Colony Bankcorp (CBAN) 10-K 2018 FY Annual report

Exhibit 13

  389 Mulberry Street | Macon, Georgia 31201 Post Office Box One | Macon, Georgia 31202 478-746-6277 | mmmcpa.com

March 15, 2019

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Colony Bankcorp, Inc.

Opinions on the Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Colony Bankcorp, Inc. and subsidiary (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Basis for Opinions

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included under Item 9A, Controls and Procedures, in the Company’s Annual Report on Form 10-K. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

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Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC

We have served as the Company’s auditor since 1995.

Macon, Georgia

March 15, 2019

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

	2018			2017
ASSETS
Cash and Cash Equivalents
Cash and Due from Banks	$	10,376,876		$	23,145,136
Interest-Bearing Deposits		49,778,576			34,667,715
Investment Securities
Available for Sale, at Fair Value		353,066,166			354,246,904
Federal Home Loan Bank Stock, at Cost		2,977,900			3,042,900
Loans		782,027,368			765,283,855
Allowance for Loan Losses		(7,276,806	)		(7,507,508	)
Unearned Interest and Fees		(501,300	)		(495,500	)
		774,249,262			757,280,847
Premises and Equipment		28,831,272			27,639,430
Other Real Estate (Net of Allowance of $876,177 and $1,451,492 in 2018 and 2017, Respectively)		1,840,743			4,256,469
Goodwill		202,244			-
Other Intangible Assets		556,573			44,766
Other Assets		29,998,856			28,431,150
Total Assets	$	1,251,878,468		$	1,232,755,317

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

	2018			2017
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest-Bearing	$	192,847,392		$	190,927,928
Interest-Bearing		892,278,066			877,057,477
		1,085,125,458			1,067,985,405
Borrowed Money
Subordinated Debentures		24,229,000			24,229,000
Other Borrowed Money		44,000,000			47,500,000
		68,229,000			71,729,000
Other Liabilities		2,831,615			2,718,249
Commitments and Contingencies
Stockholders’ Equity
Common Stock, Par Value $1; 20,000,000 Shares Authorized, 8,444,908 and 8,439,258 Shares Issued and Outstanding as of December 31, 2018 and 2017, respectively		8,444,908			8,439,258
Paid-In Capital		25,978,334			29,145,094
Retained Earnings		69,459,243			59,230,260
Accumulated Other Comprehensive Loss, Net of Tax		(8,190,090	)		(6,491,949	)
		95,692,395			90,322,663
Total Liabilities and Stockholders’ Equity	$	1,251,878,468		$	1,232,755,317

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

	2018		2017		2016
Interest Income
Loans, Including Fees	$	40,681,853	$	38,613,540	$	38,942,503
Federal Funds Sold		-		3		-
Deposits with Other Banks		409,732		232,397		124,459
Investment Securities
U.S. Government Agencies		7,528,962		6,717,827		5,263,741
State, County and Municipal		102,719		115,097		127,379
Corporate		111,763		87,387		-
Dividends on Other Investments		187,117		150,172		131,007
		49,022,146		45,916,423		44,589,089
Interest Expense
Deposits		6,057,066		4,758,073		4,781,228
Federal Funds Purchased		5,305		2,639		581
Borrowed Money		2,163,148		2,112,017		1,701,522
		8,225,519		6,872,729		6,483,331
Net Interest Income		40,796,627		39,043,694		38,105,758
Provision for Loan Losses		200,500		390,000		1,062,000
Net Interest Income After Provision for Loan Losses		40,596,127		38,653,694		37,043,758
Noninterest Income
Service Charges on Deposits		4,373,854		4,466,997		4,307,214
Other Service Charges, Commissions and Fees		3,253,922		3,048,601		2,802,651
Mortgage Fee Income		651,985		858,658		681,806
Securities Gains (Losses)		115,909		-		385,223
Other		1,225,660		1,360,309		1,376,860
		9,621,330		9,734,565		9,553,754
Noninterest Expenses
Salaries and Employee Benefits		20,122,843		19,222,594		18,482,693
Occupancy and Equipment		4,180,396		3,947,941		3,970,244
Directors’ Fees		291,400		298,100		348,755
Legal and Professional Fees		1,320,653		1,169,938		1,067,563
Foreclosed Property		204,705		363,519		1,143,518
FDIC Assessment		358,222		386,823		603,654
Advertising		337,527		349,722		609,892
Software and Data Processing		1,420,482		1,192,025		1,112,065
Telephone		738,193		813,592		737,063
ATM/Card Processing		1,510,322		1,467,411		1,136,122
Other		4,815,044		4,648,163		4,861,400
		35,299,787		33,859,828		34,072,969
Income Before Income Taxes		14,917,670		14,528,431		12,524,543
Income Taxes		3,000,270		6,777,453		3,851,333
Net Income		11,917,400		7,750,978		8,673,210
Preferred Stock Dividends		-		210,600		1,493,310
Net Income Available to Common Stockholders	$	11,917,400	$	7,540,378	$	7,179,900
Net Income Per Share of Common Stock
Basic	$	1.41	$	0.89	$	0.85
Diluted	$	1.40	$	0.87	$	0.84
Cash Dividends Declared Per Share of Common Stock	$	0.20	$	0.10	$	0.00
Weighted Average Shares Outstanding, Basic		8,439,454		8,439,258		8,439,258
Weighted Average Shares Outstanding, Diluted		8,538,608		8,633,581		8,513,295

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

FOR THE YEARS ENDED DECEMBER 31

	2018			2017			2016
Net Income	$	11,917,400		$	7,750,978		$	8,673,210
Other Comprehensive Income (Loss)
Gains (Losses) on Securities Arising During the Year		(2,033,636	)		(608,355	)		(505,367	)
Tax Effect		427,063			206,841			171,825
Realized (Gains) Losses on Sale of AFS Securities		(115,909	)		-			(385,223	)
Tax Effect		24,341			-			130,976
Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects		(1,698,141	)		(401,514	)		(587,789	)
Comprehensive Income	$	10,219,259		$	7,349,464		$	8,085,421

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, 2018, 2017 AND 2016

	Preferred Shares Issued			Preferred Stock			Common Shares Issued		Common Stock		Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2015		18,021		$	18,021,000			8,439,258	$	8,439,258	$	29,145,094		$	44,285,621		$	(4,434,351	)	$	95,456,622
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects																		(587,789	)		(587,789	)
Dividends on Preferred Shares															(1,493,310	)					(1,493,310	)
Redemption of Preferred Stock		(8,661	)		(8,661,000	)															(8,661,000	)
Net Income															8,673,210						8,673,210
Balance, December 31, 2016		9,360		$	9,360,000			8,439,258	$	8,439,258	$	29,145,094		$	51,465,521		$	(5,022,140	)	$	93,387,733
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects																		(401,514	)		(401,514	)
Dividends on Common Shares															(843,934	)					(843,934	)
Dividends on Preferred Shares															(210,600	)					(210,600	)
Redemption of Preferred Stock		(9,360	)		(9,360,000	)															(9,360,000	)
TCJ Act Reclassification															1,068,295			(1,068,295	)		-
Net Income															7,750,978						7,750,978
Balance, December 31, 2017		-		$	-			8,439,258	$	8,439,258	$	29,145,094		$	59,230,260		$	(6,491,949	)	$	90,322,663
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects																		(1,698,141	)		(1,698,141	)
Dividends on Common Shares															(1,688,417	)					(1,688,417	)
Issuance of Restricted Stock								5,650		5,650		(5,650	)					-			-
Stock-based Compensation Expense												13,890									13,890
Repurchase of Warrants												(3,175,000	)								(3,175,000	)
Net Income															11,917,400						11,917,400
Balance, December 31, 2018		-		$	-			8,444,908	$	8,444,908	$	25,978,334		$	69,459,243		$	(8,190,090	)	$	95,692,395

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

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PART I (Continued)

Item 1 (Continued)

COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

	2018			2017			2016
Cash Flows from Operating Activities
Net Income	$	11,917,400		$	7,750,978		$	8,673,210
Adjustments to Reconcile Net Income to Net Cash Provided from Operating Activities
Depreciation		1,786,652			1,647,813			1,574,249
Amortization and Accretion		1,176,224			1,449,111			1,645,088
Provision for Loan Losses		200,500			390,000			1,062,000
Share-based Compensation Expense		13,890			-			-
Deferred Income Taxes		273,176			2,833,958			222,120
Securities (Gains) Losses		(115,909	)		-			(385,223	)
(Gain) Loss on Sale of Premises and Equipment		(305	)		(10,735	)		80,329
(Gain) Loss on Sale of Other Real Estate and Repossessions		(309,077	)		(208,329	)		160,682
Provision for Losses on Other Real Estate		262,041			333,767			501,736
Increase in Cash Surrender Value of Life Insurance		(508,946	)		(1,669,424	)		(589,408	)
Provision for Losses on Premises & Equipment		172,143			-			-
Change In
Interest Receivable		(217,491	)		(90,204	)		176,766
Prepaid Expenses		266,806			139,382			(372,380	)
Interest Payable		38,573			21,188			(46,284	)
Accrued Expenses and Accounts Payable		1,418			361,005			(252,617	)
Other		(45,858	)		(403,375	)		938,223
		14,911,237			12,545,135			13,388,491
Cash Flows from Investing Activities
Interest-Bearing Deposits in Other Banks		(15,110,861	)		11,677,144			(7,729,560	)
Purchase of Investment Securities Available for Sale		(63,682,791	)		(87,160,178	)		(109,634,793	)
Proceeds from Sale of Investment Securities Available for Sale		11,267,642			-			25,209,851
Proceeds from Maturities, Calls and Paydowns of Investment Securities Available for Sale		50,422,396			54,587,986			54,868,726
Proceeds from Sale of Premises and Equipment		22,581			37,650			89,551
Net Loans to Customers		2,395,928			(14,459,526	)		(2,167,126	)
Purchase of Premises and Equipment		(2,762,585	)		(1,344,898	)		(3,259,859	)
Proceeds from Sale of Other Real Estate and Repossessions		3,002,508			3,863,576			7,529,131
Proceeds from Sale of Federal Home Loan Bank Stock		65,000			-			-
Purchase of Federal Home Loan Bank Stock		-			(32,900	)		(279,500	)
Net Cash and Cash Equivalents Paid in Acquisition		(10,043,452	)		-			-
		(24,423,634	)		(32,831,146	)		(35,373,579	)
Cash Flows from Financing Activities
Interest-Bearing Customer Deposits		(445,146	)		(8,240,418	)		7,629,930
Noninterest-Bearing Customer Deposits		5,552,700			31,869,295			25,172,362
Proceeds from Other Borrowed Money		44,007,500			10,015,500			10,000,000
Principal Payments on Other Borrowed Money		(47,507,500	)		(8,515,500	)		(4,000,000	)
Dividends Paid on Preferred Stock		-			(315,900	)		(1,590,746	)
Redemption of Preferred Stock		-			(9,360,000	)		(8,661,000	)
Repurchase of Warrants		(3,175,000	)		-			-
Dividends Paid on Common Stock		(1,688,417	)		(843,934	)		-
		(3,255,863	)		14,609,043			28,550,546
Net Increase (Decrease) in Cash and Cash Equivalents		(12,768,260	)		(5,676,968	)		6,565,458
Cash and Cash Equivalents, Beginning		23,145,136			28,822,104			22,256,646
Cash and Cash Equivalents, Ending	$	10,376,876		$	23,145,136		$	28,822,104

