large portion of the Company’s foreclosed assets are also located in these same geographic markets, making the recovery of the carrying amount of foreclosed assets susceptible to changes in market conditions.  Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis.

The success of the Company is dependent, to a certain extent, upon the economic conditions in the geographic markets it serves.  Adverse changes in the economic conditions in these geographic markets would likely have a material adverse effect on the Company’s results of operations and financial condition.  The operating results of the Company depend primarily on its net interest income. Accordingly, operations are subject to risks and uncertainties surrounding the exposure to changes in the interest rate environment.

At times, the Company may have cash and cash equivalents at financial institutions in excess of federal deposit insurance limits.  The Company places its cash and cash equivalents with high credit quality financial institutions whose credit rating is monitored by management to minimize credit risk.

Investment Securities

The Company classifies its investment securities as trading, available for sale or held to maturity.  Securities that are held principally for resale in the near term are classified as trading.  Trading securities are carried at fair value, with realized and unrealized gains and losses included in noninterest income.  Currently, no securities are classified as trading.  Securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost.  All securities not classified as trading or held to maturity are considered available for sale.  Securities available for sale are reported at estimated fair value.  Unrealized gains and losses on securities available for sale are excluded from earnings and are reported, net of deferred taxes, in accumulated other comprehensive income (loss), a component of stockholders’ equity.  Gains and losses from sales of securities available for sale are computed using the specific identification method.  Securities available for sale includes securities, which may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital requirements, or unforeseen changes in market conditions.

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(1) Summary of Significant Accounting Policies (Continued)

Investment Securities (Continued)

The Company evaluates each held to maturity and available for sale security in a loss position for other-than-temporary impairment (OTTI).  In estimating other-than-temporary impairment losses, management considers such factors as the length of time and the extent to which the market value has been below cost, the financial condition of the issuer and the Company’s intent to sell and whether it is more likely than not that the Company will be required to sell the security before anticipated recovery of the amortized cost basis.  If the Company intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery, the OTTI write-down is recognized in earnings.  If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income (loss).

Federal Home Loan Bank Stock

Investment in stock of a Federal Home Loan Bank (FHLB) is required for every federally insured institution that utilizes its services.  FHLB stock is considered restricted, as defined in the accounting standards.  The FHLB stock is reported in the consolidated financial statements at cost.  Dividend income is recognized when earned.

Loans

Loans that the Company has the ability and intent to hold for the foreseeable future or until maturity are recorded at their principal amount outstanding, net of unearned interest and fees.  Loan origination fees, net of certain direct origination costs, are deferred and amortized over the estimated terms of the loans using the straight-line method.  Interest income on loans is recognized using the effective interest method.

A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date.

When management believes there is sufficient doubt as to the collectibility of principal or interest on any loan or generally when loans are 90 days or more past due, the accrual of applicable interest is discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of collection.  Interest payments received on nonaccrual loans are either applied against principal or reported as income, according to management’s judgment as to the collectibility of principal.  Loans are returned to an accrual status when factors indicating doubtful collectibility on a timely basis no longer exist.

Loans Modified in a Troubled Debt Restructuring (TDR)

Loans are considered to have been modified in a TDR when, due to a borrower’s financial difficulty, the Company makes certain concessions to the borrower that it would not otherwise consider for new debt with similar risk characteristics.  Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of the collateral.  Generally, a nonaccrual loan that has been modified in a TDR remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan.  However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period.  If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status. Once a loan is modified in a troubled debt restructuring, it is accounted for as an impaired loan, regardless of its accrual status, until the loan is paid in full, sold or charged off.

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(1) Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the 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 is 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 the composition of the loan portfolio, (2) the extent of loan concentrations within the portfolio, (3) the effectiveness of the Company’s lending policies, procedures and internal controls, (4) the experience, ability and effectiveness of the Company’s lending management and staff, and (5) national and local economics and business conditions.

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.

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(1) Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

A significant portion of the Company’s impaired loans are deemed to be collateral dependent.  Management therefore measures impairment on these loans based on the fair value of the collateral.  Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company or by senior members of the Company’s credit administration staff.  The decision whether to obtain an external third-party appraisal usually depends on the type of property being evaluated.  External appraisals are usually obtained on more complex, income producing properties such as hotels, shopping centers and businesses.  Less complex properties such as residential lots, farm land and single family houses may be evaluated internally by senior credit administration staff.  When the Company does obtain appraisals from external third-parties, the values utilized in the impairment calculation are “as is” or current market values.  The appraisals, whether prepared internally or externally, may utilize a single valuation approach or a combination of approaches including the comparable sales, income and cost approach.  Appraised amounts used in the impairment calculation are typically discounted 10 percent to account for selling and marketing costs, if the repayment of the loan is to come from the sale of the collateral.  Although appraisals may not be obtained each year on all impaired loans, the collateral values used in the impairment calculations are evaluated quarterly by management.  Based on management’s knowledge of the collateral and the current real estate market conditions, appraised values may be further discounted to reflect facts and circumstances known to management since the initial appraisal was performed.

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are typically significant and result in a level 3 classification of the inputs for determining fair value.  Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, we consider the fair value of impaired loans to be highly sensitive to changes in market conditions.

Premises and Equipment

Premises and equipment are recorded at acquisition cost net of accumulated depreciation.

Depreciation is charged to operations over the estimated useful lives of the assets.  The estimated useful lives and methods of depreciation are as follows:

Description	Life in Years	Method
Banking Premises	15-40	Straight-Line and Accelerated
Furniture and Equipment	5-10	Straight-Line and Accelerated

Expenditures for major renewals and betterments are capitalized.  Maintenance and repairs are charged to operations as incurred.  When property and equipment are retired or sold, the cost and accumulated depreciation are removed from the respective accounts and any gain or loss is reflected in other income or expense.

Intangible Assets

Intangible assets consist of core deposit intangibles acquired in connection with a business combination.  The core deposit intangible is initially recognized based on an independent valuation performed as of the consummation date.  The core deposit intangible is amortized by the straight-line method over the average remaining life of the acquired customer deposits.

- 12 -

(1) Summary of Significant Accounting Policies (Continued)

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Statement of Cash Flows

For reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing amounts due from banks, federal funds sold and securities purchased under agreement to resell.  Cash flows from demand deposits, interest-bearing checking accounts, savings accounts, loans and certificates of deposit are reported net.

Securities Purchased Under Agreement to Resell and Securities Sold Under Agreements to Repurchase

The Company purchases certain securities under agreements to resell.  The amounts advanced under these agreements represent short-term loans and are reflected as assets in the consolidated balance sheets.

The Company sells securities under agreements to repurchase.  These repurchase agreements are treated as borrowings.  The obligations to repurchase securities sold are reflected as a liability and the securities underlying the agreements are reflected as assets in the consolidated balance sheets.

Advertising Costs

The Company expenses the cost of advertising in the periods in which those costs are incurred.

Income Taxes

The provision for income taxes is based upon income for financial statement purposes, adjusted for nontaxable income and nondeductible expenses.  Deferred income taxes have been provided when different accounting methods have been used in determining income for income tax purposes and for financial reporting purposes.

Deferred tax assets and liabilities are recognized based on future tax consequences attributable to differences arising from the financial statement carrying values of assets and liabilities and their tax bases.  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 2014, 2013, 2012 and 2011 are subject to examination by the Internal Revenue Service (IRS) and the Georgia Department of Revenue, generally for three years after filing.

- 13 -

(1) Summary of Significant Accounting Policies (Continued)

Income Taxes (Continued)

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination.  Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.  Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts.  The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing.  Penalties are recognized in the period that the Company claims the position in the tax return.  Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statements of operations.

Other Real Estate

Other real estate generally represents real estate acquired through foreclosure and is initially recorded at estimated fair value at the date of acquisition less the cost of disposal.  Losses from the acquisition of property in full or partial satisfaction of debt are recorded as loan losses.  Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and valuation allowances are recorded as necessary to reduce the carrying amount to fair value less estimated cost of disposal.  Routine holding costs and gains or losses upon disposition are included in foreclosed property expense.

