EXHIBIT NO. 13

McNair, McLemore, Middlebrooks & Co., LLC

CERTIFIED PUBLIC ACCOUNTANTS

389 Mulberry Street • Post Office Box One • Macon, GA 31202

Telephone (478) 746-6277 • Facsimile (478) 743-6858

mmmcpa.com

 

 

 

 

March 15, 2018

 

 

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

 

 

The Board of Directors and Stockholders

Colony Bankcorp, Inc.

 

Opinions on the Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Colony Bankcorp, Inc. and subsidiary (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

Basis for Opinions

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

 

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

 

 

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

 

Definition and Limitations of Internal Control Over Financial Reporting

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

 

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

 

McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC

 

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

 

Macon, Georgia

March 15, 2018

 

 

 

		2017				2016
ASSETS
Cash and Cash Equivalents
Cash and Due from Banks		$	23,145,136			$	28,822,104
Interest-Bearing Deposits			34,667,715				46,344,859
Investment Securities
Available for Sale, at Fair Value			354,246,904				323,657,870
Federal Home Loan Bank Stock, at Cost			3,042,900				3,010,000
Loans			765,283,855				754,283,563
Allowance for Loan Losses			(7,507,508	)			(8,923,293	)
Unearned Interest and Fees			(495,500	)			(361,042	)
			757,280,847				744,999,228
Premises and Equipment			27,639,430				27,969,260
Other Real Estate (Net of Allowance of $1,451,492 and $1,878,127 in 2017 and 2016, Respectively)			4,256,469				6,439,226
Other Intangible Assets			44,766				80,515
Other Assets			28,431,150				29,118,555
Total Assets		$	1,232,755,317			$	1,210,441,617

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		2017				2016
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest-Bearing		$	190,927,928			$	159,058,633
Interest-Bearing			877,057,477				885,297,895
			1,067,985,405				1,044,356,528
Borrowed Money
Subordinated Debentures			24,229,000				24,229,000
Other Borrowed Money			47,500,000				46,000,000
			71,729,000				70,229,000
Other Liabilities			2,718,249				2,468,356
Commitments and Contingencies
Stockholders’ Equity
Preferred Stock, Stated Value $1,000; 10,000,000 Shares Authorized, 0 and 9,360 Shares Issued and Outstanding as of December 31, 2017 and 2016			-				9,360,000
Common Stock, Par Value $1; 20,000,000 Shares Authorized, 8,439,258 Shares Issued and Outstanding as of December 31, 2017 and 2016			8,439,258				8,439,258
Paid-In Capital			29,145,094				29,145,094
Retained Earnings			59,230,260				51,465,521
Accumulated Other Comprehensive Loss, Net of Tax			(6,491,949	)			(5,022,140	)
			90,322,663				93,387,733
Total Liabilities and Stockholders’ Equity		$	1,232,755,317			$	1,210,441,617

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		2017				2016				2015
Interest Income
Loans, Including Fees		$	38,613,540			$	38,942,503			$	39,716,269
Federal Funds Sold			3				-				14,561
Deposits with Other Banks			232,397				124,459				79,735
Investment Securities
U.S. Government Agencies			6,717,827				5,263,741				4,235,207
State, County and Municipal			115,097				127,379				107,638
Corporate			87,387				-				-
Dividends on Other Investments			150,172				131,007				122,070
			45,916,423				44,589,089				44,275,480
Interest Expense
Deposits			4,758,073				4,781,228				4,856,673
Federal Funds Purchased			2,639				581				26
Borrowed Money			2,112,017				1,701,522				1,712,548
			6,872,729				6,483,331				6,569,247
Net Interest Income			39,043,694				38,105,758				37,706,233
Provision for Loan Losses			390,000				1,062,000				865,500
Net Interest Income After Provision for Loan Losses			38,653,694				37,043,758				36,840,733
Noninterest Income
Service Charges on Deposits			4,466,997				4,307,214				4,268,438
Other Service Charges, Commissions and Fees			3,040,262				2,802,651				2,627,157
Mortgage Fee Income			858,658				681,806				527,187
Securities Gains (Losses)			-				385,223				(11,466	)
Other			1,368,648				1,376,860				1,633,205
			9,734,565				9,553,754				9,044,521
Noninterest Expenses
Salaries and Employee Benefits			19,222,594				18,482,693				17,589,631
Occupancy and Equipment			3,947,941				3,970,244				3,989,347
Directors’ Fees			298,100				348,755				358,291
Legal and Professional Fees			893,938				791,563				737,731
Foreclosed Property			363,519				1,143,518				1,682,783
FDIC Assessment			386,823				603,654				899,302
Advertising			349,722				609,892				624,844
Software			1,192,025				1,112,065				992,593
Telephone			813,592				737,063				710,038
ATM/Card Processing			1,467,411				1,136,122				1,061,262
Other			4,924,163				5,137,400				5,078,932
			33,859,828				34,072,969				33,724,754
Income Before Income Taxes			14,528,431				12,524,543				12,160,500
Income Taxes			6,777,453				3,851,333				3,787,803
Net Income			7,750,978				8,673,210				8,372,697
Preferred Stock Dividends			210,600				1,493,310				2,375,010
Net Income Available to Common Stockholders		$	7,540,378			$	7,179,900			$	5,997,687
Net Income Per Share of Common Stock
Basic		$	0.89			$	0.85			$	0.71
Diluted		$	0.87			$	0.84			$	0.71
Cash Dividends Declared Per Share of Common Stock		$	0.10			$	0.00			$	0.00
Weighted Average Shares Outstanding, Basic			8,439,258				8,439,258				8,439,258
Weighted Average Shares Outstanding, Diluted			8,633,581				8,513,295				8,458,461