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

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PART I (Continued)

Item 1 (Continued)

COLONY BANKCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Principles of Consolidation

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

Nature of Operations

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

Use of Estimates

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

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements and note disclosures have been reclassified to conform to statement presentations selected for 2018. Such reclassifications had no effect on previously reported stockholders’ equity or net income.

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PART I (Continued)

Item 1 (Continued)

(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 if an economic downturn occurred in the real estate market. At December 31, 2018, approximately 88 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. Collateral real estate values that secure land development, construction and speculative real estate loans in the Company’s larger MSA markets have started showing signs of stabilization in values 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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PART I (Continued)

Item 1 (Continued)

(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.

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PART I (Continued)

Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Loans Modified in a Troubled Debt Restructuring (TDR)

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

Allowance for Loan Losses

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

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.

The allowance consists of specific, historical and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The historical component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. A general component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and historical losses in the portfolio. General valuation allowances are based on internal and external qualitative risk factors such as (1) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices, (2) changes in international, national, regional, and local conditions, (3) changes in the nature and volume of the portfolio and terms of loans, (4) changes in the experience, depth, and ability of lending management, (5) changes in the volume and severity of past due loans and other similar conditions, (6) changes in the quality of the organization's loan review system, (7) changes in the value of underlying collateral for collateral dependent loans, (8) the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and (9) the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.

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PART I (Continued)

Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

Loans identified as losses by management, internal loan review and/or Bank examiners are charged off. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

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

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

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PART I (Continued)

Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Premises and Equipment

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

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

Description	Life in Years				Method
Banking Premises		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.   

Goodwill

Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Goodwill is assigned to reporting units and tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.

Other Intangible Assets

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

Transfers of Financial Assets

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

Statement of Cash Flows

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

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PART I (Continued)

Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Advertising Costs

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

Income Taxes

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

Deferred tax assets and liabilities are recognized based on future tax consequences attributable to differences arising from the financial statement carrying values of assets and liabilities and their tax basis. The differences relate primarily to depreciable assets (use of different depreciation methods for financial statement and income tax purposes) and allowance for loan losses (use of the allowance method for financial statement purposes and the direct write-off method for tax purposes). In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with effects included in the income tax provision. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company and its subsidiary file a consolidated federal income tax return. The subsidiary pays its proportional share of federal income taxes to the Company based on its taxable income.

The Company’s federal and state income tax returns for tax years 2018, 2017, 2016 and 2015 are subject to examination by the Internal Revenue Service (IRS) and the Georgia Department of Revenue, generally for three years after filing.

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

Other Real Estate

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

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PART I (Continued)

Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Bank-Owned Life Insurance

The Company has purchased life insurance on the lives of certain key members of management and directors. The life insurance policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement, if applicable. Increases in the cash surrender value are recorded as other income in the consolidated statements of income. The cash surrender value of the insurance contracts is recorded in other assets on the consolidated balance sheets in the amount of $17,597,639 and $17,088,693 as of December 31, 2018 and 2017, respectively.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, represent equity changes from economic events of the period other than transactions with owners. Such items are considered components of other comprehensive income (loss). Accounting standards codification requires the presentation in the consolidated financial statements of net income and all items of other comprehensive income (loss) as total comprehensive income (loss).

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded on the consolidated balance sheets when they are funded.

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PART I (Continued)

Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Changes in Accounting Principles and Effects of New Accounting Pronouncements

ASU 2014-09, Revenue from Contracts with Customers (Topic 606). On January 1, 2018, the Company adopted ASU 2014-09 and all subsequent amendments to the ASU and ASC 606 which (1) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (2) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as other real estate owned. The majority of the Company’s revenues came from interest income and other sources, including loans and investment securities, that are outside the scope of ASC 606. With the exception of gain/losses on the sale of other real estate owned, the Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Company satisfies its obligations to the customer. Services within the scope of ASC 606 reported in noninterest income include service charges on deposit accounts, debit card interchange fees, and ATM fees. The net of gains and losses on the sale of other real estate owned are recorded in other noninterest expenses in the Company’s consolidated statements of income for the year ended December 31, 2017 and 2016. For the year ended December 31, 2018, the net of gains and losses on the sale of other real estate owned is recorded in other noninterest income in the Company’s consolidated statements of income. The adoption of ASC 606 did not change the timing or amount of revenue recognized for the Company. Accordingly, no cumulative effect adjustment was recorded under the modified retrospective transition method. See Note 26 for further discussion on the Company’s accounting policies for revenue source within the scope of ASC 606.

ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU  2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale.  ASU 2016-01 was effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

ASU 2016-02, Leases (Topic 842). This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. For public business entities, this ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is evaluating the impact of this ASU on its financial statements and disclosures.

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PART I (Continued)

Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

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

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supported forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.

ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016-15 became effective for us on January 1, 2018 and did not have a significant impact on our financial statements.

ASU 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 from the goodwill impairment test to simplify the subsequent measurement of goodwill. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The standard must be adopted using a prospective basis and the nature and reason for the change in accounting principle should be disclosed upon transition. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in reporting periods beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. The Company is currently evaluating the impact this ASU will have on the Company’s Consolidated Financial Statements, but it is not expected to have a material impact.

ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

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PART I (Continued)

Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

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

ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows an entity to elect a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (TCJ Act). ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt the provisions of ASU 2018-02 in the fourth quarter of 2017 and, as a result, reclassified $1,068,295 from AOCI to retained earnings as of December 31, 2017.

ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). This ASU modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods after December 15, 2019; early adoption is permitted. The Company is currently evaluating the provisions of ASU 2018-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

(2) Business Combination

Planters First Bank Branch Acquisition

On October 22, 2018, the Bank purchased one branch from Planters First Bank (“PFB”) located in Albany, Georgia. Pursuant to the transaction, the Bank acquired $20.4 million in loans and $12.0 million in deposits, as well as the branch equipment. In addition, the Bank purchased a vacant lot owned by PFB in Albany for $725 thousand, on which it plans to build a new branch office. In addition to the premium paid on deposits, other costs associated with the acquisition totaled $113 thousand. This acquisition provides the Bank with the opportunity to enhance its footprint in the Albany, Georgia market.

The Company has accounted for the branch purchases under the acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired assets and liabilities were recorded by the Bank at their estimated fair values as of their acquisition date.

The acquired assets and assumed liabilities of the PFB branch were measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting for the acquisition of the PFB branch. Management evaluated expected cash flows and estimated loss factors to measure fair values for loans. Deposits were valued based upon interest rates, original and remaining terms and maturities, as well as current rates for similar funds in the same markets. The vacant lot was based on recent appraised value, whereas equipment was acquired based on the remaining book value from PFB, which approximated fair value. Management engaged independent outside experts to provide the fair value estimates.

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PART I (Continued)

Item 1 (Continued)

(2) Business Combination (Continued)

The following table provides the purchase price as of acquisition date, the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $202 thousand recorded from the acquisition:

Purchase Price Consideration:
Cash Consideration	$	10,237,789
Total purchase price for PFB branch acquisition	$	10,237,789
Assets acquired at fair value:
Cash and cash equivalents	$	194,337
Loans		20,430,271
Premises and equipment, net		772,727
Core deposit intangible		560,000
Other assets		123,363
Total fair value of assets acquired	$	22,080,698
Liabilities assumed at fair value:
Deposits	$	12,032,500
Other liabilities		12,653
Total fair value of liabilities assumed	$	12,045,153
Net Assets acquired at fair value:	$	10,035,545
Amount of goodwill resulting from acquisition	$	202,244

The total amount of goodwill arising from this transaction of $202 thousand is expected to be deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.

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PART I (Continued)

Item 1 (Continued)

(2) Business Combination (Continued)

Acquired Loans

The following table outlines the contractually required payments receivable, cash flows we expect to receive and the discounted yield for all PFB loans as of the acquisition date.

	Contractually Required Payments Receivable		Cash Flows Expected To Be Collected		Discounted FMV Adjustments		Carrying Value of Loans Receivable
Performing loans acquired	$	20,749,515		20,749,515		319,244	$	20,430,271

The Bank recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. The Bank only acquired loans which were deemed to be performing loans with no signs of credit deterioration.

The Bank determined the net discounted value of cash flows on approximately 89 performing loans totaling $20.4 million. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, current market rates, loss exposure and remaining balances. These performing loans were segregated into pools based on loan and payment type. The effect of this fair valuation process was a net discount adjustment of $319 thousand at acquisition.

