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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____________to ______________
Commission File Number 000-12436

COLONY BANKCORP, INC.
(Exact Name of Registrant Specified in its Charter)

Georgia |  | 58-1492391
(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)
115 South Grant Street |  |
Fitzgerald, Georgia |  | 31750
(Address of Principal Executive Offices) |  | (Zip Code)
(229) 426-6000
Registrant’s Telephone Number, Including Area Code
Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class | Trading Symbol(s) | Name of each Exchange on which registered
Common Stock, Par Value $1.00 per share | CBAN | The NASDAQ Stock Market

Securities Registered Pursuant to Section 12(g) of the Act: None.
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Accelerated Filer ☒ Non-accelerated Filer ☐ Smaller Reporting Company ☒ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ☒
The aggregate market value of Colony Bankcorp, Inc. common stock held by non-affiliates, computed by reference to the price at which the stock was last sold on June 30, 2022, (the last business day of the registrant’s most recently completed second fiscal quarter and based upon the closing price of $15.09, as reported on Nasdaq on June 30, 2022) as reported on the NASDAQ Global Market was $244.8 million.
The number of shares outstanding of Colony Bankcorp, Inc. common stock, par value $1.00 per share, as of March 14, 2023, was 17,593,879 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2023 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2022.
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TABLE OF CONTENTS

|  | Page
PART I |  |
Item 1. | Business | 7
Item 1A. | Risk Factors | 19
Item 1B. | Unresolved Staff Comments | 33
Item 2. | Properties | 33
Item 3. | Legal Proceedings | 34
Item 4. | Mine Safety Disclosures | 34
PART II |  |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 34
Item 6. | Reserved | 36
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 36
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 61
Item 8. | Financial Statements and Supplementary Data | 61
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 115
Item 9A. | Controls and Procedures | 116
Item 9B. | Other Information | 116
PART III |  |
Item 10. | Directors and Executive Officers and Corporate Governance | 116
Item 11. | Executive Compensation | 117
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 117
Item 13. | Certain Relationships and Related Transactions and Director Independence | 117
Item 14. | Principal Accounting Fees and Services | 117
PART IV |  |
Item 15. | Exhibits, Financial Statement Schedules | 117
Item 16. | Form 10-K Summary | 119
| Signatures | 120

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In this Annual Report on Form 10-K (this “Annual Report”), references to “we,” “our,” “us,” “Colony” or “the Company” refer to Colony Bankcorp, Inc., a Georgia corporation, and our wholly-owned banking subsidiary, Colony Bank, a Georgia-state chartered bank, unless otherwise indicated or the context otherwise requires. References to “Bank” refer to Colony Bank, our wholly-owned banking subsidiary.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors discussed elsewhere in this Annual Report and the following:
•the impact of current and future economic and market conditions generally (including seasonality) and in the financial services industry, nationally and within our primary market areas, including the effects of inflationary pressures, changes in interest rates, slowdowns in economic growth, and the potential for high unemployment rates, as well as the financial stress on borrowers and changes to customer and client behavior (including the velocity of loan repayment) and credit risk as a result of the foregoing;
•changes in interest rate environment (including changes to the federal funds rate, the level and composition of deposits (as well as the cost of, and competition for, deposits), loan demand, liquidity and the values of loan collateral, securities and market fluctuations, and interest rate sensitive assets and liabilities), and competition in our markets may result in increased funding costs or reduced earning assets yields, thus reducing our margins and net interest income;
•the risk of inflation and interest rate increases resulting from monetary and fiscal stimulus responses, and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
•the risk that a future economic downturn and contraction could have a material adverse effect on our capital, financial condition, credit quality, results of operations and future growth;
•factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our borrowers and the success of various projects that we finance;
•concentration of our loan portfolio in real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate;
•weakness in the real estate market, which can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and delinquencies, and mortgage fee income;
•credit and lending risks associated with our construction and development, commercial real estate, commercial and industrial and residential real estate loan portfolios;
•negative impact in our mortgage banking services, including declines in our mortgage originations or profitability due to rising interest rates and increased competition and regulation, the Bank’s or third party’s failure to satisfy mortgage servicing obligations, loan modifications, the effects of judicial or regulatory requirements or guidance, and the possibility of the Bank being required to repurchase mortgage loans or indemnify buyers;
•our ability to attract sufficient loans that meet prudent credit standards, including in our construction and development, commercial and industrial and owner-occupied commercial real estate loan categories;
•our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;
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•our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses;
•the adequacy of our reserves (including allowance for loan losses) and the appropriateness of our methodology for calculating such reserves, including the implementation of the Current Expected Credit Losses ("CECL") model;
•our ability to successfully execute our business strategy to achieve profitable growth;
•the concentration of our business within our geographic areas of operation in Georgia and neighboring markets;
•our focus on small and mid-sized businesses;
•our ability to manage our growth;
•our ability to increase our operating efficiency;
•significant turbulence or a disruption in the capital or financial markets and the effect of a fall in stock market prices on our investment securities;
•liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;
•failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations;
•risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits;
•inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic risk and reputational risk;
•our ability to maintain expenses in line with current projections;
•the makeup of our asset mix and investments;
•external economic, political and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve, the possibility that the U.S. could default on its debt obligations, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;
•uncertainty related to the transition away from the London Inter-bank Offered Rate (“LIBOR”);
•continued or increasing competition from other financial institutions (including fintech companies), credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;
•challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;
•restraints on the ability of the Bank to pay dividends to us, which could limit our liquidity;
•increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;
•a failure in the internal controls we have implemented to address the risks inherent to the business of banking;
•inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance;
•changes in our management personnel or our inability to retain motivate and hire qualified management personnel;
•the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets, which may be impacted as a result of labor shortages;
•our ability to identify and address cyber-security risks, fraud and systems errors;
•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;
•disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;
•an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies;
•fraudulent and negligent acts by our clients, employees or vendors and our ability to identify and address such acts;
•risks related to potential acquisitions;
•the impact of any claims or legal actions to which we may be subject, including any effect on our reputation;
•compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations;
•changes in the scope and cost of FDIC insurance and other coverage;
•changes in our accounting standards;
•changes in tariffs and trade barriers;
•changes in federal tax law or policy;
•the institution and outcome of litigation and other legal proceedings against us or to which we may become subject to;
•the impact of recent and future legislative and regulatory changes;
•examinations by our regulatory authorities;
5

•the effects of war or other conflicts (including the military conflict between Russia and Ukraine), acts of terrorism, acts of God, natural disasters, health emergencies, epidemics or pandemics, climate changes; or other catastrophic events that may affect general economic conditions;
•the ongoing impact of the COVID-19 pandemic;
•risks related to environmental, social and governance (“ESG”) strategies and initiatives, the scope and pace of which could alter the Company’s reputation and shareholder, associate, customer and third-party affiliations; and
•other risks and factors identified in this Form 10-K under the heading “Risk Factors” and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Annual Report on Form 10-K. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this Annual Report on Form 10-K. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
6

Part I
Item 1
Business
COLONY BANKCORP, INC.
General
Colony Bankcorp, Inc. (the “Company” or “Colony”) is a Georgia business corporation which was incorporated on November 8, 1982. The Company was organized for the purpose of operating as a bank holding company under the Bank Holding Company Act of 1956, as amended, and the bank holding company laws of Georgia. Our business is conducted primarily through our wholly-owned bank subsidiary, Colony Bank, a Georgia state-chartered commercial bank, which provides a broad range of banking services to its retail and commercial customers. We operate thirty-four domestic banking offices and three corporate operations offices. At December 31, 2022, we had approximately $2.9 billion in total assets, $1.8 billion in total loans, $2.5 billion in total deposits and $230.3 million in stockholder’s equity. Deposits are insured, up to applicable limits, by the Federal Deposit Insurance Corporation.
The Parent Company
Because the Company is a bank holding company, its principal operations are conducted through the Bank. It has 100 percent ownership of its subsidiary bank and maintains systems of financial, operational and administrative controls that permit centralized evaluation of the operations of the subsidiary bank in selected functional areas including operations, accounting, marketing, investment management, purchasing, human resources, computer services, auditing, compliance and credit review. As a bank holding company, we perform certain shareholder and investor relations functions.
Colony Bank - Banking Services
Our principal subsidiary is the Bank. The Bank, headquartered in Fitzgerald, Georgia, offers traditional banking products and services to commercial and consumer customers in our markets. Our product line includes, among other things, loans to small and medium-sized businesses, residential and commercial construction and land development loans, commercial real estate loans, commercial loans, agri-business and production loans, residential mortgage loans, home equity loans, consumer loans and a variety of demand, savings and time deposit products. We also offer internet banking services, electronic bill payment services, safe deposit box rentals, telephone banking, credit and debit card services, remote depository products and access to a network of ATMs to our customers. The Bank conducts a general full service commercial, consumer and mortgage banking business through thirty-four offices located in central, south and coastal Georgia cities of Fitzgerald, Warner Robins, Centerville, Ashburn, Leesburg, Cordele, Albany, LaGrange, Columbus, Sylvester, Tifton, Moultrie, Douglas, Broxton, Savannah, Eastman, Fayetteville, Rochelle, Rockmart, Cedartown, Chickamauga, Atlanta, Manchester, Quitman, Thomaston, Valdosta and Statesboro, Georgia.
For additional discussion of our loan portfolio and deposit accounts, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Loans" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Deposits.”
Subordinated Debentures (Trust Preferred Securities)
During the second quarter of 2004, the Company formed Colony Bankcorp Statutory Trust III for the sole purpose of issuing $4,500,000 in Trust Preferred Securities through a pool sponsored by FTN Financial Capital Market. The securities have a maturity of thirty years and are redeemable after five years with certain exceptions.
During the second quarter of 2006, the Company formed Colony Bankcorp Capital Trust I for the sole purpose of issuing $5,000,000 in Trust Preferred Securities through a pool sponsored by Truist Capital Markets. The securities have a maturity of thirty years and are redeemable after five years with certain exceptions.
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During the first quarter of 2007, the Company formed Colony Bankcorp Capital Trust II for the sole purpose of issuing $9,000,000 in Trust Preferred Securities through a pool sponsored by Trapeza Capital Management, LLC. The securities have a maturity of thirty years and are redeemable after five years with certain exceptions. Proceeds from this issuance were used to pay off trust preferred securities issued on March 26, 2002 through Colony Bankcorp Statutory Trust I.
During the third quarter of 2007, the Company formed Colony Bankcorp Capital Trust III for the sole purpose of issuing $5,000,000 in Trust Preferred Securities through a pool sponsored by Trapeza Capital Management, LLC. The securities have a maturity of thirty years and are redeemable after five years with certain exceptions. Proceeds from this issuance were used to pay off trust preferred securities issued on December 19, 2002 through Colony Bankcorp Statutory Trust II.
The Company is not in default of any outstanding Trust Preferred Securities as of December 31, 2022.
Recent Developments
The Company paid dividends to its shareholders throughout 2022 and 2021 on a quarterly basis. In 2022, we had a quarterly dividend of $0.1075 per share of common stock and in 2021, we had a quarterly dividend of $0.1025 per share of common stock.
On February 10, 2022, the Company completed a public offering of 3,848,485 shares of its common stock at a public offering price of $16.50 per share, with aggregate proceeds of approximately $63.5 million.
On May 20, 2022, the Company completed a private placement of $40.0 million in fixed-to-floating rate subordinated notes due 2032 (the "Notes"). The Notes will bear a fixed rate of 5.25% for the first five years and will reset quarterly thereafter to then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 265 basis points for the five-year floating term. The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after May 20, 2027, or at any time, in whole but not in part, upon certain other specified events. At December 31, 2022, $39.1 million of the Notes were outstanding.
On October 20, 2022, the Board of Directors of the Company authorized a stock buyback program, under which the Company may repurchase up to $12 million of its outstanding common stock. Repurchases under this program may be made from time to time through open market purchases, privately negotiated transactions or such other manners as will comply with applicable laws and regulations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and priorities. The buyback program does not obligate the Company to purchase any particular number of shares and there is no guarantee as to the exact number of shares that will be repurchased by the Company. The buyback program is intended to expire at the end of 2023 but may be suspended, modified or terminated by the Company at any time and for any reason, without prior notice. As of December 31, 2022, 40,000 shares had been repurchased at a price of $13.50, leaving $11.5 million available for future repurchase.
Markets and Competition
The banking industry in general is highly competitive. Our market areas consist of central, south and coastal Georgia. In contrast to our rural markets, in which we typically rank in the top three in terms of market share, we face competitive pressures in attracting deposits and making loans from larger regional banks and smaller community banks. The Bank's competition includes not only other banks of comparable or larger size in the same markets, but also various other nonbank financial institutions, including savings and loan associations, credit unions, mortgage companies, personal and commercial financial companies, peer to peer lending businesses, fintech companies, investment brokerage and financial advisory firms and mutual fund companies. The Bank competes for deposits, commercial, fiduciary and investment services and various types of loans and other financial services. The Bank also competes for interest-bearing funds with a number of other financial intermediaries, including brokerage and insurance firms, as well as investment alternatives, including mutual funds, governmental and corporate bonds, and other securities. Continued consolidation and rapid technological changes within the financial services industry will likely change the nature and intensity of competition, but also will create opportunities for the Company to demonstrate and leverage its competitive advantages. The continuing consolidation within the financial services industry is leading to larger, better capitalized and geographically diverse institutions with enhanced product and technology capabilities. Additionally, competition from fintechs, is increasing. In addition to fintechs, certain technology companies are working to provide financial services directly to their customers. These nontraditional financial service providers have been successful in developing digital and other products and services that effectively compete with traditional banking services, but are in some cases subject to fewer regulatory restrictions than banks and bank holding companies, allowing them to operate with greater flexibility and lower cost structures. Although digital products and services have been important competitive features of
8