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		2017				2016				2015
Net Income		$	7,750,978			$	8,673,210			$	8,372,697
Other Comprehensive Income (Loss)
Gains (Losses) on Securities Arising During the Year			(608,355	)			(505,367	)			610,689
Tax Effect			206,841				171,825				(207,634	)
Realized (Gains) Losses on Sale of AFS Securities			-				(385,223	)			11,466
Tax Effect			-				130,976				(3,898	)
Change in Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects			(401,514	)			(587,789	)			410,623
Comprehensive Income		$	7,349,464			$	8,085,421			$	8,783,320

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		Preferred Shares Issued				Preferred Stock				Common Shares Issued				Common Stock				Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
Balance, December 31, 2014			28,000			$	28,000,000				8,439,258			$	8,439,258			$	29,145,094			$	38,287,934			$	(4,844,974	)		$	99,027,312
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects																											410,623				410,623
Dividends on Preferred Shares																							(2,375,010	)							(2,375,010	)
Redemption of Preferred Stock			(9,979	)			(9,979,000	)																							(9,979,000	)
Net Income																							8,372,697								8,372,697
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	)
TCJ Act Reclassification																							1,068,295				(1,068,295	)			-
Redemption of Preferred Stock			(9,360	)			(9,360,000	)																							(9,360,000	)
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

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		2017				2016				2015
Cash Flows from Operating Activities
Net Income		$	7,750,978			$	8,673,210			$	8,372,697
Adjustments to Reconcile Net Income to Net Cash Provided from Operating Activities
Depreciation			1,647,813				1,574,249				1,657,229
Amortization and Accretion			1,413,362				1,609,339				1,797,152
Provision for Loan Losses			390,000				1,062,000				865,500
Deferred Income Taxes			2,833,958				222,120				625,436
Securities (Gains) Losses			-				(385,223	)			11,466
(Gain) Loss on Sale of Premises and Equipment			(10,735	)			80,329				11,047
Loss on Sale of Other Real Estate and Repossessions			(208,329	)			160,682				600,663
Provision for Losses on Other Real Estate			333,767				501,736				453,148
Increase in Cash Surrender Value of Life Insurance			(1,669,424	)			(589,408	)			(299,010	)
Change In
Interest Receivable			(90,204	)			176,766				(354,274	)
Prepaid Expenses			139,382				(372,380	)			278,637
Interest Payable			21,188				(46,284	)			32,253
Accrued Expenses and Accounts Payable			361,005				(252,617	)			(202,343	)
Other			(367,626	)			973,972				217,686
			12,545,135				13,388,491				14,067,287
Cash Flows from Investing Activities
Interest-Bearing Deposits in Other Banks			11,677,144				(7,729,560	)			(17,409,260	)
Purchase of Investment Securities Available for Sale			(87,160,178	)			(109,634,793	)			(102,336,227	)
Proceeds from Sale of Investment Securities Available for Sale			-				25,209,851				28,273,634
Proceeds from Maturities, Calls and Paydowns of Investment Securities
Available for Sale			54,587,986				54,868,726				51,423,541
Held to Maturity			-				-				9,734
Proceeds from Sale of Premises and Equipment			37,650				89,551				28,608
Net Loans to Customers			(14,459,526	)			(2,167,126	)			(21,255,018	)
Purchase of Premises and Equipment			(1,344,898	)			(3,259,859	)			(3,189,969	)
Proceeds from Sale of Other Real Estate and Repossessions			3,863,576				7,529,131				8,154,596
Proceeds from Sale of Federal Home Loan Bank Stock			-				-				100,300
Purchase of Federal Home Loan Bank Stock			(32,900	)			(279,500	)			-
			(32,831,146	)			(35,373,579	)			(56,200,061	)
Cash Flows from Financing Activities
Interest-Bearing Customer Deposits			(8,240,418	)			7,629,930				26,704,254
Noninterest-Bearing Customer Deposits			31,869,295				25,172,362				5,546,508
Proceeds from Other Borrowed Money			10,015,500				10,000,000				27,000,000
Principal Payments on Other Borrowed Money			(8,515,500	)			(4,000,000	)			(27,000,000	)
Dividends Paid on Preferred Stock			(315,900	)			(1,590,746	)			(2,487,274	)
Redemption of Preferred Stock			(9,360,000	)			(8,661,000	)			(9,979,000	)
Dividends Paid on Common Stock			(843,934	)			-				-
			14,609,043				28,550,546				19,784,488
Net Increase (Decrease) in Cash and Cash Equivalents			(5,676,968	)			6,565,458				(22,348,286	)
Cash and Cash Equivalents, Beginning			28,822,104				22,256,646				44,604,932
Cash and Cash Equivalents, Ending		$	23,145,136			$	28,822,104			$	22,256,646