Pending Acquisition

On December 17, 2018, the Company and LBC Bancshares, Inc., a Georgia corporation (“LBC”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which LBC will merge into the Company. Immediately thereafter, Calumet Bank, a Georgia bank wholly owned by LBC, will be merged into Colony Bank. Calumet Bank operates two full-service banking locations, one each in LaGrange, Georgia and Columbus, Georgia, as well as a loan production office in Atlanta, Georgia. Under the terms of the Merger Agreement, each LBC shareholder will have the option to receive either $23.50 in cash or 1.3239 shares of the Company’s Common Stock in exchange for each share of LBC common stock, subject to customary proration and location procedures, such that 55% of LBC shares will receive the stock consideration and 45% will receive the cash consideration, and at least 50% of the merger consideration will be paid in the Company stock. The aggregate consideration is valued at approximately $34.1 million, based upon the $16.10 per share closing price of the Company’s common stock as of December 17, 2018. The merger is subject to customary closing conditions, including the receipt of regulatory approvals and the approval of LBC’s shareholders. The transaction is expected to close during the first half of 2019. As of December 31, 2018, LBC reported assets of $207 million, gross loans of $136 million and deposits of $182 million. The purchase price will be allocated among the net assets of LBC acquired as appropriate, with the remaining balance being reported as goodwill.

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PART I (Continued)

Item 1 (Continued)

(3) Cash and Balances Due from Banks

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

	2018		2017
Cash on Hand and Cash Items	$	9,359,924	$	9,746,132
Noninterest-Bearing Deposits with Other Banks		1,016,952		13,399,004
	$	10,376,876	$	23,145,136

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 $1,979,000 and $1,515,000 at December 31, 2018 and 2017, respectively.

(4) Investment Securities

Investment securities as of December 31, 2018 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed	$	356,498,339	$	303,360	$	(10,596,527	)	$	346,205,172
State, County and Municipal		4,007,883		17,858		(36,632	)		3,989,109
Corporate		2,927,147		-		(55,262	)		2,871,885
	$	363,433,369	$	321,218	$	(10,688,421	)	$	353,066,166

The amortized cost and fair value of investment securities as of December 31, 2018, by contractual maturity, are shown hereafter. Expected maturities may differ from contractual maturities for certain investments because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This is often the case with mortgage-backed securities, which are disclosed separately in the table below.

	Securities
	Available for Sale
	Amortized Cost		Fair Value
Due in One Year or Less	$	354,440	$	353,794
Due After One Year Through Five Years		4,294,198		4,237,813
Due After Five Years Through Ten Years		1,133,881		1,150,770
Due After Ten Years		1,152,511		1,118,617
	$	6,935,030	$	6,860,994
Mortgage-Backed Securities		356,498,339		346,205,172
	$	363,433,369	$	353,066,166

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PART I (Continued)

Item 1 (Continued)

(4) Investment Securities (Continued)

Investment securities as of December 31, 2017 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed	$	354,931,318	$	258,049	$	(8,465,948	)	$	346,723,419
State, County and Municipal		4,493,085		22,835		(23,094	)		4,492,826
Corporate		2,047,517		12,483		-			2,060,000
Asset-Backed		992,641		-		(21,982	)		970,659
	$	362,464,561	$	293,367	$	(8,511,024	)	$	354,246,904

Proceeds from sales of investments available for sale were $11,267,642 in 2018, $0 in 2017 and $25,209,851 in 2016. Gross realized gains totaled $115,909 in 2018, $0 in 2017 and $391,976 in 2016. Gross realized losses totaled $0 in 2018, $0 in 2017 and $6,753 in 2016.

Investment securities having a carrying value totaling $178,978,383 and $175,484,021 as of December 31, 2018 and 2017, respectively, were pledged to secure public deposits and for other purposes.

Information pertaining to securities with gross unrealized losses at December 31, 2018 and 2017 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, 2018
U.S. Government Agencies
Mortgage-Backed	$	39,082,750	$	(504,496	)	$	255,747,472	$	(10,092,031	)	$	294,830,222	$	(10,596,527	)
State, County and Municipal		611,882		(2,668	)		1,882,249		(33,964	)		2,494,131		(36,632	)
Corporate		2,009,080		(20,847	)		862,805		(34,415	)		2,871,885		(55,262	)
	$	41,703,712	$	(528,011	)	$	258,492,526	$	(10,160,410	)	$	300,196,238	$	(10,688,421	)
December 31, 2017
U.S. Government Agencies
Mortgage-Backed	$	120,139,340	$	(1,655,223	)	$	190,196,101	$	(6,810,725	)	$	310,335,441	$	(8,465,948	)
State, County and Municipal		2,598,344		(23,094	)		-		-			2,598,344		(23,094	)
Asset – Backed		970,659		(21,982	)		-		-			970,659		(21,982	)
	$	123,708,343	$	(1,700,299	)	$	190,196,101	$	(6,810,725	)	$	313,904,444	$	(8,511,024	)

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.

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PART I (Continued)

Item 1 (Continued)

(4) Investment Securities (Continued)

At December 31, 2018, 145 securities have unrealized losses which have depreciated 3.44 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 owns one asset-backed security at December 31, 2018 which was completely written off during prior years. This investment is comprised of one issuance of a trust preferred security and has no book value.

(5) Loans

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

	2018		2017
Commercial and Agricultural
Commercial	$	57,410,473	$	48,122,263
Agricultural		16,798,743		16,442,581
Real Estate
Commercial Construction		47,848,754		45,213,960
Residential Construction		12,499,744		8,583,446
Commercial		373,533,562		351,171,668
Residential		187,714,372		194,048,945
Farmland		62,708,998		67,767,655
Consumer and Other
Consumer		18,485,199		18,956,028
Other		5,027,523		14,977,309
Total Loans	$	782,027,368	$	765,283,855

- 24 -

PART I (Continued)

Item 1 (Continued)

(5) 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.

- 25 -

PART I (Continued)

Item 1 (Continued)

(5) 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.

2018	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	55,808,422	$	729,088	$	872,963	$	57,410,473
Agricultural		15,664,048		636,666		498,029		16,798,743
Real Estate
Commercial Construction		47,087,255		44,306		717,193		47,848,754
Residential Construction		12,499,744		-		-		12,499,744
Commercial		358,139,315		7,661,667		7,732,580		373,533,562
Residential		170,050,484		7,106,793		10,557,095		187,714,372
Farmland		58,712,452		1,912,338		2,084,208		62,708,998
Consumer and Other
Consumer		18,103,792		59,073		322,334		18,485,199
Other		5,018,095		5,475		3,953		5,027,523
Total Loans	$	741,083,607	$	18,155,406	$	22,788,355	$	782,027,368
2017
Commercial and Agricultural
Commercial	$	46,468,726	$	825,607	$	827,930	$	48,122,263
Agricultural		15,868,191		174,356		400,034		16,442,581
Real Estate
Commercial Construction		41,282,295		577,765		3,353,900		45,213,960
Residential Construction		8,583,446		-		-		8,583,446
Commercial		338,775,805		7,662,637		4,733,226		351,171,668
Residential		177,962,870		4,864,893		11,221,182		194,048,945
Farmland		66,334,906		444,095		988,654		67,767,655
Consumer and Other
Consumer		18,495,798		52,970		407,260		18,956,028
Other		14,968,677		8,632		-		14,977,309
Total Loans	$	728,740,714	$	14,610,955	$	21,932,186	$	765,283,855

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.

- 26 -

PART I (Continued)

Item 1 (Continued)

(5) 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
2018	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	$	282,116	$	-	$	282,116	$	637,085	$	56,491,272	$	57,410,473
Agricultural		117,087		-		117,087		413,254		16,268,402		16,798,743
Real Estate
Commercial Construction		88,371		-		88,371		462,841		47,297,542		47,848,754
Residential Construction		-		-		-		-		12,499,744		12,499,744
Commercial		679,387		-		679,387		2,965,546		369,888,629		373,533,562
Residential		6,881,632		-		6,881,632		2,734,179		178,098,561		187,714,372
Farmland		75,548		-		75,548		2,052,604		60,580,846		62,708,998
Consumer and Other
Consumer		110,340		-		110,340		212,524		18,162,335		18,485,199
Other		-		-		-		3,953		5,023,570		5,027,523
Total Loans	$	8,234,481	$	-	$	8,234,481	$	9,481,986	$	764,310,901	$	782,027,368
2017
Commercial and Agricultural
Commercial	$	328,483	$	-	$	328,483	$	598,305	$	47,195,475	$	48,122,263
Agricultural		110,482		-		110,482		398,509		15,933,590		16,442,581
Real Estate
Commercial Construction		27,062		-		27,062		477,043		44,709,855		45,213,960
Residential Construction		119,443		-		119,443		-		8,464,003		8,583,446
Commercial		918,997		-		918,997		2,172,229		348,080,442		351,171,668
Residential		2,482,276		-		2,482,276		2,829,966		188,736,703		194,048,945
Farmland		318,329		-		318,329		838,577		66,610,749		67,767,655
Consumer and Other
Consumer		246,175				246,175		188,073		18,521,780		18,956,028
Other		7,158		-		7,158		-		14,970,151		14,977,309
Total Loans	$	4,558,405	$	-	$	4,558,405	$	7,502,702	$	753,222,748	$	765,283,855

- 27 -

PART I (Continued)

Item 1 (Continued)

(5) Loans (Continued)

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $226,000, $205,000 and $387,000 for the years ended December 31, 2018, 2017 and 2016, respectively.

