COLONY BANKCORP INC - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-12436

COLONY BANKCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)


Georgia			58-1492391
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 Accelerate 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 the new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 10, 2021, the registrant had 13,674,198 shares of common stock, $1.00 par value per share, issued and outstanding.

TABLE OF CONTENTS


		Page
PART I – Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets –June 30, 2021 (unaudited) and December 31, 2020 (audited)	3

	Consolidated Statements of Income – For the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	4

	Consolidated Statements of Comprehensive Income – For the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity – For the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)	6

	Consolidated Statements of Cash Flows – For the Six Months Ended June 30, 2021 and 2020 (unaudited)	8

	Notes to Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	59


PART II – Other Information

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	61

Signatures		62

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COLONY BANKCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	June 30, 2021		December 31, 2020
(in thousands, except per share data)	(Unaudited)		(Audited)
ASSETS
Cash and due from banks	$	16,897	$	17,218
Federal funds sold	4,208		2,227
Interest-bearing deposits in banks	125,161		164,061
Cash and cash equivalents	146,266		183,506
Investment securities available for sale, at fair value	469,714		380,814
Other investments, at cost	2,703		3,296
Loans held for sale	30,910		52,386
Loans	1,022,618		1,059,503
Allowance for loan losses	(12,871)		(12,127)
Loans, net	1,009,747		1,047,376
Premises and equipment	32,689		32,057
Other real estate owned	270		1,006
Goodwill	15,992		15,992
Other intangible assets	1,929		2,271
Bank-owned life insurance	31,805		31,547

Other assets	13,493		13,723
Total assets	$	1,755,518	$	1,763,974

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest-bearing	$	393,677	$	326,999
Interest-bearing	1,148,537		1,118,028
Total deposits	1,542,214		1,445,027

Federal Home Loan Bank advances	22,500		22,500
Paycheck Protection Program Liquidity Facility	—		106,789
Other borrowings	37,292		37,792
Other liabilities	6,618		7,378
Total liabilities	1,608,624		1,619,486

Stockholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized, none issued or outstanding as of June 30, 2021 and December 31, 2020, respectively	—		—
Common stock, par value $1.00 per share; 20,000,000 shares authorized, 9,498,783 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively	9,499		9,499
Paid in capital	43,232		43,215
Retained earnings	91,963		84,993
Accumulated other comprehensive income, net of tax	2,200		6,781
Total stockholders' equity	146,894		144,488
Total liabilities and stockholders' equity	$	1,755,518	$	1,763,974

See accompanying notes to consolidated financial statements (unaudited).

COLONY BANKCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)


	Three Months Ended				Six Months Ended
(dollars in thousands, except per share data)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Interest income
Loans, including fees	$	14,099	$	13,699	$	27,672	$	26,989
Investment securities	1,893		1,794		3,591		3,788
Federal funds sold, deposits with other banks and short term investments	44		48		98		332
Total interest income	16,036		15,541		31,361		31,109

Interest expense
Deposits	569		1,403		1,223		3,621
Federal Home Loan Bank Advances	115		211		230		468
Paycheck Protection Program Liquidity Facility	25		87		93		87
Other borrowings	258		299		515		688
Total interest expense	967		2,000		2,061		4,864
Net interest income	15,069		13,541		29,300		26,245
Provision for loan losses	—		2,200		500		4,156
Net interest income after provision for loan losses	15,069		11,341		28,800		22,089

Noninterest income
Service charges on deposits	1,264		1,091		2,486		2,590
Mortgage fee income	3,005		1,827		7,000		3,089
Gain on sale of SBA loans	1,263		46		2,735		255
Gain on sale of securities	141		—		137		293
Interchange fees	1,667		1,250		3,197		2,283
BOLI Income	222		160		430		311

Other	189		469		367		583
Total noninterest income	7,751		4,843		16,352		9,404

Noninterest expense
Salaries and employee benefits	10,126		7,729		20,081		15,227
Occupancy and equipment	1,245		1,316		2,571		2,634
Acquisition related expenses	865		220		1,040		507
Information technology expenses	1,856		1,380		3,448		2,696

Professional fees	690		480		1,177		862
Advertising and public relations	566		385		1,146		1,020
Communications	308		229		527		420