financial institutions for some time, the COVID-19 pandemic has accelerated the move toward digital financial services products and we expect that trend to continue.
Competitors include not only financial institutions based in Georgia, but also a number of large out-of-state and foreign banks, bank holding companies and other financial institutions that have an established market presence in Georgia or that offer internet-based products. Many of the Company's competitors are engaged in local, regional, national and international operations and have greater assets, personnel and other resources. Some of these competitors are subject to less regulation and/or more favorable tax treatment. Many of these institutions have greater resources, broader geographic markets and higher lending limits, and may offer services that the Company does not offer. In addition, these institutions may be able to better afford and make broader use of media advertising, support services, and electronic and other technology. To offset these potential competitive disadvantages, the Company depends on its reputation for superior service, ability to make credit and other business decisions quickly, and the delivery of an integrated distribution of traditional branches and bankers, with digital technology.
Correspondents
Colony Bank has correspondent relationships with the following banks: Federal Reserve Bank of Atlanta; FHN Financial in Memphis, Tennessee; SouthState Bank in Lake Wales, Florida, ServisFirst in Birmingham, Alabama and the Federal Home Loan Bank of Atlanta. These correspondent relationships facilitate the transaction of business by means of loans, collections, investment services, lines of credit and exchange services, particularly in markets in which Colony Bank does not have a physical presence. As compensation for these services, the Bank maintains balances with its correspondents in primarily interest-bearing accounts and pays some service charges.
Human Capital Resources
We recognize that our most valuable asset is our people. One of our top strategic priorities is the retention and development of our talent. This includes providing career development opportunities for all associates; increasing our diversity and inclusion; training our next generation of leaders; and succession planning.
On December 31, 2022, the Company had a total of 522 employees, 511 of which are full-time equivalent employees. None of our employees are represented by any collective bargaining unit or is a party to a collective bargaining agreement. We consider our relationship with our employees to be satisfactory and have not experienced interruptions of operations due to labor disagreements.
Talent Acquisition, Development and Retention
Our culture emphasizes our longstanding dedication to being respectful to others and having a workforce that is representative of the communities we serve. Diversity and inclusion are fundamental to our culture. We believe in attracting, retaining and promoting quality talent and recognize that diversity makes us stronger as a company. Our success depends on our ability to attract, retain and develop employees, and our talent acquisition teams partner with hiring managers in sourcing and presenting a diverse slate of qualified candidates to strengthen our organization. Professional development is a key priority, which is facilitated through our many corporate development initiatives including extensive training programs, corporate mentoring, leadership programs, educational reimbursement and professional speaker series.
Health and Welfare
As part of our effort to attract and retain employees, we offer a broad range of benefits, including a profit-sharing plan covering all employees, subject to certain minimum age and service requirements. In addition, the Company maintains a comprehensive employee benefit program providing, among other benefits, hospitalization, major medical, life insurance and disability insurance. Management considers these benefits to be competitive with those offered by other financial institutions in our market area. Colony’s employees are not represented by any collective bargaining group.
Corporate Information
The Company’s headquarters is located at 115 South Grant Street, Fitzgerald, Georgia 31750, its telephone number is 229-426-6000 and its internet address is www.colonybank.com. The information contained on or accessible from our website does not constitute a part of this Annual Report on Form 10-K and is not incorporated by reference herein.
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Public Information
Persons interested in obtaining information on the Company may read and copy any materials that we file with the U.S. Securities and Exchange Commission ("SEC"). The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at https://www.sec.gov. We make available, free of charge, on or through our website, https://investors.colony.bank.com/sec-filings, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and amendments to such filings, as soon as reasonably practicable after each is electronically filed with, or furnished to, the SEC.
SUPERVISION AND REGULATION
General
We are extensively regulated under federal and state law. The following is a brief summary that does not purport to be a complete description of all regulations that affect us or all aspects of those regulations. This discussion is qualified in its entirety by reference to the particular statutory and regulatory provisions described below and is not intended to be an exhaustive description of the statutes or regulations applicable to the Company’s and the Bank’s business. In addition, proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal levels. The likelihood and timing of any changes in these laws and regulations, and the impact such changes may have on us and the Bank, are difficult to predict. In addition, bank regulatory agencies may issue enforcement actions, policy statements, interpretive letters and similar written guidance applicable to us or the Bank. Changes in applicable laws, regulations or regulatory guidance, or their interpretation by regulatory agencies or courts may have a material adverse effect on our and the Bank’s business, operations, and earnings. Supervision and regulation of banks, their holding companies and affiliates is intended primarily for the protection of depositors and customers, the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”), and the U.S. banking and financial system rather than holders of our capital stock.
Regulation of the Company
We are registered as a bank holding company with the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and have elected to be treated as a financial holding company. As such, we are subject to comprehensive supervision and regulation by the Federal Reserve and are subject to its regulatory reporting requirements. Federal law subjects bank holding companies, such as the Company, to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. Violations of laws and regulations, or other unsafe and unsound practices, may result in regulatory agencies imposing fines or penalties, cease and desist orders, or taking other enforcement actions. Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and other parties participating in the affairs of a bank or bank holding company.
Activity Limitations. As a financial holding company, we are permitted to engage directly or indirectly in a broader range of activities than those permitted for a bank holding company that has not elected to be a financial holding company. Bank holding companies are generally restricted to engaging in the business of banking, managing or controlling banks and certain other activities determined by the Federal Reserve to be closely related to banking. Financial holding companies may also engage in activities that are considered to be financial in nature, as well as those incidental or, if determined by the Federal Reserve, complementary to financial activities. We and Colony Bank must each remain “well-capitalized” and “well-managed” and Colony Bank must receive a CRA rating of at least “Satisfactory” at its most recent examination in order for us to maintain our status as a financial holding company. If Colony Bank ceases to be “well capitalized” or “well managed” under applicable regulatory standards, or if Colony Bank receives a rating of less than satisfactory under the CRA, the Federal Reserve Board may, among other things, place limitations on our ability to conduct these broader financial activities or, if the deficiencies persist, require us to divest the banking subsidiary or the businesses engaged in activities permissible only for financial holding companies.
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In addition, the Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any nonbanking activity or terminate its ownership or control of any nonbank subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company.
Source of Strength Obligations. A financial holding company is required to act as a source of financial and managerial strength to its subsidiary bank and to maintain resources adequate to support its bank. The term “source of financial strength” means the ability of a company, such as us, that directly or indirectly owns or controls an insured depository institution, such as the Bank, to provide financial assistance to such insured depository institution in the event of financial distress. The appropriate federal banking agency for the depository institution (in the case of the Bank, this agency is the FDIC) may require reports from us to assess our ability to serve as a source of strength and to enforce compliance with the source of strength requirements by requiring us to provide financial assistance to the Bank in the event of financial distress. If we were to enter bankruptcy or become subject to the orderly liquidation process established by the Dodd-Frank Act, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee or the FDIC, as appropriate, and entitled to a priority of payment.
Acquisitions. The BHC Act permits acquisitions of banks by bank holding companies, such that we and any other bank holding company, whether located in Georgia or elsewhere, may acquire a bank located in any other state, subject to certain deposit-percentage, age of bank charter requirements, and other restrictions. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any additional bank or bank holding company, (ii) taking any action that causes an additional bank or bank holding company to become a subsidiary of the bank holding company, or (iii) merging or consolidating with any other bank holding company. The Federal Reserve may not approve any such transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider: (1) the financial and managerial resources of the companies involved, including pro forma capital ratios; (2) the risk to the stability of the United States banking or financial system; (3) the convenience and needs of the communities to be served, including performance under the Community Reinvestment Act, further described below; and (4) the effectiveness of the companies in combatting money laundering.
Change in Control. Federal law restricts the amount of voting stock of a bank holding company or a bank that a person may acquire without the prior approval of banking regulators. Under the Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company, such as the Company, and the FDIC before acquiring control of the Bank. Upon receipt of such notice, the bank regulatory agencies may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a person or group acquires the power to vote 10% or more of our outstanding common stock. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Investors should be aware of these requirements when acquiring shares of our stock.
Governance and Financial Reporting Obligations. We are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board, and the Nasdaq Stock Market. In particular, we are required to include management and independent registered public accounting firm reports on internal controls as part of our Annual Report on Form 10-K in order to comply with Section 404 of the Sarbanes-Oxley Act. We have evaluated our controls, including compliance with the SEC rules on internal controls, and have and expect to continue to spend significant amounts of time and money on compliance with these rules. Our failure to comply with these internal control rules may materially adversely affect our reputation, ability to obtain the necessary certifications to financial statements, and the values of our securities.
Corporate Governance. The Dodd-Frank Act addresses many investor protections, corporate governance, and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act (1) grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for Compensation Committee members; and (3) requires companies listed on national securities exchanges to adopt incentive-based compensation claw-back policies for executive officers.
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Incentive Compensation. The Dodd-Frank Act required the banking agencies and the SEC to establish joint rules or guidelines for financial institutions with more than $1 billion in assets, such as us and the Bank, which prohibit incentive compensation arrangements that the agencies determine to encourage inappropriate risks by the institution. The federal banking agencies issued proposed rules in 2011 and previously issued guidance on sound incentive compensation policies. In 2016, the federal banking agencies also proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2022, these rules have not been implemented. We and the Bank have undertaken efforts to ensure that our incentive compensation plans do not encourage inappropriate risks, consistent with three key principles - that incentive compensation arrangements should appropriately balance risk and financial rewards, be compatible with effective controls and risk management, and be supported by strong corporate governance. On October 26, 2022, the SEC adopted final rules to implement Section 954 of the Dodd-Frank Act that require public companies to adopt and disclose a policy for the recovery of incentive-based compensation received by current or former executive officers that is based on erroneously reported financial information in the event of a required accounting restatement. The rules also require disclosure of the policy, including filing the policy as an exhibit to annual reports on Form 10-K and additional disclosure in the event an accounting restatement is required and recovery is triggered under the policy. The stock exchanges have up to 90 days after publication of the rules in the Federal Register to submit proposed listing standards to the SEC for approval, and the proposed listing standards must be effective no later than one year after the publication date. Following the effective date of the new listing standards, public companies will have 60 days to adopt the required clawback policy.
Shareholder Say-On-Pay Votes. The Dodd-Frank Act requires public companies to take shareholders’ votes on proposals addressing compensation (known as say-on-pay), the frequency of a say-on-pay vote, and the golden parachutes available to executives in connection with change-in-control transactions. Public companies must give shareholders the opportunity to vote on the compensation at least every three years and the opportunity to vote on frequency at least every six years, indicating whether the say-on-pay vote should be held annually, biennially, or triennially. The say-on-pay, the say-on-parachute and the say-on-frequency votes are explicitly nonbinding and cannot override a decision of our board of directors.
Other Regulatory Matters. We and our subsidiaries are subject to oversight by the SEC, the Financial Industry Regulatory Authority, (“FINRA”), the PCAOB, the Nasdaq Stock Market and various state securities regulators. We and our subsidiaries have from time to time received requests for information from regulatory authorities in various states, including state attorneys general, securities regulators and other regulatory authorities, concerning our business practices. Such requests are considered incidental to the normal conduct of business.
Capital Requirements. The Bank is required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account in assessing an institution’s overall capital adequacy. The following is a brief description of the relevant provisions of these capital rules and their potential impact on our capital levels.
The Bank is subject to the following risk-based capital ratios: a common equity Tier 1 (“CET1”) risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total risk-based capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock, plus retained earnings, and certain qualifying minority interests, less certain adjustments and deductions, including with respect to goodwill, intangible assets, mortgage servicing assets and deferred tax assets subject to temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital consists of instruments disqualified from Tier 1 capital, including qualifying subordinated debt, other preferred stock and certain hybrid capital instruments, and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The capital rules also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules, including, for example, certain “high volatility” commercial real estate, past due assets, structured securities and equity holdings.
The leverage capital ratio, which serves as a minimum capital standard, is the ratio of Tier 1 capital to quarterly average total consolidated assets net of goodwill, certain other intangible assets, and certain required deduction items. The required minimum leverage ratio for all banks is 4%.
In addition, as of January 1, 2019, the capital rules require a capital conservation buffer of 2.5%, constituted of CET1, above each of the minimum capital ratio requirements (CET1, Tier 1, and total risk-based capital), which is designed to absorb losses
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during periods of economic stress. These buffer requirements must be met for a bank to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five regulatory capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDICIA imposes progressively more restrictive restraints on operations, management and capital distributions, depending on the category in which an institution is classified.
To be well-capitalized, the Bank must maintain at least the following capital ratios:
•6.5% CET1 to risk-weighted assets;
•8.0% Tier 1 capital to risk-weighted assets;
•10.0% Total capital to risk-weighted assets; and
•5.0% Leverage ratio.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. For example, only a well-capitalized depository institution may accept brokered deposits without prior regulatory approval. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other restrictions on its growth.
As of December 31, 2022, our Bank's regulatory capital ratios were above the applicable well-capitalized standards and met the then-applicable capital conservation buffer.
The Company is not required to comply with minimum regulatory capital levels at this time. The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”) signed into law in May 2018 scaled back certain requirements of the Dodd-Frank Act and provided other regulatory relief. Among the provisions of the Economic Growth Act was a requirement that the Federal Reserve raise the asset threshold for those bank holding companies subject to the Federal Reserve’s Small Bank Holding Company Policy Statement (“Policy Statement”) to $3 billion. As a result, as of the effective date of that change in 2018, the Company was no longer required to comply with the risk-based capital rules applicable to the Bank as described above. The Federal Reserve may, however, require smaller bank holding companies subject to the Policy Statement to maintain certain minimum capital levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans.
As a result of the Economic Growth Act, the federal banking agencies were also required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s Tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action statutes. The federal banking agencies may consider a financial institutions risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the minimum capital for the new Community Bank Leverage Ratio at 9%. The Bank has not opted into the Community Bank Leverage Ratio Framework.
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, which introduced CECL as the methodology to replace the “incurred loss” methodology for financial assets measured at amortized cost, and changed the approaches for recognizing and recording credit losses on available-for-sale debt securities and purchased credit impaired financial assets. Under the incurred loss methodology, credit losses are recognized only when the losses are probable or have been incurred; under CECL, companies are required to recognize the full amount of expected credit losses for the lifetime of the financial assets, based on historical experience, current conditions and reasonable and supportable forecasts. This change will result in earlier recognition of credit losses that the Company deems expected but not yet probable. For SEC reporting companies with smaller reporting company designation and December 31 fiscal-year ends, such as the Company, CECL will become effective beginning with the first quarter of 2023.
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Payment of Dividends. We are a legal entity separate and distinct from the Bank and our other subsidiaries. Our primary source of cash, other than securities offerings, is dividends from the Bank. Under the laws of the State of Georgia, we, as a business corporation, may declare and pay dividends in cash or property unless the payment or declaration would be contrary to restrictions contained in our Articles of Incorporation, as amended, or unless, after payment of the dividend, we would not be able to pay our debts when they become due in the usual course of our business or our total assets would be less than the sum of our total liabilities. In addition, we are also subject to federal regulatory capital requirements that effectively limit the amount of cash dividends that we may pay.
The primary sources of funds for our payment of dividends to our shareholders are cash on hand and dividends from the Bank and our non-bank subsidiaries. Various federal and state statutory provisions and regulations limit the amount of dividends that the Bank and our non-bank subsidiaries may pay. The Bank is a Georgia bank. Under the regulations of the Georgia Department of Banking and Finance, a Georgia bank must have approval of the Georgia Department of Banking and Finance to pay cash dividends if, at the time of such payment:
•the ratio of Tier 1 capital to average total assets is less than 6%;
•the aggregate amount of dividends to be declared or anticipated to be declared during the current calendar year exceeds 50% of its net after-tax profits before dividends for the previous calendar year; or
•its total adversely classified assets in its most recent regulatory examination exceeded 80% of its Tier 1 capital plus its allowance for loan and lease losses.
The Georgia Financial Institutions Code contains restrictions on the ability of a Georgia bank to pay dividends other than from retained earnings without the approval of the Georgia Department of Banking and Finance. As a result of the foregoing restrictions, the Bank may be required to seek approval from the Georgia Department of Banking and Finance to pay dividends.
In addition, we and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The FDIC and the Federal Reserve have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. The FDIC and the Federal Reserve have each indicated that depository institutions and their holding companies should generally pay dividends only out of current operating earnings. Prior approval by the FDIC is required if the total of all dividends declared by a bank in any calendar year exceeds the bank’s profits for that year combined with its retained net profits for the preceding two calendar years.
Under a Federal Reserve policy adopted in 2009, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:
•its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
•its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or
•it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Regulation of the Bank
The Bank is subject to comprehensive supervision and regulation by the FDIC and is subject to its regulatory reporting requirements. The Bank also is subject to certain Federal Reserve regulations. In addition, as discussed in more detail below, the Bank and any other of our subsidiaries that offer consumer financial products and services are subject to regulation and potential supervision by the Consumer Financial Protection Bureau ("CFPB"). Authority to supervise and examine the Company and the Bank for compliance with federal consumer laws remains largely with the Federal Reserve and the FDIC, respectively. However, the CFPB may participate in examinations on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. The CFPB also may participate in examinations of our other direct or indirect subsidiaries that offer consumer financial products or services. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB, and state attorneys general are permitted to enforce certain federal consumer financial protection rules adopted by the CFPB.
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Broadly, regulations applicable to the Bank include limitations on loans to a single borrower and to its directors, officers and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; the disclosure of the costs and terms of such credit; requirements to maintain reserves against deposits and loans; limitations on the types of investment that may be made by the Bank; and requirements governing risk management practices. The Bank is permitted under federal law to branch on a de novo basis across state lines where the laws of that state would permit a bank chartered by that state to open a de novo branch.
Transactions with Affiliates and Insiders. The Bank is subject to restrictions on extensions of credit and certain other transactions between the Bank and the Company or any nonbank affiliate. Generally, these covered transactions with either the Company or any affiliate are limited to 10% of the Bank’s capital and surplus, and all such transactions between the Bank and the Company and all of its nonbank affiliates combined are limited to 20% of the Bank’s capital and surplus. Loans and other extensions of credit from the Bank to the Company or any affiliate generally are required to be secured by eligible collateral in specified amounts. In addition, any transaction between the Bank and the Company or any affiliate are required to be on an arm’s length basis. Federal banking laws also place similar restrictions on certain extensions of credit by insured banks, such as the Bank, to their directors, executive officers and principal shareholders.
Reserves. Federal Reserve rules require depository institutions, such as the Bank, to maintain reserves against their transaction accounts, primarily interest bearing and non-interest bearing checking accounts. Effective March 26, 2020, reserve requirement ratios were reduced to zero percent. These reserve requirements are subject to annual adjustment by the Federal Reserve.
FDIC Insurance Assessments and Depositor Preference. The Bank’s deposits are insured by the FDIC’s DIF up to the limits under applicable law, which currently are set at $250,000 per depositor, per insured bank, for each account ownership category. The Bank is subject to FDIC assessments for its deposit insurance. The FDIC calculates quarterly deposit insurance assessments based on an institution’s average total consolidated assets less its average tangible equity, and applies one of four risk categories determined by reference to its capital levels, supervisory ratings, and certain other factors. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.
As of June 30, 2020, the DIF reserve ratio fell to 1.30%, below the statutory minimum of 1.35%. The FDIC, as required under the Federal Deposit Insurance Act, established a plan on September 15, 2020 to restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35% within eight years. On October 18, 2022, the FDIC adopted an amended restoration plan to increase the likelihood that the reserve ratio would be restored to at least 1.35 percent by September 30, 2028. The FDIC’s amended restoration plan increases the initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023. The FDIC could further increase the deposit insurance assessments for certain insured depository institutions, including the Bank, if the DIF reserve ratio is not restored as projected.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency. In addition, the Federal Deposit Insurance Act provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution, including those of the parent bank holding company.
Standards for Safety and Soundness. The Federal Deposit Insurance Act requires the federal bank regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (1) internal controls; (2) information systems and audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate risk exposure; and (6) asset quality.
The federal banking agencies have adopted regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
Anti-Money Laundering. A continued focus of governmental policy relating to financial institutions in recent years has been combating money laundering and terrorist financing. The USA PATRIOT Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions such as broker-dealers, investment advisors and insurance companies, and strengthened the ability of the U.S. Government to help prevent, detect and prosecute international
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money laundering and the financing of terrorism. The principal provisions of Title III of the USA PATRIOT Act require that regulated financial institutions, including state member banks: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. Failure of a financial institution to comply with the USA PATRIOT Act’s requirements could have serious legal and reputational consequences for the institution. The Bank has augmented its systems and procedures to meet the requirements of these regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by law.
FinCEN has adopted rules that require financial institutions to obtain beneficial ownership information with respect to legal entities with which such institutions conduct business, subject to certain exclusions and exemptions. Bank regulators are focusing their examinations on anti-money laundering compliance, and we continue to monitor and augment, where necessary, our anti-money laundering compliance programs.
Banking regulators will consider compliance with the Act’s money laundering provisions in acting upon acquisition and merger proposals. Bank regulators routinely examine institutions for compliance with these obligations and have been active in imposing cease and desist and other regulatory orders and money penalty sanctions against institutions found to be violating these obligations. Sanctions for violations of the Act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to $1 million. On January 1, 2021, Congress passed federal legislation that made sweeping changes to federal anti-money laundering laws, including changes that will be implemented in 2021 and subsequent years.
Economic Sanctions. The Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and acts of Congress. OFAC publishes, and routinely updates, lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, including the Specially Designated Nationals and Blocked Persons List. If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must undertake certain specified activities, which could include blocking or freezing the account or transaction requested, and we must notify the appropriate authorities.
Concentrations in Lending. During 2006, the federal bank regulatory agencies released guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) and advised financial institutions of the risks posed by commercial real estate (“CRE”) lending concentrations. The Guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. Higher allowances for loan losses and capital levels may also be required. The Guidance is triggered when CRE loan concentrations exceed either:
•total reported loans for construction, land development, and other land of 100% or more of a bank’s total risk-based capital; or
•total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land of 300% or more of a bank’s total risk-based capital.
The Guidance also applies when a bank has a sharp increase in CRE loans or has significant concentrations of CRE secured by a particular property type. We have always had exposures to loans secured by commercial real estate due to the nature of our markets and the loan needs of both retail and commercial customers. We believe our long term experience in CRE lending, underwriting policies, internal controls, and other policies currently in place, as well as our loan and credit monitoring and administration procedures, are generally appropriate to managing our concentrations as required under the Guidance.
Community Reinvestment Act. The Bank is subject to the provisions of the Community Reinvestment Act (“CRA”), which imposes a continuing and affirmative obligation, consistent with their safe and sound operation, to help meet the credit needs of entire communities where the bank accepts deposits, including low- and moderate-income neighborhoods. The FDIC’s assessment of the Bank’s CRA record is made available to the public. Further, a less than satisfactory CRA rating will slow, if not preclude, expansion of banking activities and prevent a company from becoming or remaining a financial holding company. Following the enactment of the Gramm-Leach-Bliley Act (“GLB”), CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal regulator. A bank holding company will not be permitted to become or remain a financial holding company and no new activities authorized under GLB may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “satisfactory” CRA rating in its latest CRA examination. Federal CRA regulations require, among other things, that evidence of discrimination against applicants on a prohibited basis, and illegal or abusive lending practices be considered in the CRA evaluation. The Bank has a rating of “Satisfactory” in its most recent CRA evaluation.
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On May 5, 2022, the OCC, FRB, and FDIC issued a notice of proposed rulemaking to provide for a coordinated approach to modernize their respective CRA regulations, such that all banks will be subject to the same set of CRA rules. No final rule has been issued, but the rulemaking may affect the Bank’s CRA compliance obligations in the future.
Privacy and Data Security. The GLB generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, will be required to comply with state law if it is more protective of consumer privacy than the GLB. The GLB also directed federal regulators, including the FDIC, to prescribe standards for the security of consumer information. The Bank is subject to such standards, as well as standards for notifying customers in the event of a security breach. Under federal law, the Bank must disclose its privacy policy to consumers, permit customers to opt out of having nonpublic customer information disclosed to third parties in certain circumstances and allow customers to opt out of receiving marketing solicitations based on information about the customer received from another subsidiary. States may adopt more extensive privacy protections. We are similarly required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused. On November 18, 2021, the federal banking agencies issued a new rule effective in 2022 that requires banks to notify their regulators within 36 hours of a “computer-security incident” that rises to the level of a “notification incident.”
Consumer Regulation. Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. These laws and regulations include, among numerous other things, provisions that:
•limit the interest and other charges collected or contracted for by the Bank, including new rules respecting the terms of credit cards and of debit card overdrafts;
•govern the Bank’s disclosures of credit terms to consumer borrowers;
•require the Bank to provide information to enable the public and public officials to determine whether it is fulfilling its obligation to help meet the housing needs of the community it serves;
•prohibit the Bank from discriminating on the basis of race, creed or other prohibited factors when it makes decisions to extend credit;
•govern the manner in which the Bank may collect consumer debts; and
•prohibit unfair, deceptive or abusive acts or practices in the provision of consumer financial products and services.
Mortgage Regulation. The CFPB adopted a rule that implements the ability-to-repay and qualified mortgage provisions of the Dodd-Frank Act (the “ATR/QM rule”), which requires lenders to consider, among other things, income, employment status, assets, payment amounts, and credit history before approving a mortgage, and provides a compliance “safe harbor” for lenders that issue certain “qualified mortgages.” The ATR/QM rule defines a “qualified mortgage” to have certain specified characteristics, and generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. The rule also establishes general underwriting criteria for qualified mortgages, including that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the borrower have a total debt-to-income ratio that is less than or equal to 43%. While “qualified mortgages” will generally be afforded safe harbor status, a rebuttable presumption of compliance with the ability-to-repay requirements will attach to “qualified mortgages” that are “higher priced mortgages” (which are generally subprime loans). In addition, the securitizer of asset-backed securities must retain not less than 5% of the credit risk of the assets collateralizing the asset-backed securities, unless subject to an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages.”
The CFPB has also issued rules to implement requirements of the Dodd-Frank Act pertaining to mortgage loan origination (including with respect to loan originator compensation and loan originator qualifications) as well as integrated mortgage disclosure rules. In addition, the CFPB has issued rules that require servicers to comply with new standards and practices with regard to: error correction; information disclosure; force-placement of insurance; information management policies and procedures; requiring information about mortgage loss mitigation options be provided to delinquent borrowers; providing delinquent borrowers access to servicer personnel with continuity of contact about the borrower’s mortgage loan account; and evaluating borrowers’ applications for available loss mitigation options. These rules also address initial rate adjustment notices for adjustable-rate mortgages (ARMs), periodic statements for residential mortgage loans, and prompt crediting of mortgage payments and response to requests for payoff amounts.
In 2020, the CARES Act granted certain forbearance rights and protection against foreclosure to borrowers with a “federally backed mortgage loan,” including certain first or subordinate lien loans designed principally for the occupancy of one to four families. These consumer protections continued during the COVID 19 pandemic emergency.
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Non-Discrimination Policies. The Bank is also subject to, among other things, the provisions of the Equal Credit Opportunity Act (the “ECOA”) and the Fair Housing Act (the “FHA”), both of which prohibit discrimination based on race or color, religion, national origin, sex, and familial status in any aspect of a consumer or commercial credit or residential real estate transaction. The Department of Justice (the “DOJ”), and the federal bank regulatory agencies have issued an Interagency Policy Statement on Discrimination in Lending that provides guidance to financial institutions in determining whether discrimination exists, how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices. The DOJ has increased its efforts to prosecute what it regards as violations of the ECOA and FHA.
LIBOR. On March 15, 2022, Congress enacted the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) to address references to LIBOR in contracts that (i) are governed by U.S. law; (ii) will not mature before June 30, 2023; and (iii) lack fallback provisions providing for a clearly defined and practicable replacement for LIBOR. On December 16, 2022, the FRB adopted a final rule to implement the LIBOR Act by identifying benchmark rates based on SOFR (Secured Overnight Financing Rate) that will replace LIBOR in certain financial contracts after June 30, 2023. The final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the LIBOR Act.
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Item 1A.
Risk Factors
In addition to the other information contained in this Annual Report, you should carefully consider the risks described below, as well as the risk factors and uncertainties discussed in our other public filings with the SEC under the caption “Risk Factors” in evaluating us and our business and making or continuing an investment in our stock. Our operations and financial results are subject to various risks and uncertainties, including, but not limited to, the material risks described below. Many of these risks are beyond our control although efforts are made to manage those risks while simultaneously optimizing operational and financial results. The occurrence of any of the following risks, as well as risks of which we are currently unaware or currently deem immaterial, could materially and adversely affect our assets, business, cash flows, condition (financial or otherwise), liquidity, prospects, results of operations and the trading price of our common stock. It is impossible to predict or identify all such factors and, as a result, you should not consider the following factors to be a complete discussion of the risks, uncertainties and assumptions that could materially and adversely affect our assets, business, cash flows, condition (financial or otherwise), liquidity, prospects, results of operations and the trading price of our common stock.
In addition, certain statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” beginning on page 1 of this Annual Report.
Risks Related to Our Business
Difficult or volatile conditions in the national financial markets and local economies may adversely affect our results of operations and financial condition.
Our business and financial performance are vulnerable to weak economic conditions in the financial markets and economic conditions generally or specifically in the state of Georgia, the principal market in which we conduct business. We are operating in a challenging and uncertain economic environment. The global credit and financial markets have from time to time experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, high rates of inflation, the U.S. government’s decisions regarding its debt ceiling and the possibility that the U.S. could default on its debt obligations, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, and lower home sales and commercial activity, changes in securities markets and uncertainty about economic stability. As a result, financial institutions continue to be affected by uncertainty in the real estate market, the credit markets, and the national financial market generally. We retain direct exposure to the commercial and residential real estate markets, and we are affected by events in these markets. The financial markets and the global economy may also be adversely affected by the current or anticipated impact of military conflict, including the current conflict between Russia and Ukraine, which is increasing volatility in commodity and energy prices, creating supply chain issues and causing instability in financial markets. Sanctions imposed by the United States and other countries in response to such conflict could further adversely impact the financial markets and the global economy, and any economic countermeasures by the affected countries or others could exacerbate market and economic instability.
Moreover, substantially all of our loans are to businesses and individuals in Georgia, and all of our branches and most of our deposit customers are also located in this area. As a result, local economic conditions significantly affect the demand for loans and other products we offer to our customers (including real estate, commercial and construction loans), the ability of borrowers to repay these loans and the value of the collateral securing these loans. A decline in the economies in which we operate could have a material adverse effect on our business, financial condition and results of operations, including, but not limited to the following:
•demand for our loans, deposits and services may decline;
•loan delinquencies, problem assets and foreclosures may increase;
•weak economic conditions may continue to limit the demand for loans by creditworthy borrowers, limiting our capacity to leverage our retail deposits and maintain our net interest income;
•collateral for our loans may decline further in value; and
•the amount of our low-cost or non-interest bearing deposits may decrease.
Strong competition and changing banking environment may limit growth and profitability.
Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment
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banking firms operating locally and elsewhere, and non-traditional financial institutions, including fintech companies, non-depository financial services providers. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Additionally, non-traditional financial institutions may not have the same regulatory requirements or burdens as we do, despite playing a rapidly increasing role in the financial services industry including providing services previously limited to commercial banks. Such competition could ultimately limit our growth, profitability and shareholder value, as increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees, gains on sales, servicing fees, as well as reduced net interest margin and profitability. If we are unable to successfully compete in our market areas and adapt to the ever changing banking environment, we may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected. We also compete with many forms of payments offered by both bank and non-bank providers, including a variety of new and evolving alternative payment mechanisms, systems and products, such as aggregators and web-based and wireless payment platforms or technologies, digital or “crypto” currencies, prepaid systems and payment services targeting users of social networks, communications platforms and online gaming. Our future success may depend, in part, on our ability to use technology competitively to offer products and services that provide convenience to customers and create additional efficiencies in our operations.
Some of our competitors have reduced or eliminated certain service charges on deposit accounts, including overdraft fees, and additional competitors may be willing to reduce or eliminate service or other fees in order to attract additional customers. If the Company chooses to reduce or eliminate certain categories of fees, including those related to deposit accounts, fee income related to these products and services would be reduced. If the Company chooses not to take such actions, we may be at a competitive disadvantage in attracting customers for certain fee producing products.
Fluctuations in interest rates may impact net interest income and otherwise negatively impact our financial condition and results of operations.
Net interest income, which is the difference between the interest income that we earn on interest-earning assets and the interest expense that we pay on interest-bearing liabilities, is a major component of our income and our primary source of revenue from our operations. A further narrowing of interest rate spreads could adversely affect our earnings and financial condition. We cannot control or predict with certainty changes in interest rates. Regional and local economic conditions, competitive pressures and the policies of regulatory authorities, including monetary policies of the Federal Reserve, affect interest income and interest expense.
Interest rates are highly sensitive to many factors including, without limitation: the rate of inflation; economic conditions; federal monetary policies; and stability of domestic and foreign markets. Interest rates increased significantly in 2022 as the Federal Reserve attempted to slow economic growth and counteract rising inflation. Further changes in interest rates and monetary policy reportedly are dependent upon the Federal Reserve’s assessment of economic data as it becomes available, though the rising interest rate environment is expected to continue in 2023. Increasing interest rates can have a negative impact on our business by reducing the amount of money our customers borrow or by adversely affecting their ability to repay outstanding loan balances that may increase due to adjustments in their variable rates. This may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. In addition, in a rising interest rate environment we may have to offer more attractive interest rates to depositors to compete for deposits, or pursue other sources of liquidity, such as wholesale funds. Higher income volatility from changes in interest rates and spreads to benchmark indices could result in a decrease in net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates impacts both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, asset quality, liquidity, or financial condition. A prolonged period of volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies.
We have ongoing policies and procedures designed to manage the risks associated with changes in market interest rates and actively manage these risks through hedging and other risk mitigation strategies. However, these risks are many times outside of our control, and if our assumptions are wrong or overall economic conditions are significantly different than anticipated, our risk mitigation techniques may be ineffective or costly.
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Inflation could negatively impact our business, our profitability and our stock price.
Inflation has continued rising in 2022 at levels not seen for over 40 years. Inflationary pressures remained elevated throughout 2022 and are likely to continue into 2023. Prolonged periods of inflation may impact our profitability by negatively impacting our fixed costs and expenses, including increasing funding costs and expense related to talent acquisition and retention, and negatively impacting the demand for our products and services. Additionally, inflation may lead to a decrease in consumer and clients purchasing power and negatively affect the need or demand for our products and services. If significant inflation continues, our business could be negatively affected by, among other things, increased default rates leading to credit losses which could decrease our appetite for new credit extensions. These inflationary pressures could result in missed earnings and budgetary projections causing our stock price to suffer.
Our future success is largely dependent upon our ability to successfully execute our business strategy.
Our future success, including our ability to achieve our growth and profitability goals, is dependent on the ability of our management team to execute on our long-term business strategy, which requires them to, among other things: maintain and enhance our reputation; attract and retain experienced and talented bankers in each of our markets; maintain adequate funding sources, including by continuing to attract stable, low-cost deposits; enhance our market penetration in our metropolitan markets and maintain our leadership position in our community markets; improve our operating efficiency; implement new technologies to enhance the client experience and keep pace with our competitors; attract and maintain commercial banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas; attract sufficient loans that meet prudent credit standards; maintain adequate liquidity and regulatory capital and comply with applicable federal and state banking regulations; manage our credit, interest rate and liquidity risks; develop new, and grow our existing, streams of noninterest income; oversee the performance of third-party service providers that provide material services to our business; and control expenses in line with current projections.
Failure to achieve these strategic goals could adversely affect our ability to successfully implement our business strategies and could negatively impact our business, growth prospects, financial condition and results of operations. Further, if we do not manage our growth effectively, our business, financial condition, results of operations and future prospects could be negatively affected, and we may not be able to continue to implement our business strategy and successfully conduct our operations.
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and through other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits. Such deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income. Moreover, competition among U.S. banks and non-banks for customer deposits is intense and may increase the cost of deposits (particularly in an elevated rate environment) or prevent new deposits and may otherwise negatively affect our ability to grow our deposit base. In addition, our access to deposits may be affected by the liquidity and/or cash flow needs of depositors, which may be exacerbated in an inflationary, recessionary, or elevated rate environment. This may cause our deposit accounts to decrease in the future, and any such decrease could have a material adverse impact on our sources of funding.
Other primary sources of funds consist of cash from operations, investment maturities and sales, sale of loans and proceeds from the issuance and sale of our equity securities to investors. Additional liquidity is provided by our ability to borrow from the Federal Reserve Bank of Atlanta and the Federal Home Loan Bank of Atlanta. We also may borrow from third-party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including our ability to originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
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Our business depends on our ability to successfully manage our asset quality and credit risk.
We are subject to the risk of losses resulting from the failure of borrowers, guarantors and related parties to pay us the interest and principal amounts due on their loans. Although we maintain well-defined credit policies and credit underwriting and monitoring and collection procedures, these policies and procedures may not prevent losses, as some of these risks are outside of our control, particularly during periods in which the local, regional or national economy suffers a general decline. Moreover,
the future effects of the continued elevated inflationary and interest rate environment on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. If borrowers fail to repay their loans, our financial condition and results of operations would be adversely affected.
Our commercial real estate, real estate construction, and commercial business loans increase our exposure to credit risks.
At December 31, 2022, our portfolio of commercial real estate and commercial, financial and agricultural loans totaled $1.4 billion or 82.3% of total loans compared to $1.1 billion, or 82.7% of total loans at December 31, 2021. At December 31, 2022, the amount of nonperforming commercial real estate and commercial, financial and agricultural loans was $3.0 million , or 52.6% of total nonperforming loans. These loans may expose us to a greater risk of non-payment and loss than residential real estate loans because, in the case of commercial loans, repayment often depends on the successful operation and earnings of the borrower's businesses and, in the case of consumer loans, the applicable collateral is subject to rapid depreciation. Additionally, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest due on the loan, which could cause us to increase our provision for loan losses and adversely affect our financial condition and operating results.
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loans and other losses.
At December 31, 2022, approximately 86.1% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral. As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect credit quality, profitability, financial condition, and results of operation. Such declines and losses would have a material adverse impact on our business, results of operations and growth prospects. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may also require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.
Our provision and allowance for loan losses may not cover actual losses, and we may be required to materially increase our allowance, which may adversely affect our capital, financial condition and results of operations.
We make various assumptions and judgments about the collectability of our loan and lease portfolio and utilize these assumptions and judgments when determining the provision and allowance for loan losses. The determination of the appropriate level of the provision and allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks suing existing qualitative and quantitative information and future trends, all of which may undergo material changes. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the amount reserved in the allowance for loan losses.
Because the risk rating of the loans is dependent on some subjective information and subject to changes in the borrower's credit risk profile, evolving local market conditions and other factors, it can be difficult for us to predict the effects that those factors
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will have on the classifications assigned to the loan portfolio, and thus difficult to anticipate the velocity or volume of the migration of loans through the classification process and effect on the level of the allowance for loan losses. In addition, due to the declining economic conditions, our customers may not be able to repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance. While we maintain our allowance to provide for loan defaults and non-performance, losses may exceed the value of the collateral securing the loans and the allowance may not fully cover any excess loss. In addition, bank regulatory agencies periodically review our provision and the total allowance for loan losses and may require an increase in the allowance for loan losses or future provisions for loan losses, based on judgments different than those of management. Any increases in the provision or allowance for loan losses will result in a decrease in our net income and, potentially, capital, and may have a material adverse effect on our financial condition or results of operations.
We may not be able to meet our unfunded credit commitments, or adequately reserve for losses associated with our unfunded credit commitments.
A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The borrowing needs of our customers may exceed our expected funding requirements, especially during a challenging economic environment when our client companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from other sources. Any failure to meet our unfunded credit commitments in accordance with the borrowing needs of our customers may have a material adverse effect on our business, financial condition, results of operations or reputation.
We may not be able to continue growing our business, particularly if we cannot increase loans and deposits through organic growth.
Our ability to continue to grow successfully will depend to a significant extent on our capital resources. It also will depend, in part, upon our ability to attract deposits and grow our loan portfolio and investment opportunities and on whether we can continue to fund growth while maintaining cost controls and asset quality, as well as on other factors beyond our control, such as national, regional and local economic conditions and interest rate trends.
We use brokered deposits which may be an unstable and/or expensive deposit source to fund earning asset growth.
We use brokered deposits, as a source of funding to support our asset growth and augment deposits generated from our branch network, which are our principal source of funding. We have established policies and procedures with respect to the use of brokered deposits, which require, among other things, that (i) we limit the amount of brokered deposits as a percentage of total assets, and (ii) our asset liability committee monitors our use of brokered deposits on a regular basis, including interest rates and the total volume of such deposits in relation to our total assets. In the event that our funding strategies call for the use of brokered deposits, there can be no assurance that such sources will be available, or will remain available, or that the cost of such funding sources will be reasonable. Additionally, if the Bank is no longer considered well-capitalized, our ability to access new brokered deposits or retain existing brokered deposits could be affected by market conditions, regulatory requirements or a combination thereof, which could result in most, if not all, brokered deposit sources being unavailable. The inability to utilize brokered deposits as a source of funding could have an adverse effect on our financial position, results of operations and liquidity.
We hold certain intangible assets that in the future could be classified as either partially or fully impaired, which would reduce our earnings and the book values of these assets.
Pursuant to applicable accounting requirements, we are required to periodically test our goodwill and core deposit intangible assets for impairment. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. Future impairment testing may result in a partial or full impairment of the value of our goodwill or core deposit intangible assets, or both. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment.
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The current expected credit loss standard established by the Financial Accounting Standards Board will require significant data requirements and changes to methodologies.
In the aftermath of the 2007-2008 financial crisis, the Financial Accounting Standards Board, or FASB, decided to review how banks estimate losses in the allowance for loan losses calculation, and it issued the final Current Expected Credit Loss, or CECL, standard on June 16, 2016. The impairment model previously used by financial institutions was based on incurred losses, and loans were recognized as impaired when there was no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model has been replaced by the CECL model that will become effective for us for the fiscal year beginning after December 15, 2022 in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will require significantly greater data requirements and changes to methodologies to accurately account for expected loss. There can be no assurance that we will not be required to increase our reserves and allowance for loan losses as a result of the implementation of CECL.
Acquisitions could disrupt our business and adversely affect our operating results.
To the extent that we grow through acquisitions, we may not be able to adequately or profitably manage this growth. In addition, such acquisitions may involve the issuance of securities, which may have a dilutive effect on earnings per share. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:
•potential exposure to unknown or contingent liabilities we acquire;
•exposure to potential asset quality problems of the acquired financial institutions, businesses or branches;
•difficulty and expense of integrating the operations and personnel of financial institutions, businesses or branches we acquire;
•higher than expected deposit attrition;
•potential diversion of our management’s time and attention;
•the possible loss of key employees and customers of financial institutions, businesses or branches we acquire;
•difficulty in safely investing any cash generated by the acquisition;
•inability to utilize potential tax benefits from such transactions;
•difficulty in estimating the fair value of the financial institutions, businesses or branches to be acquired which affects the profits we generate from the acquisitions; and
•potential changes in banking or tax laws or regulations that may affect the financial institutions or businesses to be acquired.
In addition, we face significant competition from numerous other financial services institutions, many of which will have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not be available to us. Furthermore, we may not be able to complete future acquisitions and, if we do complete such acquisitions, we may not be able to successfully integrate the operations, management, products and services of the entities that we acquire and eliminate redundancies.
If we are unable to grow our noninterest income, our growth prospects will be impaired.
Taking advantage of opportunities to develop new, and expand existing, streams of noninterest income, including service charges, interchange fees and mortgage fees, is a part of our long-term growth strategy. If we are unsuccessful in our attempts to grow our noninterest income, our long-term growth will be impaired. Furthermore, focusing on these noninterest income streams may divert management’s attention and resources away from our core banking business, which could impair our core business, financial condition and operating results.
Decreased residential mortgage origination, volume and pricing decisions of competitors may adversely affect our profitability.
Our mortgage operation originates residential mortgage loans and services residential mortgage loans. Changes in interest rates, housing prices, financial stress on borrowers as a result of economic conditions, regulations by the applicable governmental authorities and pricing decisions by our loan competitors may adversely affect demand for our residential mortgage loan products, revenues received from servicing such loans for others, and ultimately reduce our net income. New regulations, increased regulatory reviews may be introduced and may increase costs and make it more difficult to operate a residential mortgage origination business.
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Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further losses in the future.
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO, thereby adversely affecting our net interest income, net income and returns on assets and equity, and our loan administration costs increase, which together with reduced interest income adversely affects our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These nonperforming loans and OREO also increase our risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which would have an adverse effect on our net income and related ratios, such as return on assets and equity.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
Changes in interest rates may negatively affect both the returns on and market value of our investment securities. Interest rate volatility can reduce unrealized gains or increase unrealized losses in our portfolio. Interest rates are highly sensitive to many factors including monetary policies, domestic and international economic and political issues, and other factors beyond our control. These changes can negatively impact our other comprehensive income and equity levels through accumulated other comprehensive income, which includes net unrealized gains and losses on our investment securities. Further, such losses could be realized into earnings should liquidity and/or business strategy necessitate the sales of securities in a loss position. Additionally, actual investment income and cash flows from investment securities that carry prepayment risk, such as mortgage-backed securities and callable securities, may materially differ from those anticipated at the time of investment or subsequently as a result of changes in interest rates and market conditions. These occurrences could have a material adverse effect on our net interest income or our results of operations.
The implementation of other new lines of business or new products and services may subject us to additional risk.
We continuously evaluate our service offerings and may implement new lines of business or offer new products and services within existing lines of business in the future. There are substantial risks and uncertainties associated with these efforts. In developing and marketing new lines of business and/or new products and services, we undergo a new product process to assess the risks of the initiative, and invest significant time and resources to build internal controls, policies and procedures to mitigate those risks, including hiring experienced management to oversee the implementation of the initiative. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could require the establishment of new key and other controls and have a significant impact on our existing system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
We are highly dependent on our management team, and the loss of our senior executive officers or other key employees could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects.
Our success depends, in large part, on our ability to attract and retain key personnel. Competition for the best personnel in most activities we engage in can be intense, as we compete with both smaller banks that may be able to offer bankers with more responsibility and autonomy and larger banks that may be able to offer bankers with higher compensation, resources and support, and we may not be able to hire personnel or to retain them. As a result, we may not be able to effectively compete for talent across our markets. Further, our bankers may leave us to work for our competitors and, in some instances, may take important banking and lending relationships with them to our competitors. If we are unable to attract and retain talented bankers in our markets, our business, growth prospects and financial results could be materially and adversely affected. In addition, the unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, relationships in the communities we serve, years of industry experience and the difficulty of promptly finding qualified replacement personnel. Although we have employment agreements with certain of our executive officers, there is no guarantee that these officers and other key personnel will remain employed with the Company.
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We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
Our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we will not be able to effectively compete.
The financial services market is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. These trends were accelerated by the COVID-19 pandemic, increasing demand for mobile banking solutions. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to keep pace with the technological changes and to use technology to satisfy and grow customer demand for our products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area. We expect that we will need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological changes. Many of our larger competitors have substantially greater resources to invest in technological improvements and have invested significantly more than us in technological improvements. As a result, they may be able to invest more heavily in developing and adopting new technologies, and offer additional or more convenient products compared to those that we will be able to provide, which would put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers, which could impair our growth and profitability. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and the failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business, financial condition and results of operations.
System failure or breaches of our network security, or the security of our data processing subsidiary, including as a result of cyberattacks or data security breaches, could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to hardware and cyber security issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure, natural disasters such as earthquakes, tornadoes and hurricanes, or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors and cyber criminals. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our internet banking activities, against damage from physical break-ins, cyber security breaches and other disruptive problems caused by the internet or other users. Such computer break-ins, breaches and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by current and potential customers, any of which may result in a material adverse impact on our financial condition, results of operations or the market price of our common stock. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify
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or enhance our protective measures or to investigate and remediate any information security vulnerabilities. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.
We are under continuous threat of loss due to hacking and cyberattacks especially as we continue to expand client capabilities to utilize internet and other remote channels to transact business. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.
To date, none of foregoing types of attacks have had a material effect on our business or operations and we maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. However, no assurances can be provided that we may not suffer from such an attack in the future that may cause us material harm, especially in light of the risks being posed by changing technologies as well as criminal intent on committing cyber-crime.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.
We depend to a significant extent on a number of relationships with third-party service providers. Specifically, we receive core systems processing, essential web hosting, deposit processing and other processing services from third-party service providers. If these third-party service providers experience financial, operational, or technological difficulties or terminate their services and we are unable to replace them with other suitable service providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps materially. Even if we are able to replace our service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, client or employee fraud and data processing system failures and errors.
Employee errors and employee and client misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our clients or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls and insurance coverage to mitigate against operational risks. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
In addition, we rely heavily upon information supplied by third parties, including the information contained in credit applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, or we may fund a loan that we would not have funded or on terms we would not have extended.
Our accounting estimates and risk management processes rely on analytical and forecasting models.
Processes that management uses to estimate our probable incurred credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models that management uses for interest rate risk and asset liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models that
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management uses for determining our probable credit losses are inadequate, the allowance for loan losses may not be sufficient to support future charge offs. If the models that management uses to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in management’s analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.
Changes in accounting standards could materially impact our financial statements.
From time to time, the FASB or the Securities and Exchange Commission, or SEC, may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business and stock price.
Management regularly monitors, reviews and updates our disclosure controls and procedures, including our internal control over financial reporting. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the controls will be effective. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition. Failure to achieve and maintain an effective internal control environment could prevent us from accurately reporting our financial results, preventing or detecting fraud or providing timely and reliable financial information pursuant to our reporting obligations, which could result in a material weakness in our internal controls over financial reporting and the restatement of previously filed financial statements and could have a material adverse effect on our business, financial condition and results of operations. Further, ineffective internal controls could cause our investors to lose confidence in our financial information, which could affect the trading price of our common stock.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings.
Hurricanes or other adverse weather events would negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.
Our market area is located in the southeastern region of the United States and is susceptible to natural disasters, such as hurricanes, tornadoes, tropical storms, other severe weather events and related flooding and wind damage, and man-made disasters. These natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us, damage our banking facilities and offices and negatively impact our growth strategy. Climate change may be increasing the nature, severity and frequency of adverse weather conditions, making the impact from these types of natural disasters on us or our customers worse. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where they operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes or tornadoes will affect our operations or the economies in our current or future market areas, but such weather events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of natural or man-made disasters.
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We may need to rely on the financial markets to provide needed capital.
Our common stock is listed and traded on the NASDAQ Global Market. If our capital resources prove in the future to be inadequate to meet our capital requirements, we may need to raise additional debt or equity capital. If conditions in the capital markets are not favorable, we may be constrained in raising capital, and an inability to raise additional capital on acceptable terms when and if needed could have a material adverse effect on our business, financial condition or results of operations.
The interest rates that we pay on our securities are also influenced by, among other things, the credit ratings that we, our affiliates and/or our securities receive from recognized rating agencies. Our credit ratings are based on a number of factors, including our financial strength and some factors not entirely within our control such as conditions affecting the financial services industry generally, and remain subject to change at any time. A downgrade to the credit rating of us or our affiliates could affect our ability to access the capital markets, increase our borrowing costs and negatively impact our profitability. A downgrade to us, our affiliates or our securities could create obligations or liabilities to us under the terms of our outstanding securities that could increase our costs or otherwise have a negative effect on our results of operations or financial condition. Additionally, a downgrade to the credit rating of any particular security issued by us or our affiliates could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.
Because our decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future. In addition, geopolitical and worldwide market conditions may cause disruption or volatility in the U.S. equity and debt markets, which could hinder our ability to issue debt and equity securities in the future on favorable terms.
Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could adversely affect our revenue, expenses, and the value of those financial instruments.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The ICE Benchmark Administration (IBA), the administrator of LIBOR, announced on November 30, 2020, that it would cease publishing the one-week and two-month LIBOR rates on December 31, 2021, but would continue publishing the one-, three-, six-, and twelve-month LIBOR rates until June 30, 2023. Regardless, the federal banking agencies also issued guidance on November 30, 2020, encouraging banks to: (i) stop using LIBOR in new financial contracts no later than December 31, 2021; and (ii) either use a rate other than LIBOR or include clear language defining the alternative rate that will be applicable after LIBOR’s discontinuation. To address the problem created by legacy financial contracts that incorporate LIBOR as their reference interest rate, but extend beyond the date after which LIBOR will be published, on March 15, 2022, Congress enacted the LIBOR Act. On December 16, 2022, the Federal Reserve adopted a final rule implementing the LIBOR Act by adopting benchmark rates based on the Secured Overnight Financing Rate (“SOFR”) that will replace LIBOR in certain financial contracts after June 30, 2023.
The Company has a number of existing loans, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR has resulted in and could continue to result in added costs and employee efforts and could present additional risk. Since alternative reference rates are calculated differently than LIBOR, payments under contracts referencing new alternative reference rates will differ from those referencing LIBOR. The transition has changed and will continue to change, the Company’s market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. The Company cannot predict what the ultimate impact of the transition from LIBOR will be; however, failure to adequately manage the transition could have a material adverse effect on the Company’s business, financial condition, results of operations and reputation with its customers.
The ongoing COVID-19 pandemic and resulting adverse economic conditions have adversely impacted, and could continue to adversely impact, our business and results.
While the level of disruption caused by, and the economic impact of, COVID-19 subsided in 2022, the extent and duration to which the continuing COVID-19 pandemic will impact our business in the future is unknown and will depend on future developments, which are highly uncertain and outside our control. These developments include the duration and severity of the pandemic (including the possibility of further surges of new or existing COVID-19 variants of concern), supply chain disruptions, decreased demand for our products and services or those of our borrowers, which could increase our credit risk, rising inflation, our ability to maintain sufficient qualified personnel due to labor shortages, talent attrition, employee illness, willingness to return to work, and the actions taken by governments, businesses and individuals to contain the impact of COVID-19, as well as further actions taken by governmental authorities to limit the resulting economic impact. It is also
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possible that the pandemic and its aftermath will lead to a prolonged economic slowdown in sectors disproportionately affected by the pandemic or recession in the U.S. economy or the world economy in general.
The costs and effects of litigation, investigations or similar matters involving us or other financial institutions or counterparties, or adverse facts and developments related thereto, could materially affect our business, operating results and financial condition.
We may be involved from time to time in a variety of litigation, investigations or similar matters arising out of our business. It is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. Our insurance may not cover all claims that may be asserted against us and indemnification rights to which we are entitled may not be honored, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation or investigation significantly exceed our insurance coverage or to the extent that we incur civil money penalties that are not covered by insurance, they could have a material adverse effect on our business, financial condition and results of operations. In addition, premiums for insurance covering the financial and banking sectors are rising. We may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms or at historic rates, if at all. Finally, in recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. We could become subject to claims based on this or other evolving legal theories in the future.
Risks Related to Legislative and Regulatory Events
We are subject to extensive government regulation that could limit or restrict our activities, which in turn may adversely impact our ability to increase our assets and earnings.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve, the Georgia Department of Banking and Finance (“DBF”) and the FDIC. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels, and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business, profitability or growth strategy. Increased regulation could increase our cost of compliance and adversely affect profitability. Moreover, certain of these regulations contain significant punitive sanctions for violations, including monetary penalties and limitations on a bank’s ability to implement components of its business plan, such as expansion through mergers and acquisitions or the opening of new branch offices. In addition, changes in regulatory requirements may add costs associated with compliance efforts. Furthermore, government policy and regulation, particularly as implemented through the Federal Reserve System, significantly affect credit conditions. Negative developments in the financial industry and the impact of new legislation and regulation in response to those developments could negatively impact our business operations and adversely impact our financial performance.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings.
The Federal Reserve, the FDIC, and the DBF periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, interest rate sensitivity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations.
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The Federal Reserve has implemented significant monetary policies and economic strategies that have impacted interest rates, inflation, asset values, and the shape of the yield curve, over which the Company has no control and which the Company may not be able to adequately anticipate.
In recent years, the Federal Reserve implemented a series of accommodative domestic monetary initiatives. Several of these have emphasized so-called quantitative easing strategies and decreases to the Federal funds target rate. The Federal Reserve reduced rates five times during 2019 through 2021. However, in response to the significant increase in the domestic inflation rate in the U.S, the Federal Reserve increased the federal funds target rate seven times in 2022 for a total increase of 4.25%, and indicated additional increases would be forthcoming in 2023. Also, during 2022, the Federal reserve has implemented quantitative tightening. Further rate changes reportedly are dependent on the Federal Reserve’s assessment of economic data as it becomes available. The Company cannot predict the nature or timing of future changes in monetary, economic, or other policies or the effect that they may have on the Company's business activities, financial condition and results of operations.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, Consumer Financial Protection Bureau (“CFPB”) and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
We could face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act of 1970, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. FinCEN, established by the U.S. Department of the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and engages in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and IRS. There is also increased scrutiny of compliance with the rules enforced by OFAC related to U.S. sanctions regimes. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on our future earnings.
The FDIC insures deposits at FDIC-insured depository institutions, such as the Bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce our profitability, may limit our ability to pursue certain business opportunities or otherwise negatively impact our operations.
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Risks Related to Our Common Stock
Our management team’s strategies for the enhancement of shareholder value may not succeed.
Our management team is taking and considering actions to enhance shareholder value, including reviewing personnel, developing new products, issuing dividends and exploring acquisition opportunities. These actions may not enhance shareholder value. For example, holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. We are not legally required to do so. Further, the Federal Reserve could decide at any time that paying any dividends on our common stock could be an unsafe or unsound banking practice. The reduction or elimination of dividends paid on our common stock could adversely affect the market price of our common stock.
An investment in our common stock is not an insured deposit and may lose value.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described herein, and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.
Our stock price may be volatile.
The market price of our common stock may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control, including rising interest rates and the impact of inflation. In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management which could materially adversely affect our business, financial condition or results of operations.
ESG risks could adversely affect our reputation and shareholder, employee, client and third party relationships and may negatively affect our stock price.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as diversity, equity, inclusion, environmental stewardship, human capital management, support for our local communities, corporate governance and transparency, or fail to consider ESG factors in our business operations.
Furthermore, as a result of our diverse base of clients and business partners, we may face potential negative publicity based on the identity of our clients or business partners and the public’s (or certain segments of the public’s) view of those entities. Such publicity may arise from traditional media sources or from social media and may increase rapidly in size and scope. If our client or business partner relationships were to become intertwined in such negative publicity, our ability to attract and retain clients, business partners, and employees may be negatively impacted, and our stock price may also be negatively impacted. Additionally, we may face pressure to not do business in certain industries that are viewed as harmful to the environment or are otherwise negatively perceived, which could impact our growth.
Additionally, investors and shareholder advocates are placing ever increasing emphasis on how corporations address ESG issues in their business strategy when making investment decisions and when developing their investment theses and proxy recommendations. We may incur meaningful costs with respect to our ESG efforts and if such efforts are negatively perceived, our reputation and stock price may suffer. In addition, ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.
Our dividend policy may change, and consequently, your only opportunity to achieve a return on your investment may be if the price of our common stock appreciates.
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We have historically paid quarterly dividends to our shareholders. However, we have no obligation to pay dividends and we may change our dividend policy at any time without notice to our shareholders. Holders of our common stock are only entitled to receive such cash dividends as our board of directors, in its discretion, may declare out of funds legally available for such payments. Furthermore, consistent with our strategic plans, growth initiatives, capital availability and requirements, projected liquidity needs, financial condition, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid to our shareholders.
We are a separate and distinct legal entity from our subsidiary, the Bank. We receive substantially all of our revenue from dividends from the Bank, which we use as the principal source of funds to pay our expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay us. Such limits are also tied to the earnings of our subsidiary. If the Bank does not receive regulatory approval or if the Bank’s earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, our ability to pay our expenses and our business, financial condition or results of operations could be materially and adversely impacted.
Securities analysts might not continue coverage on our common stock, which could adversely affect the market for our common stock.
The trading price of our common stock depends in part on the research and reports that securities analysts publish about us and our business. We do not have any control over these analysts, and they may not continue to cover our common stock. If securities analysts do not continue to cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. If securities analysts continue to cover our common stock, and our common stock is the subject of an unfavorable report, the price of our common stock may decline. If one or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline.
Future equity issuances could result in dilution, which could cause our common stock price to decline.
We are generally not restricted from issuing additional shares of our common stock up to the authorized number of shares set forth in our charter. We may issue additional shares of our common stock or securities convertible into our common stock in the future pursuant to current or future employee stock option plans, employee stock grants, upon exercise of warrants or in connection with future acquisitions or financings. We cannot predict the size of any such future issuances or the effect, if any, that any such future issuances will have on the trading price of our common stock. Any such future issuances of shares of our common stock or securities convertible into common stock may have a dilutive effect on the holders of our common stock and could have a material negative effect on the trading price of our common stock.
In addition, we may sell additional shares of our common stock in public offerings, and issue additional shares of common stock or convertible securities to finance future acquisitions. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares that may be issued in connection with acquisitions), or the perception that such issuance could occur, may adversely affect prevailing market prices for our common stock.
We have the ability to incur debt and pledge our assets, including our stock in the Bank, to secure that debt.
We have the ability to incur debt and pledge our assets to secure that debt. Absent special and unusual circumstances, a holder of indebtedness for borrowed money has rights that are superior to those of holders of common stock. For example, interest must be paid to the lender before dividends can be paid to the shareholders, and loans must be paid off before any assets can be distributed to shareholders if we were to liquidate. Furthermore, we would have to make principal and interest payments on our indebtedness, which could reduce our profitability or result in net losses on a consolidated basis even if the Bank were profitable.
Item 1B
Unresolved Staff Comments
None.
Item 2
Properties
33