The following table details impaired loan data as of December 31, 2018:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Collected
With No Related Allowance Recorded
Commercial	$	595,323	$	595,323	$	-	$	525,463	$	21,350	$	23,985
Agricultural		433,915		413,254		-		382,978		17,949		24,825
Commercial Construction		132,366		132,366		-		69,396		7,806		7,966
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		12,163,915		12,163,915		-		11,039,755		581,836		582,893
Residential Real Estate		4,214,354		4,129,876		-		4,067,529		208,138		212,509
Farmland		2,054,137		2,052,604		-		1,361,278		52,974		81,962
Consumer		212,524		212,524		-		197,225		13,614		14,373
Other		3,953		3,953		-		791		204		233
	$	19,810,487	$	19,703,815	$	-	$	17,644,415	$	903,871	$	948,746
With An Allowance Recorded
Commercial	$	41,762	$	41,762	$	6,264	$	8,352	$	2,154	$	2,247
Agricultural		-		-		-		-		-		-
Commercial Construction		398,930		398,930		38,930		465,929		-		-
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		3,691,010		3,691,010		1,275,837		5,120,933		135,042		141,978
Residential Real Estate		274,198		274,198		60,716		97,902		8,187		8,180
Farmland		363,566		363,566		35,984		367,425		24,075		24,415
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-
	$	4,769,466	$	4,769,466	$	1,417,731	$	6,060,541	$	169,458	$	176,820
Total
Commercial	$	637,085	$	637,085	$	6,264	$	533,815	$	23,504	$	26,232
Agricultural		433,915		413,254		-		382,978		17,949		24,825
Commercial Construction		531,296		531,296		38,930		535,325		7,806		7,966
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		15,854,925		15,854,925		1,275,837		16,160,688		716,878		724,871
Residential Real Estate		4,488,552		4,404,074		60,716		4,165,431		216,325		220,689
Farmland		2,417,703		2,416,170		35,984		1,728,703		77,049		106,377
Consumer		212,524		212,524		-		197,225		13,614		14,373
Other		3,953		3,953		-		791		204		233
	$	24,579,953	$	24,473,281	$	1,417,731	$	23,704,956	$	1,073,329	$	1,125,566

- 28 -

PART I (Continued)

Item 1 (Continued)

(5) Loans (Continued)

The following table details impaired loan data as of December 31, 2017:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Collected
With No Related Allowance Recorded
Commercial	$	598,305	$	598,305	$	-	$	633,528	$	33,283	$	33,868
Agricultural		485,132		398,509		-		296,578		11,046		19,376
Commercial Construction		54,306		54,306		-		141,396		3,526		3,836
Residential Construction		-		-		-		79,295		-		-
Commercial Real Estate		12,637,057		12,637,057		-		12,808,414		559,601		549,825
Residential Real Estate		4,977,769		4,579,614		-		4,566,041		211,318		226,684
Farmland		840,110		838,577		-		790,967		54,367		58,085
Consumer		188,073		188,073		-		186,348		8,576		9,452
	$	19,780,752	$	19,294,441	$	-	$	19,502,567	$	881,717	$	901,126
With An Allowance Recorded
Commercial	$	-	$	-	$	-	$	-	$	-	$	-
Agricultural		-		-		-		-		-		-
Commercial Construction		493,067		493,067		65,635		241,063		22,626		32,922
Residential Construction		-		-		-		-		-		-
Commercial Real Estate		5,729,300		5,729,300		1,712,557		6,599,144		228,745		237,066
Residential Real Estate		108,859		108,859		27,123		482,228		4,261		7,446
Farmland		371,376		371,376		21,369		375,595		22,121		22,021
Consumer		-		-		-		-		-		-
	$	6,702,602	$	6,702,602	$	1,826,684	$	7,698,030	$	277,753	$	299,455
Total
Commercial	$	598,305	$	598,305	$	-	$	633,528	$	33,283	$	33,868
Agricultural		485,132		398,509		-		296,578		11,046		19,376
Commercial Construction		547,373		547,373		65,635		382,459		26,152		36,758
Residential Construction		-		-		-		79,295		-		-
Commercial Real Estate		18,366,357		18,366,357		1,712,557		19,407,558		788,346		786,891
Residential Real Estate		5,086,628		4,688,473		27,123		5,048,269		215,579		234,130
Farmland		1,211,486		1,209,953		21,369		1,166,562		76,488		80,106
Consumer		188,073		188,073		-		186,348		8,576		9,452
	$	26,483,354	$	25,997,043	$	1,826,684	$	27,200,597	$	1,159,470	$	1,200,581

- 29 -

PART I (Continued)

Item 1 (Continued)

(5) Loans (Continued)

The following table details impaired loan data as of December 31, 2016:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Collected
With No Related Allowance Recorded
Commercial	$	634,955	$	634,955	$	-	$	539,099	$	24,563	$	27,142
Agricultural		229,182		208,522		-		210,372		8,794		12,412
Commercial Construction		190,494		190,494		-		697,893		6,630		7,127
Commercial Real Estate		14,357,601		14,276,688		-		14,274,719		567,349		560,354
Residential Real Estate		4,261,558		3,952,139		-		4,553,322		73,099		190,373
Farmland		920,666		799,556		-		1,016,395		21,526		26,012
Consumer		212,376		212,026		-		213,309		9,599		12,036
	$	20,806,832	$	20,274,380	$	-	$	21,505,109	$	711,560	$	835,456
With An Allowance Recorded
Commercial	$	-	$	-	$	-	$	30,270	$	-	$	-
Agricultural		-		-		-		-		-		-
Commercial Construction		72,296		72,296		21,135		74,098		1,532		1,416
Commercial Real Estate		8,557,582		8,467,135		3,021,943		8,339,666		238,684		235,749
Residential Real Estate		1,475,594		1,467,833		362,521		1,042,750		27,759		32,260
Farmland		379,851		379,851		29,173		384,056		21,098		21,310
Consumer		-		-		-		-		-		-
	$	10,485,323	$	10,387,115	$	3,434,772	$	9,870,840	$	289,073	$	290,735
Total
Commercial	$	634,955	$	634,955	$	-	$	569,369	$	24,563	$	27,142
Agricultural		229,182		208,522		-		210,372		8,794		12,412
Commercial Construction		262,790		262,790		21,135		771,991		8,162		8,543
Commercial Real Estate		22,915,183		22,743,823		3,021,943		22,614,385		806,033		796,103
Residential Real Estate		5,737,152		5,419,972		362,521		5,596,072		100,858		222,633
Farmland		1,300,517		1,179,407		29,173		1,400,451		42,624		47,322
Consumer		212,376		212,026		-		213,309		9,599		12,036
	$	31,292,155	$	30,661,495	$	3,434,772	$	31,375,949	$	1,000,633	$	1,126,191

- 30 -

PART I (Continued)

Item 1 (Continued)

(5) Loans (Continued)

Troubled Debt Restructurings (TDRs) are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower’s financial condition. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time. Not all loan modifications are TDRs. Loan modifications are reviewed and approved by the Company’s senior lending staff, who then determine whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:

● Interest rate reductions - Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

● Amortization or maturity date changes - Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

● Principal reductions - These are often the result of commercial real estate loan workouts where two new notes are created. The primary note is underwritten based upon the Company’s normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note. The terms of the secondary note vary by situation and often involve that note being charged off, or the principal and interest payments being deferred until after the primary note has been repaid. In situations where a portion of the note is charged off during modification, there is often no specific reserve allocated to those loans. This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is no additional exposure on those loans.

- 31 -

PART I (Continued)

Item 1 (Continued)

(5) 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, 2018. The following tables present the number of loan contracts restructured during the 12 months ended December 31, 2018, 2017 and 2016. It shows the pre- and post-modification recorded investment as well as the number of contracts and the recorded investment for those TDRs modified during the previous 12 months which subsequently defaulted during the period. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due. A TDR may cease being classified as impaired if the loan is subsequently modified at market terms, has performed according to the modified terms for at least six months, and has not had any prior principal forgiveness on a cumulative basis.

Troubled Debt Restructurings
2018	# of Contracts		Pre-Modification		Post-Modification
Commercial Real Estate		1	$	402,430	$	402,430
2017
Commercial Real Estate		-	$	-	$	-
Residential Real Estate		-		-		-
Total Loans		-		-		-
2016
Commercial Real Estate		1	$	91,280	$	91,097
Residential Real Estate		1		354,784		354,784
Total Loans		2	$	446,064	$	445,881

- 32 -

PART I (Continued)

Item 1 (Continued)

(5) Loans (Continued)

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

	2018				2017				2016
	# of Contracts		Recorded Investment		# of Contracts		Recorded Investment		# of Contracts		Recorded Investment
Residential Real Estate		1	$	131,067		-	$	-		1	$	89,297
Total Loans		1	$	131,067		-	$	-		1	$	89,297

During 2018, a restructured loan totaling $131,067 failed to continue to perform as agreed and was moved to non-accrual status. At December 31, 2017, all restructured loans were performing as agreed. During December 2016, a restructured loan totaling $89,297 failed to continue to perform as agreed and was charged off in June 2016.

(6) Allowance for Loan Losses

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

	2018			2017			2016
Balance, Beginning of Year	$	7,507,508		$	8,923,293		$	8,603,905
Provision for Loan Losses		200,500			390,000			1,062,000
Loans Charged Off		(965,447	)		(2,915,753	)		(2,087,850	)
Recoveries of Loans Previously Charged Off		534,245			1,109,968			1,345,238
Balance, End of Year	$	7,276,806		$	7,507,508		$	8,923,293

- 33 -

PART I (Continued)

Item 1 (Continued)

(6) 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.

2018	Beginning Balance		Charge-Offs			Recoveries		Provision			Ending Balance
Commercial and Agricultural
Commercial	$	446,675	$	(123,528	)	$	139,466	$	(93,049	)	$	369,564
Agricultural		185,904		(122,873	)		22,031		163,188			248,250
Real Estate
Commercial Construction		1,216,015		-			155,272		(1,256,413	)		114,874
Residential Construction		-		-			-		16,530			16,530
Commercial		3,873,959		(257,424	)		40,052		892,523			4,549,110
Residential		968,101		(162,235	)		90,703		284,483			1,181,052
Farmland		779,531		-			12,228		(90,210	)		701,549
Consumer and Other
Consumer		33,993		(299,387	)		72,386		279,121			86,113
Other		3,330		-			2,107		4,327			9,764
	$	7,507,508	$	(965,447	)	$	534,245	$	200,500		$	7,276,806
2017
Commercial and Agricultural
Commercial	$	456,197	$	(299,079	)	$	136,499	$	153,058		$	446,675
Agricultural		167,692		(159,500	)		3,963		173,749			185,904
Real Estate
Commercial Construction		322,725		(51,977	)		266,459		678,808			1,216,015
Residential Construction		13,491		-			-		(13,491	)		-
Commercial		5,750,998		(966,014	)		527,150		(1,438,175	)		3,873,959
Residential		1,396,099		(1,048,337	)		82,079		538,260			968,101
Farmland		722,331		(60,902	)		16,750		101,352			779,531
Consumer and Other
Consumer		80,265		(329,944	)		74,933		208,739			33,993
Other		13,495		-			2,135		(12,300	)		3,330
	$	8,923,293	$	(2,915,753	)	$	1,109,968	$	390,000		$	7,507,508

- 34 -

PART I (Continued)

Item 1 (Continued)

(6) Allowance for Loan Losses (Continued)

2016	Beginning Balance		Charge-Offs			Recoveries		Provision			Ending Balance
Commercial and Agricultural
Commercial	$	855,364	$	(304,918	)	$	66,738	$	(160,987	)	$	456,197
Agricultural		203,091		(19,258	)		4,150		(20,291	)		167,692
Real Estate
Commercial Construction		690,766		(25,318	)		814,586		(1,157,309	)		322,725
Residential Construction		19,890		-			-		(6,399	)		13,491
Commercial		3,850,527		(992,067	)		206,154		2,686,384			5,750,998
Residential		1,990,355		(361,630	)		49,660		(282,286	)		1,396,099
Farmland		911,692		(119,576	)		145,000		(214,785	)		722,331
Consumer and Other
Consumer		63,377		(265,083	)		52,629		229,342			80,265
Other		18,843		-			6,321		(11,669	)		13,495
	$	8,603,905	$	(2,087,850	)	$	1,345,238	$	1,062,000		$	8,923,293

The Company’s allowance for loan losses consists of specific valuation allowances established for probable losses on specific loans and historical valuation allowances for other loans with similar risk characteristics.