Bank-Owned Life Insurance

The Company has purchased life insurance on the lives of certain key members of management and directors.  The life insurance policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement, if applicable.  Increases in the cash surrender value are recorded as other income in the consolidated statements of income.The cash surrender value of the insurance contracts is recorded in other assets on the consolidated balance sheets in the amount of $14,530,851 and $13,940,176 as of December 31, 2014 and 2013, 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 balance sheet when they are funded.

- 14 -

(1) Summary of Significant Accounting Policies (Continued)

Changes in Accounting Principles and Effects of New Accounting Pronouncements

ASU 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).  For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with ASC 970-323.   ASU 2014-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, and will be applied retrospectively to all periods presented.  The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40):  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of this guidance is to clarify when an in-substance repossession or foreclosure occurs; that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company’s consolidated financial statements.

ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for the Company on January 1, 2017. The Company is still evaluating the potential impact on the Company's consolidated financial statements.

ASU 2014-11, Transfers and Servicing (Topic 860). ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 is effective for the Company on January 1, 2015 and is not expected to have a significant impact on the Company’s consolidated financial statements.

- 15 -

(1) Summary of Significant Accounting Policies (Continued)

Changes in Accounting Principles and Effects of New Accounting Pronouncements (Continued)

ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The amendments require a mortgage loan to be derecognized and a separate receivable to be recognized upon foreclosure if the loan has a government guarantee that is nonseparable from the loan before foreclosure, the creditor has the ability and intent to convey the real estate property to the guarantor, and any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Additionally, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor upon foreclosure. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. Management does not believe the amendments will have a material impact to the Company’s consolidated financial statements.

ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  ASU 2014-15 explicitly requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures.  ASU 2014-15 is effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted.  The adoption of ASU 2014-15 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

(2) Cash and Balances Due from Banks

Components of cash and balances due from banks are as follows as of December 31:

	2014		2013
Cash on Hand and Cash Items	$	9,974,663	$	10,531,340
Noninterest-Bearing Deposits with Other Banks		14,498,207		15,160,265
	$	24,472,870	$	25,691,605

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 $1,278,000 and $1,252,000 at December 31, 2014 and 2013, respectively.

- 16 -

(3) Investment Securities

Investment securities as of December 31, 2014 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed	$	278,419,055	$	155,902	$	(7,511,288	)	$	271,063,669
State, County and Municipal		3,516,400		27,181		(12,664	)		3,530,917
	$	281,935,455	$	183,083	$	(7,523,952	)	$	274,594,586
Securities Held to Maturity
State, County and Municipal	$	29,796	$	127	$	-		$	29,923

The amortized cost and fair value of investment securities as of December 31, 2014, by contractual maturity, are shown hereafter.  Expected maturities may differ from contractual maturities for certain investments because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  This is often the case with mortgage-backed securities, which are disclosed separately in the table below.

	Securities
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in One Year or Less	$	715,764	$	717,138	$	29,796	$	29,923
Due After One Year Through Five Years		718,836		730,598		-		-
Due After Five Years Through Ten Years		1,158,938		1,157,251		-		-
Due After Ten Years		922,862		925,930		-		-
		3,516,400		3,530,917		29,796		29,923
Mortgage-Backed Securities		278,419,055		271,063,669		-		-
	$	281,935,455	$	274,594,586	$	29,796	$	29,923

Investment securities as of December 31, 2013 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed	$	273,029,073	$	118,843	$	(13,799,858	)	$	259,348,058
State, County and Municipal		3,978,857		14,963		(83,988	)		3,909,832
	$	277,007,930	$	133,806	$	(13,883,846	)	$	263,257,890
Securities Held to Maturity
State, County and Municipal	$	37,062	$	247	$	-		$	37,309

- 17 -

(3) Investment Securities (Continued)

Proceeds from sales of investments available for sale were $13,620,956 in 2014, $72,672,795 in 2013 and $227,690,806 in 2012.  Gross realized gains totaled $67,601 in 2014, $442,124 in 2013 and $3,084,666 in 2012.  Gross realized gains of $1,800 in 2014 was due to a gain on a call for a held to maturity investment.  Gross realized losses totaled $45,666 in 2014, $805,928 in 2013 and $247,202 in 2012.

Investment securities having a carrying value totaling $135,531,563 and $112,912,815 as of December 31, 2014 and 2013, respectively, were pledged to secure public deposits and for other purposes.

Information pertaining to securities with gross unrealized losses at December 31, 2014 and 2013 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
December 31, 2014
U.S. Government Agencies
Mortgage-Backed	$	66,609,319	$	(396,896	)	$	183,645,552	$	(7,114,392	)	$	250,254,871	$	(7,511,288	)
State, County and Municipal		-		-			1,379,547		(12,664	)		1,379,547		(12,664	)
	$	66,609,319	$	(396,896	)	$	185,025,099	$	(7,127,056	)	$	251,634,418	$	(7,523,952	)
December 31, 2013
U.S. Government Agencies
Mortgage-Backed	$	190,063,827	$	(9,440,663	)	$	63,193,601	$	(4,359,195	)	$	253,257,428	$	(13,799,858	)
State, County and Municipal		1,647,043		(83,988	)		-		-			1,647,043		(83,988	)
	$	191,710,870	$	(9,524,651	)	$	63,193,601	$	(4,359,195	)	$	254,904,471	$	(13,883,846	)

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.

- 18 -

(3) Investment Securities (Continued)

At December 31, 2014, the debt securities with unrealized losses have depreciated 2.90 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, 2014 which was completely written off during prior years.  This investment is comprised of one issuance of a trust preferred security and has a book value of $0.  Management evaluates this investment on a quarterly basis utilizing a third-party valuation model.  The results of this model revealed other-than-temporary impairment and as a result, $366,623 and $59,568 were written off during the years ended December 31, 2013 and 2012, respectively.

(4) Loans

The following table presents the composition of loans, segregated by class of loans, as of December 31:

	2014		2013
Commercial and Agricultural
Commercial	$	50,960,265	$	48,107,448
Agricultural		16,689,444		10,665,938
Real Estate
Commercial Construction		51,258,970		52,738,783
Residential Construction		11,220,683		6,549,260
Commercial		332,230,847		341,783,538
Residential		203,752,620		206,257,927
Farmland		49,950,984		47,034,426
Consumer and Other
Consumer		22,820,314		25,675,560
Other		7,209,682		12,405,582
Total Loans	$	746,093,809	$	751,218,462

- 19 -

(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.

- 20 -

(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.

2014	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	46,230,110	$	2,905,361	$	1,824,794	$	50,960,265
Agricultural		16,504,404		27,101		157,939		16,689,444
Real Estate
Commercial Construction		45,063,306		1,740,488		4,455,176		51,258,970
Residential Construction		11,220,683		-		-		11,220,683
Commercial		309,828,039		11,220,166		11,182,642		332,230,847
Residential		180,549,640		10,582,704		12,620,276		203,752,620
Farmland		47,548,106		414,521		1,988,357		49,950,984
Consumer and Other
Consumer		22,114,932		248,997		456,385		22,820,314
Other		7,012,405		-		197,277		7,209,682
Total Loans	$	686,071,625	$	27,139,338	$	32,882,846	$	746,093,809
2013
Commercial and Agricultural
Commercial	$	41,759,281	$	2,770,284	$	3,577,883	$	48,107,448
Agricultural		10,637,705		16,830		11,403		10,665,938
Real Estate
Commercial Construction		42,668,320		1,512,301		8,558,162		52,738,783
Residential Construction		6,341,530		207,730		-		6,549,260
Commercial		317,567,749		10,759,954		13,455,835		341,783,538
Residential		182,977,361		13,523,478		9,757,088		206,257,927
Farmland		44,776,355		507,122		1,750,949		47,034,426
Consumer and Other
Consumer		24,608,175		320,473		746,912		25,675,560
Other		12,356,116		711		48,755		12,405,582
Total Loans	$	683,692,592	$	29,618,883	$	37,906,987	$	751,218,462

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.