The principal properties of the Company consist of the properties of the Bank. The Company's headquarters is located at 115 South Grant Street, Fitzgerald, Georgia 31750. The Bank currently operates thirty-four domestic banking offices and three corporate operations offices in Georgia. The Bank owns all of the banking offices occupied except for nine which are leased. In addition, the Company owns the corporate operation offices located in Fitzgerald, Georgia and Warner Robins Georgia. We believe that our banking offices are in good condition and are suitable and adequate to our needs.
Item 3
Legal Proceedings
The Company and its subsidiary may become parties to various legal proceedings arising from the normal course of business. As of December 31, 2022, there are no material pending legal proceedings to which Colony or its subsidiary are a party or of which any of its or its subsidiaries' assets or properties are subject. However, one or more unfavorable outcomes in any legal action against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.
Item 4
Mine Safety Disclosures
Not applicable.
Part II
Item 5
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
Market Information and Holders of Record
Since April 2, 1998, Colony Bankcorp, Inc.'s common stock has been quoted on the NASDAQ Global Market under the symbol “CBAN.” Prior to this date, there was no public market for the common stock of the Company.
As of March 14, 2023, there were 17,593,879 shares of our common stock outstanding held by 1,002 holders of record.
Dividends
During 2022, the Company paid $7.2 million in cash dividends on its common stock. During 2021, the Company paid $4.5 million in cash dividends on its common stock. We have no obligation to pay dividends and we may change our dividend policy at any time without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.
As a Georgia corporation, the Company is subject to certain restrictions on dividends under the Georgia Business Corporation Code. We are also subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies. See “Item 1 – Business – Supervision and Regulation – Regulation of the Company – Payment of Dividends.”
Issuer Purchase of Equity Securities
On October 20, 2022, the Board of Directors of the Company authorized a stock buyback program, under which the Company may repurchase up to $12 million of its outstanding common stock. The buyback program began on October 20, 2022 and is intended to expire at the end of 2023.
The repurchases were made in compliance with all SEC rules, including Rule 10b-18, and other legal requirements and may be made in part under Rule 10b5-1 plans, which permits share repurchases when the Company might otherwise be precluded from doing so. Repurchases can be made from time-to-time in the open market or through privately negotiated transactions depending on market and/or other conditions. The repurchase program may be modified, suspended or discontinued at any time.
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The table below sets forth information regarding repurchases of our common stock during the fourth quarter of 2022.

(dollars in thousands, except per share data) | Total Number of Shares Repurchased |  | Average Price Paid per Share |  | Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs |  | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2022 to October 31, 2022 | — |  |  | $ | — |  |  | — |  |  | $ | — |
November 1, 2022 to November 30, 2022 | — |  |  | — |  |  | — |  |  | — |
December 1, 2022 to December 31, 2022 | 40,000 |  |  | 13.50 |  |  | 40,000 |  |  | 11,460 |
Total | 40,000 |  | $ | 40 |  | $ | 13.50 |  |  | 40,000 |  |  | $ | 11,460 |

Securities Authorized for Issuance Under Equity Compensation Plans
See the information included under Part III, Item 12, which is incorporated in response to this item by reference, for information with respect to shares of common stock that are authorized for issuance under the Company's equity compensation plans as of December 31, 2022.
Performance Graph
The performance graph below compares the cumulative total shareholder return on the Company’s Common Stock with the cumulative total return on the equity securities of companies included in the NASDAQ Composite Index and the SNL Southeast Bank Index, measured at the last trading day of each year shown. The graph assumes an investment of $100 on December 31, 2017 through December 31, 2022, and assumes the reinvestment of dividends, if any. The performance graph represents past performance and should not be considered to be an indication of future performance.
35

Colony Bankcorp, Inc.

|  | Period Ending
Index |  | 12/31/17 |  | 12/31/18 |  | 12/31/19 |  | 12/31/20 |  | 12/31/21 |  | 12/31/22
Colony Bankcorp, Inc. |  | 100.00 |  |  | 101.22 |  |  | 116.53 |  |  | 106.87 |  |  | 127.68 |  |  | 97.63 |
NASDAQ Composite Index |  | 100.00 |  |  | 97.16 |  |  | 132.81 |  |  | 192.47 |  |  | 235.15 |  |  | 158.65 |
S&P U.S. BMI Banks - Southeast Region Index |  | 100.00 |  |  | 82.62 |  |  | 116.45 |  |  | 104.41 |  |  | 149.13 |  |  | 121.30 |

Source: S&P Global Market Intelligence
Item 6
Reserved.
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and, assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors,” and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected in the forward-looking statements. We assume no obligation to update any of these forward-looking statements.
36

The Company
Colony Bankcorp, Inc. is a bank holding company headquartered in Fitzgerald, Georgia that provides, through its wholly-owned subsidiary Colony Bank (collectively referred to as the Company), a broad array of products and services throughout central, south and coastal Georgia markets. The Company offers commercial, consumer and mortgage banking services.
Recent Developments
The Company paid dividends to its shareholders throughout 2022 and 2021 on a quarterly basis. In 2022, we had a quarterly dividend of $0.1075 per share of common stock and in 2021, we had a quarterly dividend of $0.1025 per share of common stock.
On February 10, 2022, the Company completed a public offering of 3,848,485 shares of its common stock at a public offering price of $16.50 per share, with aggregate proceeds of approximately $63.5 million.
On May 20, 2022, the Company completed a private placement of $40 million in fixed-to-floating rate subordinated notes due 2032 (the “Notes”). The Notes will bear a fixed rate of 5.25% for the first five years and will reset quarterly thereafter to then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 265 basis points for the five-year floating term. The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after May 20, 2027, or at any time, in whole but not in part, upon certain other specified event. At December 31, 2022, $39.1 million of Notes, net of debt issuance costs were outstanding.
On October 20, 2022, the Board of Directors of the Company authorized a stock buyback program, under which the Company may repurchase up to $12 million of its outstanding common stock. Repurchases under this program may be made from time to time through open market purchases, privately negotiated transactions or such other manners as will comply with applicable laws and regulations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and priorities. The buyback program does not obligate the Company to purchase any particular number of shares and there is no guarantee as to the exact number of shares that will be repurchased by the Company. The buyback program is intended to expire at the end of 2023 but may be suspended, modified or terminated by the Company at any time and for any reason, without prior notice. As of December 31, 2022, 40,000 shares had been repurchased at a price of $13.50, leaving $11.5 million available for future repurchases.
Reconciliation and Management Explanation of Non-GAAP Financial Measures
Our accounting and reporting policies conform to generally accepted accounting principles (GAAP) in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the fully-taxable equivalent measures: tax-equivalent net interest income, tax-equivalent net interest margin and tax-equivalent net interest spread, which include the effects of taxable-equivalent adjustments using a federal income tax rate of 14% and 19% to increase tax-exempt interest income to a tax-equivalent basis for the year ended December 31, 2022 and 2021, respectively. Tax-equivalent adjustments are reported in Notes 1 and 2 to the Average Balances with Average Yields and Rates table under Rate/Volume Analysis. Management believes that non-GAAP financial measures provide additional useful information that allows investors to evaluate the ongoing performance of the company and provide meaningful comparisons to its peers. Management believes these non-GAAP financial measures also enhance investors' ability to compare period-to-period financial results and allow investors and company management to view our operating results excluding the impact of items that are not reflective of the underlying operating performance.
Tax-equivalent net interest income, net interest margin and net interest spread.
Net interest income on a tax-equivalent basis is a non-GAAP measure that adjusts for the tax-favored status of net interest income from loans and investments. We believe this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin on a tax-equivalent basis is net interest income on a tax-equivalent basis divided by average interest-earning assets on a tax-equivalent basis. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread on a tax-equivalent basis is the difference in the average yield on average interest-earning assets on a tax equivalent basis and the average rate paid on average interest-bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread.
37

These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements, and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently.
A reconciliation of these performance measures to GAAP performance measures is included in the tables below.
38

Non-GAAP Performance Measures Reconciliation

|  | Years Ended December 31,
|  | 2022 |  | 2021 |  |
(dollars in thousands, except per share data) |  |
Operating noninterest expense reconciliation |  |  |  |  |  |
Operating net income reconciliation |  |  |  |  |  |
Net income (GAAP) |  | $ | 19,542 |  |  | $ | 18,659 |  |  |
Acquisition-related expenses |  | 142 |  |  | 4,617 |  |  |
Severance Costs |  | 1,346 |  |  | 90 |  |  |
FHLB mark from called borrowings |  | 751 |  |  | — |  |  |
Income tax benefit of expenses |  | (298) |  |  | (874) |  |  |
Operating net income |  | $ | 21,483 |  |  | $ | 22,492 |  |  |
Weighted average diluted shares |  | 17,191,079 |  |  | 11,254,130 |  |  |
Adjusted earnings per diluted share |  | $ | 1.25 |  |  | $ | 2.00 |  |  |
Tangible book value per common share reconciliation |  |  |  |  |  |
Book value per common share (GAAP) |  | $ | 13.08 |  |  | $ | 15.92 |  |  |
Effect of goodwill and other intangibles |  | (3.10) |  |  | (4.41) |  |  |
Tangible book value per common share |  | $ | 9.98 |  |  | $ | 11.51 |  |  |
Tangible equity to tangible assets reconciliation |  |  |  |  |  |
Equity to assets (GAAP) |  | 7.84 | % |  | 8.09 | % |  |
Effect of goodwill and other intangibles |  | (1.74) | % |  | (2.11) | % |  |
Tangible equity to tangible assets |  | 6.10 | % |  | 5.98 | % |  |
Operating efficiency ratio calculation |  |  |  |  |  |
Efficiency ratio (GAAP) |  | 77.34 | % |  | 76.72 | % |  |
Severance Costs |  | (1.16) |  |  | — |  |  |
Acquisition-related expenses |  | (0.12) |  |  | (4.51) |  |  |
Writedown of bank premises |  | — |  |  | (0.09) |  |  |
FHLB mark from called borrowings |  | (0.65) |  |  | — |  |  |
Operating efficiency ratio |  | 75.40 | % |  | 72.13 | % |  |
Pre-provision net revenue |  |  |  |  |  |
Net interest income before provision for credit losses |  | $ | 80,625 |  |  | $ | 66,189 |  |  |
Noninterest income |  | 35,072 |  |  | 36,290 |  |  |
|  | 115,697 |  |  | 102,479 |  |  |
Noninterest expense |  | 89,475 |  |  | 78,625 |  |  |
Pre-provision net revenue |  | $ | 26,222 |  |  | $ | 23,854 |  |  |

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Critical Accounting Policies and Estimates
The consolidated financial statements of Colony are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industry in which it operates. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the valuation of loan acquisition transactions, as well as the determination of the allowance for loan losses and income taxes and, therefore, are critical accounting policies. In addition to the discussion that follows, the accounting policies related to these estimates are further described in Note 1, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
Business Combinations and Valuation of Loans Acquired in Business Combinations
We account for acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at the estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation. Management finalized the fair values of acquired assets and assumed liabilities within this 12-month period and management currently considers such values to be the Day 1 Fair Values for the acquisition transactions.
In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Loans acquired in a business combination transaction are evaluated either individually or in pools of loans with similar characteristics; including consideration of a credit component. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.
Allowance for Loan Losses
The allowance for loan losses is a critical accounting estimate that requires significant judgments and assumptions, which are inherently subjective. The use of different estimates or assumptions could have a significant impact on the provision for credit losses, allowance for loan losses, financial condition, and results of operations. The economic and business climate in any given industry or market is difficult to gauge and can change rapidly, and the effects of those changes can vary by borrower.
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 loans that are 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.
Consolidated net income and stockholders’ equity could be affected if management’s estimate of the allowance necessary to cover loan losses is subsequently materially different, requiring a change in the level of provision for loan losses to be recorded. While management uses currently available information to recognize losses on loans, future adjustments may be necessary
40

based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions or forecasts that affect the Company's customers.
Income Taxes
The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.
Colony files a consolidated federal income tax return and a combined state income tax return (both of which include Colony and its wholly owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed quarterly for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Colony may also recognize a liability for unrecognized tax benefits from uncertainty in income taxes. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
Overview
The following discussion and analysis present the more significant factors affecting the Company’s financial condition as of December 31, 2022 and 2021 and results of operations for each of the two year-periods ended December 31, 2022. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements, notes thereto and other financial information appearing elsewhere in this report.
Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 14% federal tax rate for 2022 and a 19% federal rate for 2021, thus making tax-exempt yields comparable to taxable asset yields.
Dollar amounts in tables are stated in thousands, except for per share amounts.
Results of Operations
The Company’s results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since market forces and economic conditions beyond the control of the Company determine interest rates, the ability to generate net interest income is dependent upon the Company’s ability to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average interest-earning assets. Net income available to common shareholders totaled $19.5 million, or $1.14 per diluted shares in 2022, compared to $18.7 million, or $1.66 per diluted shares in 2021.
Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company’s largest source of revenue, representing 63.7% of total revenue during 2022 and 61.9% of total revenue during 2021.
Net interest margin is the taxable-equivalent net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin.
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The Company’s loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, was 7.50% as of December 31, 2022 and 3.25% as of December 31, 2021. The Federal Reserve Board sets general market rates of interest, including the deposit and loan rates offered by many financial institutions. During 2022, the prime interest rate increased 4.25%. During 2021, the prime interest rate remained the same.
The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of interest-earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each. The Company’s consolidated average balance sheets along with an analysis of taxable-equivalent net interest earnings are presented in the Rate/Volume Analysis.
Rate/Volume Analysis
The rate/volume analysis presented hereafter illustrates the change from year to year for each component of the taxable equivalent net interest income separated into the amount generated through volume changes and the amount generated by changes in the yields/rates.

|  | Changes from 2021 to 2022 (a) |  |
(dollars in thousands) |  | Volume |  | Rate |  | Total |  |  |  |  |  |
Interest income |  |  |  |  |  |  |  |  |  |  |  |
Loans, net of unearned fees |  | $ | 16,231 |  |  | $ | (5,755) |  |  | $ | 10,476 |  |  |  |  |  |  |
Investment securities, taxable |  | 4,661 |  |  | 3,950 |  |  | 8,611 |  |  |  |  |  |  |
Investment securities, exempt |  | 1,033 |  |  | 53 |  |  | 1,086 |  |  |  |  |  |  |
Interest-bearing deposits |  | (101) |  |  | 774 |  |  | 673 |  |  |  |  |  |  |
Total interest income |  | 21,824 |  |  | (978) |  |  | 20,846 |  |  |  |  |  |  |
Interest expense |  |  |  |  |  |  |  |  |  |  |  |
Interest-Bearing Demand and Savings Deposits |  | 329 |  |  | 1,789 |  |  | 2,118 |  |  |  |  |  |  |
Time Deposits |  | 407 |  |  | 750 |  |  | 1,157 |  |  |  |  |  |  |
Federal funds purchased |  | — |  |  | 54 |  |  | 54 |  |  |  |  |  |  |
FHLB Advances |  | 729 |  |  | 1,144 |  |  | 1,873 |  |  |  |  |  |  |
Paycheck Protection Program Liquidity Facility ("PPPLF") |  | (93) |  |  | — |  |  | (93) |  |  |  |  |  |  |
Other Borrowings |  | 626 |  |  | 733 |  |  | 1,359 |  |  |  |  |  |  |
Total interest expense |  | 1,998 |  |  | 4,470 |  |  | 6,468 |  |  |  |  |  |  |
Net interest income |  | $ | 19,826 |  |  | $ | (5,448) |  |  | $ | 14,378 |  |  |  |  |  |  |

(a)Changes in net interest income for the periods, based on either changes in average balances or changes in average rates for interest-earning assets and interest-bearing liabilities, are shown on this table. During each year there are numerous and simultaneous balance and rate changes; therefore, it is not possible to precisely allocate the changes between balances and rates. For the purpose of this table, changes that are not exclusively due to balance changes or rate changes have been attributed to rates.
The Company maintains about 11.66% of its loan portfolio in adjustable rate loans that reprice with prime rate changes, while approximately half of its other loans mature within 5 years. The liabilities to fund assets are primarily in non-maturing core deposits and short-term certificates of deposit that mature within one year. During 2022, Federal Reserve rates increased 425 basis points. The Federal Reserve rates remained the same in 2021. We have seen the net interest margin decrease to 3.20% for 2022, compared to 3.39% for 2021 primarily due to increased deposit rates along with an increase in borrowings.
Taxable-equivalent net interest income for 2022 increased by $14.4 million or 21.6%, compared to 2021, due to increases in loan volume and purchases of investment securities, offset by increases in deposit rates and increases in borrowings to fund loan growth. The average volume of interest-earning assets during 2022 increased $568.8 million compared to 2021, primarily
42

related to increases in loans and securities.. The total yield on interest-earning assets remained consistent year over year with decreases in loans related to fees recognized on PPP loans in 2021 which was offset with increases in the investment portfolio during 2022.
The average volume of loans increased $318.9 million in 2022 compared to 2021, which primarily reflects organic loan growth. The average yield on loans decreased by 38 basis points in 2022 compared to 2021, primarily due to the decrease of $4.9 million in PPP loan fees. The average volume of interest-bearing deposits increased $438.1 million in 2022 compared to 2021. Average savings and interest-bearing demand deposits increased $365.4 million and average time deposits increased $72.7 million in 2022 compared to 2021.
Accordingly, the ratio of average interest-bearing deposits to total average deposits was 76.23% in 2022 and 75.32% in 2021. For 2022, this deposit mix, combined with an increase in interest rates, had the effect of increasing the average cost of total deposits by 13 basis points in 2022 compared to 2021. The Company used borrowings to fund loan growth during 2022. The funds borrowed in 2022 were at higher interest rates and were a contributing factor in the increase of 26 basis points in total other interest-bearing liabilities in 2022 compared to 2021.
The Company’s net interest spread, which represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities, decreased to 3.07% in 2022 from 3.32% in 2021 and was also a result of deposit rate increases and an increase in borrowings, along with the decrease in loan yields due to the PPP loan fee decrease noted above. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in "Market Risk and Interest Rate Sensitivity" included elsewhere in this report.
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AVERAGE BALANCE SHEETS

|  | 2022 |  | 2021 |  |
|  | Average |  | Income/ |  | Yields/ |  | Average |  | Income/ |  | Yields/ |  |  |  |  |  |
(dollars in thousands) |  | Balances |  | Expense |  | Rates |  | Balances |  | Expense |  | Rates |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans, net of unearned fees (1) |  | $ | 1,505,792 |  |  | $ | 70,856 |  |  | 4.71 | % |  | $ | 1,186,919 |  |  | $ | 60,380 |  |  | 5.09 | % |  |  |  |  |  |
Investment securities, taxable |  | 820,356 |  |  | 17,954 |  |  | 2.19 |  |  | 547,793 |  |  | 9,343 |  |  | 1.71 |  |  |  |  |  |  |
Investment securities, exempt (2) |  | 116,154 |  |  | 2,247 |  |  | 1.93 |  |  | 61,476 |  |  | 1,161 |  |  | 1.89 |  |  |  |  |  |  |
Deposits in banks and short term investments |  | 91,825 |  |  | 887 |  |  | 0.97 |  |  | 169,188 |  |  | 214 |  |  | 0.13 |  |  |  |  |  |  |
Total interest-earning assets |  | 2,534,127 |  |  | 91,944 |  |  | 3.63 | % |  | 1,965,376 |  |  | 71,098 |  |  | 3.62 | % |  |  |  |  |  |
Total noninterest-earning assets |  | 215,723 |  |  |  |  |  |  | 135,916 |  |  |  |  |  |  |  |  |  |  |
Total assets |  | $ | 2,749,850 |  |  |  |  |  |  | $ | 2,101,292 |  |  |  |  |  |  |  |  |  |  |
Liabilities and Stockholders' Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Savings and interest-bearing demand deposits |  | $ | 1,439,234 |  |  | 3,047 |  |  | 0.21 | % |  | $ | 1,073,824 |  |  | 929 |  |  | 0.09 | % |  |  |  |  |  |
Time deposits |  | 370,375 |  |  | 2,829 |  |  | 0.76 |  |  | 297,704 |  |  | 1,672 |  |  | 0.56 |  |  |  |  |  |  |
Total interest-bearing deposits |  | 1,809,609 |  |  | 5,876 |  |  | 0.32 |  |  | 1,371,528 |  |  | 2,601 |  |  | 0.19 |  |  |  |  |  |  |
Federal funds purchased |  | 2,835 |  |  | 54 |  |  | 1.89 |  |  | — |  |  | — |  |  | — |  |  |  |  |  |  |
FHLB advances (3) |  | 71,690 |  |  | 2,564 |  |  | 3.58 |  |  | 34,849 |  |  | 691 |  |  | 1.98 |  |  |  |  |  |  |
Paycheck Protection Program Liquidity Facility |  | — |  |  | — |  |  | — |  |  | 25,546 |  |  | 93 |  |  | 0.36 |  |  |  |  |  |  |
Other borrowings |  | 52,872 |  |  | 2,371 |  |  | 4.48 |  |  | 32,686 |  |  | 1,012 |  |  | 3.10 |  |  |  |  |  |  |
Total other interest-bearing liabilities |  | 127,397 |  |  | 4,989 |  |  | 3.92 |  |  | 93,081 |  |  | 1,796 |  |  | 1.93 |  |  |  |  |  |  |
Total interest-bearing liabilities |  | 1,937,006 |  |  | 10,865 |  |  | 0.56 | % |  | 1,464,609 |  |  | 4,397 |  |  | 0.30 | % |  |  |  |  |  |
Noninterest-bearing demand deposits |  | 564,322 |  |  |  |  |  |  | 449,445 |  |  |  |  |  |  |  |  |  |  |
Other liabilities |  | 12,173 |  |  |  |  |  |  | 11,195 |  |  |  |  |  |  |  |  |  |  |
Stockholders' equity |  | 236,349 |  |  |  |  |  |  | 176,043 |  |  |  |  |  |  |  |  |  |  |
Total liabilities and stockholders' equity |  | $ | 2,749,850 |  |  |  |  |  |  | $ | 2,101,292 |  |  |  |  |  |  |  |  |  |  |
Interest rate spread |  |  |  |  |  | 3.07 | % |  |  |  |  |  | 3.32 | % |  |  |  |  |  |
Net interest income |  |  |  | $ | 81,079 |  |  |  |  |  |  | $ | 66,701 |  |  |  |  |  |  |  |  |
Net interest margin |  |  |  |  |  | 3.20 | % |  |  |  |  |  | 3.39 | % |  |  |  |  |  |

(1)The average balance of loans includes the average balance of nonaccrual loans. Income on such loans is recognized and recorded on the cash basis. Taxable-equivalent adjustments totaling $139,000 and $268,000 for the year ended December 31, 2022 and 2021, respectively, are included in income and fees on loans. Accretion income of $590,000 and $470,000 for the year ended December 31, 2022 and 2021are also included in income and fees on loans.
(2)Taxable-equivalent adjustments totaling $315,000 and $244,000 for the year ended December 31, 2022 and 2021, respectively, are included in tax-exempt interest on investment securities.
(3)Federal Home Loan Bank advances interest expense includes $751,000 for the year ended December 31, 2022 and is the recognized mark on two advances that were acquired in the SouthCrest Financial Group, Inc. acquisition that were called early.
Provision for Loan Losses
The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses totaled $3.4 million in 2022 compared to $700,000 in 2021. See the section captioned “Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses. The increase in provision for loan losses for the year ended December 31, 2022 compared to 2021 is largely due to the loan growth the Bank experienced during 2022. See the sections captioned “Loans" and "Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses. Net charge-offs for the year ended December 31, 2022 were $152,000 compared to net recoveries of $83,000 for the same period in 2021. As of December 31, 2022, Colony’s allowance for loan losses was $16.1 million, or 0.93% of total loans, compared to $12.9 million,
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or 0.96% of total loans, at December 31, 2021. At December 31, 2022 and 2021, nonperforming assets were $6.4 million and $5.8 million, or 0.22% and 0.21% of total assets, respectively, with asset quality remaining stable period over period.
Noninterest Income
The components of noninterest income were as follows:

|  |  |  |  |  | $ |  | % |  |  |  |  |  |  |  |
(dollars in thousands) |  | 2022 |  | 2021 |  | Variance |  | Variance |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 7,875 |  |  | $ | 6,213 |  |  | $ | 1,662 |  |  | 26.76 | % |  |  |  |  |  |  |  |
Mortgage fee income |  | 8,550 |  |  | 13,213 |  |  | (4,663) |  |  | (35.29) |  |  |  |  |  |  |  |  |
Gain on sales of SBA loans |  | 6,216 |  |  | 7,547 |  |  | (1,331) |  |  | (17.64) |  |  |  |  |  |  |  |  |
Gain (loss) on sales of securities |  | (82) |  |  | (87) |  |  | 5 |  |  | (5.80) |  |  |  |  |  |  |  |  |
Interchange fees |  | 8,381 |  |  | 6,929 |  |  | 1,452 |  |  | 20.95 |  |  |  |  |  |  |  |  |
BOLI income |  | 1,313 |  |  | 1,041 |  |  | 272 |  |  | 26.09 |  |  |  |  |  |  |  |  |
Other |  | 2,819 |  |  | 1,434 |  |  | 1,385 |  |  | 96.62 |  |  |  |  |  |  |  |  |
Total |  | $ | 35,072 |  |  | $ | 36,290 |  |  | $ | (1,218) |  |  | (3.36) | % |  |  |  |  |  |  |  |

Noninterest income decreased $1.2 million, or 3.36% from 2021. The Company saw decreases in mortgage fee income and gain on sale of SBA loans, offset by increases in interchange fees, and service charges on deposit accounts. The decrease in mortgage fee income was a result of adjustable rate portfolio loan products becoming more attractive as mortgage rates began to rise. As our production efforts shifted more toward this adjustable rate portfolio, our secondary market production and thus the gain on sales of SBA loans also decreased. The increase in mortgage rates was partially attributable to the 425 basis point increase in the national federal funds rate during 2022. The increase of $1.5 million in interchange fees was primarily a result of the continued success with both the MasterCard and Discover card programs. The increase of $1.7 million in service charges on deposit accounts can be attributed to our strong retail banking center footprint and our ability to continue to grow core deposits coupled with a reduction in NSF fee refunds.
Noninterest Expense
The components of noninterest expense were as follows:

|  |  |  |  |  | $ |  | % |  |  |  |  |  |  |  |
(dollars in thousands) |  | 2022 |  | 2021 |  | Variance |  | Variance |  |  |  |  |  |  |  |
Salaries and employee benefits |  | $ | 52,809 |  |  | $ | 45,596 |  |  | $ | 7,213 |  |  | 15.82 | % |  |  |  |  |  |  |  |
Occupancy and equipment |  | 6,534 |  |  | 6,149 |  |  | 385 |  |  | 6.27 |  |  |  |  |  |  |  |  |
Acquisition related expenses |  | 142 |  |  | 4,617 |  |  | (4,475) |  |  | (96.92) |  |  |  |  |  |  |  |  |
Information technology |  | 9,947 |  |  | 7,673 |  |  | 2,274 |  |  | 29.64 |  |  |  |  |  |  |  |  |
Professional Fees |  | 3,432 |  |  | 2,750 |  |  | 682 |  |  | 24.80 |  |  |  |  |  |  |  |  |
Advertising and public relations |  | 3,664 |  |  | 2,705 |  |  | 959 |  |  | 35.47 |  |  |  |  |  |  |  |  |
Communications |  | 1,602 |  |  | 1,373 |  |  | 229 |  |  | 16.69 |  |  |  |  |  |  |  |  |
Writedown of building |  | — |  |  | 90 |  |  | (90) |  |  | (100.00) |  |  |  |  |  |  |  |  |
Other |  | 11,345 |  |  | 7,672 |  |  | 3,673 |  |  | 47.88 |  |  |  |  |  |  |  |  |
Total |  | $ | 89,475 |  |  | $ | 78,625 |  |  | $ | 10,850 |  |  | 13.80 | % |  |  |  |  |  |  |  |

Increases in salaries and employee benefits, information technology expenses and other expenses accounted for the majority of the increase in noninterest expense, offset by a decrease in acquisition related expenses. The increase in salaries and employee benefits of $7.2 million in 2022 was primarily attributable to the salary and employee expenses from the additional employees from the SouthCrest Financial Group, Inc. and insurance acquisitions completed in the last half of 2021, as well as an increase in restricted stock expense related to restricted stock awards issued to employees. The expense 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. Information technology expenses increased $2.3 million primarily due to the Company's additional processing needs from growth, as well as implementation of new software. Other noninterest expense increased due to increases in FDIC insurance premiums,
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amortization of expense of intangibles and servicing rights valuations and a donation related to a $500,000 contribution to a Georgia tax credit program with local hospitals. These increases were partially offset by a decrease in acquisition related expenses of $4.5 million from expenses incurred with the acquisition of SouthCrest Financial Group, Inc. and insurance acquisitions that occurred in 2021.
Sources and Uses of Funds
The following table illustrates, during the years presented, the mix of the Company’s funding sources and the assets in which those funds are invested as a percentage of the Company’s average total assets for the period indicated. Average assets totaled $2.7 billion in 2022 compared to $2.1 billion in 2021.