The Company determines its individual reserves during its quarterly review of substandard loans. This process involves reviewing all loans with a risk grade of 6 or greater and an outstanding balance of $250,000 or more, regardless of the loans impairment classification.

Since not all loans in the substandard category are considered impaired, this quarterly review process may result in the identification of specific reserves on nonimpaired loans. Management considers those loans graded substandard, but not classified as impaired, to be higher risk loans and, therefore, makes specific allocations to the allowance for those loans if warranted. The total of such loans is $8,875,310 and $9,470,621 as of December 31, 2018 and 2017, respectively. Specific allowance allocations were made for these loans totaling $1,312,154 and $1,510,868 as of December 31, 2018 and 2017, 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.

- 35 -

PART I (Continued)

Item 1 (Continued)

(6) Allowance for Loan Losses (Continued)

At December 31, 2018, there were 148 impaired loans totaling $4,257,258 below the $250,000 review threshold which were not individually reviewed for impairment. Those loans were subject to the Bank’s general loan loss reserve methodology and are included in the “Collectively Evaluated for Impairment” column of the following tables. Likewise, at December 31, 2017 and 2016, impaired loans totaling $4,335,524 and $4,204,156, respectively, were below the $250,000 review threshold and were subject to the Bank’s general loan loss reserve methodology and are included in the “Collectively Evaluated for Impairment” column of the following tables.

	Ending Allowance Balance						Ending Loan Balance
2018	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and Agricultural
Commercial	$	6,264	$	363,300	$	369,564	$	83,309	$	57,327,164	$	57,410,473
Agricultural		-		248,250		248,250		27,031		16,771,712		16,798,743
Real Estate
Commercial Construction		38,930		75,944		114,874		467,384		47,381,370		47,848,754
Residential Construction		-		16,530		16,530		-		12,499,744		12,499,744
Commercial		1,275,837		3,273,273		4,549,110		15,413,112		358,120,450		373,533,562
Residential		60,716		1,120,336		1,181,052		2,067,906		185,646,466		187,714,372
Farmland		35,984		665,565		701,549		2,157,281		60,551,717		62,708,998
Consumer and Other
Consumer		-		86,113		86,113		-		18,485,199		18,485,199
Other		-		9,764		9,764		-		5,027,523		5,027,523
Total End of Year Balance	$	1,417,731	$	5,859,075	$	7,276,806	$	20,216,023	$	761,811,345	$	782,027,368

- 36 -

PART I (Continued)

Item 1 (Continued)

(6) Allowance for Loan Losses (Continued)

	Ending Allowance Balance						Ending Loan Balance
2017	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and Agricultural
Commercial	$	-	$	446,675	$	446,675	$	77,599	$	48,044,664	$	48,122,263
Agricultural		-		185,904		185,904		5,121		16,437,460		16,442,581
Real Estate
Commercial Construction		65,635		1,150,380		1,216,015		493,067		44,720,893		45,213,960
Residential Construction		-		-		-		-		8,583,446		8,583,446
Commercial		1,712,557		2,161,402		3,873,959		18,010,035		333,161,633		351,171,668
Residential		27,123		940,978		968,101		2,040,125		192,008,820		194,048,945
Farmland		21,369		758,162		779,531		1,035,572		66,732,083		67,767,655
Consumer and Other
Consumer		-		33,993		33,993		-		18,956,028		18,956,028
Other		-		3,330		3,330		-		14,977,309		14,977,309
Total End of Year Balance	$	1,826,684	$	5,680,824	$	7,507,508	$	21,661,519	$	743,622,336	$	765,283,855
2016
Commercial and Agricultural
Commercial	$	-	$	456,197	$	456,197	$	6,671	$	47,018,207	$	47,024,878
Agricultural		-		167,692		167,692		-		17,079,579		17,079,579
Real Estate
Commercial Construction		21,135		301,590		322,725		72,296		30,286,066		30,358,362
Residential Construction		-		13,491		13,491		-		11,830,447		11,830,447
Commercial		3,021,943		2,729,055		5,750,998		22,422,451		326,667,580		349,090,031
Residential		362,522		1,033,577		1,396,099		2,911,874		192,668,093		195,579,967
Farmland		29,172		693,159		722,331		1,044,047		65,833,150		66,877,197
Consumer and Other
Consumer		-		80,265		80,265		-		19,695,241		19,695,241
Other		-		13,495		13,495		-		16,747,861		16,747,861
Total End of Year Balance	$	3,434,772	$	5,488,521	$	8,923,293	$	26,457,339	$	727,826,224	$	754,283,563

- 37 -

PART I (Continued)

Item 1 (Continued)

(7) Premises and Equipment

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

	2018			2017
Land	$	10,934,885		$	9,668,722
Building		26,544,689			26,893,354
Furniture, Fixtures and Equipment		12,782,042			13,090,366
Leasehold Improvements		696,529			655,166
Construction in Progress		581,389			68,253
		51,539,534			50,375,861
Accumulated Depreciation		(22,708,262	)		(22,736,431	)
	$	28,831,272		$	27,639,430

Depreciation charged to operations totaled $1,786,652 in 2018, $1,647,813 in 2017 and $1,574,249 in 2016.

Certain Company facilities and equipment are leased under various operating leases. Rental expense approximated $443,000 for 2018, $427,000 for 2017 and $437,000 for 2016.

Future minimum rental payments as of December 31, 2018 are as follows:

Year Ending December 31	Amount
2019	$	63,480
2020		42,000
2021		42,000
2022		38,500
2023 and Thereafter		-
	$	185,980

(8) Other Real Estate Owned

The aggregate carrying amount of Other Real Estate Owned (OREO) at December 31, 2018, 2017 and 2016 was $1,840,743, $4,256,469 and $6,439,226, 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 2018, 2017 and 2016 as of December 31:

	2018			2017			2016
Balance, Beginning of Year	$	4,256,469		$	6,439,226		$	8,839,103
Additions		792,459			1,724,936			5,664,554
Sales of OREO		(2,949,283	)		(3,786,567	)		(7,416,293	)
Transfer to Bank Premises		(300,000	)		-			-
Gain/(Loss) on Sale		303,139			212,641			(146,402	)
Provision for Losses		(262,041	)		(333,767	)		(501,736	)
Balance, End of Year	$	1,840,743		$	4,256,469		$	6,439,226

- 38 -

PART I (Continued)

Item 1 (Continued)

(8) Other Real Estate Owned (Continued)

At December 31, 2018, the Company held $564,748 of residential real estate property as foreclosed property. Also at December 31, 2018, $25,069 of consumer mortgage loans collateralized by residential real estate property was in the process of foreclosure according to local requirements of the applicable jurisdictions.

(9) 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, 2016	$	1,056,693	$	(976,178	)	$	80,515
Amortization Expense		-		(35,749	)		(35,749	)
Balance, December 31, 2017	$	1,056,693	$	(1,011,927	)	$	44,766
Addition		560,000		-			560,000
Amortization Expense		-		(48,193	)		(48,193	)
Balance, December 31, 2018	$	1,616,693	$	(1,060,120	)	$	556,573

Amortization expense related to the core deposit intangible was $48,193, $35,749 and $35,749 for the years ended December 31, 2018, 2017 and 2016. The estimated future amortization expense for intangible assets remaining as of December 31, 2018 is as follows:

Year Ending December 31	Amount
2019	$	83,684
2020		74,667
2021		74,667
2022		74,667
2023		74,667
Thereafter		174,221
	$	556,573

(10) Income Taxes

The Tax Cuts and Jobs Act (the "TCJ Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate to 21 percent. As a result of the enactment of the TCJ Act we remeasured our deferred tax assets and liabilities based upon the new U.S. statutory federal income tax rate of 21 percent, which is the tax rate at which these assets and liabilities are expected to reverse in the future. Nonetheless, we recognized additional income tax expense of $2,040,946 in the fourth quarter of 2017 related to the remeasurement of our deferred tax assets and liabilities.