- 21 -

(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:

	Accruing Loans
2014	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans
Commercial and Agricultural
Commercial	$	872,321	$	-	$	872,321	$	405,398	$	49,682,546	$	50,960,265
Agricultural		-		-		-		44,605		16,644,839	$	16,689,444
Real Estate
Commercial Construction		141,850		-		141,850		3,251,290		47,865,830	$	51,258,970
Residential Construction		-		-		-		-		11,220,683	$	11,220,683
Commercial		2,309,114		-		2,309,114		5,325,047		324,596,686	$	332,230,847
Residential		5,782,701		-		5,782,701		7,461,507		190,508,412	$	203,752,620
Farmland		281,967		-		281,967		1,449,226		48,219,791	$	49,950,984
Consumer and Other
Consumer		313,424		6,642		320,066		201,695		22,298,553	$	22,820,314
Other		-		-		-		195,497		7,014,185	$	7,209,682
Total Loans	$	9,701,377	$	6,642	$	9,708,019	$	18,334,265	$	718,051,525	$	746,093,809
2013
Commercial and Agricultural
Commercial	$	581,281	$	-	$	581,281	$	1,646,418	$	45,879,749	$	48,107,448
Agricultural		81,036		-		81,036		-		10,584,902		10,665,938
Real Estate
Commercial Construction		139,826		-		139,826		8,221,745		44,377,212		52,738,783
Residential Construction		-		-		-		-		6,549,260		6,549,260
Commercial		2,287,341		-		2,287,341		7,366,703		332,129,494		341,783,538
Residential		5,273,586		-		5,273,586		4,933,420		196,050,921		206,257,927
Farmland		350,718		-		350,718		1,629,611		45,054,097		47,034,426
Consumer and Other
Consumer		453,580		3,991		457,571		307,456		24,910,533		25,675,560
Other		198,451		-		198,451		9,146		12,197,985		12,405,582
Total Loans	$	9,365,819	$	3,991	$	9,369,810	$	24,114,499	$	717,734,153	$	751,218,462

- 22 -

(4) Loans (Continued)

During its review of impaired loans, the Company determined the majority of its exposures on these loans were known losses.  As a result, the exposures were charged off, reducing the specific allowances on impaired loans.  Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $591,900, $968,700 and $1,634,600 for the years ended December 31, 2014, 2013 and 2012, respectively.

The following table details impaired loan data as of December 31, 2014:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected
With No Related Allowance Recorded
Commercial	$	310,447	$	308,817	$	-	$	679,267	$	9,248		$	17,973
Agricultural		50,163		44,605		-		50,959		(6,029	)		3,000
Commercial Construction		9,573,141		3,463,502		-		3,376,033		13,111			12,833
Commercial Real Estate		17,129,876		16,227,379		-		18,350,015		462,355			474,936
Residential Real Estate		9,136,987		7,600,073		-		5,690,573		312,024			306,859
Farmland		1,450,759		1,449,226		-		949,003		(8,518	)		17,273
Consumer		201,695		201,695		-		211,775		14,455			15,495
Other		206,894		195,497		-		197,519		5,874			10,677
		38,059,962		29,490,794		-		29,505,144		802,520			859,046
With An Allowance Recorded
Commercial		96,580		96,580		96,580		419,464		(299	)		-
Agricultural		-		-		-		-		-			-
Commercial Construction		207,308		136,369		53,947		1,528,817		375			375
Commercial Real Estate		6,135,238		6,135,238		456,941		6,415,086		60,629			50,468
Residential Real Estate		2,072,919		2,065,158		414,684		1,829,102		84,177			86,472
Farmland		396,048		396,048		28,962		529,555		13,077			12,210
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-
		8,908,093		8,829,393		1,051,114		10,722,024		157,959			149,525
Total
Commercial		407,027		405,397		96,580		1,098,731		8,949			17,973
Agricultural		50,163		44,605		-		50,959		(6,029	)		3,000
Commercial Construction		9,780,449		3,599,871		53,947		4,904,850		13,486			13,208
Commercial Real Estate		23,265,114		22,362,617		456,941		24,765,101		522,984			525,404
Residential Real Estate		11,209,906		9,665,231		414,684		7,519,675		396,201			393,331
Farmland		1,846,807		1,845,274		28,962		1,478,558		4,559			29,483
Consumer		201,695		201,695		-		211,775		14,455			15,495
Other		206,894		195,497		-		197,519		5,874			10,677
	$	46,968,055	$	38,320,187	$	1,051,114	$	40,227,168	$	960,479		$	1,008,571

- 23 -

(4) Loans (Continued)

The following table details impaired loan data as of December 31, 2013:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected
With No Related Allowance Recorded
Commercial	$	305,272	$	305,272	$	-	$	216,057	$	24,494		$	25,193
Agricultural		-		-		-		9,803		-			-
Commercial Construction		7,856,411		4,750,157		-		4,105,370		34,908			41,164
Commercial Real Estate		20,120,403		19,252,946		-		13,198,988		493,940			503,392
Residential Real Estate		7,836,718		6,361,592		-		4,564,666		224,439			209,330
Farmland		302,629		302,629		-		1,858,654		803			869
Consumer		313,194		307,456		-		252,944		18,469			21,109
Other		9,146		9,146		-		2,287		556			575
		36,743,773		31,289,198		-		24,208,769		797,609			801,632
With An Allowance Recorded
Commercial		1,452,798		1,452,798		433,714		1,689,125		14,845			20,748
Agricultural		-		-		-		-		-			-
Commercial Construction		5,922,674		3,471,587		830,546		5,025,176		(159	)		-
Commercial Real Estate		5,874,473		5,874,473		423,685		11,072,314		157,536			148,495
Residential Real Estate		1,949,301		1,849,301		526,005		3,661,706		25,739			24,414
Farmland		1,326,982		1,326,982		85,500		663,903		44,638			46,930
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-
		16,526,228		13,975,141		2,299,450		22,112,224		242,599			240,587
Total
Commercial		1,758,070		1,758,070		433,714		1,905,182		39,339			45,941
Agricultural		-		-		-		9,803		-			-
Commercial Construction		13,779,085		8,221,744		830,546		9,130,546		34,749			41,164
Commercial Real Estate		25,994,876		25,127,419		423,685		24,271,302		651,476			651,887
Residential Real Estate		9,786,019		8,210,893		526,005		8,226,372		250,178			233,744
Farmland		1,629,611		1,629,611		85,500		2,522,557		45,441			47,799
Consumer		313,194		307,456		-		252,944		18,469			21,109
Other		9,146		9,146		-		2,287		556			575
	$	53,270,001	$	45,264,339	$	2,299,450	$	46,320,993	$	1,040,208		$	1,042,219

- 24 -

(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 our 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.

- 25 -

(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, 2014.  The following tables present the number of loan contracts restructured during the 12 months ended December 31, 2014 and 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.

Troubled Debt Restructurings
2014	# of Contracts		Pre-Modification		Post-Modification
Farmland		1	$	400,778	$	400,778
Commercial Construction		1		349,976		349,976
Commercial Real Estate		1		1,771,395		1,775,407
Residential Real Estate		1		49,194		49,194
Total Loans		4	$	2,571,343	$	2,575,355
2013
Commercial		1	$	83,748	$	81,277
Commercial Construction		2		228,633		225,959
Commercial Real Estate		1		225,852		225,852
Residential Real Estate		4		1,885,700		1,764,399
Total Loans		8	$	2,423,933	$	2,297,487
2012
Commercial		1	$	107,749	$	107,749
Commercial Real Estate		1		56,835		56,835
Residential Real Estate		5		1,082,585		1,079,614
Total Loans		7	$	1,247,169	$	1,244,198

- 26 -

(4) Loans (Continued)

Troubled debt restructurings that subsequently defaulted as of December 31 are as follows:

	2014				2013				2012
	# of Contracts		Recorded Investment		# of Contracts		Recorded Investment		# of Contracts		Recorded Investment
Commercial		-	$	-		1	$	81,277		-	$	-
Commercial Real Estate		-		-		-		-		1		203,291
Residential Real Estate		-		-		-		-		1		10,000
Total Loans		-	$	-		1	$	81,277		2	$	213,291

At December 31, 2014, all restructured loans were performing as agreed.  During 2013 and 2012, restructured loans totaling $81,277 and $10,000 failed to continue to perform as agreed and were charged off in August 2013 and January 2012, respectively.