(dollars in thousands) |  | 2022 |  | 2021 |  |
Sources of Funds: |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing deposits |  | $ | 564,322 |  |  | 20.52 | % |  | $ | 449,445 |  |  | 21.39 | % |  |  |  |
Interest-bearing deposits |  | 1,809,609 |  |  | 65.81 | % |  | 1,371,528 |  |  | 65.27 |  |  |  |  |
FHLB advances |  | 71,690 |  |  | 2.61 | % |  | 34,849 |  |  | 1.66 |  |  |  |  |
Federal funds purchased |  | 2,835 |  | 0.10 | % |  | — |  |  | 0.00 | % |  |  |  |
PPPLF |  | — |  |  | — | % |  | 25,546 |  |  | 1.22 |  |  |  |  |
Other borrowings |  | 52,872 |  |  | 1.92 | % |  | 32,685 |  |  | 1.56 |  |  |  |  |
Other noninterest-bearing liabilities |  | 12,173 |  |  | 0.44 | % |  | 11,196 |  |  | 0.53 |  |  |  |  |
Equity capital |  | 236,349 |  |  | 8.60 | % |  | 176,043 |  |  | 8.37 |  |  |  |  |
Total |  | $ | 2,749,850 |  |  | 100.00 | % |  | $ | 2,101,292 |  |  | 100.00 | % |  |  |  |
Uses of Funds: |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale and loans |  | $ | 1,505,792 |  |  | 54.76 | % |  | $ | 1,186,919 |  |  | 56.49 | % |  |  |  |
Investment securities |  | 936,510 |  |  | 34.06 | % |  | 609,269 |  |  | 28.99 |  |  |  |  |
Deposits in banks and short term investments |  | 91,825 |  |  | 3.34 | % |  | 169,188 |  |  | 8.05 |  |  |  |  |
Other noninterest-bearing assets |  | 215,723 |  |  | 7.84 | % |  | 135,916 |  |  | 6.47 |  |  |  |  |
Total |  | $ | 2,749,850 |  |  | 100.00 | % |  | $ | 2,101,292 |  |  | 100.00 | % |  |  |  |

Deposits continue to be the Company’s primary source of funding. Over the comparable periods, interest-bearing deposits continues to be the largest component of the Company's mix of deposits. Average interest-bearing deposits totaled 76.2% in 2022 compared to 75.3% of total average deposits in 2021.
The Company primarily invests funds in loans and securities. Loans continue to be the largest component of the Company’s mix of invested assets.
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Loans
The following table presents the composition of the Company’s loan portfolio as of December 31 for the past five years.

(dollars in thousands) |  | December 31, 2022 |  | December 31, 2021 |  | December 31, 2020 |  | December 31, 2019 |  | December 31, 2018
Construction, land & land development |  | $ | 229,435 |  |  | $ | 165,446 |  |  | $ | 121,093 |  |  | $ | 96,097 |  |  | $ | 60,310 |
Other commercial real estate |  | 975,447 |  |  | 787,392 |  |  | 520,391 |  |  | 540,239 |  |  | 435,961 |
Total commercial real estate |  | 1,204,882 |  |  | 952,838 |  |  | 641,484 |  |  | 636,336 |  |  | 496,271 |
Residential real estate |  | 290,054 |  |  | 212,527 |  |  | 183,021 |  |  | 194,796 |  |  | 187,592 |
Commercial, financial & agricultural |  | 223,923 |  |  | 154,048 |  |  | 213,380 |  |  | 114,360 |  |  | 74,166 |
Consumer & other |  | 18,247 |  |  | 18,564 |  |  | 21,618 |  |  | 23,322 |  |  | 23,497 |
Total loans, net of unearned fees |  | 1,737,106 |  |  | 1,337,977 |  |  | 1,059,503 |  |  | 968,814 |  |  | 781,526 |
Allowance for loan losses |  | (16,128) |  |  | (12,910) |  |  | (12,127) |  |  | (6,863) |  |  | (7,277) |
Loans, net |  | $ | 1,720,978 |  |  | $ | 1,325,067 |  |  | $ | 1,047,376 |  |  | $ | 961,951 |  |  | $ | 774,249 |

Maturity and Repricing Opportunity
The following table presents total loans as of December 31, 2022 according to maturity distribution and/or repricing opportunity on adjustable rate loans.

(dollars in thousands) |  | One year or less |  | After one year through five years |  | After five years through fifteen years |  | After fifteen years |  | Total
Construction, land & land development |  | $ | 112,010 |  |  | $ | 51,254 |  |  | $ | 43,165 |  |  | $ | 23,006 |  |  | $ | 229,435 |
Other commercial real estate |  | 80,789 |  |  | 381,248 |  |  | 466,351 |  |  | 47,059 |  |  | 975,447 |
Total commercial real estate |  | 192,799 |  |  | 432,502 |  |  | 509,516 |  |  | 70,065 |  |  | 1,204,882 |
Residential real estate |  | 36,909 |  |  | 78,586 |  |  | 114,471 |  |  | 60,088 |  |  | 290,054 |
Commercial, financial & agricultural |  | 51,680 |  |  | 115,116 |  |  | 50,449 |  |  | 6,678 |  |  | 223,923 |
Consumer & other |  | 4,336 |  |  | 12,537 |  |  | 1,374 |  |  | — |  |  | 18,247 |
Total loans, net of unearned fees |  | 285,724 |  |  | 638,741 |  |  | 675,810 |  |  | 136,831 |  |  | 1,737,106 |

Overview. Loans totaled $1.7 billion at December 31, 2022, up 29.8% from $1.3 billion at December 31, 2021. The majority of the Company’s loan portfolio is comprised of real estate loans. Commercial and residential real estate which is primarily 1-4 family residential properties, nonfarm nonresidential properties and real estate construction loans made up 86.1% and 87.1% of total loans at December 31, 2022 and December 31, 2021, respectively. Commercial, financial and agriculture loans represents 12.9% of the loans at December 31, 2022, up from 11.5% at December 31, 2021 despite the decrease in PPP loan balances from $9.0 million at December 31, 2021 to $95,000 at December 31, 2022.
Loan origination/risk management. In accordance with the Company’s decentralized banking model, loan decisions are made at the local bank level. The Company utilizes both an Executive Loan Committee and a Director Loan Committee to assist lenders with the decision making and underwriting process of larger loan requests. Due to the diverse economic markets served by the Company, evaluation and underwriting criterion may vary slightly by market. Overall, loans are extended after a review of the borrower’s repayment ability, collateral adequacy, and overall credit worthiness.
Commercial purpose, commercial real estate, and agricultural loans are underwritten similarly to how other loans are underwritten throughout the Company. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. In addition, the Company restricts total loans to $10 million per borrower, subject to exception and approval by the Director Loan Committee. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans monthly based on collateral, geography, and risk grade criteria. The Company also utilizes information provided by third-party agencies to provide additional insight and guidance about economic conditions and trends affecting the markets it serves.
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The Company extends loans to builders and developers that are secured by non-owner occupied properties. In such cases, the Company reviews the overall economic conditions and trends for each market to determine the desirability of loans to be extended for residential construction and development. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim mini-perm loan commitment from the Company until permanent financing is obtained. In some cases, loans are extended for residential loan construction for speculative purposes and are based on the perceived present and future demand for housing in a particular market served by the Company. These loans are monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and trends, the demand for the properties, and the availability of long-term financing.
The Company originates consumer loans at the bank level. Due to the diverse economic markets served by the Company, underwriting criterion may vary slightly by market. The Company is committed to serving the borrowing needs of all markets served and, in some cases, adjusts certain evaluation methods to meet the overall credit demographics of each market. Consumer loans represent relatively small loan amounts that are spread across many individual borrowers to help minimize risk. Additionally, consumer trends and outlook reports are reviewed by management on a regular basis.
The Company utilizes an independent third-party company for loan review and validation of the credit risk program on an ongoing quarterly basis. Results of these reviews are presented to management and the audit committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
Commercial, financial and agricultural. Commercial, financial and agricultural loans at December 31, 2022 increased by $69.9 million, or 45.4% to $223.9 million from December 31, 2021 at $154.0 million. This increase was related to organic growth of commercial and industrial loans. The Company’s commercial, financial and agricultural loans are a diverse group of loans to small, medium and large businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment. These agricultural lines typically reduce in size at year end as crops are sold. While some short-term loans may be made on an unsecured basis, most are secured by the assets being financed with collateral margins that are consistent with the Company’s loan policy guidelines.
Construction, land and land development. Construction, land and land development loans increased by $64.0 million, or 38.7%, at December 31, 2022 to $229.4 million from $165.4 million at December 31, 2021. This increase was primarily attributable to organic growth of consumer residential construction loans.
Other commercial real estate. Other commercial real estate loans increased by $188.1 million, or 23.9%, at December 31, 2022 to $975.4 million from $787.4 million at December 31, 2021. This increase was primarily attributable to similar levels of organic growth in both owner occupied and non-owner occupied commercial real estate.
Residential Real Estate Loans. Residential real estate loans increased by $77.5 million or 36.5%, at December 31, 2022 to $290.1 million from $212.5 million at December 31, 2021. This increase was attributable to growth of portfolio 1-4 family residential real estate loans. Residential real estate loans consist of revolving, open-end and closed-end loans as well as those secured by closed-end first and junior liens.
Consumer and other. Consumer and other loans include loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit. Consumer and other loans at December 31, 2022 decreased $317,000 or 1.7% to $18.2 million from $18.6 million at December 31, 2021. This decrease was primarily attributable to payoffs and amortization of the portfolio.
Industry concentrations. As of December 31, 2022 and December 31, 2021, there were no concentrations of loans within any single industry in excess of 10% of total loans, as segregated by Standard Industrial Classification code (“SIC code”). The SIC code is a federally designed standard industrial numbering system used by the Company to categorize loans by the borrower’s type of business. The Company has established industry-specific guidelines with respect to maximum loans permitted for each industry with which the Company does business.
Collateral concentrations. Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions. The Company has a concentration in real estate loans as well as a geographic concentration that could pose an adverse credit risk. At December 31, 2022, approximately 86.1% of the Company’s loan portfolio was concentrated in loans secured by real estate. A substantial portion of borrowers’ ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector. In addition, a large portion of the Company’s foreclosed assets are also located in these same geographic markets, making the recovery of the
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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. In recent years, we have seen real estate values stabilizing in our markets. The stabilization of rates has resulted in a decrease in the number of loans being classified as impaired over the past several years.
Large credit relationships. The Company currently operates 34 branches in north, central, south and coastal Georgia and includes metropolitan markets in Forsyth, Fulton, Fayette, Dougherty, L owndes, Houston, Chatham and Muscogee counties. As a result, the Company originates and maintains large credit relationships with several commercial customers in the ordinary course of business. The Company considers large credit relationships to be those with commitments equal to or in excess of $5.0 million prior to any portion being sold. Large relationships also include loan participations purchased if the credit relationship with the agent is equal to or in excess of $5.0 million. In addition to the Company’s normal policies and procedures related to the origination of large credits, the Company’s Executive Loan Committee and Director Loan Committee must approve all new and renewed credit facilities which are part of large credit relationshi ps. At December 31, 2022, our largest 20 relationships consisted of loans and loan commitments, where the total committed balance was $327.2 million with $227.2 million outstanding. At December 31, 2021, our largest 20 relationships had total committed balance of $203.6 million with $160.6 million outstanding.
Maturities and sensitivities of loans to changes in interest rates. The following table presents the maturity distribution of the Company’s loans at December 31, 2022. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index such as the prime rate.

(dollars in thousands) |  | Due in One Year or Less |  | After One, but within Five Years |  | After Five Years, but within Fifteen Years |  | After Fifteen Years |  | Total
Loans with fixed interest rates: |  |  |  |  |  |  |  |  |  |
Construction, land & land development |  | $ | 104,164 |  |  | $ | 50,117 |  |  | $ | 29,597 |  |  | $ | 23,006 |  |  | $ | 206,884 |
Other commercial real estate |  | 59,734 |  |  | 354,610 |  |  | 464,102 |  |  | 47,059 |  |  | 925,505 |
Total commercial real estate |  | 163,898 |  |  | 404,727 |  |  | 493,699 |  |  | 70,065 |  |  | 1,132,389 |
Residential real estate |  | 9,332 |  |  | 52,745 |  |  | 66,830 |  |  | 60,063 |  |  | 188,970 |
Commercial, financial & agricultural |  | 36,999 |  |  | 101,124 |  |  | 50,449 |  |  | 6,678 |  |  | 195,250 |
Consumer & other |  | 4,025 |  |  | 12,480 |  |  | 1,374 |  |  | — |  |  | 17,879 |
Total loans with fixed interest rates, net of unearned fees |  | 214,254 |  |  | 571,076 |  |  | 612,352 |  |  | 136,806 |  |  | 1,534,488 |
Loans with floating interest rates: |  |  |  |  |  |  |  |  |  |
Construction, land & land development |  | 7,846 |  |  | 1,137 |  |  | 13,568 |  |  | — |  |  | 22,551 |
Other commercial real estate |  | 21,055 |  |  | 26,638 |  |  | 2,249 |  |  | — |  |  | 49,942 |
Total commercial real estate |  | 28,901 |  |  | 27,775 |  |  | 15,817 |  |  | — |  |  | 72,493 |
Residential real estate |  | 27,577 |  |  | 25,841 |  |  | 47,641 |  |  | 25 |  |  | 101,084 |
Commercial, financial & agricultural |  | 14,681 |  |  | 13,992 |  |  | — |  |  | — |  |  | 28,673 |
Consumer & other |  | 311 |  |  | 57 |  |  | — |  |  | — |  |  | 368 |
Total loans with floating interest rates, net of unearned fees |  | 71,470 |  |  | 67,665 |  |  | 63,458 |  |  | 25 |  |  | 202,618 |
Total loans, net of unearned fees |  | $ | 285,724 |  |  | $ | 638,741 |  |  | $ | 675,810 |  |  | $ | 136,831 |  |  | $ | 1,737,106 |

The Company may renew loans at maturity when requested by a customer whose financial strength appears to support such renewal or when such renewal appears to be in the Company’s best interest. In such instances, the Company generally requires payment of accrued interest and may adjust the rate of interest, require a principal reduction or modify other terms of the loan at the time of renewal.
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Nonperforming Assets and Potential Problem Loans
Asset quality experienced some recovery during the year ended December 31, 2022, as the level of disruption caused by the economic impact of COVID-19 subsided in 2022, and nonperforming loans to total loans remained stable and levels of criticized and classified loans decreased. Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more, repossessed personal property and other real estate owned ("OREO"). Nonaccrual loans totaled $5.7 million at December 31, 2022, an increase of $257,000, or 4.7%, from $5.4 million at December 31, 2021. There were no loans contractually past due 90 days or more and still accruing for either period presented. At December 31, 2022, OREO totaled $651,000, an increase of $370,000, or 131.7%, compared with $281,000 at December 31, 2021. The change in OREO is a combination of a donation of a property worth $35,000 and an asset addition of $405,000. At the end of the year ended December 31, 2022, total nonperforming assets as a percentage of total asset s increased to 0.22% compared with 0.21% at December 31, 2021.
Year-end nonperforming assets and accruing past due loans were as follows:

(dollars in thousands) |  | 2022 |  | 2021 |  | 2020 |  |  |  |
Loans accounted for on nonaccrual |  | $ | 5,706 |  |  | $ | 5,449 |  |  | $ | 9,128 |  |  |  |  |
Loans accruing past due 90 days or more |  | — |  |  | — |  |  | — |  |  |  |  |
Other real estate foreclosed |  | 651 |  |  | 281 |  |  | 1,006 |  |  |  |  |
Repossessed assets |  | — |  |  | 49 |  |  | 30 |  |  |  |  |
Total nonperforming assets |  | $ | 6,357 |  |  | $ | 5,779 |  |  | $ | 10,164 |  |  |  |  |
Nonperforming loans by segment |  |  |  |  |  |  |  |  |  |
Construction, land & land development |  | $ | 149 |  |  | $ | 31 |  |  | $ | 197 |  |  |  |  |
Commercial real estate |  | 1,509 |  |  | 837 |  |  | 4,613 |  |  |  |  |
Residential real estate |  | 2,686 |  |  | 3,839 |  |  | 2,958 |  |  |  |  |
Commercial, financial & agricultural |  | 1,341 |  |  | 708 |  |  | 1,065 |  |  |  |  |
Consumer & other |  | 21 |  |  | 34 |  |  | 295 |  |  |  |  |
Total nonperforming loans |  | $ | 5,706 |  |  | $ | 5,449 |  |  | $ | 9,128 |  |  |  |  |
Nonperforming assets as a percentage of: |  |  |  |  |  |  |  |  |  |
Total loans, other real estate and foreclosed assets |  | 0.37 | % |  | 0.43 | % |  | 0.96 | % |  |  |  |
Total assets |  | 0.22 | % |  | 0.21 | % |  | 0.58 | % |  |  |  |
Nonperforming loans as a percentage of: |  |  |  |  |  |  |  |  |  |
Total loans |  | 0.33 | % |  | 0.41 | % |  | 0.86 | % |  |  |  |
Supplemental data: |  |  |  |  |  |  |  |  |  |
Trouble debt restructured loans in compliance with modified terms (1) |  | $ | 7,378 |  |  | $ | 7,326 |  |  | $ | 12,320 |  |  |  |  |
Trouble debt restructured loans |  |  |  |  |  |  |  |  |  |
Past due 30-89 days (1) |  | — |  |  | — |  |  | 273 |  |  |  |  |
Accruing past due loans: |  |  |  |  |  |  |  |  |  |
30-89 days past due (1) |  | $ | 1,793 |  |  | $ | 4,567 |  |  | $ | 3,092 |  |  |  |  |
90 or more days past due |  | — |  |  | — |  |  | — |  |  |  |  |
Total accruing past due loans |  | $ | 1,793 |  |  | $ | 4,567 |  |  | $ | 3,092 |  |  |  |  |
Allowance for loan losses |  | $ | 16,128 |  |  | $ | 12,910 |  |  | $ | 12,127 |  |  |  |  |
Allowance for loan losses as a percentage of: |  |  |  |  |  |  |  |  |  |
Total loans |  | 0.93 | % |  | 0.96 | % |  | 1.14 | % |  |  |  |
Nonperforming loans |  | 282.65 |  |  | 236.92 |  |  | 132.85 |  |  |  |  |

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(1) Loans granted payment deferrals related to the COVID-19 pandemic are not reported as past due or placed on nonaccrual status (provided the loans were not past due or on nonaccrual status prior to the deferral), and there were no loans under these terms deemed past due or nonaccrual as of December 31, 2021.
Nonperforming assets include nonaccrual loans, loans past due 90 days or more, foreclosed real estate, repossessed assets and nonaccrual securities. Nonperforming assets at December 31, 2022 increased 10.0% from December 31, 2021, as a result of the small increase in nonaccrual loans and other real estate owned property.
Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to a customer whose financial condition has deteriorated are considered for nonaccrual status whether or not the loan is 90 days or more past due. For consumer loans, collectability and loss are generally determined before the loan reaches 90 days past due. Accordingly, losses on consumer loans are recorded at the time they are determined. Consumer loans that are 90 days or more past due are generally either in liquidation/payment status or bankruptcy awaiting confirmation of a plan. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Classification of a loan as nonaccrual does not preclude the ultimate collection of loan principal or interest.
The restructuring of a loan is considered a "troubled debt restructuring ("TDR")" if both (i) the borrower is experiencing financial difficulties, and (ii) the Company has granted the borrower a concession that we would not consider otherwise. At December 31, 2022, TDRs totaled $7.4 million, an increase from $7.3 million reported at December 31, 2021. At December 31, 2022 and 2021, all TDRs were performing according to their modified terms and were therefore not considered to be nonperforming assets.
Troubled debt restructured loans are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven.
Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The allowance for loan losses includes allowance allocations calculated in accordance with current U.S. accounting standards. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
The Company’s allowance for loan losses consists of specific valuation allowances established for probable losses on specific loans and historical valuation allowances for other loans with similar risk characteristics. The allowances established for probable losses on specific loans are the result of management’s quarterly review of substandard loans with an outstanding balance of $500,000 or more and impaired troubled debt restructured loans. This review process usually involves the Chief Credit Officer and Director of Credit Administration along with local lending officers reviewing the loans for impairment. Specific valuation allowances are determined after considering the borrower’s financial condition, collateral deficiencies, and economic conditions affecting the borrower’s industry, among other things. In the case of collateral dependent loans, collateral shortfall is most often based upon local market real estate value estimates. This review process is performed at the subsidiary bank level and is reviewed at the parent Company level.
Once the loan becomes impaired, it is removed from the pool of loans covered by the general reserve and reviewed individually for exposure as described above. In cases where the individual review reveals no exposure, no reserve is recorded for that loan,
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either through an individual reserve or through a general reserve. If, however, the individual review of the loan does indicate some exposure, management often charges off this exposure, rather than recording a specific reserve. In these instances, a loan which becomes nonperforming could actually reduce the allowance for loan losses. Those loans deemed uncollectible are transferred to our problem loan department for workout, foreclosure and/or liquidation. The problem loan department obtains a current appraisal on the property in order to record the fair market value (less selling expenses) when the property is foreclosed on and moved into other real estate.
The allowances established for the remainder of the loan portfolio are based on historical loss factors, adjusted for certain qualitative factors, which are applied to groups of loans with similar risk characteristics. Loans are segregated into fifteen separate groups based on call codes. Most of the Company’s charge-offs during the past two years have been real estate dependent loans. The historical loss ratios applied to these groups of loans are updated quarterly based on actual charge-off experience. The historical loss ratios are further adjusted by qualitative factors.
Management evaluates the adequacy of the allowance for each of these components on a quarterly basis. Peer comparisons, industry comparisons, and regulatory guidelines are also used in the determination of the general valuation allowance. Loans identified as losses by management, internal loan review, and/or bank examiners are charged off. Additional information about the Company’s allowance for loan losses is provided in the Notes to the Consolidated Financial Statements for Allowance for Loan Losses.
The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. The allocation of the allowance to each category is subjective and is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category.

|  | December 31, |  | December 31, |  | December 31, |  | December 31, |  | December 31,
(dollars in thousands) |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | 2018
|  | Reserve |  | %(1) |  | Reserve |  | %(1) |  | Reserve |  | %(1) |  | Reserve |  | %(1) |  | Reserve |  | %(1)
Construction, land & land development |  | $ | 1,959 |  |  | 13.2 | % |  | $ | 1,127 |  |  | 12.4 | % |  | $ | 1,013 |  |  | 11.4 | % |  | $ | 215 |  |  | 9.9 | % |  | $131 |  | 7.7 | %
Commercial real estate |  | 8,886 |  |  | 56.2 |  |  | 7,691 |  |  | 58.8 |  |  | 6,880 |  |  | 49.1 |  |  | 3,908 |  |  | 55.8 |  |  | 5,251 |  |  | 55.8 |
Residential real estate |  | 2,354 |  |  | 16.7 |  |  | 1,805 |  |  | 15.9 |  |  | 2,278 |  |  | 17.3 |  |  | 980 |  |  | 20.1 |  |  | 1,181 |  |  | 24.0 |
Commercial, financial & agricultural |  | 2,709 |  |  | 12.9 |  |  | 1,083 |  |  | 11.5 |  |  | 1,713 |  |  | 20.1 |  |  | 1,657 |  |  | 11.8 |  |  | 618 |  |  | 9.5 |
Consumer & other |  | 220 |  |  | 1.1 |  |  | 1,204 |  |  | 1.4 |  |  | 243 |  |  | 2.0 |  |  | 103 |  |  | 2.4 |  |  | 96 |  |  | 3.0 |
|  | $ | 16,128 |  |  | 100.1 | % |  | $ | 12,910 |  |  | 100.0 | % |  | $ | 12,127 |  |  | 99.9 | % |  | $ | 6,863 |  |  | 100.0 | % |  | $ | 7,277 |  |  | 100.1 | %

(1) Percentage represents the loan balance in each category expressed as a percentage of total end of period loans.
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The following table presents an analysis of the Company’s loan loss experience for the periods indicated.

(dollars in thousands) |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | 2018
Allowance for loan losses at beginning of year |  | $ | 12,910 |  |  | $ | 12,127 |  |  | $ | 6,863 |  |  | $ | 7,277 |  |  | $ | 7,508 |
Charge-offs |  |  |  |  |  |  |  |  |  |
Construction, land & land development |  | — |  |  | — |  |  | 4 |  |  | 29 |  |  | — |
Commercial real estate |  | 58 |  |  | 568 |  |  | 226 |  |  | 119 |  |  | 257 |
Residential real estate |  | 48 |  |  | 3 |  |  | 206 |  |  | 758 |  |  | 162 |
Commercial, financial & agricultural |  | 314 |  |  | 274 |  |  | 242 |  |  | 403 |  |  | 247 |
Consumer & other |  | 60 |  |  | 68 |  |  | 1,103 |  |  | 784 |  |  | 299 |
Total charge-offs |  | $ | 480 |  |  | $ | 913 |  |  | $ | 1,781 |  |  | $ | 2,093 |  |  | $ | 965 |
Recoveries |  |  |  |  |  |  |  |  |  |
Construction, land & land development |  | 25 |  |  | 466 |  |  | 45 |  |  | 82 |  |  | 155 |
Commercial real estate |  | 85 |  |  | 118 |  |  | 153 |  |  | 218 |  |  | 52 |
Residential real estate |  | 50 |  |  | 274 |  |  | 142 |  |  | 174 |  |  | 91 |
Commercial, financial & agricultural |  | 139 |  |  | 91 |  |  | 43 |  |  | 36 |  |  | 161 |
Consumer & other |  | 29 |  |  | 47 |  |  | 104 |  |  | 65 |  |  | 74 |
Total recoveries |  | 328 |  |  | 996 |  |  | 487 |  |  | 575 |  |  | 533 |
Net (recoveries)/ charge-offs |  | 152 |  |  | (83) |  |  | 1,294 |  |  | 1,518 |  |  | 432 |
Provision for loans losses |  | 3,370 |  |  | 700 |  |  | 6,558 |  |  | 1,104 |  |  | 201 |
Allowance for loan losses at end of year |  | $ | 16,128 |  |  | $ | 12,910 |  |  | $ | 12,127 |  |  | $ | 6,863 |  |  | $ | 7,277 |
Ratio of net (recoveries)/charge-offs to average loans |  | 0.01 | % |  | (0.01) | % |  | 0.12 | % |  | 0.11 | % |  | 0.04 | %

The allowance for loan losses increased from $12.9 million or 0.96% of total loans at December 31, 2021 to $16.1 million, or 0.93% of total loans at December 31, 2022. Excluding outstanding PPP loans of $95,000 and $9.0 million as of December 31, 2022 and 2021, the allowance for loan losses as a percentage of total loans was 0.93% and 0.97%, respectively. The provision for loan losses reflects loan quality trends, including the level of net charge-offs or recoveries, among other factors.
The amount of provision expense recorded in each period is the amount required such that the total allowance for loan losses reflects the appropriate balance, in the estimation of management, sufficient to cover probable, inherent losses in the loan portfolio. The primary reason for the increase in allowance to loans as a percentage of loans and provision is primarily due to the Bank's strong loan growth.
Investment Portfolio
The following table presents carrying values of investment securities available-for-sale held by the Company as of December 31, 2022, 2021 and 2020.

(dollars in thousands) |  | 2022 |  | 2021 |  | 2020
U.S. treasury securities |  | $ | 1,622 |  |  | $ | 87,551 |  |  | $ | 245 |
U.S. agency |  | 4,585 |  |  | 17,781 |  |  | 1,004 |
Asset backed securities |  | 29,988 |  |  | — |  |  | — |
State, county and municipal securities |  | 104,756 |  |  | 250,153 |  |  | 62,388 |
Corporate debt securities |  | 49,585 |  |  | 48,408 |  |  | 4,250 |
Mortgage-backed securities |  | 242,017 |  |  | 534,271 |  |  | 312,927 |
Total debt securities |  | $ | 432,553 |  |  | $ | 938,164 |  |  | $ | 380,814 |

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The following table presents investment securities held-to-maturity, carried at cost by the Company as of December 31, 2022, 2021 and 2020.