- 39 -

PART I (Continued)

Item 1 (Continued)

(10) Income Taxes (Continued)

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

	2018		2017		2016
Current Federal Expense	$	2,727,094	$	3,943,495	$	3,629,213
Deferred Federal Expense		273,176		793,012		222,120
Deferred Tax Expense from Tax Rate Changes		-		2,040,946		-
Federal Income Tax Expense		3,000,270		6,777,453		3,851,333
Current State Income Tax Expense		-		-		-
Federal and State Income Tax Expense	$	3,000,270	$	6,777,453	$	3,851,333

The federal income tax expense of $3,000,270 in 2018, $6,777,453 in 2017 and $3,851,333 in 2016 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:

	2018			2017			2016
Statutory Federal Income Taxes	$	3,132,711		$	4,954,199		$	4,283,394
Tax-Exempt Interest		(57,271	)		(102,345	)		(109,759	)
Income from Cash Value Life Insurance, net of premiums		(96,733	)		(198,730	)		(182,532	)
Meal and Entertainment Disallowance		9,578			14,354			16,813
Other		11,985			69,029			(156,583	)
Tax Expense from Tax Rate Changes		-			2,040,946			-
Actual Federal Income Taxes	$	3,000,270		$	6,777,453		$	3,851,333

- 40 -

PART I (Continued)

Item 1 (Continued)

(10) Income Taxes (Continued)

Deferred taxes, which are included in Other Assets, in the accompanying consolidated balance sheets as of December 31 include the following:

	2018			2017
Deferred Tax Assets
Allowance for Loan Losses	$	1,528,129		$	1,576,577
Other Real Estate		183,997			304,813
Deferred Compensation		148,402			161,000
Core Deposit Intangible		1,307			-
Investments		210,000			210,000
Goodwill		48,086			76,058
Restricted Stock		2,917			-
Other		201,574			237,591
	$	2,324,412		$	2,566,039
Deferred Tax Liabilities
Premises and Equipment		(1,023,090	)		(995,190	)
Other		(6,234	)		(2,585	)
		(1,029,324	)		(997,775	)
Deferred Tax Assets (Liabilities) on Unrealized Securities Gains (Losses)		2,177,113			1,725,708
Net Deferred Tax Assets	$	3,472,201		$	3,293,972

(11) Deposits

The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $476,182 and $475,161 as of December 31, 2018 and 2017, respectively.

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

	2018		2017
Interest-Bearing Demand	$	471,794,491	$	458,717,332
Savings		79,452,705		78,172,441
Time, $250,000 and Over		53,881,417		38,919,469
Other Time		287,149,453		301,248,235
	$	892,278,066	$	877,057,477

At December 31, 2018 and 2017, the Company had brokered deposits of $80,535,032 and $46,328,995 respectively. All of these brokered deposits represent Certificate of Deposit Account Registry Service (CDARS) reciprocal deposits. The CDARS deposits are ones in which customers placed core deposits into the CDARS program for FDIC insurance coverage and the Company receives reciprocal brokered deposits in a like amount. The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $250,000 was $53,881,417 and $38,919,469 as of December 31, 2018 and December 31, 2017, respectively.

- 41 -

PART I (Continued)

Item 1 (Continued)

(11) Deposits (Continued)

As of December 31, 2018, the scheduled maturities of certificates of deposit are as follows:

Year	Amount
2019	$	241,365,987
2020		45,279,800
2021		37,132,339
2022		8,423,379
2023		8,788,583
Thereafter		40,782
	$	341,030,870

(12) Other Borrowed Money

Other borrowed money at December 31 is summarized as follows:

	2018		2017
Federal Home Loan Bank Advances	$	44,000,000	$	46,000,000
Other Borrowings		-		1,500,000
	$	44,000,000	$	47,500,000

Advances from the Federal Home Loan Bank (FHLB) have maturities ranging from 2019 to 2028 and interest rates ranging from 0.98 percent to 3.51 percent. As collateral on the outstanding FHLB advances, the Company has provided a blanket lien on its portfolio of qualifying residential first mortgage loans and commercial loans. At December 31, 2018, the book value of those loans pledged is $108,634,687. At December 31, 2018, the Company had remaining credit availability from the FHLB of $252,071,000. The Company may be required to pledge additional qualifying collateral in order to utilize the full amount of the remaining credit line.

The Company borrowed $5,000,000 during the first quarter of 2017 as a short term loan to be paid off within one year with an interest rate of prime plus 0.75 percent, currently 5.25 percent. The Company paid down $3,500,000 during November 2017. The remaining amount was paid off during January 2018.

The aggregate stated maturities of other borrowed money at December 31, 2018 are as follows:

Year	Amount
2019	$	5,000,000
2020		2,500,000
2021		-
2022		18,000,000
2023		6,000,000
2024 and Thereafter		12,500,000
	$	44,000,000

- 42 -

PART I (Continued)

Item 1 (Continued)

(12) Other Borrowed Money (Continued)

At December 31, 2018, $10,500,000 of FHLB advances are subject to fixed rates of interest, while the remaining $33,500,000 is subject to floating interest rates which will convert to fixed rates of interests in the next few years.

The Company also has available federal funds lines of credit with various financial institutions totaling $43,500,000, of which there were none outstanding at December 31, 2018.

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, 2018, 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.

(13) 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		2.78819		2.68		5.46819	6/14/2034	6/17/2009
Colony Bankcorp Capital Trust I	4/13/2006		5,155		2.80300		1.50		4.30300	4/13/2036	4/13/2011
Colony Bankcorp Capital Trust II	3/12/2007		9,279		2.80300		1.65		4.45300	3/12/2037	3/12/2012
Colony Bankcorp Capital Trust III	9/14/2007		5,155		2.52038		1.40		3.92038	9/14/2037	9/14/2012

The Trust Preferred Securities are recorded as subordinated debentures on the consolidated balance sheets, and subject to certain limitations, qualify as Tier 1 Capital for regulatory capital purposes. The proceeds from these offerings were used to fund certain acquisitions, pay off holding company debt and inject capital into the Bank subsidiary. The Trust Preferred Securities pay interest quarterly.

(14) Preferred Stock and Warrant

The Company redeemed 9,360 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock) outstanding with private investors as of March 31, 2017. The Company redeemed 8,661 shares of Preferred Stock at $1,000 per share in 2016. The Company redeemed 9,979 shares of Preferred Stock at $1,000 per share during 2015. The Company currently has no outstanding shares of Preferred Stock. 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. The Warrant was repurchased by the Company on June 5, 2018, for $3,175,000. 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 Company currently has no outstanding warrants as of December 31, 2018.

- 43 -

PART I (Continued)

Item 1 (Continued)

(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 2018, 2017 and 2016, the Company made total contributions of $709,723, $686,580 and $408,303 to the Plan, respectively.

(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, 2018 and 2017, the following financial instruments were outstanding whose contract amounts represent credit risk:

	Contract Amount
	2018		2017
Commitments to Extend Credit	$	98,736,000	$	96,374,000
Standby Letters of Credit		1,525,000		1,536,000

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.

- 44 -

PART I (Continued)

Item 1 (Continued)

(16) Commitments and Contingencies (Continued)

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

(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 $706,677 and $766,667 as of December 31, 2018 and 2017, respectively. Benefit payments under the contracts were $107,850 in 2018 and $110,080 in 2017.

Provisions charged to operations totaled $52,285 in 2018, $55,572 in 2017 and $57,125 in 2016.

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 $135,218 in 2018, $233,064 in 2017 and $165,128 in 2016.

(18) Supplemental Cash Flow Information

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

	2018		2017		2016
Interest Expense	$	8,186,946	$	6,851,541	$	6,529,615
Income Taxes	$	2,695,000	$	4,000,000	$	3,365,000

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

	2018			2017			2016
Acquisitions of Real Estate Through Loan Foreclosures	$	792,459		$	1,724,936		$	5,664,554
Change in Unrealized Gain (Loss) on AFS Investment Securities	$	(2,149,545	)	$	(608,355	)	$	(890,590	)

- 45 -

PART I (Continued)

Item 1 (Continued)

(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:

	2018			2017
Balance, Beginning	$	744,637		$	1,025,543
New Loans		97,690			1,050,393
Repayments		(166,997	)		(1,106,606	)
Transactions Due to Changes in Directors		-			(224,693	)
Balance, Ending	$	675,330		$	744,637

(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.

Generally accepted accounting principles related to Fair Value Measurements define fair value, establish a framework for measuring fair value, establish a three-level valuation hierarchy for disclosure of fair value measurement and enhance disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

• Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 inputs to the valuation methodology are unobservable and represent the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

- 46 -

PART I (Continued)

Item 1 (Continued)

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

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

Investment Securities - Fair values for investment securities are based on quoted market prices where available and classified as Level 1. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments and classified as Level 2. If a comparable is not available, the investment securities are classified as Level 3.

Federal Home Loan Bank Stock - The fair value of Federal Home Loan Bank stock approximates carrying value and is classified as Level 1.

Loans - The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. Most loans are classified as Level 2, but impaired loans with a related allowance are classified as Level 3.

Bank-Owned Life Insurance - The carrying value of bank-owned life insurance policies approximates fair value and is classified as Level 1.

Deposit Liabilities - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date and is classified as Level 1. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities and is classified as Level 2.

Subordinated Debentures – The fair value of subordinated debentures is estimated by discounting the future cash flows using the current rates at which similar advances would be obtained. Subordinated debentures are classified as Level 2.

Other Borrowed Money - The fair value of other borrowed money is calculated by discounting contractual cash flows using an estimated interest rate based on current rates available to the Company for debt of similar remaining maturities and collateral terms. Other borrowed money is classified as Level 2 due to their expected maturities.

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PART I (Continued)

Item 1 (Continued)

(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
2018	Amount		Fair Value		1		2		3
	(in Thousands)
Assets
Cash and Short-Term Investments	$	60,155	$	60,155	$	60,155	$	-	$	-
Investment Securities Available for Sale		353,066		353,066		-		348,788		4,278
Federal Home Loan Bank Stock		2,978		2,978		2,978		-		-
Loans, Net		774,249		769,809		-		766,457		3,352
Bank-Owned Life Insurance		17,598		17,598		17,598		-		-
Liabilities
Deposits		1,085,125		1,086,503		744,094		342,409		-
Subordinated Debentures		24,229		24,229		-		24,229		-
Other Borrowed Money		44,000		44,032		-		44,032		-
2017
Assets
Cash and Short-Term Investments	$	57,813	$	57,813	$	57,813	$	-	$	-
Investment Securities Available for Sale		354,247		354,247		-		346,950		7,297
Federal Home Loan Bank Stock		3,043		3,043		3,043		-		-
Loans, Net		757,281		757,163		-		752,287		4,876
Bank-Owned Life Insurance		17,089		17,089		17,089		-		-
Liabilities
Deposits		1,067,985		1,068,392		727,818		340,574		-
Subordinated Debentures		24,229		24,229		-		24,229		-
Other Borrowed Money		47,500		47,626		-		47,626		-

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.