(5) Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31 are as follows:

	2014			2013			2012
Balance, Beginning of Year	$	11,805,986		$	12,736,921		$	15,649,594
Provision for Loan Losses		1,308,000			4,485,000			6,784,767
Loans Charged Off		(5,104,491	)		(6,227,716	)		(10,454,175	)
Recoveries of Loans Previously Charged Off		792,821			811,781			756,735
Balance, End of Year	$	8,802,316		$	11,805,986		$	12,736,921

- 27 -

(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.

2014	Beginning Balance		Charge-Offs			Recoveries		Provision		Ending Balance
Commercial and Agricultural
Commercial	$	1,017,073	$	(624,944	)	$	76,002	$	29,430	$	497,561
Agricultural		293,886		-			2,700		7,586		304,172
Real Estate
Commercial Construction		1,782,179		(1,543,099	)		485,005		498,610		1,222,695
Residential Construction		138,092		-			-		-		138,092
Commercial		4,379,276		(1,326,825	)		90,042		522,284		3,664,777
Residential		3,278,269		(1,033,966	)		31,127		149,897		2,425,327
Farmland		311,494		(233,580	)		20,000		5,886		103,800
Consumer and Other
Consumer		243,253		(342,077	)		72,477		93,261		66,914
Other		362,464		-			15,468		1,046		378,978
	$	11,805,986	$	(5,104,491	)	$	792,821	$	1,308,000	$	8,802,316
2013
Commercial and Agricultural
Commercial	$	981,021	$	(120,690	)	$	55,829	$	100,913	$	1,017,073
Agricultural		296,175		(34,502	)		6,200		26,013		293,886
Real Estate
Commercial Construction		1,890,200		(2,071,162	)		253,459		1,709,682		1,782,179
Residential Construction		138,092		-			-		-		138,092
Commercial		5,162,839		(2,872,408	)		297,984		1,790,861		4,379,276
Residential		3,405,947		(706,242	)		64,583		513,981		3,278,269
Farmland		290,526		(20,977	)		21,762		20,183		311,494
Consumer and Other
Consumer		227,774		(397,822	)		93,520		319,781		243,253
Other		344,347		(3,913	)		18,444		3,586		362,464
	$	12,736,921	$	(6,227,716	)	$	811,781	$	4,485,000	$	11,805,986

- 28 -

(5) Allowance for Loan Losses (Continued)

2012	Beginning Balance		Charge-Offs			Recoveries		Provision		Ending Balance
Commercial and Agricultural
Commercial	$	1,070,560	$	(653,389	)	$	139,802	$	424,048	$	981,021
Agricultural		297,168		(3,028	)		-		2,035		296,175
Real Estate
Commercial Construction		3,122,594		(4,106,124	)		209,352		2,664,378		1,890,200
Residential Construction		138,092		-			-		-		138,092
Commercial		6,448,064		(4,325,642	)		232,880		2,807,537		5,162,839
Residential		3,695,357		(960,620	)		47,690		623,520		3,405,947
Farmland		364,663		(224,725	)		4,716		145,872		290,526
Consumer and Other
Consumer		205,154		(169,249	)		81,956		109,913		227,774
Other		307,942		(11,398	)		40,339		7,464		344,347
	$	15,649,594	$	(10,454,175	)	$	756,735	$	6,784,767	$	12,736,921

The loss history period used at December 31, 2014 and 2013 was based on the loss rate from the eight quarters ended September 30, 2014 and 2013, respectively.  During 2012, the Company changed its loss history period used in calculating the ALLL from a one-year average to a rolling eight-quarter average.   At December 31, 2012 the loss history period used was based on the annual loss rate from calendar year 2011 and the first three quarters of 2012.

During 2014 management changed its methodology for calculating the allowance for loan losses to better reflect the estimated losses inherent in the portfolio.  Specific changes included:

· Reducing the historical loss ratios by including loan loss recoveries in the calculation.  Previously, management only included the loan charge-off amount and did not consider the effect of subsequent recoveries.

· Reducing the balance of those loans which are guaranteed by government agencies, such as SBA loans.  Previously, the entire balance of such loans was considered in the calculation of the general reserves; however, beginning in 2014, only the non-guaranteed portion of these loans is subject to the loss calculation.

Management feels these changes better align the calculation of the allowance for loan losses with the direction of the loan portfolio.  These changes did not result in a significant change to the recorded allowance for loan loss balance.

During the third quarter of 2013, management implemented a change to its methodology for calculating the allowance for loan losses.  This change was intended to better reflect the current position of the loan portfolio.  Prior to the third quarter, the allowance for loan loss calculation incorporated a qualitative factor related to improvements in credit administration.  These improvements, which began in 2008, included organizational changes to credit administration, specifically related to managing past due loans, grading of loans, recognition of losses and underwriting of new loans.  Primary among the organizational changes was the appointment of experienced lending officers to oversee the lending function, as well as the appointment of a chief credit officer.  Management feels these organizational changes are now fully implemented, as evidenced by a lower charge-off rate, and therefore, the qualitative factor is no longer relevant.  The removal of this qualitative factor did not result in a significant adjustment to the recorded allowance for loan loss balance.

- 29 -

(5) Allowance for Loan Losses (Continued)

The Company determines its individual reserves during its quarterly review of substandard loans.  This process involves reviewing all loans with a risk grade of 6 or greater and an outstanding balance of $250,000 or more, regardless of the loans impairment classification.  Effective March 31, 2013, management increased the dollar threshold of this review process from $50,000 to $250,000.  The threshold change resulted in loans totaling $4.1 million at December 31, 2013 being removed from the individual impairment review process and being placed in the collective review process.

Since not all loans in the substandard category are considered impaired, this quarterly review process may result in the identification of specific reserves on nonimpaired loans.  Management considers those loans graded substandard, but not classified as impaired, to be higher risk loans and, therefore, makes specific allocations to the allowance for those loans if warranted.  The total of such loans is $9,356,253 and $6,664,935 as of December 31, 2014 and 2013, respectively.  Specific allowance allocations were made for these loans totaling $747,982 and $260,742 as of December 31, 2014 and 2013, 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, 2014, impaired loans totaling $3,885,411 were below the $250,000 review threshold and were not individually reviewed for impairment.  Those loans were subject to the Bank’s general loan loss reserve methodology and are included in the “Collectively Evaluated for Impairment” column of the following tables.  Likewise, at December 31, 2013 and 2012, impaired loans totaling $2,821,199 and $1,026,624, respectively, were below the $250,000 and $50,000 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.

	Ending Allowance Balance						Ending Loan Balance
2014	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and Agricultural
Commercial	$	96,580	$	400,981	$	497,561	$	96,580	$	50,863,685	$	50,960,265
Agricultural		-		304,172		304,172		-		16,689,444		16,689,444
Real Estate
Commercial Construction		53,947		1,168,748		1,222,695		3,384,377		47,874,593		51,258,970
Residential Construction		-		138,092		138,092		-		11,220,683		11,220,683
Commercial		456,941		3,207,836		3,664,777		21,693,061		310,537,786		332,230,847
Residential		414,684		2,010,643		2,425,327		7,559,965		196,192,655		203,752,620
Farmland		28,962		74,838		103,800		1,700,793		48,250,191		49,950,984
Consumer and Other
Consumer		-		66,914		66,914		-		22,820,314		22,820,314
Other		-		378,978		378,978		-		7,209,682		7,209,682
Total End of Year Balance	$	1,051,114	$	7,751,202	$	8,802,316	$	34,434,776	$	711,659,033	$	746,093,809

- 30 -

(5) Allowance for Loan Losses (Continued)