(dollars in thousands) |  | 2022 |  | 2021 |  | 2020
U.S. treasury securities |  | $ | 91,615 |  |  | $ | — |  |  | $ | — |
U.S. agency |  | 16,409 |  |  | — |  |  | — |
State, county and municipal securities |  | 136,138 |  |  | — |  |  | — |
Mortgage-backed securities |  | 221,696 |  |  | — |  |  | — |
Total debt securities |  | $ | 465,858 |  |  | $ | — |  |  | $ | — |

The following table represents expected maturities and weighted-average yields of investment securities held by the Company as of December 31, 2022 (mortgage-backed securities are based on the average life at the projected speed, while State and Political Subdivisions reflect anticipated calls being exercised).

|  |  |  |  |  | After 1 Year But |  | After 5 Years But |  |  |  |
Available for Sale |  | Within 1 Year |  | Within 5 Years |  | Within 10 Years |  | After 10 Years
(dollars in thousands) |  | Amount |  | Yield |  | Amount |  | Yield |  | Amount |  | Yield |  | Amount |  | Yield
U.S. treasury securities |  | $ | 1,135 |  |  | 2.59 | % |  | $ | 487 |  |  | 2.90 | % |  | $ | — |  |  | — | % |  | $ | — |  |  | — | %
U.S. agency |  | — |  |  | — |  |  | 859 |  |  | 0.76 |  |  | 505 |  |  | 2.19 |  |  | 3,221 |  |  | 2.75 |
Asset backed securities |  | — |  |  | — |  |  | 550 |  |  | 2.59 |  |  | — |  |  | — |  |  | 29,438 |  |  | 5.43 |
State, county and municipal securities |  | 171 |  |  | 2.19 |  |  | 1,699 |  |  | 2.20 |  |  | 39,690 |  |  | 2.04 |  |  | 63,196 |  |  | 2.07 |
Corporate debt securities |  | — |  |  | — |  |  | 9,276 |  |  | 3.40 |  |  | 36,698 |  |  | 4.24 |  |  | 3,611 |  |  | 8.61 |
Mortgage-backed securities |  | 16,025 |  |  | 7.22 |  |  | 50,515 |  |  | 4.10 |  |  | 13,786 |  |  | 2.57 |  |  | 161,691 |  |  | 2.26 |
Total debt securities |  | $ | 17,331 |  |  | 6.87 | % |  | $ | 63,386 |  |  | 3.88 | % |  | $ | 90,679 |  |  | 3.01 | % |  | $ | 261,157 |  |  | 2.67 | %

|  |  |  |  |  | After 1 Year But |  | After 5 Years But |  |  |  |
Held to Maturity |  | Within 1 Year |  | Within 5 Years |  | Within 10 Years |  | After 10 Years
(dollars in thousands) |  | Amount |  | Yield |  | Amount |  | Yield |  | Amount |  | Yield |  | Amount |  | Yield
U.S. treasury securities |  | $ | — |  |  | — | % |  | $ | 72,558 |  |  | 1.05 | % |  | $ | 19,057 |  |  | 1.12 | % |  | $ | — |  |  | — | %
U.S. agency |  | — |  |  | — |  |  | 6,748 |  |  | 1.13 |  |  | 9,661 |  |  | 1.46 |  |  | — |  |  | — |
State, county and municipal securities |  | — |  |  | — |  |  | — |  |  | — |  |  | 50,257 |  |  | 2.29 |  |  | 85,881 |  |  | 2.27 |
Mortgage-backed securities |  | — |  |  | — |  |  | 27,079 |  |  | 1.88 |  |  | 49,428 |  |  | 1.83 |  |  | 145,189 |  |  | 1.76 |
Total debt securities |  | $ | — |  |  | — | % |  | $ | 106,385 |  |  | 1.27 | % |  | $ | 128,403 |  |  | 1.88 | % |  | $ | 231,070 |  |  | 1.95 | %

Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. The Company had both held to maturity and available for sale securities in the investment portfolio at December 31, 2022.
At December 31, 2022, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of the Company’s stockholders’ equity.
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The average yield of the securities portfolio was 2.16% in 2022 and 1.72% in 2021. The increase in the average yield from 2021 to 2022 was primarily attributed to the purchase of new securities which have a higher yield.
Deposits
The following table presents the average amount outstanding and the average rate paid on deposits by the Company for the years 2022, 2021, and 2020.

|  | 2022 |  | 2021 |  | 2020
(dollars in thousands) |  | Average Amount |  | Average Rate |  | Average Amount |  | Average Rate |  | Average Amount |  | Average Rate
Noninterest-bearing demand deposits |  | $ | 564,322 |  |  | — |  |  | $ | 449,445 |  |  | — |  |  | $ | 294,008 |  |  | — |
Interest-bearing demand and savings deposits |  | 1,439,234 |  |  | 0.21 | % |  | 1,073,824 |  |  | 0.09 | % |  | 787,030 |  |  | 0.24 | %
Time deposits |  | 370,375 |  |  | 0.76 | % |  | 297,704 |  |  | 0.56 | % |  | 305,374 |  |  | 1.22 | %
Total deposits |  | $ | 2,373,931 |  |  | 0.25 | % |  | $ | 1,820,973 |  |  | 0.14 | % |  | $ | 1,386,412 |  |  | 0.40 | %

The following table presents the maturities of the Company’s time deposits as of December 31, 2022.

(dollars in thousands) |  | Time Deposits $250,000 or Greater |  | Time Deposits Less than $250,000 |  | Total
Months to Maturity |  |  |  |  |  |
3 months or less |  | $ | 11,814 |  |  | $ | 63,479 |  |  | $ | 75,293 |
Over 3 months through 6 months |  | 28,473 |  |  | 77,411 |  |  | 105,884 |
Over 6 months through 12 months |  | 33,562 |  |  | 107,674 |  |  | 141,236 |
Over 12 months |  | 40,931 |  |  | 110,196 |  |  | 151,127 |
|  | $ | 114,780 |  |  | $ | 358,760 |  |  | $ | 473,540 |

Average deposits increased $553.0 million in 2022 compared to 2021. The increase in 2022 included $365.4 million or 34.0% in interest-bearing demand and savings deposits while, at the same time, noninterest bearing deposits increased $114.9 million, or 25.6% and time deposits increased $72.7 million, or 24.4%. The growth in our deposits is due primarily to the increase in rates the Company offers on its deposit products as well as the increase in brokered deposits. The increase in deposit rates is partially attributable to the 425 basis point increase in the national federal funds rate during 2022.
As of December 31, 2022 and 2021, $882.2 million and $809.1 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimated based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.
The Company supplements deposit sources with brokered deposits. As of December 31, 2022, the Company had $50.8 million, or 2.04% of total deposits, in brokered certificates of deposit attracted by external third parties. Additional information is provided in the Notes to Consolidated Financial Statements for Deposits.
Off-Balance-Sheet Arrangements and Contractual Obligations
In the ordinary course of business, our Bank has granted commitments to extend credit to approved customers. Generally, these commitments to extend credit have been granted on a temporary basis for seasonal or inventory requirements or for construction period financing and have been approved within the Bank’s credit guidelines. Our Bank has also granted commitments to approved customers for financial standby letters of credit. These commitments are recorded in the financial statements when funds are disbursed or the financial instruments become payable. The Bank uses the same credit policies for these off-balance-sheet commitments as it does for financial instruments that are recorded in the consolidated financial statements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
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The following table summarizes commitments and contractual obligations outstanding at December 31, 2022.

(dollars in thousands) |  | Payments Due by Period
|  | Total |  | Less Than 1 Year |  | 1 – 3 Years |  | 3 – 5 Years |  | More Than 5 Years
Contractual Obligations: |  |  |  |  |  |  |  |  |  |
Borrowings |  | $ | 203,352 |  |  | $ | 120,000 |  |  | $ | — |  |  | $ | 15,000 |  |  | $ | 68,352 |
Operating lease liabilities |  | 1,895 |  | 460 |  |  | 795 |  |  | 568 |  |  | 72 |
Time Deposits |  | 473,540 |  | 322,413 |  |  | 137,794 |  |  | 12,967 |  |  | 366 |
|  | $ | 678,787 |  |  | $ | 442,873 |  |  | $ | 138,589 |  |  | $ | 28,535 |  |  | $ | 68,790 |
Other Commitments: |  |  |  |  |  |  |  |  |  |
Loan commitments |  | $ | 379,997 |  |  | $ | 156,854 |  |  | $ | 46,067 |  |  | $ | 26,074 |  |  | $ | 151,002 |
Standby letters of credit |  | 3,333 |  |  | 3,019 |  |  | 314 |  |  | — |  |  | — |
|  | 383,330 |  |  | 159,873 |  |  | 46,381 |  |  | 26,074 |  |  | 151,002 |
Total Contractual Obligations and Other Commitments |  | $ | 1,062,117 |  |  | $ | 602,746 |  |  | $ | 184,970 |  |  | $ | 54,609 |  |  | $ | 219,792 |

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments which are not reflected in the consolidated financial statements. These instruments include commitments to extend credit, standby letters of credit, performance letters of credit, guarantees and liability for assets held in trust.
Such financial instruments are recorded in the financial statements when funds are disbursed or the instruments become payable. The Company uses the same credit policies for these off-balance sheet financial instruments as they do for instruments that are recorded in the consolidated financial statements.
Loan Commitments. The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Loan commitments outstanding at December 31, 2022 are included in the preceding table.
Standby Letters of Credit. Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. Standby letters of credit outstanding at December 31, 2022 are included in the preceding table.
Capital Requirements
The Bank is required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy. For more information, see “Item 1. Business – Supervision and Regulation – Regulation of the Company – Capital Requirements.”
At December 31, 2022, shareholders’ equity totaled $230.3 million compared to $217.7 million at December 31, 2021. In addition to net income of $19.5 million, other significant changes in shareholders’ equity during 2022 included $59.5 million
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issuance of common stock and $7.2 million of dividends declared on common stock. The accumulated other comprehensive loss component of stockholders’ equity totaled $66.4 million at December 31, 2022 compared to accumulated other comprehensive income of $6.2 million at December 31, 2021. This fluctuation was mostly related to the after-tax effect of changes in the fair value of securities available for sale. Under regulatory requirements, the unrealized gain or loss on securities available for sale does not increase or reduce regulatory capital and is not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure Tier 1 and total capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items.
Tier 1 capital consists of common stock and qualifying preferred securities less goodwill, intangibles and disallowed deferred tax assets. Tier 2 capital consists of certain convertible, subordinated and other qualifying debt and the allowance for loan losses up to 1.25% of risk-weighted assets. The Company's Tier 2 capital consists of subordinated notes and the allowance for loan losses.
Using the capital requirements presently in effect, the Tier 1 ratio as of December 31, 2022 was 12.49% and total Tier 1 and 2 risk-based capital was 15.11%. Both of these measures compare favorably with the regulatory minimum of 6.0% for Tier 1 and 8% for total risk-based capital. The Company’s common equity Tier 1 ratio as of December 31, 2022 was 11.34%, which exceeds the regulatory minimum of 4.50%. The Company’s Tier 1 leverage ratio as of December 31, 2022 was 9.17%, which exceeds the required ratio standard of 4.0%.
For the year ended December 31, 2022, average capital was $236.3 million representing 8.6% of average assets for the year. This compares to average capital of $176.0 million, representing 8.4% of average assets for 2021.
For the years ended December 31, 2022 and 2021, the Company did not have any material commitments for capital expenditures.
The Company granted 139,720 and 187,600 restricted shares of common stock for the years ended December 31, 2022 and 2021, respectively . All restricted shares vest over a three year period.
A cash dividend of $7.2 million and $4.5 million was paid for the year ended December 31, 2022 and 2021, respectively.
Liquidity
The Company, primarily through the actions of its subsidiary bank, engages in liquidity management to ensure adequate cash flow for deposit withdrawals, credit commitments and repayments of borrowed funds. Needs are met through loan repayments, net interest and fee income and the sale or maturity of existing assets. In addition, liquidity is continuously provided through the acquisition of new deposits, the renewal of maturing deposits and external borrowings.
Cash and cash equivalents at December 31, 2022 and 2021 were $80.7 million and $197.2 million, respectively. The decrease in cash and cash equivalents was primarily due to the loan growth, partially offset by fundings of the loan growth through deposits and borrowings. Management believes the various funding sources discussed above are adequate to meet the Company’s liquidity needs in these unsettled times without any material adverse impact on our operating results.
Management monitors deposit flow and evaluates alternate pricing structures to retain and grow deposits. To the extent needed to fund loan demand, traditional local deposit funding sources are supplemented by the use of FHLB borrowings, brokered deposits and other wholesale deposit sources outside the immediate market area. Internal policies have been updated to monitor the use of various core and non-core funding sources, and to balance ready access with risk and cost. Through various asset/liability management strategies, a balance is maintained among goals of liquidity, safety and earnings potential. Internal policies that are consistent with regulatory liquidity guidelines are monitored and enforced by the Bank.
The investment portfolio provides a ready means to raise cash if liquidity needs arise. As of December 31, 2022, the available-for-sale bond portfolio totaled $432.6 million. At December 31, 2021, the available for sale bond portfolio totaled $938.2 million. This decrease is primarily attributable to the transfer during 2022 of agency-issued securities from the available-for-sale to the held-to-maturity portfolio. These securities had a combined book value of approximately $511.0 million and a combined market value of approximately $477.0 million. Only marketable investment grade bonds are purchased. Although approximately 60.3% of the Bank’s bond portfolio is encumbered as pledges to secure various public funds deposits, repurchase
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agreements, and for other purposes, management can restructure and free up investment securities for sale if required to meet liquidity needs.
Management continually monitors the relationship of loans to deposits as it primarily determines the Company’s liquidity posture. Colony had ratios of loans to deposits of 69.7% as of December 31, 2022 and 56.3% as of December 31, 2021. Management employs alternative funding sources when deposit balances will not meet loan demands. The ratios of loans to all funding sources (excluding Subordinated Debentures) at December 31, 2022 and December 31, 2021 were 66.0% and 54.9%, respectively. Management continues to emphasize programs to generate local core deposits as our Company’s primary funding sources. The stability of the Banks’ core deposit base is an important factor in Colony’s liquidity position. A heavy percentage of the deposit base is comprised of accounts of individuals and small businesses with comprehensive banking relationships and limited volatility. At December 31, 2022 and December 31, 2021, the Bank had $114.8 million and $73.4 million, respectively, in certificates of deposit of $250,000 or more. These larger deposits represented 4.6% and 3.1% of total deposits as of December 31, 2022 and 2021, respectively. Management seeks to monitor and control the use of these larger certificates, which tend to be more volatile in nature, to ensure an adequate supply of funds as needed. Relative interest costs to attract local core relationships are compared to market rates of interest on various external deposit sources to help minimize the Company’s overall cost of funds.
The Company supplemented deposit sources with brokered deposits. As of December 31, 2022, the Company had $50.8 million or 2.04% of total deposits in brokered deposits. Additional information is provided in the Notes to the Consolidated Financial Statements regarding these brokered deposits. Additionally, the Company uses external deposit listing services to obtain out-of-market certificates of deposit at competitive interest rates when funding is needed. The deposits obtained from listing services are often referred to as wholesale or internet CDs.
To plan for contingent sources of funding not satisfied by both local and out-of-market deposit balances, Colony and its subsidiary have established multiple borrowing sources to augment their funds management. The Company has borrowing capacity through membership of the Federal Home Loan Bank program. The Bank has also established overnight borrowing for Federal Funds Purchased through various correspondent banks. Management believes the various funding sources discussed above are adequate to meet the Company’s liquidity needs in the future without any material adverse impact on operating results. At December 31, 2022 and 2021, we had $125.0 million and $51.7 million, respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had $574.9 million and $574.7 million of additional borrowing availability with the FHLB at December 31, 2022 and 2021, respectively.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of balance sheet structure, the ability to liquidate assets, and the availability of alternative sources of funds. The Company seeks to ensure its funding needs are met by maintaining a level of liquid funds through asset/liability management.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, securities available for sale and federal funds sold and securities purchased under resale agreements.
Liability liquidity is provided by access to funding sources which include core deposits. Should the need arise, the Company also maintains relationships with the Federal Home Loan Bank, Federal Reserve Bank, three correspondent banks and repurchase agreement lines that can provide funds on short notice.
Since Colony is a bank holding Company and does not conduct operations, its primary sources of liquidity are dividends up streamed from the subsidiary bank and borrowings from outside sources.
The liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented, would have a material adverse effect on the Company.
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Impact of Inflation and Changing Prices
The Company’s financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). GAAP presently requires the Company to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Company is reflected in increased operating costs, and the Company has experienced material effects of inflation during the last two fiscal years due to the government's monetary policies and the current economic climate. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities, among other things, as further discussed in the next section.
Regulatory and Economic Policies
The Company’s business and earnings are affected by general and local economic conditions and by the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities, among other things. The Federal Reserve Board regulates the supply of money in order to influence general economic conditions. Among the instruments of monetary policy available to the Federal Reserve Board are (i) conducting open market operations in United States government obligations, (ii) changing the discount rate on financial institution borrowings, (iii) imposing or changing reserve requirements against financial institution deposits, and (iv) restricting certain borrowings and imposing or changing reserve requirements against certain borrowings by financial institutions and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the Federal Reserve Board have a material effect on the earnings of the Company.
Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future; however, the Company cannot accurately predict the nature, timing or extent of any effect such policies may have on its future business and earnings.
Recently Issued Accounting Pronouncements
See Note 1 - Summary of Significant Accounting Policies included in the Notes to the Consolidated Financial Statements.
Market Risk and Interest Rate Sensitivity
Our financial performance is impacted by, among other factors, interest rate risk and credit risk. We do not utilize derivatives to mitigate our credit risk, relying instead on an extensive loan review process and our allowance for loan losses.
Interest rate risk is the change in value due to changes in interest rates. The Company is exposed only to U.S. dollar interest rate changes and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of its investment portfolio as held for trading. The Company does not engage in any hedging activity or utilize any derivatives. The Company has no exposure to foreign currency exchange rate risk, commodity price risk and other market risks. Interest rate risk is addressed by our Risk Management Committee which includes senior management representatives. The Risk Management Committee monitors interest rate risk by analyzing the potential impact to the net portfolio of equity value and net interest income from potential changes to interest rates and considers the impact of alternative strategies or changes in balance sheet structure.
Interest rates play a major part in the net interest income of financial institutions. The repricing of interest earnings assets and interest-bearing liabilities can influence the changes in net interest income. The timing of repriced assets and liabilities is Gap management and our Company has established its policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.
Our exposure to interest rate risk is reviewed at least quarterly by our Board of Directors and by our Risk Management Committee. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net portfolio value in the event of assumed changes in interest rates. In order to reduce the exposure to interest rate fluctuations, we have implemented strategies to more closely match our balance sheet composition. The Company has engaged FTN Financial
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to run a quarterly asset/liability model for interest rate risk analysis. We are generally focusing our investment activities on securities with terms or average lives in the 3 ½ - 5 ½ year range.
Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either reduced current market values or reduced current and potential net income. Colony’s most significant market risk is interest rate risk. This risk arises primarily from Colony’s extension of loans and acceptance of deposits.
Managing interest rate risk is a primary goal of the asset liability management function. Colony attempts to achieve stability in net interest income while limiting volatility arising from changes in interest rates. Colony seeks to achieve this goal by balancing the maturity and repricing characteristics of assets and liabilities. Colony manages its exposure to fluctuations in interest rates through policies established by the Risk Management Committee and approved by the Board of Directors. The Risk Management Committee meets at least quarterly and has responsibility for developing asset liability management policies, reviewing the interest rate sensitivity of Colony, and developing and implementing strategies to improve balance sheet structure and interest rate risk positioning.
Colony measures the sensitivity of net interest income to changes in market interest rates through the utilization of Asset/Liability simulation modeling. On at least a quarterly basis, the following twenty-four month time period is simulated to determine a baseline net interest income forecast and the sensitivity of this forecast to changes in interest rates. These simulations include all of Colony’s earning assets and liabilities. Forecasted balance sheet changes, primarily reflecting loan and deposit growth and forecasts, are included in the periods modeled. Projected rates for loans and deposits are based on management’s outlook and local market conditions.
The magnitude and velocity of rate changes among the various asset and liability groups exhibit different characteristics for each possible interest rate scenario; additionally, customer loan and deposit preferences can vary in response to changing interest rates. Simulation modeling enables Colony to capture the expected effect of these differences. Assumptions utilized in the model are updated on an ongoing basis and are reviewed and approved by the Risk Management Committee of the Board of Directors.
Colony has modeled its baseline net interest income forecast assuming a flat interest rate environment with the federal funds rate at the Federal Reserve's targeted range of 4.25% and the prime rate of 7.50% at December 31, 2022. Colony has modeled the impact of a gradual increase in short-term rates of 100 and 200 basis points and a decline of 100 basis points to determine the sensitivity of net interest income for the next twelve months. As illustrated in the table below, the net interest income sensitivity model indicates that, compared with a net interest income forecast assuming stable rates, net interest income is projected to increase by 1.37% and 2.59% if interest rates increased by 100 and 200 basis points, respectively. Net interest income is projected to decline by 0.61% if interest rates decreased by 100 basis points. These changes were within Colony’s policy limit of a maximum 15% negative change.

Twelve Month Net Interest Income Sensitivity |  |  |  |
|  | Estimated Change in Net Interest Income as of December 31,
Change in Short-term Interest Rates (in basis points) |  | 2022 |  | 2021
+200 |  | 2.59% |  | 13.80%
+100 |  | 1.37% |  | 6.83%
Flat |  | —% |  | —%
-100 |  | -0.61% |  | -3.18%

The measured interest rate sensitivity indicates an asset sensitive position over the next year, which could serve to improve net interest income in a rising interest rate environment. The actual realized change in net interest income would depend on several factors, some of which could serve to reduce or eliminate the asset sensitivity noted above. These factors include a higher than projected level of deposit customer migration to higher cost deposits, such as certificates of deposit, which would increase total interest expense and serve to reduce the realized level of asset sensitivity. Another factor which could impact the realized interest rate sensitivity in a rising rate environment is the repricing behavior of interest-bearing non-maturity deposits. Assumptions for repricing are expressed as a beta relative to the change in the prime rate. For instance, a 25% beta would correspond to a deposit rate that would increase 0.25% for every 1% increase in the prime rate. Projected betas for interest
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bearing non-maturity deposit repricing are a key component of determining the Company's interest rate risk position. Should realized betas be higher than projected betas, the expected benefit from higher interest rates would be reduced.
Colony is also subject to market risk in certain of its fee income business lines. Mortgage banking income is subject to market risk. Mortgage loan originations are sensitive to levels of mortgage interest rates and therefore, mortgage banking income could be negatively impacted during a period of rising interest rates. The extension of commitments to customers to fund mortgage loans also subjects Colony to market risk. This risk is primarily created by the time period between making the commitment and closing and delivering the loan. Colony seeks to minimize this exposure by utilizing various risk management tools, the primary of which are forward sales commitments and best efforts commitments.
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is located in Item 7 under the heading Market Risk and Interest Rate Sensitivity.
Item 8
Financial Statements and Supplemental Data
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Colony Bankcorp is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and affected by the company’s board of directors, management and other personnel, 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 and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•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.
Management has assessed the effectiveness of the internal control over financial reporting as of December 31, 2022. In making this assessment, we used the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management also conducted an assessment of requirements pertaining to Section 112 of the Federal Deposit Insurance Corporation Improvement Act. This section relates to management’s evaluation of internal control over financial reporting, including controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) and in compliance with laws and regulations. Our evaluation included a review of the documentation of controls, evaluations of the design of the internal control system and tests of the effectiveness of internal controls.
Based on our assessment, management concluded that as of December 31, 2022, Colony Bankcorp, Inc.’s internal control over financial reporting is effective based on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 has been audited by Mauldin and Jenkins, LLC, an independent registered public accounting firm, as stated in their report which appears herein.

/s/ T. Heath Fountain
T. Heath Fountain Chief Executive Officer/Director/Acting Chief Financial Officer

62

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Colony Bankcorp, Inc. and Subsidiaries
Fitzgerald, Georgia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Colony Bankcorp, Inc. and Subsidiaries (the Company) as of December 31, 2022 and 2021 and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2023, expressed an unqualified opinion.We have audited the accompanying consolidated balance sheet of Colony Bankcorp, Inc. and Subsidiaries (the “Company”) as of December 31, 2022 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits 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. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgements. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
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as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
Description of the Matter
The Company’s loan portfolio totaled $1.737 billion as of December 31, 2022, and the associated allowance for loan losses (“ALL”) was $16.1 million. As discussed in Notes 1, 4, and 5 to the financial statements, the ALL is established to absorb probable credit losses inherent in the Company’s loan portfolio. Management’s estimate for the probable credit losses is established through quantitative, as well as qualitative, factors. The Company attributes portions of the allowance to loans that it evaluates individually and determines to be impaired. For non-impaired loans, the ALL is estimated based on historical default and/or loss information for pools of loans with similar risk characteristics and product types. The Company’s methodology for determining the appropriate ALL also considers the imprecision inherent in the estimation process. As a result, management adjusts the ALL for consideration of the potential impact of qualitative factors, which include levels of and trends in delinquencies and impaired loans (including TDRs); levels of and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration.
Auditing management’s estimate of the ALL involved a high degree of subjectivity in evaluating the qualitative factors that management assessed and the measurement of each qualitative factor. Management’s assessment and measurement of the qualitative factors is highly judgmental and has a significant effect on the ALL.
How We Addressed the Matter in Our Audit
Our audit procedures related to the qualitative factors of the ALL included the following procedures, among others. We gained an understanding of the Company’s process for establishing the ALL, including the identification and measurement of qualitative factors. We evaluated the design and documented the operating effectiveness of controls relevant to that process, including controls over the reliability of data from the loan systems, the completeness and accuracy of quantitative data, and the ALL methodology and assumptions. In doing so, we tested review and approval controls in the Company’s governance process designed to identify and assess the need for and measurement of qualitative factors to estimate inherent credit losses associated with factors not captured fully in the quantitative components of the ALL.
With respect to the identification of qualitative factors, we evaluated 1) the potential impact of imprecision in the quantitative models (and hence the need to consider a qualitative adjustment to the ALL); 2) changes, assumptions, and adjustments to the models; 3) sufficiency, availability, and relevance of historical loss data used in the models; and 4) the risk factors used in the models. Regarding measurement of the qualitative factors, we evaluated internal data utilized by management to estimate the appropriate level of the qualitative factors, as well as internal/external data produced by the Company’s Credit Review functions, with consideration given to the reliability of the factors and existence of new and potentially contradictory information. We also evaluated the overall ALL balance taken inclusive of such qualitative factors.
We have served as the Company’s auditor since 2021.
Albany, Georgia
March 16, 2023
64

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Colony Bankcorp, Inc. and Subsidiaries
Fitzgerald, Georgia
Opinion on Internal Control over Financial Reporting
We have audited Colony Bankcorp, Inc. and Subsidiaries (the Company) internal control over financial reporting, as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Colony Bankcorp, Inc. and Subsidiaries (the “Company”) as of December 31, 2022 and 2021 and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements) and our report dated March 15, 2023 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
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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.
/s/ Mauldin & Jenkins, LLC
Albany, Georgia
March 16, 2023
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COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(DOLLARS IN THOUSANDS)

| 2022 |  | 2021
Assets |  |  |
Cash and due from banks | $ | 20,584 |  |  | $ | 18,975 |
Fed Funds sold and interest-bearing deposits in banks | 60,094 |  |  | 178,257 |
Cash and cash equivalents | 80,678 |  |  | 197,232 |
Investment securities available for sale, at fair value | 432,553 |  |  | 938,164 |
Investment securities held to maturity, at amortized cost (fair value $411,264) | 465,858 |  |  | — |
Other investments | 13,793 |  |  | 14,012 |
Loans held for sale | 17,743 |  |  | 38,150 |
Loans | 1,737,106 |  |  | 1,337,977 |
Allowance for loan losses | (16,128) |  |  | (12,910) |
Net loans | 1,720,978 |  |  | 1,325,067 |
Premises and equipment | 41,606 |  |  | 43,033 |
Other real estate owned | 651 |  |  | 281 |
Goodwill | 48,923 |  |  | 52,906 |
Other intangible assets | 5,664 |  |  | 7,389 |
Bank-owned life insurance | 55,504 |  |  | 55,159 |
Deferred income taxes, net | 28,199 |  |  | 3,644 |
Other assets | 24,420 |  |  | 16,678 |
Total assets | $ | 2,936,570 |  |  | $ | 2,691,715 |
Liabilities and stockholders’ equity |  |  |
Deposits |  |  |
Noninterest-bearing | $ | 569,170 |  |  | $ | 552,576 |
Interest-bearing | 1,921,827 |  |  | 1,822,032 |
Total deposits | 2,490,997 |  |  | 2,374,608 |
Federal Home Loan Bank advances | 125,000 |  |  | 51,656 |
Other borrowed money | 78,352 |  |  | 36,792 |
Other liabilities | 11,953 |  |  | 10,952 |
Total liabilities | 2,706,302 |  |  | 2,474,008 |
Commitments and Contingencies (Note 14) |  |  |
Stockholders’ equity |  |  |
Preferred stock, stated value $1,000; 10,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2022 and 2021 | — |  |  | — |
Common stock, par value $1; 50,000,000 shares authorized, 17,598,123 and 13,673,898 shares issued and outstanding as of December 31, 2022 and 2021 | 17,598 |  |  | 13,674 |
Paid-in capital | 167,537 |  |  | 111,021 |
Retained earnings | 111,573 |  |  | 99,189 |
Accumulated other comprehensive loss, net of tax | (66,440) |  |  | (6,177) |
Total stockholders’ equity | 230,268 |  |  | 217,707 |
Total liabilities and stockholders’ equity | $ | 2,936,570 |  |  | $ | 2,691,715 |

See accompanying notes which are an integral part of these financial statements.
67

COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

| 2022 |  | 2021
Interest income |  |  |
Loans, including fees | $ | 70,717 |  |  | $ | 60,112 |
Investment securities | 19,887 |  |  | 10,260 |
Deposits with other banks and short term investments | 886 |  |  | 214 |
Total interest income | 91,490 |  |  | 70,586 |
Interest expense |  |  |
Deposits | 5,876 |  |  | 2,601 |
Federal funds purchased | 54 |  |  | — |
Federal Home Loan Bank advances | 2,564 |  |  | 691 |
Paycheck Protection Program Liquidity Facility | — |  |  | 93 |
Other borrowings | 2,371 |  |  | 1,012 |
Total interest expense | 10,865 |  |  | 4,397 |
Net interest income | 80,625 |  |  | 66,189 |
Provision for loan losses | 3,370 |  |  | 700 |
Net interest income after provision for loan losses | 77,255 |  |  | 65,489 |
Noninterest income |  |  |
Service charges on deposits | 7,875 |  |  | 6,213 |
Mortgage fee income | 8,550 |  |  | 13,213 |
Gain on sales of SBA loans | 6,216 |  |  | 7,547 |
Loss on sales of securities | (82) |  |  | (87) |
Interchange fees | 8,381 |  |  | 6,929 |
BOLI income | 1,313 |  |  | 1,041 |
Other | 2,819 |  |  | 1,434 |
Total noninterest income | 35,072 |  |  | 36,290 |
Noninterest expenses |  |  |
Salaries and employee benefits | 52,809 |  |  | 45,596 |
Occupancy and equipment | 6,534 |  |  | 6,149 |
Acquisition related expenses | 142 |  |  | 4,617 |
Information technology expense | 9,947 |  |  | 7,673 |
Professional fees | 3,432 |  |  | 2,750 |
Advertising and public relations | 3,664 |  |  | 2,705 |
Communications | 1,602 |  |  | 1,373 |
Writedown of building | — |  |  | 90 |
Other | 11,345 |  |  | 7,672 |
Total noninterest expense | 89,475 |  |  | 78,625 |
Income before income taxes | 22,852 |  |  | 23,154 |
Income taxes | 3,310 |  |  | 4,495 |
Net income | $ | 19,542 |  |  | $ | 18,659 |
Net income per share of common stock |  |  |
Basic | $ | 1.14 |  |  | $ | 1.66 |
Diluted | $ | 1.14 |  |  | $ | 1.66 |
Cash dividends declared per share of common stock | $ | 0.43 |  |  | $ | 0.41 |
Weighted average shares outstanding, basic | 17,191,079 |  |  | 11,254,130 |
Weighted average shares outstanding, diluted | 17,191,079 |  |  | 11,254,130 |

See accompanying notes which are an integral part of these financial statements.
68

COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)

| 2022 |  | 2021
Net income | $ | 19,542 |  |  | $ | 18,659 |
Other comprehensive loss: |  |  |
Net unrealized losses on investment securities arising during the period | (63,230) |  |  | (16,491) |
Tax effect | 8,851 |  |  | 3,463 |
Reclassification adjustment for amortization of unrealized holding losses included in accumulated other comprehensive income (loss) from the transfer of securities from available for sale to held to maturity | (6,925) |  |  | — |
Tax effect | 970 |  |  | — |
Reclassification adjustment for losses on sales of securities available for sale included in net income | 82 |  |  | 87 |
Tax effect | (11) |  |  | (17) |
Change in unrealized losses on securities available for sale, net of reclassification adjustment and tax effects | (60,263) |  |  | (12,958) |
Comprehensive (loss) income | $ | (40,721) |  |  | $ | 5,701 |

See accompanying notes which are an integral part of these financial statements.
69

COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 and 2021
(DOLLARS IN THOUSANDS)

| Preferred Stock |  | Common Stock |  | Paid-in capital |  | Retained earnings |  | Accumulated other comprehensive income (loss) |  | Total
| Shares |  | Amount |  | Shares |  | Amount |  |  |  |
Balance, December 31, 2020 | — |  |  | $ | — |  |  | 9,498,783 |  |  | $ | 9,499 |  |  | $ | 43,215 |  |  | $ | 84,993 |  |  | $ | 6,781 |  |  | 144,488 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (12,958) |  |  | (12,958) |
Dividends on common shares | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (4,463) |  |  | — |  |  | (4,463) |
Issuance of common stock | — |  |  | — |  |  | 3,987,815 |  |  | 3,988 |  |  | 67,394 |  |  | — |  |  | — |  |  | 71,382 |
Issuance of restricted stock, net of forfeitures | — |  |  | — |  |  | 187,300 |  |  | 187 |  |  | (187) |  |  | — |  |  | — |  |  | — |
Stock-based compensation expense, net | — |  |  | — |  |  | — |  |  | — |  |  | 599 |  |  | — |  |  | — |  |  | 599 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 18,659 |  |  | — |  |  | 18,659 |
Balance, December 31, 2021 | — |  |  | $ | — |  |  | 13,673,898 |  |  | $ | 13,674 |  |  | $ | 111,021 |  |  | $ | 99,189 |  |  | $ | (6,177) |  |  | 217,707 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (60,263) |  |  | (60,263) |
Dividends on common shares | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7,158) |  |  | — |  |  | (7,158) |
Issuance of common stock, net | — |  |  | — |  |  | 3,848,485 |  |  | 3,848 |  |  | 55,620 |  |  | — |  |  | — |  |  | 59,468 |
Issuance of restricted stock, net of forfeitures | — |  |  | — |  |  | 130,720 |  |  | 131 |  |  | (131) |  |  | — |  |  | — |  |  | — |
Tax withholding related to vesting of restricted stock | — |  |  | — |  |  | (14,980) |  |  | (15) |  |  | (216) |  |  | — |  |  | — |  |  | (231) |
Repurchase of shares | — |  |  | — |  |  | (40,000) |  |  | (40) |  |  | (500) |  |  | — |  |  | — |  |  | (540) |
Stock-based compensation expense, net | — |  |  | — |  |  | — |  |  | — |  |  | 1,743 |  |  | — |  |  | — |  |  | 1,743 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 19,542 |  |  | — |  |  | 19,542 |
Balance, December 31, 2022 | — |  |  | $ | — |  |  | 17,598,123 |  |  | $ | 17,598 |  |  | $ | 167,537 |  |  | $ | 111,573 |  |  | $ | (66,440) |  |  | $ | 230,268 |

See accompanying notes which are an integral part of these financial statements.
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COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)

| 2022 |  | 2021
CASH FLOWS FROM OPERATING ACTIVITIES |  |  |
Net income | $ | 19,542 |  |  | $ | 18,659 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Provision for loan losses | 3,370 |  |  | 700 |
Depreciation, amortization and accretion | 11,629 |  |  | 8,628 |
Stock-based compensation expense | 1,743 |  |  | 599 |
Losses on sales of securities available for sale | 82 |  |  | 87 |
Net increase in servicing asset | (554) |  |  | (1,040) |
Loss on sales and writedowns of other real estate and repossessions | — |  |  | 48 |
(Gain) losses on sales of premises & equipment | (62) |  |  | 49 |
Gain on sale of bank owned buildings | — |  |  | (96) |
Writedowns on sale of bank owned buildings | — |  |  | 90 |
Increase in bank owned life insurance | (1,353) |  |  | (1,042) |
Equity method investment income | 364 |  |  | 44 |
Deferred tax expense | 1,130 |  |  | (2,739) |
Donation of other real estate owned | 35 |  |  | — |
Gain on sales of SBA loans | (6,216) |  |  | (7,547) |
Origination of loans held for sale | (317,997) |  |  | (439,160) |
Proceeds from sales of loans held for sale | 344,620 |  |  | 460,943 |
Change in other assets | (7,593) |  |  | 2,041 |
Change in other liabilities | 1,001 |  |  | (4,160) |
Net cash provided by operating activities | 49,741 |  |  | 36,104 |
CASH FLOWS FROM INVESTING ACTIVITIES |  |  |
Purchases of investment securities available for sale | (174,219) |  |  | (460,500) |
Proceeds from maturities, calls, and paydowns of investment securities available for sale | 54,859 |  |  | 103,002 |
Proceeds from sales of investment securities available for sale | 60,924 |  |  | 96,781 |
Proceeds from maturities, calls, and paydowns of investment securities held to maturity | 11,592 |  |  | — |
Net change in loans | (399,871) |  |  | 28,450 |
Purchase of premises and equipment | (2,895) |  |  | (5,838) |
Proceeds from sales of other real estate and repossessions | — |  |  | 1,360 |
(Purchase) redemption of equity securities | 3,306 |  |  | (9,500) |
Purchase of bank-owned life insurance | — |  |  | — |
Proceeds from bank owned life insurance | 1,008 |  |  | 752 |
Redemption (purchase of) Federal Home Loan Bank stock | (3,451) |  |  | 2,308 |
Proceeds from sale of bank owned buildings | — |  |  | 1,535 |
Proceeds from sales of premises and equipment | 519 |  |  | 17 |
Net cash and cash equivalents received from bank acquisition | — |  |  | 37,511 |
Net cash and cash equivalents paid in insurance acquisitions | — |  |  | (4,210) |
Net cash used in investing activities | (448,228) |  |  | (208,332) |
CASH FLOWS FROM FINANCING ACTIVITIES |  |  |
Change in noninterest-bearing customer deposits | 16,594 |  |  | 86,307 |
Change in interest-bearing customer deposits | 99,795 |  |  | 211,899 |
Dividends paid on common stock | (7,158) |  |  | (4,463) |
Repayment of Paycheck Protection Program Liquidity Fund | — |  |  | (106,789) |
Proceeds from Federal Home Loan Bank advances | 430,000 |  |  | — |
Repayments of Federal Home Loan Bank advances | (357,500) |  |  | — |
Issuance of subordinated debt, net | 39,068 |  |  | — |
Increase (decrease) in other borrowings | 2,437 |  |  | (1,000) |
Issuance of common stock, net | 59,468 |  |  | — |
Repurchase of shares | (540) |  |  | — |
Cash paid for tax withholding related to vesting of restricted stock | (231) |  |  | — |
Net cash provided by financing activities | 281,933 |  |  | 185,954 |
Net increase (decrease) in cash and cash equivalents | (116,554) |  |  | 13,726 |
Cash and cash equivalents at beginning of period | 197,232 |  |  | 183,506 |
Cash and cash equivalents at end of period | $ | 80,678 |  |  | $ | 197,232 |

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |  |  |
Cash paid during the period for interest | $ | 10,222 |  |  | $ | 4,387 |
Cash paid during the period for income taxes | 3,836 |  |  | 3,859 |
NONCASH INVESTING AND FINANCING ACTIVITIES |  |  |
Transfers to other real estate | 405 |  |  | 145 |
Change in goodwill | (3,984) |  |  | — |
Carrying amount of securities AFS transferred to HTM, net of $34.0 million unrealized loss | 510,956 |  |  | — |

See accompanying notes which are an integral part of these financial statements.
72

COLONY BANKCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Colony Bankcorp, Inc. and subsidiaries (the “Company”) is a financial holding company headquartered in Fitzgerald, Georgia, whose primary business is presently conducted by Colony Bank, its wholly owned banking subsidiary (the “Bank”). Through the Bank, the Company offers a broad range of retail and commercial banking services to its customers concentrated in central, south and coastal Georgia. The Bank also engages in mortgage banking and SBA lending, and, as such originates, acquires, sells and services one-to-four family residential mortgage loans and SBA loans in the Southeast. The Company is subject to the regulations of certain state and federal agencies and are periodically examined by those regulatory agencies. The Company also provides an option for its customers to purchase insurance services including vehicle, home, renters and life insurance. Additionally, Colony Risk Management, Inc. is a subsidiary of the Company and is located in Las Vegas, Nevada. It is a captive insurance subsidiary which insures various liability and property damage policies for the Company and its related subsidiaries. Colony Risk Management is regulated by the State of Nevada Division of Insurance.
Basis of Presentation and Accounting Estimates
The consolidated financial statements include the accounts of Colony Bankcorp, Inc. and its wholly owned subsidiaries, Colony Bank and Colony Risk Management. All significant intercompany transactions and balances have been eliminated in consolidation.
In preparing the consolidated financial statements in conformity with generally accepted accounting principles in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Acquisition Accounting
Acquisitions are accounted for under the acquisition method of accounting. Purchased assets and assumed liabilities are recorded at their estimated fair values as of the purchase date. Any identifiable intangible assets are also recorded at fair value. When the consideration given is less than the fair value of the net assets received, the acquisition results in a “bargain purchase gain”. If the consideration given exceeds the fair value of the net assets received, goodwill is recognized. Fair values are subject to refinement for up to one year after the closing date of an acquisition as additional information regarding the closing date fair values becomes available.
All identifiable intangible assets that are acquired in a business combination are recognized at fair value on the acquisition date. Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity).
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date and carryover of the seller's related allowance for loan losses is prohibited. When the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. The Company must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows result in a reversal of the provision for loan losses to the extent of prior provisions and adjust accretable discount if no prior provisions have been made or have been fully reversed. This increase in accretable discount will have a positive impact on future interest income.
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, 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 the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
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Cash and Cash Equivalents
For purposes of reporting cash flow, cash and cash equivalents include cash on hand, cash items in process of collection, amounts due from banks, interest-bearing deposits in banks and federal funds sold.
Investment Securities
The Company classifies its investment securities in one of three categories: (i) trading, (ii) held to maturity or (iii) available for sale. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other investment securities are classified as available for sale. At December 31, 2022, securities were classified as either held to maturity or available for sale. At December 31, 2021, all securities were classified as available for sale.
Trading securities are carried at fair value. Unrealized gains and losses on trading securities are recorded in earnings as a component of other noninterest income. Held to maturity securities are recorded initially at cost and subsequently adjusted for paydowns and amortization of purchase premium or accretion of purchase discount. Available for sale securities are carried at fair value. Unrealized holding gains and losses, net of the related deferred tax effect, on available for sale securities are excluded from earnings and are reported in other comprehensive income as a separate component of shareholders’ equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains or losses associated with transfers of securities from held to maturity to available for sale are recorded as a separate component of shareholders’ equity. These unrealized holding gains or losses are amortized into income over the remaining life of the security as an adjustment to the yield in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security.
The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the expected life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the trade date. A decline in the market value of any available for sale or held to maturity investment below cost that is deemed other than temporary establishes a new cost basis for the security. Other than temporary impairment deemed to be credit related is charged to earnings. Other than temporary impairment attributed to non-credit related factors is recognized in other comprehensive income.
In determining whether other-than-temporary impairment losses exist, management considers (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer or underlying collateral of the security, and (iii) the Company’s 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.
Other Investments
Other investments include managed investment funds which are carried at their fair value and unrealized gains or losses are recorded through earnings as a component of noninterest income.
Federal Home Loan Bank (“FHLB”) and First National Bankers Bank ("FNBB") stock are also included in other investments. These investments do not have a readily determinable market value due to restrictions placed on transferability and therefore are carried at cost.
These other investments are periodically evaluated for impairment based on ultimate recovery of par value or cost basis. Both cash and stock dividends are reported as income.
Loans Held for Sale
Mortgage and SBA loans held for sale are carried at the lower of aggregate cost or estimated fair value, as determined by outstanding commitments from third party investors in the secondary market. Adjustments to reflect unrealized gains and losses resulting from changes in fair value of mortgage loans held for sale and realized gains and losses upon ultimate sale of the mortgage loans held for sale are classified as mortgage fee income in the consolidated statements of income. Adjustments to reflect unrealized gains and losses resulting from changes in fair value of SBA loans held for sale and realized gains and losses upon ultimate sale of the SBA loans held for sale are classified as gain on sale of SBA loans in the consolidated statements of income.
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Loans
Loans are reported at their outstanding principal balances less unearned income, net of deferred fees and origination costs. Interest income is accrued on the outstanding principal balance. For all classes of loans, the accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to make payments as they become due, unless the loan is well secured and in the process of collection. Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. All interest accrued, but not collected for loans that are placed on nonaccrual or charged off, is reversed against interest income. Interest income on nonaccrual loans is applied against principal until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
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 loan balance to be uncollectable. 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 collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.
The allowance consists of specific, historical and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The historical component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. A general component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and historical losses in the portfolio. General valuation allowances are based on internal and external qualitative risk factors such as (1) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices, (2) changes in international, national, regional, and local conditions, (3) changes in the nature and volume of the portfolio and terms of loans, (4) changes in the experience, depth, and ability of lending management, (5) changes in the volume and severity of past due loans and other similar conditions, (6) changes in the quality of the organization's loan review system, (7) changes in the value of underlying collateral for collateral dependent loans, (8) the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and (9) the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.
Loans identified as losses by management, internal loan review and/or Bank examiners are charged off. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
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. 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 the staff appraiser and appraisal department. When the Company does obtain appraisals from external third-parties, the values utilized in the impairment calculation are “as is” or
75

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 25 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.
The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the Company has granted a concession. Concessions may include interest rate reductions to below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. The Company’s policy requires a restructure request to be supported by a current, well-documented credit evaluation of the borrower’s financial condition and a collateral evaluation that is no older than six months from the date of the restructure. The Company’s policy states in the event a loan has been identified as a troubled debt restructuring, it should be assigned a grade of substandard and placed on nonaccrual status until such time that the borrower has demonstrated the ability to service the loan payments based on the restructured terms – generally defined as six months of satisfactory payment history. The Company’s loan policy states that a nonaccrual loan may be returned to accrual status when (i) none of its principal and interest is due and unpaid, and the Company expects repayment of the remaining contractual principal and interest, or (ii) it otherwise becomes well secured and in the process of collection. Restoration to accrual status on any given loan must be supported by a well-documented credit evaluation of the borrower’s financial condition and the prospects for full repayment, approved by the Company’s Chief Credit Officer, Senior Credit Officer, Director of Administration or Regional Credit Officer. In the normal course of business, the Company renews loans with a modification of the interest rate or terms that are not deemed as troubled debt restructurings because the borrower is not experiencing financial difficulty. 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.
Commitments and Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Premises and Equipment
Land is carried at cost. Other premises and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. In general, estimated lives for buildings are up to 40 years, furniture and equipment useful lives range from five to 10 years and the lives of software and computer related equipment range from three to five years. Leasehold improvements are amortized over the life of the related lease, or the related assets, whichever is shorter. Expenditures for major improvements of the Company’s premises and equipment are capitalized and depreciated over their estimated useful lives. Minor repairs, maintenance and improvements are charged to operations as incurred. When assets are sold or disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings.
Leases
The Company has entered into various operating leases for certain branch locations, ATM locations, loan production offices, and corporate support services locations. Generally, these leases have initial lease terms of 13 years or less. Many of the leases have one or more lease renewal options. The exercise of lease renewal options is at our sole discretion. The Company does not consider exercise of any lease renewal options reasonably certain. Certain of our lease agreements contain early termination options. No renewal options or early termination options have been included in the calculation of the operating right-of-use assets or operating lease liabilities. Certain of our lease agreements provide for periodic adjustments to rental payments for inflation. At the commencement date of the lease, the Company recognizes a lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease or the Company’s incremental borrowing rate. As the
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majority of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate at the commencement date in determining the present value of lease payments. The incremental borrowing rate is based on the term of the lease. At the commencement date, the company also recognizes a right-of-use asset measured at (i) the initial measurement of the lease liability; (ii) any lease payments made to the lessor at or before the commencement date less any lease incentives received; and (iii) any initial direct costs incurred by the lessee. Leases with an initial term of 12 months or less are not recorded on the balance sheet. For these short-term leases, lease expense is recognized on a straight-line basis over the lease term. At December 31, 2022, the Company had no leases classified as finance leases.
Goodwill and Intangible Assets
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.
Intangible assets consist of core deposit and customer relationship intangibles acquired in connection with a business combination. The core deposit intangible is initially recognized based on an independent valuation performed as of the acquisition date. The core deposit intangible is amortized by the straight-line method over the average remaining life of the acquired customer deposits. The customer relationship intangible is associated with the acquisition of several insurance companies during 2021. The customer intangible assets were also initially recognized based on independent valuations performed as of the acquisition date and are being amortized by the straight-line method over 10 years.
Cash Value of Bank Owned Life Insurance
The Company has purchased life insurance policies on certain officers. The life insurance is 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 other amounts due that are probable at settlement.
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.
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 2022, 2021, 2020 and 2019 are subject to examination by the Internal Revenue Service (IRS) and the Georgia Department of Revenue, generally for three years after filing.
The Company believes that its income tax filing positions taken or expected to be taken on its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.
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Revenue Recognition
The Company's' contracts with customers generally do not contain terms that require significant judgment to determine the amount of revenue to recognize. The Company's' policies for recognizing noninterest income that falls within the scope of ASC Topic 606, and include service charges on deposits, interchange fees, and insurance revenue (included with other noninterest income).
Service charges on deposits include both account maintenance fees and overdraft fees and revenue from safe deposit box rental fees and lockbox services and ATM fees. Revenue is recognized for these services either over time, corresponding with deposit accounts' monthly cycle, or at a point in time for transaction-related services and fees. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to clients' accounts. Safe deposits and lockbox service fees are recognized over time, on a monthly basis, as the Company's' performance obligation for services is satisfied. 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.
Interchange fees include debit card interchange 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.
Other income includes insurance revenue (included in other noninterest income on the consolidated statements of income): Insurance revenue primarily consists of commissions received on insurance products sold. The commissions are recognized as revenue when the client executes an insurance policy with the insurance carrier. In some cases, the company receives payment of trailing commissions each year when the client pays its annual premium.
Earnings per Share
Basic earnings per share are computed by dividing net income allocated to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share are computed by dividing net income allocated to common shareholders by the sum of the weighted-average number of shares of common stock outstanding and the effect of the issuance of potential common shares that are dilutive. Potential common shares consist of restricted shares for the years ended December 31, 2022 and 2021, and are determined using the treasury stock method. The Company has determined that its outstanding non-vested stock awards are participating securities, and all dividends on these awards are paid similar to other dividends.
Comprehensive Income (Loss)
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 as total comprehensive income (loss).
Fair Value Measures
Fair values of assets and liabilities are estimated using relevant market information and other assumptions, as more fully disclosed in Note 16. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Operating Segments
The Company has three reportable segments, the Banking Division, the Retail Mortgage Division and the Small Business Specialty Lending Division. The Banking Division derives its revenues from the delivery of full service financial services to include commercial loans, consumer loans and deposit accounts. The Retail Mortgage Division derives its revenues from the origination, sales and servicing of one-to-four family residential mortgage loans. The Small Business Specialty Lending Division derives its revenues from origination, sales and servicing of SBA and USDA government guaranteed loans.
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The Banking, Retail Mortgage and Small Business Specialty Lending Divisions are managed as separate business units because of the different products and services they provide. The Company evaluates performance and allocates resources based on profit or loss from operations. There are no material intersegment sales or transfers.
Reclassifications
Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on stockholders’ equity or net income.
Accounting Standards Updates Pending Adoption
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. On October 16, 2019, the Financial Accounting Standards Board ("FASB") voted to extend the delay of the effective date of this ASU for smaller reporting companies, such as the Company, until fiscal years beginning after December 15, 2022. The Company adopted this ASU on January 1, 2023 and recorded a one-time entry to retained earnings of $1.2 million, net of tax, primarily related to credit losses for unfunded commitments.
In March 2020, the FASB issued ASU No. 2020-04, Reference Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance was originally effective for all entities from March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The Company has been diligent in responding to reference rate reform and does not anticipate a significant impact to its financial statements as a result.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU provides guidance on eliminating the requirement for classification of and disclosures around troubled debt restructurings. The purpose of this guidance is to eliminate unnecessary and overly-complex disclosures of loans that are already incorporated into the allowance for credit losses and related disclosures. This ASU further requires the disclosure of current-period gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for all entities which have implemented ASU 2016-13. The Company has historically had very few credit relationships classified as troubled debt restructurings, and as such does not anticipate that the elimination of accounting for and disclosure of these types of credit relationships will have a significant impact to its financial statements upon implementation of ASU 2016-13 beginning with the first quarter of 2023.
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NOTE 2. BUSINESS COMBINATIONS
Acquisition of SouthCrest Financial Group
On August 1, 2021, the Company completed its acquisition of SouthCrest Financial Group, Inc. (“SouthCrest”), a bank holding company headquartered in Atlanta, Georgia. Upon consummation of the acquisition, SouthCrest was merged with and into the Company, with Colony Bankcorp, Inc. as the surviving entity in the merger. Immediately following the holding company merger, SouthCrest’s wholly owned bank subsidiary, SouthCrest Bank, N.A. was also merged with and into the Bank. The acquisition expanded the Company’s market presence, as SouthCrest Bank, N.A. had eight full-service banking locations, one in Cedartown, Chickamauga, Cumming, Fayetteville, Luthersville, Manchester, Rockmart and Thomaston, Georgia. Under the terms of the Agreement and Plan of Merger, each SouthCrest shareholder had the option to receive either $10.45 in cash or 0.7318 shares of the Company’s common stock in exchange for each share of SouthCrest stock. As a result, the Company issued 3,987,815 common shares at a fair value of $71.4 million and paid $21.6 million in cash to the former shareholders of SouthCrest as merger consideration.
The merger was effected by the issuance of shares of the Company’s common stock along with cash consideration to shareholders of SouthCrest. The assets and liabilities of SouthCrest as of the effective date of the merger were recorded at their respective estimated fair values and combined with those of the Company. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill. Goodwill of $35.0 million was recorded as part of the SouthCrest acquisition and is not expected to be deductible for income tax purposes. The Company recorded a subsequent adjustment within the one year period allowed after the acquisition of approximately $4.0 million in 2022 primarily related to premises and equipment and deferred taxes.
In periods following the merger, the financial statements of the combined entity will include the results attributable to SouthCrest beginning on the date the merger was completed. For the twelve month period ended December 31, 2021, the revenues attributable to SouthCrest were approximately $7.9 million. In the twelve month period ended December 31, 2021, the net income attributable to SouthCrest was approximately $6.0 million.
The supplemental consolidated pro-forma impact to 2021 revenues if the merger had occurred on January 1, 2020 would have been $121.9 million for the year ended December 31, 2021. The supplemental consolidated pro-forma impact to 2021 net income if the merger had occurred on January 1, 2020 would have been $20.8 million for the year ended December 31, 2021. While certain adjustments were made for the estimated impact of certain fair value adjustments, they are not indicative of what would have occurred had the merger taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of SouthCrest’s provision for credit losses or any adjustments to estimate any additional income that would have been recorded as a result of fair value adjustments for 2020 that may have occurred had the acquired loans been recorded at fair value as of the beginning of 2020. In addition, there are no adjustments to reflect any expenses that potentially could have been reduced for 2020 had the merger occurred on January 1, 2020.
The following table presents the assets acquired and liabilities assumed of SouthCrest as of August 1, 2021, and their fair value estimates. The fair value estimates are subject to refinement for up to one year after the closing date of the acquisition for new information obtained about facts and circumstances that existed at the acquisition date. The Company continues its evaluation of the facts and circumstances available as of August 1, 2021, to assign fair values to assets acquired and liabilities assumed, which could result in further adjustments to the fair values presented below.
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(dollars in thousands, except market price) | Initial Fair Value Adjustments
Purchase price consideration: |
Shares of CBAN common stock issued to SouthCrest shareholders as of August 1, 2021 | 3,987,815 |
Market price of CBAN common stock on July 30, 2021 | $ | 17.90 |
Estimated fair value of CBAN common stock issued | 71,382 |
Cash consideration paid | 21,620 |
Total consideration | $ | 93,002 |
Assets acquired at fair value: |
Cash and cash equivalents | $ | 59,131 |
Investments securities available for sale | 317,857 |
Restricted investments | 3,196 |
Loans | 307,456 |
Premises and equipment | 8,543 |
Core deposit intangible | 4,025 |
Other real estate | 538 |
Prepaid and other assets | 25,393 |
Total fair value of assets acquired | $ | 726,139 |
Liabilities assumed at fair value: |
Deposits | $ | (631,375) |
FHLB advances | (29,064) |
Payables and other liabilities | (7,735) |
Total fair value of liabilities assumed | $ | (668,174) |
Net assets acquired at fair value: | $ | 57,965 |
Amount of goodwill resulting from acquisition | $ | 35,037 |

In the acquisition, the Company purchased $307.5 million of loans at fair value, net of $635,000, or 0.21%, estimated discount to the outstanding principal balance. Of the total loans acquired, management identified $1.2 million that were considered to be credit impaired and are accounted for under ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of the acquisition date for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments. The Company recorded a subsequent adjustment within the one year period allowed after the acquisition of approximately $4.0 million in 2022.

(dollars in thousands) |
Contractually required principal and interest | $ | 1,154 |
Non-accretable difference | — |
Cash flows expected to be collected | 1,154 |
Accretable yield | — |
Total purchased credit-impaired loans acquired | $ | 1,154 |

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The following table presents the acquired loan data for the SouthCrest acquisition.

| Fair value of acquired loans at acquisition date |  | Contractually required principal and interest payments |  | Nonaccretable difference
(dollars in thousands) |  |  |  |  |
Acquired receivables subject to ASC 310-30 | $ | 1,154 |  |  | $ | 1,154 |  |  | $ | — |
Acquired receivables not subject to ASC 310-30 | 306,302 |  |  | 306,937 |  |  | — |

Formation of Colony Insurance
On August 1, 2021, September 1, 2021 and October 1, 2021, the Company acquired several insurance agencies and formed Colony Insurance, a division of the Bank and recorded goodwill of $1.9 million and customer deposit intangibles of $2.3 million.
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NOTE 3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity, along with gross unrealized gains and losses are summarized as follows:

(dollars in thousands) |  |  |  |  |  |  |
December 31, 2022 | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Securities Available for Sale: |  |  |  |  |  |  |
U.S. treasury securities | $ | 1,644 |  |  | $ | — |  |  | $ | (22) |  |  | $ | 1,622 |
U.S. agency | 5,035 |  |  | — |  |  | (450) |  |  | 4,585 |
Asset backed securities | 31,468 |  |  | — |  |  | (1,480) |  |  | 29,988 |
State, county and municipal securities | 126,119 |  |  | — |  |  | (21,363) |  |  | 104,756 |
Corporate debt securities | 54,741 |  |  | 164 |  |  | (5,320) |  |  | 49,585 |
Mortgage-backed securities | 271,199 |  |  | 9 |  |  | (29,191) |  |  | 242,017 |
Total | $ | 490,206 |  |  | $ | 173 |  |  | $ | (57,826) |  |  | $ | 432,553 |
December 31, 2022 | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Securities Held to Maturity: |  |  |  |  |  |  |
U.S. treasury securities | $ | 91,615 |  |  | $ | — |  |  | $ | (4,149) |  |  | $ | 87,466 |
U.S. agency | 16,409 |  |  | — |  |  | (1,838) |  |  | 14,571 |
State, county & municipal securities | 136,138 |  |  | 32 |  |  | (19,518) |  |  | 116,652 |
Mortgage-backed securities | 221,696 |  |  | — |  |  | (29,121) |  |  | 192,575 |
Total | $ | 465,858 |  |  | $ | 32 |  |  | $ | (54,626) |  |  | $ | 411,264 |

December 31, 2021 | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Securities Available for Sale: |  |  |  |  |  |  |
U.S. treasury securities | $ | 88,638 |  |  | $ | — |  |  | $ | (1,087) |  |  | $ | 87,551 |
U.S. agency | 17,916 |  |  | 5 |  |  | (140) |  |  | 17,781 |
State, county and municipal securities | 252,632 |  |  | 877 |  |  | (3,356) |  |  | 250,153 |
Corporate debt securities | 48,153 |  |  | 520 |  |  | (265) |  |  | 48,408 |
Mortgage-backed securities | 539,172 |  |  | 2,160 |  |  | (7,061) |  |  | 534,271 |
Total | $ | 946,511 |  |  | $ | 3,562 |  |  | $ | (11,909) |  |  | $ | 938,164 |

The Company transferred certain agency-issued securities from the available-for-sale to held-to-maturity portfolio on January 1, 2022 and September 1, 2022, having a combined book value of approximately $511.0 million and a combined market value of approximately $477.0 million. As of the date of each transfer, the related pre-tax net unrecognized losses of approximately $34.0 million included in other comprehensive loss and remained in other comprehensive loss, to be amortized out of other comprehensive loss over the remaining term of the securities using the effective interest method. This transfer was completed after careful consideration of the Company’s intent and ability to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding.
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Information pertaining to available-for-sale securities with gross unrealized losses at December 31, 2022 and December 31, 2021 aggregated by investment category and length of time that securities have been in a continuous unrealized loss position are summarized as follows:

| Less Than 12 Months |  | 12 Months or More |  | Total
(dollars in thousands) | Estimated Fair Value |  | Unrealized Losses |  | Estimated Fair Value |  | Unrealized Losses |  | Estimated Fair Value |  | Unrealized Losses
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
U.S. treasury securities | $ | 1,377 |  |  | $ | (17) |  |  | $ | 245 |  |  | $ | (5) |  |  | $ | 1,622 |  |  | $ | (22) |
U.S. agency | 3,221 |  |  | (257) |  |  | 1,364 |  |  | (193) |  |  | 4,585 |  |  | (450) |
Asset backed securities | 10,780 |  |  | (319) |  |  | 19,208 |  |  | (1,161) |  |  | 29,988 |  |  | (1,480) |
State, county and municipal securities | 29,284 |  |  | (3,629) |  |  | 75,472 |  |  | (17,734) |  |  | 104,756 |  |  | (21,363) |
Corporate debt securities | 17,258 |  |  | (1,463) |  |  | 30,651 |  |  | (3,857) |  |  | 47,909 |  |  | (5,320) |
Mortgage-backed securities | 122,031 |  |  | (7,890) |  |  | 119,409 |  |  | (21,301) |  |  | 241,440 |  |  | (29,191) |
Total debt securities | $ | 183,951 |  |  | $ | (13,575) |  |  | $ | 246,349 |  |  | $ | (44,251) |  |  | $ | 430,300 |  |  | $ | (57,826) |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |
U.S. treasury securities | $ | 87,302 |  |  | $ | (1,087) |  |  | $ | — |  |  | $ | — |  |  | $ | 87,302 |  |  | $ | (1,087) |
U.S. agency | 10,969 |  |  | (140) |  |  | — |  |  | — |  |  | 10,969 |  |  | (140) |
State, county and municipal securities | 180,551 |  |  | (3,131) |  |  | 5,970 |  |  | (225) |  |  | 186,521 |  |  | $ | (3,356) |
Corporate debt securities | 31,977 |  |  | (265) |  |  | — |  |  | — |  |  | 31,977 |  |  | (265) |
Mortgage-backed securities | 377,413 |  |  | (6,421) |  |  | 21,129 |  |  | (640) |  |  | 398,542 |  |  | (7,061) |
Total debt securities | $ | 688,212 |  |  | $ | (11,044) |  |  | $ | 27,099 |  |  | $ | (865) |  |  | $ | 715,311 |  |  | $ | (11,909) |

Information pertaining to held-to-maturity securities with gross unrealized losses at December 31, 2022 aggregated by investment category and length of time that individual securities have been in a continuous loss position is summarized as follows:

| Less Than 12 Months |  | 12 Months or Greater |  | Total
(dollars in thousands) | Fair Value |  | Gross Unrealized Losses |  | Fair Value |  | Gross Unrealized Losses |  | Fair Value |  | Gross Unrealized Losses
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury | $ | — |  |  | $ | — |  |  | $ | 87,466 |  |  | $ | (4,149) |  |  | $ | 87,466 |  |  | $ | (4,149) |
U.S. agency | — |  |  | — |  |  | 14,571 |  |  | (1,838) |  |  | 14,571 |  |  | (1,838) |
State, county & municipal securities | 9,858 |  |  | (1,392) |  |  | 105,734 |  |  | (18,126) |  |  | 115,592 |  |  | (19,518) |
Mortgage-backed securities | 13,580 |  |  | (729) |  |  | 178,995 |  |  | (28,392) |  |  | 192,575 |  |  | (29,121) |
| $ | 23,438 |  |  | $ | (2,121) |  |  | $ | 386,766 |  |  | $ | (52,505) |  |  | $ | 410,204 |  |  | $ | (54,626) |

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.
At December 31, 2022, there were 286 available-for-sale securities and 160 held-to-maturity securities that have unrealized losses 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.
The amortized cost and fair value of investment securities as of December 31, 2022, by contractual maturity, are shown hereafter. Expected maturities may differ from contractual maturities for certain investments because issuers may have the right
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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.

| Available for Sale |  | Held to Maturity
(dollars in thousands) | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
Due in one year or less | $ | 1,319 |  |  | $ | 1,304 |  |  | $ | — |  |  | $ | — |
Due after one year through five years | 14,126 |  |  | 12,871 |  |  | 79,306 |  |  | 75,759 |
Due after five years through ten years | 89,731 |  |  | 76,895 |  |  | 78,975 |  |  | 69,275 |
Due after ten years | 113,831 |  |  | 99,466 |  |  | 85,881 |  |  | 73,655 |
| $ | 219,007 |  |  | $ | 190,536 |  |  | $ | 244,162 |  |  | $ | 218,689 |
Mortgage-backed securities | 271,199 |  |  | 242,017 |  |  | 221,696 |  |  | 192,575 |
| $ | 490,206 |  |  | $ | 432,553 |  |  | $ | 465,858 |  |  | $ | 411,264 |

Proceeds from sales of investments available for sale were $60.9 million in 2022 and $96.8 million in 2021. Gross realized gains totaled $24,000 in 2022 and $391,000 in 2021. Gross realized losses totaled $106,000 in 2022 and $478,000 in 2021.
Investment securities having a carrying value totaling $541.8 million and $247.4 million as of December 31, 2022 and 2021, respectively, were pledged to secure public deposits and for other purposes.
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NOTE 4. LOANS
The following table presents the composition of loans segregated by legacy and purchased loans and by class of loans, as of December 31, 2022 and 2021. Purchased loans are defined as loans that were acquired in bank acquisitions.

| December 31, 2022
(dollars in thousands) | Legacy Loans |  | Purchased Loans |  | Total
Construction, land & land development | $ | 216,206 |  |  | $ | 13,229 |  |  | $ | 229,435 |
Other commercial real estate | 847,684 |  |  | 127,763 |  |  | 975,447 |
Total commercial real estate | 1,063,890 |  |  | 140,992 |  |  | 1,204,882 |
Residential real estate | 249,390 |  |  | 40,664 |  |  | 290,054 |
Commercial, financial & agricultural(*) | 210,413 |  |  | 13,510 |  |  | 223,923 |
Consumer & other | 17,296 |  |  | 951 |  |  | 18,247 |
Total loans | $ | 1,540,989 |  |  | $ | 196,117 |  |  | $ | 1,737,106 |

| December 31, 2021
(dollars in thousands) | Legacy Loans |  | Purchased Loans |  | Total
Construction, land & land development | $ | 119,953 |  |  | $ | 45,493 |  |  | $ | 165,446 |
Other commercial real estate | 595,739 |  |  | 191,653 |  |  | 787,392 |
Total commercial real estate | 715,692 |  |  | 237,146 |  |  | 952,838 |
Residential real estate | 159,469 |  |  | 53,058 |  |  | 212,527 |
Commercial, financial & agricultural(*) | 113,040 |  |  | 41,008 |  |  | 154,048 |
Consumer & other | 16,003 |  |  | 2,561 |  |  | 18,564 |
Total loans | $ | 1,004,204 |  |  | $ | 333,773 |  |  | $ | 1,337,977 |

(*) Includes $95,000 and $9.0 million in PPP loans as of December 31, 2022 and 2021, respectively.
Commercial, financial 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 10. A description of the general characteristics of the grades is as follows:
•Grades 1, 2 and 3 - Borrowers with these assigned risk grades range 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 4 and 5 - 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. These loans are also included in into the “pass” classification.
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•Grade 6 - 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.
•Grades 7 and 8 - These grades 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 grade 8, 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 9 and 10 - 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 7 or 8.
The following tables present the loan portfolio, excluding purchased loans, by credit quality indicator (risk grade) as of December 31, 2022. Those loans with a risk grade of 1, 2, 3, 4, and 5 have been combined in the pass column for presentation purposes. For the periods ending December 31, 2022, the Company did not have any loans classified as “doubtful” or a “loss”.