- 48 -

PART I (Continued)

Item 1 (Continued)

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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring and nonrecurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Assets

Securities - Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy, include certain collateralized mortgage and debt obligations and certain high-yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

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

Other Real Estate - Other real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned. Typically, an external, third-party appraisal is performed on the collateral upon transfer into the other real estate owned account to determine the asset’s fair value. Subsequent adjustments to the collateral’s value may be based upon either updated third-party appraisals or management’s knowledge of the collateral and the current real estate market conditions.   Appraised amounts used in determining the asset’s fair value, whether internally or externally prepared, are discounted 10 percent to account for selling and marketing costs. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a level 3 classification of the inputs for determining fair value. Because of the high degree of judgment required in estimating the fair value of other real estate owned assets and because of the relationship between fair value and general economic conditions, we consider the fair value of other real estate owned assets to be highly sensitive to changes in market conditions.

Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis - The following table presents the recorded amount of the Company’s assets measured at fair value on a recurring and nonrecurring basis as of December 31, 2018 and 2017, 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, 2018 and 2017. Those impaired loans and other real estate properties are shown net of the related specific reserves and valuation allowances.

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PART I (Continued)

Item 1 (Continued)

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

Assets (Continued)

			Fair Value Measurements at Reporting Date Using
2018	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	$	346,205,172	$	-	$	342,142,079	$	4,063,093
State, County and Municipal		3,989,109		-		3,774,634		214,475
Corporate		2,871,885		-		2,871,885		-
	$	353,066,166	$	-	$	348,788,598	$	4,277,568
Nonrecurring
Impaired Loans	$	3,351,735	$	-	$	-	$	3,351,735
Other Real Estate	$	1,182,783	$	-	$	-	$	1,182,783
2017
Recurring
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed	$	346,723,419	$	-	$	341,701,288	$	5,022,131
State, County and Municipal		4,492,826		-		4,277,460		215,366
Corporate		2,060,000		-		-		2,060,000
Asset-Backed		970,659		-		970,659		-
	$	354,246,904	$	-	$	346,949,407	$	7,297,497
Nonrecurring
Impaired Loans	$	4,875,918	$	-	$	-	$	4,875,918
Other Real Estate	$	2,014,904	$	-	$	-	$	2,014,904

Liabilities

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

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PART I (Continued)

Item 1 (Continued)

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

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

The following tables present quantitative information about the significant unobservable inputs used in the fair value measurements for assets in level 3 of the fair value hierarchy measured on a nonrecurring basis at December 31, 2018 and 2017. These tables are comprised primarily of collateral dependent impaired loans and other real estate owned:

	December 31, 2018		Valuation Techniques	Unobservable Inputs	Range Weighted Avg
Real Estate
Commercial Construction	$	360,000	Sales Comparison	Adjustment for Differences		(6.60)%	-	1,975.00%
				Between the Comparable Sales			984.20%
				Management Adjustments for Age		0.00%	-	10.00%
				of Appraisals and/or Current			5.00%
				Market Conditions
Residential Real Estate		213,482	Sales Comparison	Adjustment for Differences		(10.86)%	-	6.70%
				Between the Comparable Sales			(2.08)%
				Management Adjustments for Age		0.00%	-	25.00%
				of Appraisals and/or Current			12.50%
				Market Conditions
Commercial Real Estate		2,415,174	Sales Comparison	Adjustment for Differences		(60.00)%	-	80.00%
				Between the Comparable Sales			10.00%
				Management Adjustments for Age		0.00%	-	35.00%
				of Appraisals and/or Current			17.50%
				Market Conditions
			Income Approach	Capitalization Rate			10.13%
Farmland		327,581	Sales Comparison	Adjustment for Differences Between the Comparable Sales		(71.00)%	-	(3.50)%
							(37.25)%
				Management Adjustments for Age		10.00%	-	80.00%
				of Appraisals and/or Current			45.00%
				Market Conditions
Commercial		35,498	Sales Contract	Adjustment for Estimated Costs to		0.00%	-	0.00%
				Sell			(0.00)%
				Management Adjustments for Age		0.00%	-	15.00%
				of Appraisals and/or Current			15.00%
				Market Conditions
Other Real Estate Owned		1,182,783	Sales Comparison	Adjustment for Differences		(30.00)%	-	25.02%
				Between the Comparable Sales			(2.49)%
				Management Adjustments for Age		9.82%	-	99.39%
				of Appraisals and/or Current			35.26%
				Market Conditions
			Income Approach	Capitalization Rate			10.00%

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PART I (Continued)

Item 1 (Continued)

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

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

	December 31, 2017		Valuation Techniques	Unobservable Inputs	Range Weighted Avg
Real Estate
Commercial Construction	$	427,433	Sales Comparison	Adjustment for Differences		(16.00)%	-	1,975.00%
				Between the Comparable Sales			979.50%
				Management Adjustments for Age		0.00%	-	10.00%
				of Appraisals and/or Current			5.00%
				Market Conditions
Residential Real Estate		81,736	Sales Comparison	Adjustment for Differences		(43.30)%	-	83.30%
				Between the Comparable Sales			20.00%
				Management Adjustments for Age		0.00%	-	25.00%
				of Appraisals and/or Current			12.50%
				Market Conditions
Commercial Real Estate		4,016,742	Income Approach	Management Adjustments for Age		0.00%	-	10.00%
				of Appraisals and/or Current			5.00%
				Market Conditions
				Capitalization Rate			10.75%
Farmland		350,007	Sales Comparison	Adjustment for Differences		(71.00)%	-	88.70%
				Between the Comparable Sales			8.85%
				Management Adjustments for Age		10.00%	-	75.00%
				of Appraisals and/or Current			42.50%
				Market Conditions
Other Real Estate Owned		2,014,904	Sales Comparison	Adjustment for Differences		(22.74)%	-	15.00%
				Between the Comparable Sales			(3.87)%
				Management Adjustments for Age		5.44%	-	87.24%
				of Appraisals and/or Current			24.44%
				Market Conditions
			Income Approach	Capitalization Rate			10.00%

- 52 -

PART I (Continued)

Item 1 (Continued)

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

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

The following table presents a reconciliation and statement of income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the years ended December 31, 2018, 2017 and 2016:

	Available for Sale Securities
	2018			2017			2016
Balance, Beginning	$	7,297,497		$	576,384		$	930,311
Transfers out of Level 3		(2,009,080	)		-			-
Securities Purchased During the Year		-			7,069,649			-
Securities Matured During the Year		-			(360,000	)		(330,000	)
Paydowns on Securities		(885,082	)		-			-
Unrealized Gains(Losses) Included in Other
Comprehensive Income		(125,767	)		11,464			(23,927	)
Balance, Ending	$	4,277,568		$	7,297,497		$	576,384

The Company’s policy is to recognize transfers in and transfers out of levels 1, 2 and 3 as of the end of a reporting period. There was one security totaling $2,009,080 that was transferred from level 3 to level 2 for the year ended December 31, 2018. There were no transfers of securities between level 1 and level 2 or level 3 for the years ended December 31, 2017 or 2016.

The following table presents quantitative information about recurring level 3 fair value measurements as of December 31, 2018 and 2017:

December 31, 2018	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
State, County and Municipal	$	214,475	Discounted Cash Flow	Discount Rate or Yield		N/A*
U. S. Government Agencies Mortgage - Backed		4,063,093	Fundamental Analysis	Discount Rate or Yield		N/A*
December 31, 2017
State, County and Municipal	$	215,366	Discounted Cash Flow	Discount Rate or Yield		N/A*
U. S. Government Agencies Mortgage - Backed		5,022,131	Fundamental Analysis	Discount Rate or Yield		N/A*
Corporate		2,060,000	Option Pricing	Discount Rate or Yield		N/A*

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

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PART I (Continued)

Item 1 (Continued)

(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.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. As of December 31, 2018, the interim final Basel III rules (Basel III) require the Company to also maintain minimum amounts and ratios of common equity Tier 1 capital to risk weighted assets. These amounts and ratios as defined in regulations are presented hereafter. Management believes, as of December 31, 2018, the Company meets all capital adequacy requirements to which it is subject under the regulatory framework for prompt corrective action. In the opinion of management, there are no conditions or events since prior notification of capital adequacy from the regulators that have changed the institution’s category.

The Basel III rules also require the implementation of a new capital conservation buffer comprised of common equity Tier 1 capital. The capital conservation buffer was phased in beginning January 1, 2016 at 0.625 percent of risk-weighted assets, with subsequent increases of 0.625 percent each year until reaching its final level of 2.5 percent on January 1, 2019.

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PART I (Continued)

Item 1 (Continued)

(21) Regulatory Capital Matters (Continued)

The following table summarizes regulatory capital information as of December 31, 2018 and December 31, 2017 on a consolidated basis and for the subsidiary, as defined. Regulatory capital ratios for December 31, 2018 and 2017 were calculated in accordance with the Basel III rules.

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2018	(In Thousands)
Total Capital to Risk-Weighted Assets
Consolidated	$	133,900		15.86	%	$	67,527		8.00	%		N/A		N/A
Colony Bank		131,723		15.63			67,418		8.00			84,272		10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated		126,623		15.00			50,645		6.00			N/A		N/A
Colony Bank		124,446		14.77			50,563		6.00			67,418		8.00
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		103,123		12.22			37,984		4.50			N/A		N/A
Colony Bank		124,446		14.77			37,923		4.50			54,777		6.50
Tier I Capital to Average Assets
Consolidated		126,623		10.24			49,478		4.00			N/A		N/A
Colony Bank		124,446		10.08			49,396		4.00			61,745		5.00
As of December 31, 2017
Total Capital to Risk-Weighted Assets
Consolidated	$	127,786		15.56	%	$	65,718		8.00	%		N/A		N/A
Colony Bank		127,470		15.54			65,628		8.00		$	82,036		10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated		120,279		14.64			49,289		6.00			N/A		N/A
Colony Bank		119,963		14.62			49,221		6.00			65,628		8.00
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		96,779		11.78			36,967		4.50			N/A		N/A
Colony Bank		119,963		14.62			36,916		4.50			53,323		6.50
Tier I Capital to Average Assets
Consolidated		120,279		9.89			48,635		4.00			N/A		N/A
Colony Bank		119,963		9.88			48,566		4.00			60,708		5.00

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PART I (Continued)

Item 1 (Continued)

(21) Regulatory Capital Matters (Continued)

In 2018, the Bank obtained approval of its regulators and paid a $8,300,000 dividend to the Company. The dividend was utilized to pay dividends to shareholders and to repurchase the Warrant, which was for 500,000 shares of the Company’s common stock outstanding with private investors. The Warrant was repurchased during the second quarter for $3.2 million. In 2017, the Bank obtained approval of its regulators and paid a $8,725,000 dividend to the Company. The dividend was utilized to pay dividends to shareholders and to redeem 9,360 shares of Preferred Stock. In 2016, the Bank obtained approval of its regulators and paid a $9,100,000 dividend to the Company. The dividend was utilized to redeem 8,661 shares of Preferred Stock.