	Ending Allowance Balance						Ending Loan Balance
2013	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and Agricultural
Commercial	$	433,714	$	583,359	$	1,017,073	$	1,542,058	$	46,565,390	$	48,107,448
Agricultural		-		293,886		293,886		-		10,665,938		10,665,938
Real Estate
Commercial Construction		830,546		951,633		1,782,179		7,971,298		44,767,485		52,738,783
Residential Construction		-		138,092		138,092		-		6,549,260		6,549,260
Commercial		423,685		3,955,591		4,379,276		24,757,942		317,025,596		341,783,538
Residential		526,005		2,752,264		3,278,269		6,545,490		199,712,437		206,257,927
Farmland		85,500		225,994		311,494		1,617,206		45,417,220		47,034,426
Consumer and Other
Consumer		-		243,253		243,253		-		25,675,560		25,675,560
Other		-		362,464		362,464		9,146		12,396,436		12,405,582
Total End of Year Balance	$	2,299,450	$	9,506,536	$	11,805,986	$	42,443,140	$	708,775,322	$	751,218,462
2012
Commercial and Agricultural
Commercial	$	462,555	$	518,466	$	981,021	$	2,512,133	$	53,172,359	$	55,684,492
Agricultural		-		296,175		296,175		-		6,210,953		6,210,953
Real Estate
Commercial Construction		1,732,534		157,666		1,890,200		13,892,135		39,915,921		53,808,056
Residential Construction		-		138,092		138,092		-		5,852,238		5,852,238
Commercial		1,236,526		3,926,313		5,162,839		28,205,405		306,180,772		334,386,177
Residential		840,492		2,565,455		3,405,947		8,022,249		195,822,273		203,844,522
Farmland		-		290,526		290,526		2,393,775		46,663,086		49,056,861
Consumer and Other
Consumer		-		227,774		227,774		28,007		29,749,769		29,777,776
Other		-		344,347		344,347		17,491		8,411,445		8,428,936
Total End of Year Balance	$	4,272,107	$	8,464,814	$	12,736,921	$	55,071,195	$	691,978,816	$	747,050,011

- 31 -

(6) Premises and Equipment

Premises and equipment are comprised of the following as of December 31:

	2014			2013
Land	$	8,270,678		$	7,790,167
Building		23,894,943			23,832,454
Furniture, Fixtures and Equipment		12,243,988			13,846,579
Leasehold Improvements		990,626			970,346
Construction in Progress		14,090			236,591
		45,414,325			46,676,137
Accumulated Depreciation		(20,453,880	)		(21,799,668	)
	$	24,960,445		$	24,876,469

Depreciation charged to operations totaled $1,595,253 in 2014, $1,527,392 in 2013 and $1,676,820 in 2012.

Certain Company facilities and equipment are leased under various operating leases.  Rental expense approximated $613,000 for 2014, $490,000 for 2013 and $447,000 for 2012.

Future minimum rental payments as of December 31, 2014 are as follows:

Year Ending December 31	Amount
2015	$	129,457
2016		73,883
2017		38,500
	$	241,840

(7) Other Real Estate Owned

The aggregate carrying amount of Other Real Estate Owned (OREO) at December 31, 2014, 2013 and 2012 was $10,401,832, $15,502,462 and $15,940,693, 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 2014, 2013 and 2012 as of December 31:

	2014			2013			2012
Balance, Beginning of Year	$	15,502,462		$	15,940,693		$	20,445,085
Additions		3,852,848			10,251,006			9,729,174
Sales of OREO		(7,102,136	)		(7,804,080	)		(9,711,890	)
Loss on Sale		(844,515	)		(1,563,739	)		(1,818,967	)
Provision for Losses		(1,006,827	)		(1,321,418	)		(2,702,709	)
Balance, End of Year	$	10,401,832		$	15,502,462		$	15,940,693

- 32 -

(8) Other Intangible Assets

The following is an analysis of the core deposit intangible activity for the years ended December 31:

	Core Deposit Intangible		Accumulated Amortization			Net Core Deposit Intangible
Core Deposit Intangible
Balance, December 31, 2012	$	1,056,693	$	(833,183	)	$	223,510
Amortization Expense		-		(35,749	)		(35,749	)
Balance, December 31, 2013		1,056,693		(868,932	)		187,761
Amortization Expense		-		(35,749	)		(35,749	)
Balance, December 31, 2014	$	1,056,693	$	(904,681	)	$	152,012

Amortization expense related to the core deposit intangible was $35,749, $35,749 and $35,748 for the years ended December 31, 2014, 2013 and 2012.  Amortizations expense will continue at an annual rate of approximately $35,749 through the first quarter of 2019, at which point the core deposit will be fully amortized.

(9) Income Taxes

The components of income tax (benefit) expense for the years ended December 31 are as follows:

	2014		2013		2012
Current Federal (Benefit) Expense	$	1,335,337	$	156,642	$	(6,114	)
Deferred Federal Expense		1,932,950		2,178,222		1,204,439
Federal Income Tax Expense		3,268,287		2,334,864		1,198,325
Current State Income Tax  Expense		-		-		2,526
Federal and State Income Tax Expense	$	3,268,287	$	2,334,864	$	1,200,851

The federal income tax (benefit) expense of $3,268,287 in 2014, $2,334,864 in 2013 and $1,198,325 in 2012 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:

	2014			2013			2012
Statutory Federal Income Taxes	$	3,671,971		$	2,367,729		$	1,306,331
Tax-Exempt Interest		(74,138	)		(104,307	)		(89,983	)
Premiums on Officers’ Life Insurance		(186,712	)		(111,749	)		(59,603	)
Meal and Entertainment Disallowance		14,044			15,319			14,574
Other		(156,878	)		167,872			27,006
Actual Federal Income Taxes	$	3,268,287		$	2,334,864		$	1,198,325

- 33 -

(9) Income Taxes (Continued)

Deferred taxes in the accompanying consolidated balance sheets as of December 31 include the following:

	2014			2013
Deferred Tax Assets
Allowance for Loan Losses	$	2,992,787		$	4,014,035
Other Real Estate		1,178,278			1,404,812
Deferred Compensation		287,365			303,380
Investments		340,000			340,000
Goodwill		256,714			301,238
Net Operating Loss Carryforward		-			730,484
Other		427,924			343,919
		5,483,068			7,437,868
Deferred Tax Liabilities
Premises and Equipment		(1,299,216	)		(1,322,377	)
Other		(4,185	)		(2,874	)
		(1,303,401	)		(1,325,251	)
Deferred Tax Assets (Liabilities) on Unrealized Securities Gains (Losses)		2,495,896			4,550,362
Net Deferred Tax Assets	$	6,675,563		$	10,662,979

The deferred tax assets are included in Other Assets in the consolidated balance sheets.  As discussed in Note 1, certain positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities.  An analysis of activity related to unrecognized taxes as of December 31 follows.

	2014		2013			2012
Balance, Beginning	$	42,327	$	38,676		$	33,368
Positions Taken During the Current Year		-		7,247			11,794
Reductions Resulting from Lapse of Statutes of Limitation		42,327		(3,596	)		(6,486	)
Balance, Ending	$	-	$	42,327		$	38,676

The net decrease of $42,327 is included in income tax expense for the year ended December 31, 2014, while the net increase of $3,651 is included in income tax expense for the year ended December 31, 2013.

- 34 -

(10) Deposits

The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $511,387 and $400,552 as of December 31, 2014 and 2013, respectively.

Components of interest-bearing deposits as of December 31 are as follows:

	2014		2013
Interest-Bearing Demand	$	363,501,727	$	357,290,975
Savings		59,215,257		54,094,617
Time, $100,000 and Over		210,502,901		220,672,794
Other Time		217,743,826		240,210,393
	$	850,963,711	$	872,268,779

At December 31, 2014 and December 31, 2013, the Company had brokered deposits of $26,298,267 and $26,579,934, respectively.  All of these brokered deposits represent Certificate of Deposit Account Registry Service (CDARS) reciprocal deposits.  The CDARS deposits are ones in which customers placed core deposits into the CDARS program for FDIC insurance coverage and the Company receives reciprocal brokered deposits in a like amount.  The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000 was $140,832,026 and $148,388,694 as of December 31, 2014 and December 31, 2013, respectively.