(dollars in thousands) | Pass |  | Special Mention |  | Substandard |  | Total Loans
Construction, land & land development | $ | 215,265 |  |  | $ | 290 |  |  | $ | 651 |  |  | $ | 216,206 |
Other commercial real estate | 827,300 |  |  | 14,236 |  |  | 6,148 |  |  | 847,684 |
Total commercial real estate | 1,042,565 |  |  | 14,526 |  |  | 6,799 |  |  | 1,063,890 |
Residential real estate | 239,570 |  |  | 5,976 |  |  | 3,844 |  |  | 249,390 |
Commercial, financial & agricultural | 207,935 |  |  | 812 |  |  | 1,666 |  |  | 210,413 |
Consumer & other | 17,206 |  |  | 54 |  |  | 36 |  |  | 17,296 |
Total loans | $ | 1,507,276 |  |  | $ | 21,368 |  |  | $ | 12,345 |  |  | $ | 1,540,989 |

The following table presents the purchased loan portfolio by credit quality indicator (risk grade) as of December 31, 2022.

(dollars in thousands) | Pass |  | Special Mention |  | Substandard |  | Total Loans
Construction, land & land development | $ | 13,229 |  |  | $ | — |  |  | $ | — |  |  | $ | 13,229 |
Other commercial real estate | 123,826 |  |  | 3,326 |  |  | 611 |  |  | 127,763 |
Total commercial real estate | 137,055 |  |  | 3,326 |  |  | 611 |  |  | 140,992 |
Residential real estate | 38,360 |  |  | 598 |  |  | 1,706 |  |  | 40,664 |
Commercial, financial & agricultural | 12,973 |  |  | 73 |  |  | 464 |  |  | 13,510 |
Consumer & other | 951 |  |  | — |  |  | — |  |  | 951 |
Total loans | $ | 189,339 |  |  | $ | 3,997 |  |  | $ | 2,781 |  |  | $ | 196,117 |

The following tables present the loan portfolio, excluding purchased loans, by credit quality indicator (risk grade) as of December 31, 2021. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes. For the periods ending December 31, 2021, the Company did not have any loans classified as “doubtful” or a “loss”.
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(dollars in thousands) | Pass |  | Special Mention |  | Substandard |  | Total Loans
Construction, land & land development | $ | 116,524 |  |  | $ | 3,154 |  |  | $ | 275 |  |  | $ | 119,953 |
Other commercial real estate | 562,228 |  |  | 25,718 |  |  | 7,793 |  |  | 595,739 |
Total commercial real estate | 678,752 |  |  | 28,872 |  |  | 8,068 |  |  | 715,692 |
Residential real estate | 148,507 |  |  | 5,733 |  |  | 5,229 |  |  | 159,469 |
Commercial, financial & agricultural | 100,282 |  |  | 11,460 |  |  | 1,298 |  |  | 113,040 |
Consumer & other | 15,787 |  |  | 78 |  |  | 138 |  |  | 16,003 |
Total loans | $ | 943,328 |  |  | $ | 46,143 |  |  | $ | 14,733 |  |  | $ | 1,004,204 |

The following table presents the purchased loan portfolio by credit quality indicator (risk grade) as of December 31, 2021.

(dollars in thousands) | Pass |  | Special |  | Substandard |  | Total Loans
Construction, land & land development | $ | 45,432 |  |  | $ | — |  |  | $ | 61 |  |  | $ | 45,493 |
Other commercial real estate | 186,905 |  |  | 3,518 |  |  | 1,230 |  |  | 191,653 |
Total commercial real estate | 232,337 |  |  | 3,518 |  |  | 1,291 |  |  | 237,146 |
Residential real estate | 49,875 |  |  | 563 |  |  | 2,620 |  |  | 53,058 |
Commercial, financial & agricultural | 40,711 |  |  | — |  |  | 297 |  |  | 41,008 |
Consumer & other | 2,558 |  |  | 3 |  |  | — |  |  | 2,561 |
Total loans | $ | 325,481 |  |  | $ | 4,084 |  |  | $ | 4,208 |  |  | $ | 333,773 |

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 $500,000 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.
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, excluding purchased loans, as of December 31, 2022:

| Accruing Loans |  |  |  |  |  |
(dollars in thousands) | 30-89 Days Past Due |  | 90 Days or More Past Due |  | Total Accruing Loans Past Due |  | Nonaccrual Loans |  | Current Loans |  | Total Loans
Construction, land & land development | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 149 |  |  | $ | 216,057 |  |  | $ | 216,206 |
Other commercial real estate | 395 |  |  | — |  |  | 395 |  |  | 1,389 |  |  | 845,900 |  |  | 847,684 |
Total commercial real estate | 395 |  |  | — |  |  | 395 |  |  | 1,538 |  |  | 1,061,957 |  |  | 1,063,890 |
Residential real estate | 870 |  |  | — |  |  | 870 |  |  | 1,875 |  |  | 246,645 |  |  | 249,390 |
Commercial, financial & agricultural | 403 |  |  | — |  |  | 403 |  |  | 878 |  |  | 209,132 |  |  | 210,413 |
Consumer & other | 40 |  |  | — |  |  | 40 |  |  | 21 |  |  | 17,235 |  |  | 17,296 |
Total loans | $ | 1,708 |  |  | $ | — |  |  | $ | 1,708 |  |  | $ | 4,312 |  |  | $ | 1,534,969 |  |  | $ | 1,540,989 |

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The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, for purchased loans, as of December 31, 2022:

| Accruing Loans |  |  |  |  |  |
(dollars in thousands) | 30-89 Days Past Due |  | 90 Days or More Past Due |  | Total Accruing Loans Past Due |  | Nonaccrual Loans |  | Current Loans |  | Total Loans
Construction, land & land development | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 13,229 |  |  | $ | 13,229 |
Other commercial real estate | — |  |  | — |  |  | — |  |  | 120 |  |  | 127,643 |  |  | 127,763 |
Total commercial real estate | — |  |  | — |  |  | — |  |  | 120 |  |  | 140,872 |  |  | 140,992 |
Residential real estate | 12 |  |  | — |  |  | 12 |  |  | 811 |  |  | 39,841 |  |  | 40,664 |
Commercial, financial & agricultural | 73 |  |  | — |  |  | 73 |  |  | 463 |  |  | 12,974 |  |  | 13,510 |
Consumer & other | — |  |  | — |  |  | — |  |  | — |  |  | 951 |  |  | 951 |
Total loans | $ | 85 |  |  | $ | — |  |  | $ | 85 |  |  | $ | 1,394 |  |  | $ | 194,638 |  |  | $ | 196,117 |

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, excluding purchased loans, as of December 31, 2021:

| Accruing Loans |  |  |  |  |  |
(dollars in thousands) | 30-89 Days Past Due |  | 90 Days or More Past Due |  | Total Accruing Loans Past Due |  | Nonaccrual Loans |  | Current Loans |  | Total Loans
Construction, land & land development | $ | 6 |  |  | $ | — |  |  | $ | 6 |  |  | $ | — |  |  | $ | 119,947 |  |  | $ | 119,953 |
Other commercial real estate | 349 |  |  | — |  |  | 349 |  |  | 577 |  |  | 594,813 |  |  | 595,739 |
Total commercial real estate | 355 |  |  | — |  |  | 355 |  |  | 577 |  |  | 714,760 |  |  | 715,692 |
Residential real estate | 421 |  |  | — |  |  | 421 |  |  | 2,641 |  |  | 156,407 |  |  | 159,469 |
Commercial, financial & agricultural | 69 |  |  | — |  |  | 69 |  |  | 708 |  |  | 112,263 |  |  | 113,040 |
Consumer & other | 93 |  |  | — |  |  | 93 |  |  | 26 |  |  | 15,884 |  |  | 16,003 |
Total loans | $ | 938 |  |  | $ | — |  |  | $ | 938 |  |  | $ | 3,952 |  |  | $ | 999,314 |  |  | $ | 1,004,204 |

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, for purchased loans, as of December 31, 2021:

| Accruing Loans |  |  |  |  |  |
(dollars in thousands) | 30-89 Days Past Due |  | 90 Days or More Past Due |  | Total Accruing Loans Past Due |  | Nonaccrual Loans |  | Current Loans |  | Total Loans
Construction, land & land development | $ | 2,680 |  |  | $ | — |  |  | $ | 2,680 |  |  | $ | 31 |  |  | $ | 42,782 |  |  | $ | 45,493 |
Other commercial real estate | — |  |  | — |  |  | — |  |  | 260 |  |  | 191,393 |  |  | 191,653 |
Total commercial real estate | 2,680 |  |  | — |  |  | 2,680 |  |  | 291 |  |  | 234,175 |  |  | 237,146 |
Residential real estate | 560 |  |  | — |  |  | 560 |  |  | 1,198 |  |  | 51,300 |  |  | 53,058 |
Commercial, financial & agricultural | 389 |  |  | — |  |  | 389 |  |  | — |  |  | 40,619 |  |  | 41,008 |
Consumer & other | — |  |  | — |  |  | — |  |  | 8 |  |  | 2,553 |  |  | 2,561 |
Total loans | $ | 3,629 |  |  | $ | — |  |  | $ | 3,629 |  |  | $ | 1,497 |  |  | $ | 328,647 |  |  | $ | 333,773 |

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The following table details impaired loan data, including purchased credit impaired loans, as of December 31, 2022:

(dollars in thousands) | Unpaid Contractual Principal Balance |  | Recorded investment |  | Related allowance |  | Average Recorded Investment
With No Related Allowance Recorded |  |  |  |  |  |  |
Construction, land & land development | $ | 40 |  |  | $ | 40 |  |  | $ | — |  |  | $ | 10 |
Other commercial real estate | 3,754 |  |  | 3,754 |  |  | — |  |  | 5,311 |
Residential real estate | 62 |  |  | 62 |  |  | — |  |  | 570 |
Commercial, financial & agricultural | — |  |  | — |  |  | — |  |  | 306 |
Consumer & other | — |  |  | — |  |  | — |  |  | 1 |
Total Impaired Loans with no Allowance | 3,856 |  |  | 3,856 |  |  | — |  |  | 6,198 |
With An Allowance Recorded |  |  |  |  |  |  |
Construction, land & land development | 474 |  |  | 474 |  |  | 44 |  |  | 177 |
Other commercial real estate | — |  |  | — |  |  | — |  |  | 503 |
Residential real estate | — |  |  | — |  |  | — |  |  | 588 |
Commercial, financial & agricultural | — |  |  | — |  |  | — |  |  | 369 |
Consumer & other | — |  |  | — |  |  | — |  |  | — |
Total Impaired Loans with Allowance | 474 |  |  | 474 |  |  | 44 |  |  | 1,637 |
Purchased Credit Impaired Loans |  |  |  |  |  |  |
Construction, land & land development | — |  |  | — |  |  | — |  |  | — |
Other commercial real estate | 798 |  |  | 798 |  |  | 33 |  |  | 760 |
Residential real estate | — |  |  | — |  |  | — |  |  | 13 |
Commercial, financial & agricultural | — |  |  | — |  |  | — |  |  | — |
Consumer & other | — |  |  | — |  |  | — |  |  | 65 |
Total Purchased Credit Impaired Loans | 798 |  |  | 798 |  |  | 33 |  |  | 838 |
Total |  |  |  |  |  |  |
Construction, land & land development | 514 |  |  | 514 |  |  | 44 |  |  | 187 |
Other commercial real estate | 4,552 |  |  | 4,552 |  |  | 33 |  |  | 6,574 |
Residential real estate | 62 |  |  | 62 |  |  | — |  |  | 1,171 |
Commercial, financial & agricultural | — |  |  | — |  |  | — |  |  | 675 |
Consumer & other | — |  |  | — |  |  | — |  |  | 66 |
| $ | 5,128 |  |  | $ | 5,128 |  |  | $ | 77 |  |  | $ | 8,673 |

Interest income recorded on impaired loans during the year ended December 31, 2022 was $724,000, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on TDRs. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.3 million for the year ended December 31, 2022.
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The following table details impaired loan data as of December 31, 2021, including purchased credit impaired loans.

(dollars in thousands) | Unpaid Contractual Principal Balance |  | Recorded Investment |  | Related Allowance |  | Average Recorded Investment
With No Related |  |  |  |  |  |  |
Allowance Recorded |  |  |  |  |  |  |
Construction, land & land development | $ | 62 |  |  | $ | 62 |  |  | $ | — |  |  | $ | 4,311 |
Other commercial real estate | 7,203 |  |  | 6,369 |  |  | — |  |  | 8,113 |
Residential real estate | 958 |  |  | 997 |  |  | — |  |  | 1,083 |
Commercial, financial & agricultural | 75 |  |  | 75 |  |  | — |  |  | 56 |
Consumer & other | — |  |  | — |  |  | — |  |  | — |
| 8,298 |  |  | 7,503 |  |  | — |  |  | 13,563 |
With An Allowance Recorded |  |  |  |  |  |  |
Construction, land & land development | — |  |  | — |  |  | — |  |  | — |
Other commercial real estate | 430 |  |  | 483 |  |  | 148 |  |  | 4,429 |
Residential real estate | 685 |  |  | 773 |  |  | 108 |  |  | 1,029 |
Commercial, financial & agricultural | — |  |  | — |  |  | — |  |  | 79 |
Consumer & other | — |  |  | — |  |  | — |  |  | 1 |
| 1,115 |  |  | 1,256 |  |  | 256 |  |  | 5,538 |
Purchase credit impaired |  |  |  |  |  |  |
Construction, land & land development | — |  |  | — |  |  | — |  |  | 51 |
Other commercial real estate | 2,003 |  |  | 1,916 |  |  | 18 |  |  | 802 |
Residential real estate | 4 |  |  | — |  |  | 6 |  |  | 7 |
Commercial, financial & agricultural | — |  |  | — |  |  | — |  |  | 35 |
Consumer & other | 192 |  |  | 73 |  |  | 96 |  |  | 72 |
| 2,199 |  |  | 1,989 |  |  | 120 |  |  | 967 |
Total |  |  |  |  |  |  |
Construction, land & land development | 62 |  |  | 62 |  |  | — |  |  | 4,362 |
Other commercial real estate | 9,636 |  |  | 8,768 |  |  | 166 |  |  | 13,344 |
Residential real estate | 1,647 |  |  | 1,770 |  |  | 114 |  |  | 2,119 |
Commercial, financial & agricultural | 75 |  |  | 75 |  |  | — |  |  | 170 |
Consumer & other | 192 |  |  | 73 |  |  | 96 |  |  | 73 |
| $ | 11,612 |  |  | $ | 10,748 |  |  | $ | 376 |  |  | $ | 20,068 |

Interest income recorded on impaired loans during the year ended December 31, 2021 was $570,000, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on TDRs. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.2 million for the year ended December 31, 2021.
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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.
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. 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 and, has performed according to the modified terms for at least six months, and there has not been any prior principal forgiveness on a cumulative basis.
The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of December 31, 2022 and 2021. The Company had one commercial real estate loan with outstanding principal balance of $181,000 restructured related to payment terms.
The Company had three loan contracts totaling $647,000 restructured and one of these loans which was a construction, land and development loan for $511,000, was subsequently paid off during 2021. The remaining two loan contracts restructured at December 31, 2021 were payment deferral modifications. The loans consisted of two residential real estate loans totaling $136,000. Both residential real estate loans were also placed on non-accrual status as of December 31, 2021. A TDR may cease being classified as impaired if the loan is subsequently modified at market terms and, has performed according to the modified terms for at least six months, and there has not been any prior principal forgiveness on a cumulative basis. During 2022 and 2021, the Company had no loans that subsequently defaulted.
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NOTE 5. ALLOWANCE FOR LOAN LOSSES
The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the year ended December 31, 2022. 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.

(dollars in thousands) | Construction, land and land development |  | Other commercial real estate |  | Residential real estate |  | Commercial, financial & agricultural |  | Consumer and other |  | Total
Year ended December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 1,127 |  |  | $ | 7,691 |  |  | $ | 1,805 |  |  | $ | 1,083 |  |  | $ | 1,204 |  |  | $ | 12,910 |
Charge-offs | — |  |  | (58) |  |  | (48) |  |  | (314) |  |  | (60) |  |  | (480) |
Recoveries | 25 |  |  | 85 |  |  | 50 |  |  | 139 |  |  | 29 |  |  | 328 |
Provision | 807 |  |  | 1,168 |  |  | 547 |  |  | 1,801 |  |  | (953) |  |  | 3,370 |
Ending balance | $ | 1,959 |  |  | $ | 8,886 |  |  | $ | 2,354 |  |  | $ | 2,709 |  |  | $ | 220 |  |  | $ | 16,128 |
Period-end amount allocated to: |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 44 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 44 |
Collectively evaluated for impairment | 1,915 |  |  | 8,853 |  |  | 2,354 |  |  | 2,709 |  |  | 220 |  |  | 16,051 |
Purchase credit impaired | — |  |  | 33 |  |  | — |  |  | — |  |  | — |  |  | 33 |
Ending balance | $ | 1,959 |  |  | $ | 8,886 |  |  | $ | 2,354 |  |  | $ | 2,709 |  |  | $ | 220 |  |  | $ | 16,128 |
Loans: |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment | $ | 514 |  |  | $ | 3,754 |  |  | $ | 62 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,330 |
Loans collectively evaluated for impairment | 228,921 |  |  | 970,895 |  |  | 289,992 |  |  | 223,923 |  |  | 18,247 |  |  | 1,731,978 |
Purchased credit impaired | — |  |  | 798 |  |  | — |  |  | — |  |  | — |  |  | 798 |
Ending balance | $ | 229,435 |  |  | $ | 975,447 |  |  | $ | 290,054 |  |  | $ | 223,923 |  |  | $ | 18,247 |  |  | $ | 1,737,106 |

The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the year ended December 31, 2021. 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.

(dollars in thousands) | Construction, land and land development |  | Other commercial real estate |  | Residential real estate |  | Commercial, financial & agricultural |  | Consumer and other |  | Total
Year ended December 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 1,013 |  |  | $ | 6,880 |  |  | $ | 2,278 |  |  | $ | 1,713 |  |  | $ | 243 |  |  | $ | 12,127 |
Charge-offs | — |  |  | (568) |  |  | (3) |  |  | (274) |  |  | (68) |  |  | (913) |
Recoveries | 466 |  |  | 118 |  |  | 274 |  |  | 91 |  |  | 47 |  |  | 996 |
Provision | (352) |  |  | 1,261 |  |  | (744) |  |  | (447) |  |  | 982 |  |  | 700 |
Ending balance | $ | 1,127 |  |  | $ | 7,691 |  |  | $ | 1,805 |  |  | $ | 1,083 |  |  | $ | 1,204 |  |  | $ | 12,910 |
Period-end amount allocated to: |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | — |  |  | $ | 148 |  |  | $ | 108 |  |  | $ | — |  |  | $ | — |  |  | $ | 256 |
Collectively evaluated for impairment | 1,127 |  |  | 7,525 |  |  | 1,691 |  |  | 1,083 |  |  | 1,108 |  |  | 12,534 |
Purchase credit impaired | — |  |  | 18 |  |  | 6 |  |  | — |  |  | 96 |  |  | 120 |
Ending balance | $ | 1,127 |  |  | $ | 7,691 |  |  | $ | 1,805 |  |  | $ | 1,083 |  |  | $ | 1,204 |  |  | $ | 12,910 |
Loans: |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment | $ | 62 |  |  | $ | 6,852 |  |  | $ | 1,770 |  |  | $ | 75 |  |  | $ | — |  |  | $ | 8,759 |
Loans collectively evaluated for impairment | 165,384 |  |  | 778,624 |  |  | 210,757 |  |  | 153,973 |  |  | 18,491 |  |  | 1,327,229 |
Purchase credit impaired | — |  |  | 1,916 |  |  | — |  |  | — |  |  | 73 |  |  | 1,989 |
Ending balance | $ | 165,446 |  |  | $ | 787,392 |  |  | $ | 212,527 |  |  | $ | 154,048 |  |  | $ | 18,564 |  |  | $ | 1,337,977 |

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NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following as of December 31:

(dollars in thousands) | 2022 |  | 2021
Land | $ | 12,944 |  |  | $ | 11,848 |
Building | 37,718 |  |  | 38,777 |
Furniture, fixtures and equipment | 19,524 |  |  | 17,792 |
Leasehold improvements | 1,099 |  |  | 1,073 |
Construction in progress | 942 |  |  | 1,946 |
Total cost | 72,227 |  |  | 71,436 |
Accumulated depreciation | (30,621) |  |  | (28,403) |
Total premises and equipment | $ | 41,606 |  |  | $ | 43,033 |

Depreciation charged to operations totaled $2.7 million in both 2022 and 2021. Construction in progress consists of building and land improvements to six of the Company's bank branches. Cost to complete these projects is expected not to exceed $2.2 million.
NOTE 7. OTHER REAL ESTATE OWNED
The following is a summary of the activity in other real estate owned during the years ended December 31, 2022 and 2021:

(dollars in thousands) | 2022 |  | 2021
Balance, Beginning of year | $ | 281 |  |  | $ | 1,006 |
Loans transferred to other real estate | — |  |  | 145 |
Acquired in acquisitions | — |  |  | 538 |
Sales proceeds | (35) |  |  | (1,360) |
Transfer from other assets | 405 |  |  | — |
Net loss on sale and writedowns | — |  |  | (48) |
Ending balance | $ | 651 |  |  | $ | 281 |

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NOTE 8. GOODWILL AND INTANGIBLE ASSETS
The following is an analysis of the core deposit intangible activity for the years ended December 31:

| 2022 |  | 2021
(dollars in thousands) | Gross Carrying Amount |  | Accumulated Amortization |  | Gross Carrying Amount |  | Accumulated Amortization
Amortizable intangible assets: |  |  |  |  |  |  |
Core deposit intangible | $ | 7,685 |  |  | $ | 3,965 |  |  | $ | 7,685 |  |  | $ | 2,464 |
Customer relationship intangible | 2,250 |  |  | 306 |  |  | 2,250 |  |  | 82 |
Total | 9,935 |  |  | 4,271 |  |  | 9,935 |  |  | 2,546 |
Unamortizable intangible assets: |  |  |  |  |  |  |
Goodwill | $ | 48,923 |  |  |  |  | $ | 52,906 |  |  |

Activity related to transactions since January 1, 2021 includes the following:
(1)In connection with the SouthCrest Financial Group, Inc. acquisition on August 1, 2021, the Company recorded $4.0 million in core deposit intangible and $35.0 million in goodwill. The Company recorded a subsequent adjustment within the one year period allowed after the acquisition of approximately $4.0 million reduction in goodwill related to premises and equipment and deferred taxes in 2022.
(2)In connection with insurance acquisitions that occurred on August 1, 2021, September 1, 2021, and October 1, 2021, the Company recorded $2.3 million in customer deposit intangibles and $1.9 million in goodwill.
Amortization expense related to the intangible assets was $1.7 million and $1.2 million at December 31, 2022 and 2021, respectively. The estimated future amortization expense for intangible assets remaining as of December 31, 2022 is as follows:

(dollars in thousands) |  | Amount
2023 |  | $ | 1,471 |
2024 |  | 1,217 |
2025 |  | 963 |
2026 |  | 658 |
2027 |  | 453 |
Thereafter |  | 902 |
Total |  | $ | 5,664 |

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NOTE 9. INCOME TAXES
The income tax expense in the consolidated statements of income for the years ended December 31, 2022 and 2021 are as follows:

(dollars in thousands) | 2022 |  | 2021
Current federal expense | $ | 2,855 |  |  | $ | 5,316 |
Deferred federal expense | 782 |  |  | (661) |
Federal income tax expense | 3,637 |  |  | 4,655 |
Current state expense | (474) |  |  | 663 |
Deferred state expense | 147 |  |  | (823) |
State income tax expense | (327) |  |  | (160) |
Provision for income taxes | $ | 3,310 |  |  | $ | 4,495 |

The Company's income tax expense differs from amounts computed by applying the federal statutory rates to income before income taxes. A reconciliation of the differences for the years ended December 31, 2022 and 2021 is as follows:

(dollars in thousands) | 2022 |  | 2021
Tax at federal income tax rate | $ | 4,799 |  |  | $ | 4,862 |
Change resulting from: |  |  |
State taxes | (258) |  |  | (126) |
Tax-exempt interest | (541) |  |  | (404) |
Income in cash value of bank owned life insurance | (329) |  |  | (219) |
Tax-exempt insurance premiums | (248) |  |  | — |
Nondeductible merger expenses | — |  |  | 222 |
Other | (113) |  |  | 160 |
Provision for income taxes | $ | 3,310 |  |  | $ | 4,495 |

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The components of deferred income taxes for the years ended December 31, 2022 and 2021 are as follows:

(dollars in thousands) | 2022 |  | 2021
Deferred Tax Assets |  |  |
Allowance for loan losses | $ | 4,108 |  |  | $ | 3,290 |
Lease liability | 483 |  |  | 169 |
Net operating loss carryforwards | 3,160 |  |  | 272 |
Tax credit carryforwards | 501 |  |  | — |
Deferred compensation | 282 |  |  | 297 |
Unrealized loss on securities available for sale | 22,703 |  |  | 2,170 |
Restricted stock | 308 |  |  | 166 |
Investment in partnerships | 195 |  |  | 232 |
Other | 50 |  |  | 19 |
Gross deferred tax assets | 31,790 |  |  | 6,615 |
Deferred Tax Liabilities |  |  |
Premises and equipment | 707 |  |  | 267 |
Right of use lease asset | 467 |  |  | 164 |
Purchase accounting adjustments | 1,779 |  |  | 1,322 |
Core deposit intangible | 638 |  |  | 1,218 |
Gross deferred tax liabilities | 3,591 |  |  | 2,971 |
Net deferred tax assets | $ | 28,199 |  |  | $ | 3,644 |

NOTE 10. DEPOSITS
The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $612,000 and $626,000 as of December 31, 2022 and 2021, respectively.
Components of interest-bearing deposits as of December 31 are as follows:

(dollars in thousands) | 2022 |  | 2021
Interest-bearing demand | $ | 831,152 |  |  | $ | 930,811 |
Savings and money market deposits | 617,135 |  |  | 541,993 |
Time, $250,000 and over | 114,780 |  |  | 73,407 |
Other time | 358,760 |  |  | 275,821 |
Total interest-bearing deposits | $ | 1,921,827 |  |  | $ | 1,822,032 |

We had $50.8 million and $883,000 in brokered deposits at December 31, 2022 and 2021, respectively. We use brokered deposits, subject to certain limitations and requirements, as a source of funding to support our asset growth and augment the deposits generated from our branch network, which are our principal source of funding. Our level of brokered deposits varies from time to time depending on competitive interest rate conditions and other factors, and tends to increase as a percentage of total deposits when the brokered deposits are less costly than issuing internet certificates of deposit or borrowing from the FHLB.
The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $250,000 was $114.8 million and $73.4 million as of December 31, 2022 and 2021, respectively.
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As of December 31, 2022, the scheduled maturities of certificates of deposit are as follows:

(dollars in thousands) |  |
Year Ending December 31 |  | Amount
2023 |  | $ | 322,413 |
2024 |  | 88,954 |
2025 |  | 48,840 |
2026 |  | 5,063 |
2027 |  | 7,904 |
Thereafter |  | 366 |
Total time deposits |  | $ | 473,540 |

NOTE 11. BORROWINGS
The following table presents information regarding the Company’s outstanding borrowings at December 31, 2022:

Description | Maturity Date |  | Amount |  | Interest Rate
(dollars in thousands) |  |  |  |  |
FHLB Advances | March 21, 2028 |  | $ | 5,000 |  |  | 2.67%
FHLB Advances | January 5, 2023 |  | 20,000 |  |  | 4.18%
FHLB Advances | January 9, 2023 |  | 20,000 |  |  | 4.15%
FHLB Advances | March 8, 2023 |  | 10,000 |  |  | 4.65%
FHLB Advances | January 17, 2023 |  | 20,000 |  |  | 4.15%
FHLB Advances | January 20, 2023 |  | 15,000 |  |  | 4.23%
FHLB Advances | December 22, 2027 |  | 15,000 |  |  | 4.00%
FHLB Advances | January 30, 2023 |  | 20,000 |  |  | 4.23%
FRB Discount Window | January 5, 2023 |  | 15,000 |  |  | 4.10%
Subordinated notes | May 20, 2032 |  | 39,123 |  |  | 5.25%
Subordinated debentures | (1) |  | 24,229 |  |  | (1)
Total borrowings |  | $ | 203,352 |  |  |

(1) See individual maturity dates and interest rates in table below.
The following table presents information regarding the Company’s outstanding borrowings at December 31, 2021:

Description | Maturity Date |  | Amount |  | Interest Rate
(dollars in thousands) |  |  |  |  |  |  |
FHLB Advances | February 3, 2023 |  | $ | 3,000 |  |  | 3.51%
FHLB Advances | March 21, 2028 |  | 5,000 |  |  | 2.67%
FHLB Advances | August 15, 2025 |  | 4,500 |  |  | 2.62%
FHLB Advances | July 30, 2029 |  | 10,000 |  |  | 1.01%
FHLB Advances | July 11, 2029 |  | 10,000 |  |  | 1.03%
FHLB Advances | November 9, 2029 |  | 20,000 |  |  | 1.07%
Term Note | May 24, 2025 |  | 7,250 |  |  | 4.70%
Revolving Credit | July 30, 2022 |  | 5,313 |  |  | 2.85%
Subordinated debentures | (1) |  | 24,229 |  |  | (1)
Fair value adjustment for FHLB Borrowings acquired from SouthCrest |  |  | (844) |  |  | N/A
Total borrowings |  | $ | 88,448 |  |  |  |  |

(1) See individual maturity dates and interest rates in table below.
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As collateral on the outstanding FHLB advances, the Company has provided a blanket lien on its portfolio of qualifying residential first mortgage loans, commercial loans, multifamily loans and HELOC loans, as well as U.S. Treasury and Agency securities. At December 31, 2022 and 2021, the lendable collateral value of those loans and securities pledged was $150.0 million and $130.3 million, respectively. At December 31, 2022, the Company had remaining credit availability from the FHLB of $574.9 million. At December 31, 2021, the Company had remaining credit availability from the FHLB of $574.7 million. The Company may be required to pledge additional qualifying collateral in order to utilize the full amount of the remaining credit line.
At December 31, 2022 and 2021, the Company also has available federal funds lines of credit with various financial institutions totaling $64.5 million, of which there were none outstanding at December 31, 2022 and 2021.
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, 2022, the Company had borrowing capacity available under this arrangement, with $15.0 million outstanding. The Company could be required to pledge certain available-for-sale investment securities as collateral under this agreement.
On May 1, 2019, the Company entered into two borrowing arrangements with a correspondent bank for $10.0 million each. The term note is secured by the Bank’s stock, expiring on May 1, 2024, and bears a fixed interest rate of 4.70%. The line of credit is also secured by the Bank's stock, expiring on July 30, 2022, and bears a variable interest rate of Wall Street Journal Prime minus 0.40%. The proceeds were used for the acquisition of LBC Bancshares, Inc. and its subsidiary, Calumet Bank. As of December 31, 2022, the term note and the line of credit were closed and had zero balances, as both were paid off with the proceeds from the Company's public offering of its common stock completed on February 10, 2022. As of December 31, 2021, the outstanding balance of the term note and the line of credit were $7.3 million and $5.3 million, respectively.
On May 20, 2022, the Company completed a private placement of $40.0 million in fixed-to-floating rate subordinated notes due 2032 (the “Notes”). The Notes will bear a fixed rate of 5.25% for the first five years and will reset quarterly thereafter to then current three-month Secured Overnight Financing Rate, as published by the Federal Reserve Bank of New York, plus 265 basis points for the five year floating term. The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after May 20, 2027, or at any time, in whole but not in part, upon certain other specified events. At December 31, 2022, $39.1 million of the Notes, net of debt issuance costs were outstanding.
The following table presents the information regarding the Company's subordinated debentures at December 31, 2022 and 2021. All subordinated debentures are at three month LIBOR rate plus added points noted below at December 31, 2022 and 2021.