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(1) Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Nature of Operations

 

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

 

Use of Estimates

 

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

 

Reclassifications

 

In certain instances, amounts reported in prior years’ consolidated financial statements and note disclosures have been reclassified to conform to statement presentations selected for 2017. Such reclassifications had no effect on previously reported stockholders’ equity or net income.

 

 

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 with the current economic downturn in the real estate market. At December 31, 2017, approximately 87.1 percent of the Company’s loan portfolio was concentrated in loans secured by real estate. A substantial portion of borrowers’ ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector. Declining collateral real estate values that secure land development, construction and speculative real estate loans in the Company’s larger MSA markets have resulted in high loan loss provisions in recent years. In addition, a large portion of the Company’s foreclosed assets are also located in these same geographic markets, making the recovery of the carrying amount of foreclosed assets susceptible to changes in market conditions. Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis.

 

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

 

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

 

Investment Securities

 

The Company classifies its investment securities as trading, available for sale or held to maturity. Securities that are held principally for resale in the near term are classified as trading. Trading securities are carried at fair value, with realized and unrealized gains and losses included in noninterest income. Currently, no securities are classified as trading. Securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost. All securities not classified as trading or held to maturity are considered available for sale. Securities available for sale are reported at estimated fair value. Unrealized gains and losses on securities available for sale are excluded from earnings and are 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.

 

 

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.

 

 

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.

 

 

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.

 

 

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:

 

 

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

 

Other Intangible Assets

 

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

 

Transfers of Financial Assets

 

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

 

Statement of Cash Flows

 

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

 

Advertising Costs

 

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

 

 

PART I (Continued)

Item 1 (Continued)

 

(1) Summary of Significant Accounting Policies (Continued)

 

Income Taxes

 

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

 

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

 

The Company’s federal and state income tax returns for tax years 2017, 2016, 2015 and 2014 are subject to examination by the Internal Revenue Service (IRS) and the Georgia Department of Revenue, generally for three years after filing.

 

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

 

Other Real Estate

 

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

 

 

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 $17,088,693 and $15,419,269 as of December 31, 2017 and 2016, respectively.

 

Comprehensive Income

 

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

 

Off-Balance Sheet Credit Related Financial Instruments

 

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

 

 

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). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity is expected to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation. ASU 2014-09, as deferred one year by ASU 2015-14, is effective for the Company in the first quarter of fiscal year 2018. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements.

 

ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU  2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale.  ASU 2016-01 will be effective for the Company on  January 1, 2018. The Company is currently evaluating the impact of the pending adoption of ASU 2016-01 on the consolidated financial statements.

 

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

 

 

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 is not expected to have a significant impact on our financial statements.

 

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

 

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

 

 

 

(2) Cash and Balances Due from Banks

 

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

 

 

The Company is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a percentage of deposits. Reserve balances totaled approximately $1,515,000 and $1,417,000 at December 31, 2017 and 2016, respectively.

 

 

(3) Investment Securities

 

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

 

 

The amortized cost and fair value of investment securities as of December 31, 2017, by contractual maturity, are shown hereafter. Expected maturities may differ from contractual maturities for certain investments because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This is often the case with mortgage-backed securities, which are disclosed separately in the table below.