As of December 31, 2014, the scheduled maturities of certificates of deposit are as follows:

Year	Amount
2015	$	302,584,884
2016		72,869,687
2017		25,349,468
2018		19,773,611
2019 and Thereafter		7,669,077
	$	428,246,727

(11) Other Borrowed Money

Other borrowed money at December 31 is summarized as follows:

	2014		2013
Federal Home Loan Bank Advances	$	40,000,000	$	40,000,000

Advances from the Federal Home Loan Bank (FHLB) have maturities ranging from 2017 to 2020 and interest rates ranging from 0.49 percent to 4.75 percent.  As collateral on the outstanding FHLB advances, the Company has provided a blanket lien on its portfolio of qualifying residential first mortgage loans and commercial loans.  At December 31, 2014, the book value of those loans pledged $101,128,937.  At December 31, 2014, the Company had remaining credit availability from the FHLB of $126,620,000.  The Company may be required to pledge additional qualifying collateral in order to utilize the full amount of the remaining credit line.

- 35 -

(11) Other Borrowed Money (Continued)

The aggregate stated maturities of other borrowed money at December 31, 2014 are as follows:

Year	Amount
2015	$	-
2016		-
2017		9,000,000
2018		20,500,000
2019 and Thereafter		10,500,000
	$	40,000,000

At December 31, 2014, $35,000,000 of FHLB advances are subject to fixed rates of interest, while the remaining $5,000,000 are subject to floating interest rates which will convert to fixed rates of interests next year.

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, 2014.

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, 2014, 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.

In addition, at December 31, 2014, the Company had an available repurchase agreement line of credit with a third party totaling $50,000,000.  Use of this credit facility is subject to the underwriting and risk management policies of the third party in effect at the time of the request.  Such policies may take into consideration current market conditions, the current financial condition of the Company and the ability of the Company to provide adequate securities as collateral for the transaction, among other factors.

(12) Subordinated Debentures (Trust Preferred Securities)

Total

3-Month

Added

Interest

5-Year

Description

Date

Amount

Libor Rate

Points

Rate

Maturity

Call Option

(In Thousands)

Colony Bankcorp Statutory Trust III

6/17/2004

$

4,640

0.24260

2.68

2.92260

6/14/2034

6/17/2009

Colony Bankcorp Capital Trust I

4/13/2006

5,155

0.25510

1.50

1.75510

4/13/2036

4/13/2011

Colony Bankcorp Capital Trust II

3/12/2007

9,279

0.25660

1.65

1.90660

3/12/2037

3/12/2012

Colony Bankcorp Capital Trust III

9/14/2007

5,155

0.23260

1.40

1.63260

9/14/2037

9/14/2012

The Trust Preferred Securities are recorded as subordinated debentures on the consolidated balance sheets, but 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.

- 36 -

(12) Subordinated Debentures (Trust Preferred Securities) (Continued)

On February 13, 2012, the Company announced the suspension of the quarterly interest payments on the Trust Preferred Securities.  Under the terms of the trust documents, the Company may defer payments of interest for up to 20 consecutive quarterly periods without default or penalty.  On November 17, 2014, the Company reinstated interest payments on the Trust Preferred Securities and paid $1,069,695 to bring to current status.

(13) Preferred Stock

At December 31, 2014, the Company had 28,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock) issued and outstanding with private investors.  The Company also had a warrant (the Warrant) to purchase up to 500,000 shares of the Company’s common stock outstanding with private investors.  Both the Preferred Stock and the Warrant originated in 2009 through transactions with the United States Department of the Treasury and were subsequently sold to the public through an auction process during 2013.

The Preferred Stock qualifies as Tier 1 capital and is nonvoting, other than class voting rights on certain matters that could adversely affect the Preferred Stock.  The Preferred Stock may be redeemed by the Company at the liquidation preference of $1,000 per share, plus any accrued and unpaid dividends.  The Warrant may be exercised on or before January 9, 2019 at an exercise price of $8.40 per share.  No voting rights may be exercised with respect to the shares of the Warrant until the Warrant has been exercised.

The Preferred Stock requires a cumulative cash dividend be paid quarterly at a rate of 9 percent per annum.  Prior to January 9, 2014 the annual dividend rate for the Preferred Stock was 5 percent.  Unpaid dividends on the Preferred Stock must be declared and set aside for the benefit of the holders of the Preferred Stock before any dividend may be declared on common stock.  On February 13, 2012, the Company announced the suspension of dividends on Preferred Stock.  On November 17, 2014, the Company reinstated dividend payments on the Preferred Stock and paid $5,492,749 of accumulated dividends in arrears to the holders of the Preferred Stock.

(14) Restricted Stock - Unearned Compensation

In April 2004, the stockholders of Colony Bankcorp, Inc. adopted a restricted stock grant plan which awards certain executive officers common shares of the Company.  The maximum number of shares which may be subject to restricted stock awards (split-adjusted) is 143,500.  To date, 53,256 shares have been issued under this plan and 17,798 shares have been forfeited; thus, the remaining shares which may be issued are 108,042 at December 31, 2014.  During 2014, there were no shares of restricted stock issued or forfeited. The shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity.  The cost of the shares, when issued, is amortized against earnings using the straight-line method over the restriction period, typically three years.

(15) 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 2014, the Company made a total contribution of $401,497 to the Plan.  The Company made no discretionary contributions in 2013 or 2012.

- 37 -

(16) 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, 2014 and 2013, the following financial instruments were outstanding whose contract amounts represent credit risk:

	Contract Amount
	2014		2013
Commitments to Extend Credit	$	68,742,000	$	65,688,000
Standby Letters of Credit		1,762,000		1,411,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  The commitments for equity lines of credit may expire without being drawn upon.  Therefore, the total commitment amounts do not necessarily represent future cash requirements.  The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers.  These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

Standby and performance letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party.  Those letters of credit are primarily issued to support public and private borrowing arrangements.  Essentially all letters of credit issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Legal Contingencies.  In the ordinary course of business, there are various legal proceedings pending against Colony and its subsidiary.  The aggregate liabilities, if any, arising from such proceedings would not, in the opinion of management, have a material adverse effect on Colony’s consolidated financial position.

- 38 -

(17) Deferred Compensation Plan

Colony Bank, the wholly-owned subsidiary, has deferred compensation plans covering certain former directors and certain officers choosing to participate through individual deferred compensation contracts.  In accordance with terms of the contracts, the Bank is committed to pay the participant’s deferred compensation over a specified number of years, beginning at age 65.  In the event of a participant’s death before age 65, payments are made to the participant’s named beneficiary over a specified number of years, beginning on the first day of the month following the death of the participant.

Liabilities accrued under the plans totaled $845,192 and $892,294 as of December 31, 2014 and 2013, respectively.  Benefit payments under the contracts were $112,605 in 2014 and $188,240 in 2013.  Provisions charged to operations totaled $69,653 in 2014, $75,777 in 2013 and $82,250 in 2012.

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 $167,911 in 2014, $164,073 in 2013 and $175,302 in 2012.

(18) Supplemental Cash Flow Information

Cash payments for the following were made during the years ended December 31:

	2014		2013		2012
Interest Expense	$	7,898,543	$	7,111,361	$	10,942,113
Income Taxes	$	113,000	$	173,883	$	-

Noncash financing and investing activities for the years ended December 31 are as follows:

	2014		2013			2012
Acquisitions of Real Estate Through Loan Foreclosures	$	3,852,848	$	10,251,006		$	9,729,174
Change In Unrealized Gain (Loss) on AFS Investment Securities	$	6,409,171	$	(13,523,050	)	$	(3,120,540	)

(19) 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:

	2014			2013
Balance, Beginning	$	4,064,588		$	4,776,492
New Loans		6,406,713			7,610,259
Repayments		(7,237,352	)		(8,322,163	)
Balance, Ending	$	3,233,949		$	4,064,588

- 39 -

(20) Fair Value of Financial Instruments and Fair Value Measurements

Generally accepted accounting standards in the U.S. require disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value.  The assumptions used in the estimation of the fair value of Colony Bankcorp, Inc. and Subsidiary’s financial instruments are detailed hereafter.  Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques.  The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Cash and Short-Term Investments - For cash, due from banks, bank-owned deposits and federal funds sold, the carrying amount is a reasonable estimate of fair value and is classified Level 1.