(22) Stock-Based Compensation

In August 2018, the Company granted an award of 5,650 restricted shares of the Company’s common stock to T. Heath Fountain, the Company’s Chief Executive Officer (“CEO”), with a market price of $17.73 per share. The restricted shares vest in equal installments on each of July 30, 2019, July 2020 and July 2021, subject to continued service by Mr. Fountain through each applicable vesting date, or earlier upon the occurrence of a change in control. With the restricted stock, there will be no cash consideration to the Company for the shares. The CEO will have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested.

Compensation expense for restricted stock is based on the market price of the Company stock at the time of the grant and amortized on a straight-line basis over the vesting period. The balance of unearned compensation related to these restricted shares as of December 31, 2018 is $86,115 which is expected to be recognized over a weighted-average of 2.58 years. Total compensation expense recognized for the restricted shares granted for the year ended December 31, 2018 was $13,890.

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PART I (Continued)

Item 1 (Continued)

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

The parent company’s balance sheets as of December 31, 2018 and 2017 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

	2018			2017
ASSETS
Cash	$	936,808		$	910,239
Premises and Equipment, Net		1,198,006			1,099,626
Investment in Subsidiary, at Equity		117,743,674			114,235,955
Other		235,878			24,458
Total Assets	$	120,114,366		$	116,270,278
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Other Borrowed Money	$	-		$	1,500,000
Other		192,971			218,615
	$	192,971		$	1,718,615
Subordinated Debt		24,229,000			24,229,000
Stockholders’ Equity
Common Stock, Par Value $1; 20,000,000 Shares Authorized, 8,444,908 and 8,439,258 Shares Issued and Outstanding as of December 31, 2018 and 2017, respectively		8,444,908			8,439,258
Paid-In Capital		25,978,334			29,145,094
Retained Earnings		69,459,243			59,230,260
Accumulated Other Comprehensive Loss, Net of Tax		(8,190,090	)		(6,491,949	)
		95,692,395			90,322,663
Total Liabilities and Stockholders’ Equity	$	120,114,366		$	116,270,278

- 57 -

PART I (Continued)

Item 1 (Continued)

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

COLONY BANKCORP, INC. (PARENT ONLY)

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

	2018		2017		2016
Income
Dividends from Subsidiaries	$	8,329,127	$	8,746,882	$	9,118,104
Management Fees		601,080		601,080		601,080
Other		105,968		97,103		103,612
	$	9,036,175	$	9,445,065	$	9,822,796
Expenses
Interest		971,847		900,113		601,567
Salaries and Employee Benefits		1,083,960		917,259		840,130
Other		691,037		604,166		554,434
		2,746,844		2,421,538		1,996,131
Income Before Taxes and Equity in Undistributed Earnings of Subsidiary		6,289,331		7,023,527		7,826,665
Income Tax Benefits		422,210		568,258		457,934
Income Before Equity in Undistributed Earnings of Subsidiary		6,711,541		7,591,785		8,284,599
Equity in Undistributed Earnings of Subsidiary		5,205,859		159,193		388,611
Net Income		11,917,400		7,750,978		8,673,210
Preferred Stock Dividends		-		210,600		1,493,310
Net Income Available to Common Stockholders	$	11,917,400	$	7,540,378	$	7,179,900

- 58 -

PART I (Continued)

Item 1 (Continued)

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

COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31

	2018			2017			2016
Net Income	$	11,917,400		$	7,750,978		$	8,673,210
Other Comprehensive Income (Loss)
Gains (Losses) on Securities Arising During the Year		(2,033,636	)		(608,355	)		(505,367	)
Tax Effect		427,063			206,841			171,825
Realized (Gains) Losses on Sale of AFS Securities		(115,909	)		-			(385,223	)
Tax Effect		24,341			-			130,976
Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects		(1,698,141	)		(401,514	)		(587,789	)
Comprehensive Income	$	10,219,259		$	7,349,464		$	8,085,421

- 59 -

PART I (Continued)

Item 1 (Continued)

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

COLONY BANKCORP, INC. (PARENT ONLY)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

	2018			2017			2016
Cash Flows from Operating Activities
Net Income	$	11,917,400		$	7,750,978		$	8,673,210
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and Amortization		84,848			70,183			66,476
Share-based Compensation Expense		13,890			-			-
Equity in Undistributed
Earnings of Subsidiary		(5,205,859	)		(159,193	)		(388,611	)
Change in Interest Payable		2,450			17,887			5,367
Other		(239,515	)		38,135			108,288
		6,573,214			7,717,990			8,464,730
Cash Flows from Investing Activities
Purchases of Premises and Equipment		(183,228	)		(94,925	)		(6,836	)
Cash Flows from Financing Activities
Proceeds from Other Borrowed Money		7,500			5,000,000			-
Principal Payments on Other Borrowed Money		(1,507,500	)		(3,500,000	)		-
Dividends Paid on Common Stock		(1,688,417	)		(843,934	)		-
Dividends Paid on Preferred Stock		-			(315,900	)		(1,590,746	)
Repurchase of Warrants		(3,175,000	)		-			-
Redemption of Preferred Stock		-			(9,360,000	)		(8,661,000	)
		(6,363,417	)		(9,019,834	)		(10,251,746	)
Increase (Decrease) in Cash		26,569			(1,396,769	)		(1,793,852	)
Cash, Beginning		910,239			2,307,008			4,100,860
Cash, Ending	$	936,808		$	910,239		$	2,307,008

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PART I (Continued)

Item 1 (Continued)

(24) Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted earnings per share reflects the potential dilution of common stock warrants and restricted stock. Net income available to common stockholders represents net income after preferred stock dividends. The following table presents earnings per share for the years ended December 31, 2018, 2017 and 2016:

	2018		2017		2016
Numerator
Net Income Available to Common Stockholders	$	11,917,400	$	7,540,378	$	7,179,900
Denominator
Weighted Average Number of Common Shares Outstanding for Basic Earnings Per Common Share		8,439,454		8,439,258		8,439,258
Dilutive Effect of Potential Common Stock
Restricted Stock		-		-		-
Stock Warrants		99,154		194,323		74,037
Weighted-Average Number of Shares Outstanding for Diluted Earnings Per Common Share		8,538,608		8,633,581		8,513,295
Earnings Per Share - Basic	$	1.41	$	0.89	$	0.85
Earnings Per Share - Diluted	$	1.40	$	0.87	$	0.84

(25) Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) for unrealized gains and losses securities available for sale for the years ended December 31, 2018, 2017 and 2016 are as follows:

	2018			2017			2016
Beginning Balance	$	(6,491,949	)	$	(5,022,140	)	$	(4,434,351	)
Other Comprehensive Income
Before Reclassification		(1,606,573	)		(401,514	)		(333,542	)
Amounts Reclassified from Accumulated
Other Comprehensive Income		(91,568	)		-			(254,247	)
TCJ Act		-			(1,068,295	)		-
Net Current Period Other Comprehensive Income		(1,698,141	)		(1,469,809	)		(587,789	)
Ending Balance	$	(8,190,090	)	$	(6,491,949	)	$	(5,022,140	)

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PART I (Continued)

Item 1 (Continued)

(26) Revenue From Contracts with Customers

With the exception of gains and losses on the sale of other real estate owned, revenue from contracts with customers is recognized in the service charges on deposits category and the other service charges, commissions and fees category in the Company’s consolidated statements of operations as part of noninterest income. The following provides information on the Company’s sources of noninterest income within the scope of ASC 606 for the periods indicated.

Service Charges on Deposits

Service charges on deposits include both account maintenance fees and overdraft fees. The overdraft fees are recognized at the point in time that the overdraft occurs. For the years ended December 31, 2018, 2017, and 2016, there was $4.4 million, $4.5 million and $4.3 million, respectively, in service charges on deposits.

Other Service Charges, Commissions and Fees

Other service charges, commissions and fees include debit card interchange fees and ATM fees. Debit card interchange fees are earned from debit card holder transactions conducted through various payment networks. Interchange fees from debit card holders transactions represent a percentage of the underlying transaction amount and are recognized daily, concurrently with the transaction processing services provided to the debit cardholder. For the years ended December 31, 2018, 2017 and 2016, there was $2.8 million, $2.6 million and $2.4 million, respectively, for debit card interchange fees. ATM fees are transaction-based fees recognized at the time the transaction is executed as that is the point at which the Company satisfies the performance obligation. For the years ended December 31, 2018, 2017 and 2016, there was $352 thousand, $338 thousand and $307 thousand, respectively, for ATM fees.

Gains/Losses on the Sale of Other Real Estate

The net gains and losses on sales of other real estate owned are recorded in other noninterest expenses in the Company’s consolidated statements of operations for the years ended December 31, 2017 and 2016. For the year ended December 31, 2018, the net gains and losses on sales of other real estate owned is recorded in other noninterest income in the Company’s consolidated statements of operations. The Company records a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of other real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the other real estate owned asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. The Company does not provide financing for the sale of other real estate owned property unless these criteria are met and the property can be derecognized. For the years ended December 31, 2018, 2017 and 2016, there was $41 thousand, $(121) thousand and $(648) thousand, respectively, for the gains and losses on the sale of other real estate.

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