Description | Date | Amount |  | Added Points |  |  | Maturity | 5-Year Call Option
(dollars in thousands) |  |  |  |  |  |  |  |
Colony Bankcorp Statutory Trust III | June 16, 2004 | $ | 4,640 |  |  | 2.68% |  |  | June 14, 2034 | June 17, 2009
Colony Bankcorp Capital Trust I | April 13, 2006 | 5,155 |  |  | 1.50% |  |  | April 13, 2036 | April 13, 2011
Colony Bankcorp Capital Trust II | March 12, 2007 | 9,279 |  |  | 1.65% |  |  | March 12, 2037 | March 12, 2012
Colony Bankcorp Capital Trust III | September 14, 2007 | 5,155 |  |  | 1.40% |  |  | September 14, 2037 | September 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.
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NOTE 12. LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-2 and all subsequent ASUs that modified this topic (collectively referred to as “Topic 842”). For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
Substantially all of the leases in which the Company is the lessee are comprised of real estate for branches and office space with terms extending through 2028. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. With the adoption of Topic 842, operating lease arrangements are required to be recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.
The following table represents the consolidated balance sheet classification of the Company’s ROU assets and liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet.

(dollars in thousands) | Classification |  | December 31, 2022 |  | December 31, 2021
Assets |  |  |  |  |
Operating lease right-of-use assets | Other assets |  | $ | 1,834 |  |  | $ | 645 |
Liabilities |  |  |  |  |
Operating lease liabilities | Other liabilities |  | $ | 1,895 |  |  | $ | 663 |

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.
For the year ended December 31, 2022 and 2021, operating lease cost was $615,000 and $351,000, respectively.
As of December 31, 2022, the weighted average remaining lease term was 4.66 years and the weighted average discount rate was 4.09%.
The following table represents the future maturities of the Company’s operating lease liabilities and other lease information.

(dollars in thousands) |  |
Year |  | Lease Liability
2023 |  | $ | 460 |
2024 |  | 412 |
2025 |  | 383 |
2026 |  | 279 |
2027 |  | 289 |
Thereafter |  | 72 |
Total Lease Payments |  | $ | 1,895 |

Supplemental Lease Information: (dollars in thousands) | December 31, 2022 |  | December 31, 2021
Cash paid for amounts included in the measurement of lease liabilities: |  |  |
Operating cash flows from operating leases (cash payments) | $ | 549 |  |  | $ | 335 |
Operating lease right-of-use assets obtained in exchange for leases entered into during the period | 1,750 |  |  | 742 |

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NOTE 13. COMPENSATION PLANS
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 2022 and 2021, the Company made total contributions of $1.9 million and $1.4 million to the Plan, respectively.
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 $1.1 million and $1.2 million as of December 31, 2022 and 2021, respectively. Benefits accrued monthly under the contracts totaled $39,000 in 2022 and $43,000 in 2021. Payments were $151,000 in 2022 and $136,000 in 2021.
The Company has purchased life insurance policies on the plans’ participants and uses the cash flow from these policies to partially fund the plan. There was no fee income recognized in 2022 and 2021.
The Company awards restricted shares of the Company's common stock to various bank employees with a grant price equal to the market price of the Company's common stock on the grant date. The restricted shares vest in equal installments over three years, subject to continued service 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 employees 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.
The following table presents the outstanding balance for restricted stock awards as of December 31, 2022 and 2021.

| Quantity |  | Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2020 | 1,884 |  |  | $ | 17.73 |
Granted | 187,600 |  |  | 17.93 |
Vested | (1,884) |  |  | 17.73 |
Forfeited | (300) |  |  | 17.93 |
Outstanding at December 31, 2021 | 187,300 |  |  | 17.93 |
Granted | 139,720 |  |  | 16.11 |
Vested | (71,154) |  |  | 17.93 |
Forfeited | (9,000) |  |  | 17.36 |
Outstanding at December 31, 2022 | 246,866 |  |  | 16.92 |

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. Compensation expense recognized for the years ended December 31, 2022 and 2021 was $1.7 million and $599,000, respectively. Total compensation expense unrecognized for the restricted shares granted for the year ended December 31, 2022 was $3.1 million, which is expected to be recognized over a weighted average period of 1.9 years.
NOTE 14. 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.
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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, 2022 and 2021, the following financial instruments were outstanding whose contract amounts represent credit risk:

| Contract Amount
| 2022 |  | 2021
(dollars in thousands) |  |  |
Commitments to extend credit | $ | 379,997 |  |  | $ | 318,853 |
Standby letters of credit | 3,333 |  |  | 4,869 |

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
Standby and performance letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Legal Contingencies. In the ordinary course of business, there are various legal proceedings pending against Colony and its subsidiaries. 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.
NOTE 15. 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 collectability. A summary of activity of related party loans is shown below:

(dollars in thousands) | 2022 |  | 2021
Balance, Beginning | $ | 7,732 |  |  | $ | 5,043 |
New loans | 1,182 |  |  | 6,576 |
Repayments | (5,471) |  |  | (5,721) |
Transactions due to changes in directors | — |  |  | 1,834 |
Balance, Ending | $ | 3,443 |  |  | $ | 7,732 |

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NOTE 16. 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 Bancorp, Inc. and subsidiaries 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.
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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.
Other investments - The fair value of other bank stock approximates carrying value and is classified as Level 2. Fair values for investment funds 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.
Loans held for sale – The fair value of loans held for sale is determined on outstanding commitments from third party investors in the secondary markets and is classified within Level 2 of the valuation hierarchy.
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. Loans are classified as Level 3.
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.
Federal Home Loan Bank advances – The fair value of Federal Home Loan Bank advances is estimated by discounting the future cash flows using the current rates at which similar advances would be obtained. Federal Home Loan Bank advances are classified as Level 2.
Other borrowings – The fair value of other borrowings 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 borrowings is classified as Level 2 due to their expected maturities.
104

Disclosures of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis, are required in the financial statements.
The carrying amount, estimated fair values, and placement in the fair value hierarchy of the Company’s financial instruments are as follows:

| Carrying |  | Estimated |  | Level
(dollars in thousands) | Amount |  | Fair Value |  | 1 |  | 2 |  | 3
December 31, 2022 |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |
Cash and short-term investments | $ | 80,678 |  |  | $ | 80,678 |  |  | $ | 80,678 |  |  | $ | — |  |  | $ | — |
Investment securities available for sale | 432,553 |  |  | 432,553 |  |  | — |  |  | 416,957 |  |  | 15,596 |
Investment securities held to maturity | 465,858 |  |  | 411,264 |  |  | — |  |  | 411,264 |  |  | — |
Other investments | 13,793 |  |  | 13,793 |  |  | — |  |  | 13,003 |  |  | 790 |
Loans held for sale | 17,743 |  |  | 17,743 |  |  | — |  |  | 17,743 |  |  | — |
Loans, net | 1,720,978 |  |  | 1,469,707 |  |  | — |  |  | — |  |  | 1,469,707 |
Liabilities |  |  |  |  |  |  |  |  |
Deposits | 2,490,997 |  |  | 2,489,481 |  |  | — |  |  | 2,489,481 |  |  | — |
Federal Home Loan Bank advances | 125,000 |  |  | 125,163 |  |  | — |  |  | 125,163 |  |  | — |
Other borrowed money | 78,352 |  |  | 69,930 |  |  | — |  |  | 69,930 |  |  | — |
December 31, 2021 |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |
Cash and short-term investments | $ | 197,232 |  |  | $ | 197,232 |  |  | $ | 197,232 |  |  | $ | — |  |  | $ | — |
Investment securities available for sale | 938,164 |  |  | 938,164 |  |  | 87,551 |  |  | 850,613 |  |  | — |
Other investments | 14,012 |  |  | 14,012 |  |  | 5,574 |  |  | 4,183 |  |  | 4,255 |
Loans held for sale | 38,150 |  |  | 38,150 |  |  | — |  |  | 38,150 |  |  | — |
Loans, net | 1,325,067 |  |  | 1,328,853 |  |  | — |  |  | — |  |  | 1,328,853 |
Liabilities |  |  |  |  |  |  |  |  |
Deposits | 2,374,608 |  |  | 2,375,385 |  |  | — |  |  | 2,375,385 |  |  | — |
Federal Home Loan Bank advances | 51,656 |  |  | 51,162 |  |  | — |  |  | 51,162 |  |  | — |
Other borrowed money | 36,792 |  |  | 36,796 |  |  | — |  |  | 36,796 |  |  | — |

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.
105

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:
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 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, 2022 and 2021, 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, 2022 and 2021. Those impaired loans and other real estate properties are shown net of the related specific reserves and valuation allowances.

|  |  | Fair Value Measurements at Reporting Date Using
(dollars in thousands) | Total Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
December 31, 2022 |  |  |  |  |  |  |
Nonrecurring |  |  |  |  |  |  |
Impaired loans | $ | 521 |  |  | $ | — |  |  | $ | — |  |  | $ | 521 |
Other real estate | 651 |  |  | — |  |  | — |  |  | 651 |
December 31, 2021 |  |  |  |  |  |  |
Nonrecurring |  |  |  |  |  |  |
Impaired loans | $ | 1,837 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,837 |
Other real estate | 281 |  |  | — |  |  | — |  |  | 281 |

106

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, 2022 and 2021. These tables are comprised primarily of collateral dependent impaired loans and other real estate owned:

(dollars in thousands) |  | December 31, 2022 |  | Valuation Techniques |  | Unobservable Inputs |  | Range Weighted Avg
Impaired Loans |  | $ | 521 |  |  | Appraised Value |  | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell |  | 25 | % | - | 50%
Other Real Estate |  | $ | 651 |  |  | Appraised Value/ Comparable Sales |  | Discounts to reflect current market conditions and estimated costs to sell |  | 0 | % | - | 20%

|  | December 31, 2021 |  | Valuation Techniques |  | Unobservable Inputs |  | Range Weighted Avg
Impaired Loans |  | $ | 1,837 |  |  | Appraised Value |  | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell |  | 25 | % | - | 100%
Other Real Estate |  | $ | 281 |  |  | Appraised Value/ Comparable Sales |  | Discounts to reflect current market conditions and estimated costs to sell |  | 0 | % | - | 20%

The following table presents quantitative information about recurring level 3 fair value measurements as of December 31, 2022.

|  | December 31, 2022
(dollars in thousands) |  | Fair Value |  | Valuation Techniques |  | Unobservable Inputs |  | Range (Weighted Avg)
Available for sale securities |  | $ | 15,596 |  |  | Discounted Cash Flow |  | Discount Rate or Yield |  | N/A*
Other investments |  | $ | 790 |  |  | Discounted Cash Flow |  | 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.
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 year ended December 31, 2022 and 2021:

| Other Investments |  | Available for sale securities
(dollars in thousands) | 2022 |  | 2021 |  | 2022
Beginning balance | $ | 4,255 |  |  | $ | — |  |  | $ | — |
Additions | — |  |  | 4,107 |  |  | — |
Redemptions | (3,306) |  |  | — |  |  | — |
Total unrealized/realized gains included in earnings | (159) |  |  | 148 |  |  | — |
Transfer to Level 3 | — |  |  | — |  |  | 15,596 |
Ending balance | $ | 790 |  |  | $ | 4,255 |  |  | $ | 15,596 |

107

The Company’s policy is to recognize transfers in and transfers out of levels 1, 2 and 3 as of the end of a reporting period. There were $15.6 million in transfers between levels for the period ended December 31, 2022 and no transfers for the period ended December 31, 2021 .
108

NOTE 17. REGULATORY CAPITAL MARKETS
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, 2022, 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, 2022, 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 is 2.5 percent of risk-weighted assets.
109

The following table summarizes regulatory capital information as of December 31, 2022 and December 31, 2021 on a consolidated basis and for the subsidiary, as defined. Regulatory capital ratios for December 31, 2022 and 2021 were calculated in accordance with the Basel III rules.

| Actual |  | For Capital Adequacy Purposes |  | To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands) | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio
As of December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
Total Capital to Risk-Weighted Assets |  |  |  |  |  |  |  |  |  |  |
Consolidated | $ | 318,250 |  |  | 15.11 | % |  | $ | 168,498 |  |  | 8.00 | % |  | N/A |  | N/A
Colony Bank | 272,812 |  |  | 12.99 |  |  | 168,014 |  |  | 8.00 |  |  | 210,017 |  |  | 10.00 | %
Tier I Capital to Risk-Weighted Assets |  |  |  |  |  |  |  |  |  |  |
Consolidated | 262,999 |  |  | 12.49 |  |  | 126,341 |  |  | 6.00 |  |  | N/A |  | N/A
Colony Bank | 256,684 |  |  | 12.22 |  |  | 126,031 |  |  | 6.00 |  |  | 168,042 |  |  | 8.00 |
Common Equity Tier 1 Capital to Risk-Weighted Assets |  |  |  |  |  |  |  |  |  |  |
Consolidated | 238,770 |  |  | 11.34 |  |  | 94,750 |  |  | 4.50 |  |  | N/A |  | N/A
Colony Bank | 256,684 |  |  | 12.22 |  |  | 94,524 |  |  | 4.50 |  |  | 136,534 |  |  | 6.50 |
Tier I Capital to Average Assets |  |  |  |  |  |  |  |  |  |  |
Consolidated | 262,999 |  |  | 9.17 |  |  | 114,721 |  |  | 4.00 |  |  | N/A |  | N/A
Colony Bank | 256,684 |  |  | 8.97 |  |  | 114,463 |  |  | 4.00 |  |  | 143,079 |  |  | 5.00 |
As of December 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Total Capital to Risk-Weighted Assets |  |  |  |  |  |  |  |  |  |  |
Consolidated | $ | 207,366 |  |  | 12.05 | % |  | $ | 137,670 |  |  | 8.00 | % |  | N/A |  | N/A
Colony Bank | 203,265 |  |  | 12.18 |  |  | 133,507 |  |  | 8.00 |  |  | 166,884 |  |  | 10.00 | %
Tier I Capital to Risk-Weighted Assets |  |  |  |  |  |  |  |  |  |  |
Consolidated | 194,456 |  |  | 11.28 |  |  | 103,434 |  |  | 6.00 |  |  | N/A |  | N/A
Colony Bank | 190,355 |  |  | 11.41 |  |  | 100,099 |  |  | 6.00 |  |  | 133,465 |  |  | 8.00 |
Common Equity Tier 1 Capital to Risk-Weighted Assets |  |  |  |  |  |  |  |  |  |  |
Consolidated | 170,956 |  |  | 9.87 |  |  | 77,943 |  |  | 4.50 |  |  | N/A |  | N/A
Colony Bank | 190,355 |  |  | 11.41 |  |  | 75,074 |  |  | 4.50 |  |  | 108,441 |  |  | 6.50 |
Tier I Capital to Average Assets |  |  |  |  |  |  |  |  |  |  |
Consolidated | 194,456 |  |  | 7.25 |  |  | 107,286 |  |  | 4.00 |  |  | N/A |  | N/A
Colony Bank | 190,355 |  |  | 7.53 |  |  | 101,118 |  |  | 4.00 |  |  | 126,398 |  |  | 5.00 |

110

NOTE 18. FINANCIAL INFORMATION OF COLONY BANKCORP, INC. (PARENT ONLY)
The parent company’s balance sheets as of December 31, 2022 and 2021 and the related statements of operations and comprehensive income (loss) and cash flows for each of the years in the two-year period then ended are as follows:
COLONY BANKCORP, INC. (PARENT ONLY)
BALANCE SHEETS
DECEMBER 31
(DOLLARS IN THOUSANDS)

| 2022 |  | 2021
ASSETS |  |  |
Cash | $ | 40,361 |  |  | $ | 7,304 |
Investment in subsidiaries | 249,868 |  |  | 245,614 |
Other | 5,115 |  |  | 1,689 |
Total Assets | $ | 295,344 |  |  | $ | 254,607 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |
Liabilities |  |  |
Other | $ | 1,724 |  |  | $ | 108 |
Other borrowed money | — |  |  | 12,563 |
Subordinated notes | 39,123 |  |  | — |
Subordinated debentures | 24,229 |  |  | 24,229 |
Total Liabilities | 65,076 |  |  | 36,900 |
Stockholders’ Equity |  |  |
Common stock, par value $1.00; 50,000,000 shares authorized, 17,598,123 and 13,673,898 shares issued and outstanding as of December 31, 2022 and 2021, respectively | 17,598 |  |  | 13,674 |
Paid-in capital | 167,537 |  |  | 111,021 |
Retained earnings | 111,573 |  |  | 99,189 |
Accumulated other comprehensive loss, net of tax | (66,440) |  |  | (6,177) |
Total Stockholder’s Equity | 230,268 |  |  | 217,707 |
Total Liabilities and Stockholders’ Equity | $ | 295,344 |  |  | $ | 254,607 |

111

COLONY BANKCORP, INC. (PARENT ONLY)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)

| 2022 |  | 2021
Income |  |  |
Dividends from subsidiaries | $ | 10,295 |  |  | $ | 31,060 |
Other | 22 |  |  | 15 |
Total income | 10,317 |  |  | 31,075 |
Expenses |  |  |
Interest | 2,299 |  |  | 1,012 |
Salaries and employee benefits | 457 |  |  | 371 |
Other | 450 |  |  | 604 |
Total expenses | 3,206 |  |  | 1,987 |
Income before income taxes and equity in undistributed earnings (distributions in excess of earnings) of subsidiaries | 7,111 |  |  | 29,088 |
Income tax benefit | (914) |  |  | (731) |
Income before equity in undistributed earnings (distributions in excess of earnings) of subsidiaries | 8,025 |  |  | 29,819 |
Equity in undistributed earnings(distributions in excess of earnings) of subsidiaries | 11,517 |  |  | (11,160) |
Net income | $ | 19,542 |  |  | $ | 18,659 |

112

COLONY BANKCORP, INC. (PARENT ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)

| 2022 |  | 2021
CASH FLOWS FROM OPERATING ACTIVITIES |  |  |
Net income | $ | 19,542 |  |  | $ | 18,659 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Stock-based compensation expense | 1,743 |  |  | 599 |
Distribution in excess of earnings (equity in undistributed earnings) of subsidiaries | (11,517) |  |  | 11,160 |
Change in deferred taxes | (2,125) |  |  | — |
Change in interest payable | 45 |  |  | 1 |
Other | 270 |  |  | (1,146) |
Net cash provided by operating activities | 7,958 |  |  | 29,273 |
CASH FLOWS FROM INVESTING ACTIVITIES |  |  |
Net cash and cash equivalents paid in bank acquisition | — |  |  | (19,178) |
Capital injection into Bank subsidiary | (53,000) |  |  | — |
Net cash provided by investing activities | (53,000) |  |  | (19,178) |
CASH FLOWS FROM FINANCING ACTIVITIES |  |  |
Net increase (decrease) in other borrowed money | 26,560 |  |  | (1,000) |
Issuance of common stock | 59,468 |  |  | — |
Cash paid for tax withholding related to vesting of restricted stock | (231) |  |  | — |
Repurchase of shares | (540) |  |  | — |
Dividends paid on common stock | (7,158) |  |  | (4,463) |
Net cash used in financing activities | 78,099 |  |  | (5,463) |
Net increase in cash and cash equivalents | 33,057 |  |  | 4,632 |
Cash and cash equivalents at beginning of period | 7,304 |  |  | 2,672 |
Cash and cash equivalents at end of period | $ | 40,361 |  |  | $ | 7,304 |

113

NOTE 19. EARNINGS PER SHARE
The following table presents earnings per share for the years ended December 31, 2022 and 2021:

| 2022 |  | 2021
(dollars in thousands, except per share amounts) |  |  |
Numerator |  |  |
Net income available to common stockholders | $ | 19,542 |  |  | $ | 18,659 |
Denominator |  |  |
Weighted average number of common shares outstanding for basic earnings per common share | 17,191,079 |  |  | 11,254,130 |
Weighted average number of common shares outstanding for diluted earnings per common share | 17,191,079 |  |  | 11,254,130 |
Earnings per share - basic | $ | 1.14 |  |  | $ | 1.66 |
Earnings per share - diluted | $ | 1.14 |  |  | $ | 1.66 |

114

NOTE 20. SEGMENT INFORMATION
The Company’s operating segments include banking, mortgage banking and small business specialty lending division. The reportable segments are determined by the products and services offered, and internal reporting. The Bank segment derives its revenues from the delivery of full-service financial services, including retail and commercial banking services and deposit accounts. The Mortgage Banking segment derives its revenues from the origination and sales of residential mortgage loans held for sale. The Small Business Specialty Lending Division segment derives its revenue from the origination, sales and servicing of Small Business Administration loans and other government guaranteed loans. Segment performance is evaluated using net interest income and noninterest income. Income taxes are allocated based on income before income taxes, and indirect expenses (includes management fees) are allocated based on various internal factors for each segment. Transactions among segments are made at fair value. The following tables present information reported internally for performance assessment as of December 31, 2022 and 2021:

|  | December 31, 2022
(dollars in thousands) |  | Bank |  | Mortgage |  | Small Business Specialty Lending Division |  | Totals
Net Interest Income |  | $ | 79,193 |  |  | $ | 102 |  |  | $ | 1,330 |  |  | $ | 80,625 |
Provision for Loan Losses |  | 3,370 |  |  | — |  |  | — |  |  | 3,370 |
Noninterest Income |  | 18,082 |  |  | 9,630 |  |  | 7,360 |  |  | 35,072 |
Noninterest Expenses |  | 72,781 |  |  | 9,735 |  |  | 6,959 |  |  | 89,475 |
Income Taxes |  | 3,010 |  |  | 98 |  |  | 202 |  |  | 3,310 |
Net income/(loss) |  | $ | 18,114 |  |  | $ | (101) |  |  | $ | 1,529 |  |  | $ | 19,542 |
Total assets |  | $ | 2,857,893 |  |  | $ | 18,221 |  |  | $ | 60,456 |  |  | $ | 2,936,570 |
Full Time Employees |  | 427 |  | 65 |  | 30 |  | 522

|  | December 31, 2021
(dollars in thousands) |  | Bank |  | Mortgage Banking |  | Small Business Specialty Lending Division |  | Totals
Net Interest Income |  | $ | 64,293 |  |  | $ | 543 |  |  | $ | 1,353 |  |  | $ | 66,189 |
Provision for Loan Losses |  | 700 |  |  | — |  |  | — |  |  | 700 |
Noninterest Income |  | 14,889 |  |  | 13,189 |  |  | 8,212 |  |  | 36,290 |
Noninterest Expenses |  | 61,202 |  |  | 11,314 |  |  | 6,109 |  |  | 78,625 |
Income Taxes |  | 3,311 |  |  | 458 |  |  | 726 |  |  | 4,495 |
Net income/(loss) |  | $ | 13,969 |  |  | $ | 1,960 |  |  | $ | 2,730 |  |  | $ | 18,659 |
Total assets |  | $ | 2,620,501 |  |  | $ | 25,149 |  |  | $ | 46,065 |  |  | $ | 2,691,715 |
Full Time Employees |  | 400 |  | 55 |  | 26 |  | 481

115

Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A
Controls and Procedures
The Company’s Chief Executive Officer and Acting Chief Financial Officer has evaluated the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officer has concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for ensuring that information the Company is required to disclose in reports that it files or submits under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's senior management, including its Chief Executive Officer and Acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During the year ended December 31, 2022, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022 is included in Part II, Item 8 of this Report under the heading “Management’s Report on Internal Control Over Financial Reporting.”
Our independent auditors have issued an audit report on management’s assessment of internal controls over financial reporting. This report is included in Part II, Item 8 of this Report under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Controls
There were no changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that have materially affected, or are reasonably likely to materially affect these controls.
.
Item 9B
Other Information
None.
Part III
Item 10
116

Directors and Executive Officers and Corporate Governance
Code of Ethics
Colony Bankcorp, Inc. has adopted a Code of Ethics that applies to the Company’s principal executive officer and principal accounting and financial officer. A copy of the Code of Ethics will be provided to any person without charge, upon written request mailed to T. Heath Fountain, Colony Bankcorp, Inc., 115 S. Grant Street, Fitzgerald, Georgia 31750.
The remaining information required by this item is incorporated by reference to the Directors and Nominees section of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 11
Executive Compensation
The information required by this item is incorporated by reference to the Executive Compensation section of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
The information required by this item is incorporated by reference to Security Ownership of Certain Beneficial Owners section of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 13
Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated by reference to the Governance of the Company and Related Party Transactions with the Company sections of the Company’s definitive Proxy Statement to be filed with Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the fiscal year covered by this Annual Report.
Item 14
Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the Independent Public Accountants section of the Company’s definitive Proxy Statement to be filed with Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the fiscal year covered by this Annual Report.
The Independent Registered Public Accounting Firm is Mauldin & Jenkins, LLC (Public Company Accounting Oversight Board Firm ID 669) located in Albany, Georgia for the years ended December 31, 2022 and 2021.
Item 15
Exhibits, Financial Statement Schedules
(a)The following documents are filed as part of this report:
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(1) | The consolidated financial statements of Colony Bankcorp, Inc. and subsidiaries are filed as part of this report.
| Report of Independent Registered Accounting Firm
| Consolidated Balance Sheets - December 31, 202 2 and 202 1
| Consolidated Statements of Income – Years ended December 31, 202 2 and 202 1
| Consolidated Statements of Comprehensive Income (Loss) – Years ended December 31, 202 2 and 202 1
| Consolidated Statements of Changes in |Stockholders’ Equity– Years ended December 31, 202 2 and 202 1
| Consolidated Statements of Cash Flows –Years ended December 31, 202 2 and 202 1
| Notes to Consolidated Financial Statements
(2) | Financial Statements Schedules:
| All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or the related notes.
(3) | A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this report is shown on the “Exhibit Index” filed herewith.

Exhibit Index

2.1 |  | Agreement and Plan of Merger by and between Colony Bankcorp, Inc. and SouthCrest Financial Group, Inc., dated as of April 22, 2021
|  | -filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 0-12436), filed with the Commission on April 22, 2021 and incorporated herein by reference.
3.1 |  | Articles of Incorporation, as amended
|  | -filed as Exhibit99.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-12436), filed with the Commission on August 4, 2014 and incorporated herein by reference.
3.2 |  | Articles of Amendment to Articles of Incorporation, as amended
|  | -filed as Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-12436), filed with the Commission on August 12, 2022 and incorporated herein by reference.
3.3 |  | Amended and Restated Bylaws
|  | -filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 0-12436), filed with the Commission on September 18, 2020 and incorporated herein by reference.
4.1 |  | Description of Securities
4.2 |  | Form of 5.25% Fixed to Floating Rate Subordinated Note due 2032
|  | -filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 0-12436), filed with the Commission on May 23, 2022 and incorporated herein by reference.
10.1 |  | Deferred Compensation Plan and Sample Director Agreement†
|  | -filed as Exhibit 10(a) to the Registrant's Registration Statement on Form 10 (File No. 0-18486), filed with the Commission on April 25, 1990 and incorporated herein by reference.
10.2 |  | Profit-Sharing Plan Dated January 1, 1979†
|  | -filed as Exhibit 10(b) to the Registrant's Registration Statement on Form 10 (File No. 0-18486), filed with the Commission on April 25, 1990 and incorporated herein by reference.
10.3 |  | 1999 Restricted Stock Grant Plan and Restricted Stock Grant Agreement†
|  | -filed as Exhibit 10.C to the Registrant's Annual Report on Form 10-K405 (File 000-12436), filed with the Commission on March 30, 2001 and incorporated herein by reference.
10.4 |  | 2004 Restricted Stock Grant Plan and Restricted Stock Grant Agreement†
|  | -filed as Exhibit C to the Registrant's Definitive Proxy Statement for Annual Meeting of Stockholders held on April 27, 2004, filed with the Commission on March 3, 2004 (File No. 000-12436) and incorporated herein by reference.
10.5 |  | Restricted Stock Award Between T. Heath Fountain and Colony Bankcorp, Inc.†
|  | -filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-226984), filed with the Commission on August 23, 2018 and incorporated herein by reference.

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10.6 |  | Employment Agreement, Dated July 30, 2021, Between T. Heath Fountain and Colony Bankcorp, Inc.†
|  | -filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on August 2, 2021 and incorporated herein by reference.
10.7 |  | Retention Agreement, Dated January 15, 2019, Between Colony Bank and Kimberly C. Dockery†
|  | -filed as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on January 17, 2019 and incorporated herein by reference.
10.8 |  | Employment Agreement, Dated June 24, 2021, Between Colony Bank and Tracie Youngblood†
|  | -filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on June 28, 2021 and incorporated herein by reference.
10.9 |  | Separation Agreement, Dated April 14, 2022, Between Colony Bank and Tracie Youngblood†
|  | -filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-12436), filed with the Commission on August 12, 2022 and incorporated herein by reference.
10.10 |  | Employment Agreement, Dated April 22, 2021, Between Colony Bank and Andrew Borrmann†
|  | -filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on January 26, 2023 and incorporated herein by reference.
10.11 |  | Separation and Release Agreement, Dated January 25, 2023, Between Colony Bank and Andrew Borrmann†
|  | -filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on January 26, 2023 and incorporated herein by reference.
10.12 |  | Employment Agreement, dated as of September 9, 2022, between Colony Bankcorp, Inc. and Max Edward Hoyle†
|  | -filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-12436), filed with the Commission on November 10, 2022 and incorporated herein by reference.
10.13 |  | Employment Agreement, dated as of September 9, 2022, between Colony Bankcorp, Inc. and R. Dallis Copeland, Jr.†
|  | -filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-12436), filed with the Commission on November 10, 2022 and incorporated herein by reference.
10.14 |  | Form of Note Purchase Agreement, dated as of May 20, 2022, by and among Colony Bankcorp, Inc. and the purchasers named therein.
|  | - filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 0-12436), filed with the Commission on May 23, 2022 and incorporated herein by reference.
21 |  | Subsidiaries of the Company
23.1 |  | Consent of Mauldin & Jenkins, LLC
31 |  | Certificate of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 |  | Certificate of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS |  | XBRL Instance Document
101.SCH |  | XBRL Schema Document
101.CAL |  | XBRL Calculation Linkbase Document
101.DEF |  | XBRL Definition Linkbase Document
101.PRE |  | XBRL Label Linkbase Document
101.LAB |  | XBRL Presentation Linkbase Document
104 |  | Cover Page Interactive Data File (formatted as inline XBRL and included in Exhibit 101)

† Represents a management contract or a compensatory plan or arrangement.
Item 16. Form 10-K Summary
None.
119

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Colony Bankcorp, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
COLONY BANKCORP, INC.

/s/ T. Heath Fountain |
T. Heath Fountain Chief Executive Officer/Director/Acting Chief Financial Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
March 16, 2023 |
Date |

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
120

/s/ T. Heath Fountain |  | March 16, 2023
T. Heath Fountain, /Director/Chief Executive Officer and Acting Chief Financial Officer |  | Date
/s/ Mark H. Massee |  | March 16, 2023
Mark H. Massee, Director |  | Date
/s/ Jonathan W. R. Ross |  | March 16, 2023
Jonathan W. R. Ross, Director |  | Date
/s/ M. Frederick Dwozan |  | March 16, 2023
M. Frederick Dwozan, Director |  | Date
/s/ Meagan M. Mowry |  | March 16, 2023
Meagan M. Mowry, Director |  | Date
/s/ Scott Lowell Downing |  | March 16, 2023
Scott Lowell Downing, Director |  | Date
/s/ Matthew D. Reed |  | March 16, 2023
Matthew D. Reed, Director |  | Date
/s/ Edward P. Loomis |  | March 16, 2023
Edward P. Loomis, Director |  | Date
/s/ Brian D. Schmitt |  | March 16, 2023
Brian Schmitt, Director |  | Date
/s/ Harold W. Wyatt, III |  | March 16, 2023
Harold W. Wyatt, III, Director |  | Date
/s/ Audrey D. Hollingsworth |  | March 16, 2023
Audrey D. Hollingsworth, Director |  | Date

121