Investment Securities - Fair values for investment securities are based on quoted market prices where available and classified as Level 1.  If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments and classified as 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 - Fair value approximates carrying value due to the variable interest rates of the subordinated debentures.  Subordinated Debentures are classified as Level 1.

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.

- 40 -

(20) 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:

	Carrying		Estimated		Level
2014	Amount		Fair Value		1		2		3
	(in Thousands)
Assets
Cash and Short-Term Investments	$	65,811	$	65,811	$	65,811	$	-	$	-
Investment Securities Available for Sale		274,595		274,595		-		273,647		948
Investment Securities Held to Maturity		30		30		-		30		-
Federal Home Loan Bank Stock		2,831		2,831		2,831		-		-
Loans, Net		736,930		738,948		-		731,170		7,778
Bank-Owned Life Insurance		14,531		14,531		14,531		-		-
Liabilities
Deposits		979,303		980,874		551,057		429,817		-
Subordinated Debentures		24,229		24,229		24,229		-		-
Other Borrowed Money		40,000		41,962		-		41,962		-
2013
Assets
Cash and Short-Term Investments	$	68,147	$	68,147	$	68,147	$	-	$	-
Investment Securities Available for Sale		263,258		263,258		-		262,317		941
Investment Securities Held to Maturity		37		37		-		37		-
Federal Home Loan Bank Stock		3,164		3,164		3,164		-		-
Loans, Net		739,052		741,112		-		729,436		11,676
Bank-Owned Life Insurance		10,165		10,165		10,165		-		-
Liabilities
Deposits		987,529		989,101		526,646		462,455		-
Subordinated Debentures		24,229		24,229		24,229		-		-
Other Borrowed Money		40,000		42,074		-		42,074		-

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

- 41 -

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements

Generally accepted accounting principles related to Fair Value Measurements define fair value, establish a framework for measuring fair value, establish 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.

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.

- 42 -

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements (Continued)

Assets (Continued)

Impaired Loans -Impaired loans are those loans which the Company has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Other Real Estate - Other real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned.  Typically, an external, third-party appraisal is performed on the collateral upon transfer into the other real estate owned account to determine the asset’s fair value.  Subsequent adjustments to the collateral’s value may be based upon either updated third-party appraisals or management’s knowledge of the collateral and the current real estate market conditions.   Appraised amounts used in determining the asset’s fair value, whether internally or externally prepared, are discounted 10 percent to account for selling and marketing costs.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are typically significant and result in a 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.

- 43 -

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements (Continued)

Assets (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis -The following table presents the recorded amount of the Company’s assets measured at fair value on a recurring and nonrecurring basis as of December 31, 2014 and 2013, 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, 2013.  Those impaired loans and other real estate properties are shown net of the related specific reserves and valuation allowances.

			Fair Value Measurements at Reporting Date Using
2014	Total Fair Value		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	$	271,063,669	$	-	$	271,063,669	$	-
State, County and Municipal		3,530,917		-		2,582,527		948,390
	$	274,594,586	$	-	$	273,646,196	$	948,390
Nonrecurring
Impaired Loans	$	7,778,279	$	-	$	-	$	7,778,279
Other Real Estate	$	6,128,365	$	-	$	-	$	6,128,365
2013
Recurring
Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	259,348,058	$	-	$	259,348,058	$	-
State, County and Municipal		3,909,832		-		2,968,567		941,265
	$	263,257,890	$	-	$	262,316,625		941,265
Nonrecurring
Impaired Loans	$	11,675,691	$	-	$	-	$	11,675,691
Other Real Estate	$	7,019,799	$	-	$	-	$	7,019,799

Liabilities

The Company did not identify any liabilities that are required to be presented at fair value.

- 44 -

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

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, 2014 and 2013.  These tables are comprised primarily of collateral dependent impaired loans and other real estate owned:

	December 31, 2014		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Real Estate
Commercial Construction	$	82,422	Sales Comparison	Adjustment for Differences Between the Comparable Sales	(22.00)% - 38.10% (8.05%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	0.00% - 10.00% (5.00%)
Residential Real Estate		1,650,474	Sales Comparison	Adjustment for Differences Between the Comparable Sales	(2.30)% - 191.70% (94.70%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	0.00% - 10.00% (5.00%)
			Income Approach	Capitalization Rate	13.75%
Commercial Real Estate		5,678,297	Sales Comparison	Adjustment for Differences Between the Comparable Sales	0.00% - 0.00% (0.00%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	0.00% - 90.00% (45.00%)
			Income Approach	Capitalization Rate	11.00%
Farmland		367,086	Sales Comparison	Adjustment for Differences Between the Comparable Sales	(8.30)% - 252.50% (122.10%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	10.00% - 50.00% (30.00%)
Other Real Estate Owned		6,128,365	Sales Comparison	Adjustment for Differences Between the Comparable Sales	(40.00)% - 45.00% (2.50%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	0.33% - 69.36% (31.88%)
			Income Approach	Discount Rate	9.00%
				Capitalization Rate	10.00%

- 45 -

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements (Continued)

Fair Value Measurements using Significant Unobservable Inputs (Level 3) (Continued)

	December 31, 2013		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired Loans
Commercial	$	1,019,084	Sales Comparison	Adjustment for Differences Between the Comparable Sales	0.00%-15.00% (7.50%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	10.00%-50.00% (30.00%)
Real Estate
Commercial Construction		2,641,041	Sales Comparison	Adjustment for Differences Between the Comparable Sales	(16.00)%-28.00% (6.00%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	0.00%-10.00% (5.00%)
			Income Approach	Capitalization Rate	8.50%
Residential Real Estate		1,323,296	Sales Comparison	Adjustment for Differences Between the Comparable Sales	0.00%-46.00% (23.00%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	0.00%-25.00% (12.50%)
Commercial Real Estate		5,450,788	Sales Comparison	Adjustment for Differences Between the Comparable Sales	(27.20%)-216.80% (94.80%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	25.00%-90.00% (57.50%)
			Income Approach	Capitalization Rate	11.00%
Farmland		1,241,482	Sales Comparison	Adjustment for Differences Between the Comparable Sales	(55.00%)-388.00% (166.50%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	10.00%-35.00% (22.50%)
Other Real Estate Owned		7,019,799	Sales Comparison	Adjustment for Differences Between the Comparable Sales	(10.00%)-319.10% (154.55%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions	0.36%-87.81% (29.99%)
			Income Approach	Discount Rate	10.00%

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(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

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, 2014, 2013 and 2012:

	Available for Sale Securities
	2014		2013			2012
Balance, Beginning	$	941,265	$	1,138,238		$	1,122,427
Transfers into Level 3		-		-			788,933
Transfers out of Level 3		-		(41,908	)		-
Securities Purchased During the Year		-		-			-
Securities Called During the Year		-		-			(1,000,000	)
Loss on OTTI Impairment Included in Noninterest Income		-		(366,623	)		(59,568	)
Unrealized Gains Included in Other Comprehensive Income		7,125		211,558			78,201
Balance, Ending	$	948,390	$	941,265		$	1,138,238

The Company’s policy is to recognize transfers in and transfers out of levels 1, 2 and 3 as of the end of a reporting period.  During the year ended December 31, 2013, the Company had transfers out of level 3 and into level 2.  The transfers out of level 3 were the result of increased market activity for these types of securities, as well as more current credit ratings on these securities.  During the year ended December 31, 2012, the Company transferred certain state, county and municipal securities out of level 2 and into     level 3.  The transfers into level 3 were the result of decreased market activity for these types of securities, as well as a lack of current credit ratings on these securities.  There were no gains or losses recognized as a result of the transfers.  There were no transfers of securities between level 1 and level 2 for the years ended December 31, 2014, 2013 or 2012.