 

 

 

PART I (Continued)

Item 1 (Continued)

 

(3) Investment Securities (Continued)

 

Investment securities as of December 31, 2016 are summarized as follows:

 

 

Proceeds from sales of investments available for sale were $0 in 2017, $25,209,851 in 2016 and $28,273,634 in 2015. Gross realized gains totaled $0 in 2017, $391,976 in 2016 and $207,896 in 2015. Gross realized losses totaled $0 in 2017, $6,753 in 2016 and $196,316 in 2015.

 

Investment securities having a carrying value totaling $175,484,021 and $144,853,885 as of December 31, 2017 and 2016, respectively, were pledged to secure public deposits and for other purposes.

 

Information pertaining to securities with gross unrealized losses at December 31, 2017 and 2016 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

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.

 

 

PART I (Continued)

Item 1 (Continued)

 

(3) Investment Securities (Continued)

 

At December 31, 2017, 130 securities have unrealized losses which have depreciated 2.64 percent from the Company’s amortized cost basis. These securities are guaranteed by either the U.S. Government, other governments or U.S. corporations. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other than temporary. However, the Company did own one asset-backed security at December 31, 2017 which was completely written off during prior years. This investment is comprised of one issuance of a trust preferred security and has no book value.

 

 

(4) Loans

 

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

 

 

 

PART I (Continued)

Item 1 (Continued)

 

(4) Loans (Continued)

 

Commercial and agricultural loans are extended to a diverse group of businesses within the Company’s market area. These loans are often underwritten based on the borrower’s ability to service the debt from income from the business. Real estate construction loans often require loan funds to be advanced prior to completion of the project. Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans. Consumer loans are originated at the bank level. These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.

 

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (1) the risk grade assigned to commercial and consumer loans, (2) the level of classified commercial loans, (3) net charge-offs, (4) nonperforming loans, and (5) the general economic conditions in the Company’s geographic markets.

 

The Company uses a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the grades is as follows:

 

●

Grades 1 and 2 - Borrowers with these assigned grades range in risk from virtual absence of risk to minimal risk. Such loans may be secured by Company-issued and controlled certificates of deposit or properly margined equity securities or bonds. Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans. Loans in this category fall into the “pass” classification.

 

●

Grades 3 and 4 - Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

 

●

Grade 5 - This grade includes “special mention” loans on management’s watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.

 

●

Grade 6 - This grade includes “substandard” loans in accordance with regulatory guidelines. This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms. Loans considered to be impaired are assigned this grade, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses. Generally, loans on which interest accrual has been stopped would be included in this grade.

 

●

Grades 7 and 8 - These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively. In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades. Management manages the Company’s problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

 

 

PART I (Continued)

Item 1 (Continued)

 

(4) Loans (Continued)

 

The following tables present the loan portfolio by credit quality indicator (risk grade) as of December 31. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

 

 

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.

 

 

PART I (Continued)

Item 1 (Continued)

 

(4) Loans (Continued)

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provision. Loans may be placed on nonaccrual status regardless of whether such loans are considered past due.

 

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of December 31:

 

 

 

PART I (Continued)

Item 1 (Continued)

 

(4) Loans (Continued)

 

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $205,000, $387,300 and $418,400 for the years ended December 31, 2017, 2016 and 2015, respectively.

 

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

 

 

 

PART I (Continued)

Item 1 (Continued)

 

(4) Loans (Continued)

 

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

 

 

 

PART I (Continued)

Item 1 (Continued)

 

(4) Loans (Continued)

 

The following table details impaired loan data as of December 31, 2015:

 

 

 

PART I (Continued)

Item 1 (Continued)

 

(4) Loans (Continued)

 

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

 

●

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

 

●

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

 

●

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

 

 

PART I (Continued)

Item 1 (Continued)

 

(4) Loans (Continued)

 

As discussed in Note 1, Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of December 31, 2017. The following tables present the number of loan contracts restructured during the 12 months ended December 31, 2017, 2016 and 2015. It shows the pre- and post-modification recorded investment as well as the number of contracts and the recorded investment for those TDRs modified during the previous 12 months which subsequently defaulted during the period. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due. A TDR may cease being classified as impaired if the loan is subsequently modified at market terms, has performed according to the modified terms for at least six months, and has not had any prior principal forgiveness on a cumulative basis.

 

 

 

PART I (Continued)

Item 1 (Continued)

 

(4) Loans (Continued)

 

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

 

 

At December 31, 2017, all restructured loans were performing as agreed. During December 2016, a restructured loan totaling $89,297 failed to continue to perform as agreed and was charged off in June 2016. At December 31, 2015, all restructured loans were performing as agreed.