The following table presents quantitative information about recurring level 3 fair value measurements as of December 31, 2014 and 2013:

December 31, 2014	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
State, County and Municipal	$	948,390	Discounted Cash Flow	Discount Rate or Yield		N/A*
December 31, 2013
State, County and Municipal	$	941,265	Discounted Cash Flow	Discount Rate or Yield		N/A*

*  The Company relies on a third-party pricing service to value its municipal securities.  The details of the unobservable inputs and other adjustments used by the third-party pricing service were not readily available to the Company.

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(21) Regulatory Capital Matters

The amount of dividends payable to the parent company from the subsidiary bank is limited by various banking regulatory agencies.  Upon approval by regulatory authorities, the Bank may pay cash dividends to the parent company in excess of regulatory limitations.  Additionally, the Company suspended the payment of dividends to its stockholders in the third quarter of 2009.

The Company is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets.  The amounts and ratios as defined in regulations are presented hereafter.  Management believes, as of December 31, 2014, 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.

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(21) Regulatory Capital Matters (Continued)

The following table summarizes regulatory capital information as of December 31, 2014 and 2013 on a consolidated basis and for its wholly-owned subsidiary, as defined:

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount			Ratio
As of December 31, 2014	(In Thousands)
Total Capital to Risk-Weighted Assets
Consolidated	$	136,022		17.95	%	$	60,639		8.00	%		N/	A		N/	A
Colony Bank		127,833		16.89			60,542		8.00		$	75,678			10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated		127,220		16.78			30,320		4.00			N/	A		N/	A
Colony Bank		119,031		15.73			30,271		4.00			45,407			6.00
Tier I Capital to Average Assets
Consolidated		127,220		11.18			45,509		4.00			N/	A		N/	A
Colony Bank		119,031		10.50			45,364		4.00			56,705			5.00
As of December 31, 2013
Total Capital to Risk-Weighted Assets
Consolidated	$	129,569		17.06	%	$	60,791		8.00	%		N/	A		N/	A
Colony Bank		131,024		17.29			60,638		8.00		$	75,797			10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated		120,048		15.81			30,396		4.00			N/	A		N/	A
Colony Bank		121,521		16.03			30,319		4.00			45,478			6.00
Tier I Capital to Average Assets
Consolidated		120,048		10.57			45,419		4.00			N/	A		N/	A
Colony Bank		121,521		10.72			45,333		4.00			56,666			5.00

Effective October 22, 2014, the Board Resolution (BR) the bank had been operating under was lifted.  The BR required that, prior to declaring or paying any cash dividend to the Company, the Bank must obtain written consent of its regulators.  In November 2014, the Bank paid a $12,000,000 dividend to the Company.  This dividend was utilized to bring the interest payments of the Trust Preferred Securities and the dividend payments of the Preferred Stock to a current status and to fund holding company operations for the coming year.

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(22) Financial Information of Colony Bankcorp, Inc. (Parent Only)

The parent company’s balance sheets as of December 31, 2014 and 2013 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

	2014			2013
Cash	$	5,750,652		$	1,422,289
Premises and Equipment, Net		1,199,639			1,272,965
Investment in Subsidiary, at Equity		115,066,948			114,559,866
Other		1,708,380			1,221,285
Total Assets	$	123,725,619		$	118,476,405
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Dividends Payable	$	315,000		$	3,119,146
Other		154,307			1,174,020
		469,307			4,293,166
Subordinated Debt		24,229,000			24,229,000
Stockholders’ Equity
Preferred Stock, Stated Value $1,000; Authorized 10,000,000 Shares, Issued 28,000 Shares		28,000,000			28,000,000
Common Stock, Par Value $1; Authorized 20,000,000 Shares, Issued 8,439,258 Shares as of December 31, 2014 and 2013		8,439,258			8,439,258
Paid-In Capital		29,145,094			29,145,094
Retained Earnings		38,287,934			33,444,913
Accumulated Other Comprehensive Loss, Net of Tax		(4,844,974	)		(9,075,026	)
		99,027,312			89,954,239
Total Liabilities and Stockholders’ Equity	$	123,725,619		$	118,476,405

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(22) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued)

COLONY BANKCORP, INC. (PARENT ONLY)

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

	2014			2013		2012
Income
Dividends from Subsidiary	$	12,015,572		$	1,515,549	$	17,372
Management Fees		581,334			581,334		590,422
Other		100,269			96,953		101,397
	$	12,697,175			2,193,836		709,191
Expenses
Interest		517,381			516,641		554,004
Amortization		938			2,250		2,250
Salaries and Employee Benefits		782,152			748,149		735,919
Other		538,847			543,139		558,151
		1,839,318			1,810,179		1,850,324
Income (Loss) Before Taxes and Equity in Undistributed Earnings of Subsidiary		10,857,857			383,657		(1,141,133	)
Income Tax Benefits		396,738			406,518		365,691
Income (Loss) Before Equity in Undistributed Earnings of Subsidiary		11,254,595			790,175		(775,442	)
Equity in Undistributed Earnings of Subsidiary		(3,722,970	)		3,838,870		3,416,740
Net Income		7,531,625			4,629,045		2,641,298
Preferred Stock Dividends		2,688,604			1,508,761		1,435,385
Net Income Available to Common Stockholders	$	4,843,021		$	3,120,284	$	1,205,913

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(22) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued)

COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31

	2014			2013			2012
Net Income	$	7,531,625		$	4,629,045		$	2,641,298
Other Comprehensive Income (Loss)
Gains (Losses) on Securities Arising During the Year		6,432,906			(13,886,854	)		(283,076	)
Tax Effect		(2,187,189	)		4,721,531			96,246
Realized Gains (Losses) on Sale of AFS Securities		(23,735	)		(2,819	)		(2,897,032	)
Tax Effect		8,070			959			984,991
Impairment Loss on Securities		-			366,623			59,568
Tax Effect		-			(124,652	)		(20,253	)
Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects		4,230,052			(8,925,212	)		(2,059,556	)
Comprehensive Income (Loss)	$	11,761,677		$	(4,296,167	)	$	581,742

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(22) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued)

COLONY BANKCORP, INC. (PARENT ONLY)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

	2014			2013			2012
Cash Flows from Operating Activities
Net Income	$	7,531,625		$	4,629,045		$	2,641,298
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities
Depreciation and Amortization		75,347			80,711			93,427
Equity in Undistributed Earnings of Subsidiary		3,722,970			(3,838,870	)		(3,416,740	)
Change in Interest Payable		(1,069,695	)		516,641			529,922
Other		(437,115	)		(390,962	)		(405,379	)
		9,823,132			996,565			(557,472	)
Cash Flows from Investing Activities
Purchases of Premises and Equipment		(2,020	)		(68,708	)		-
Cash Flows from Financing Activities
Dividends Paid on Preferred Stock		(5,492,749	)		-			-
Increase (Decrease) in Cash		4,328,363			927,857			(557,472	)
Cash, Beginning		1,422,289			494,432			1,051,904
Cash, Ending	$	5,750,652		$	1,422,289		$	494,432

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(23) Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during each period.  Diluted earnings per share reflects the potential dilution of restricted stock and common stock warrants.  Net income available to common stockholders represents net income (loss) after preferred stock dividends.  The following table presents earnings per share for the years ended December 31, 2014, 2013 and 2012:

	2014		2013		2012
Numerator
Net Income (Loss) Available to Common Stockholders	$	4,843,021	$	3,120,284	$	1,205,913
Denominator
Weighted Average Number of Common Shares Outstanding for Basic Earnings Per Common Share		8,439,258		8,439,258		8,439,258
Dilutive Effect of Potential Common Stock
Restricted Stock		-		-		-
Stock Warrants		-		-		-
Weighted-Average Number of Shares Outstanding for Diluted Earnings Per Common Share		8,439,258		8,439,258		8,439,258
Earnings (Loss) Per Share - Basic	$	0.57	$	0.37	$	0.14
Earnings (Loss) Per Share - Diluted	$	0.57	$	0.37	$	0.14

For the years ended December 31, 2014, 2013 and 2012, respectively, the Company has excluded 500,000 shares of common stock equivalents because the strike price of the common stock equivalents would cause them to have an anti-dilutive effect.

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