FHLB prepayment penalty	—		276		—		276
Other	1,809		1,360		3,229		3,111
Total noninterest expense	17,465		13,375		33,219		26,753
Income before income taxes	5,355		2,809		11,933		4,740
Income taxes	1,358		595		3,016		923
Net income	$	3,997	$	2,214	$	8,917	$	3,817
Earnings per common share:
Basic	$	0.42	$	0.23	$	0.94	$	0.40
Diluted	0.42		0.23		0.94		0.40
Dividends declared per share	0.10		0.10		0.21		0.20
Weighted average common shares outstanding:
Basic	9,498,783		9,498,783		9,498,783		9,498,783
Diluted	9,498,783		9,498,783		9,498,783		9,498,783

See accompanying notes to consolidated financial statements (unaudited).

COLONY BANKCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (unaudited)


	Three Months Ended				Six Months Ended
(in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Net income	$	3,997	$	2,214	$	8,917	$	3,817
Other comprehensive income:
Unrealized (losses) gains on securities arising during the period	629		2,195		(5,851)		8,697
Tax effect	(146)		(461)		1,375		(1,827)
Realized gains on sale of available for sale securities	(141)		—		(137)		(293)
Tax effect	33		—		32		62
Change in unrealized (losses) gains on securities available for sale, net of reclassification adjustment and tax effects	375		1,734		(4,581)		6,639
Comprehensive income	$	4,372	$	3,948	$	4,336	$	10,456

See accompanying notes to consolidated financial statements (unaudited).

COLONY BANKCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity (unaudited)


(in thousands, except per share data)	Common Stock
Three Months Ended	Shares	Amount		Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance, March 31, 2021	9,499	$	9,499	$	43,224	$	88,939	$	1,825	$	143,487
Change in net unrealized gains on securities available for sale, net of reclassification adjustment and tax effects	—	—		—		—		375		375
Dividends on common shares ($0.1025 per share)	—	—		—		(973)		—		(973)

Stock-based compensation expense	—	—		8		—		—		8
Net income	—	—		—		3,997		—		3,997
Balance, June 30, 2021	9,499	$	9,499	$	43,232	$	91,963	$	2,200	$	146,894

Balance, March 31, 2020	9,499	$	9,499	$	43,675	$	77,631	$	5,267	$	136,072
Change in net unrealized gains on securities available for sale, net of reclassification adjustment and tax effects	—	—		—		—		1,734		1,734
Dividends on common shares ($0.10 per share)	—	—		—		(950)		—		(950)
Goodwill adjustment	—	—		(485)		—		—		(485)
Stock-based compensation expense	—	—		9		—		—		9
Net income	—	—		—		2,214		—		2,214
Balance, June 30, 2020	9,499	$	9,499	$	43,199	$	78,895	$	7,001	$	138,594

See accompanying notes to consolidated financial statements (unaudited).

COLONY BANKCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity (unaudited)


(in thousands, except per share data)	Common Stock
Six Months Ended	Shares		Amount		Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance, December 31, 2020	9,499		$	9,499	$	43,215	$	84,993	$	6,781	$	144,488
Change in net unrealized losses on securities available for sale, net of reclassification adjustment and tax effects	—		—		—		—		(4,581)		(4,581)
Dividends on common shares ($0.21 per share)	—		—		—		(1,947)		—		(1,947)

Stock-based compensation expense	—		—		17		—		—		17
Net income	—		—		—		8,917		—		8,917
Balance, June 30, 2021	9,499		$	9,499	$	43,232	$	91,963	$	2,200	$	146,894

Balance, December 31, 2019	$	9,499	$	9,499	$	43,667	$	76,978	$	362	$	130,506
Change in net unrealized gains on securities available for sale, net of reclassification adjustment and tax effect	—		—		—		—		6,639		6,639
Dividends on common shares ($0.20 per share)	—		—		—		(1,900)		—		(1,900)
Goodwill adjustment	—		—		(485)		—		—		(485)
Stock-based compensation expense	—		—		17		—		—		17
Net income	—		—		—		3,817		—		3,817
Balance, June 30, 2020	9,499		$	9,499	$	43,199	$	78,895	$	7,001	$	138,594

COLONY BANKCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)


	Six Months Ended
(in thousands)	June 30, 2021		June 30, 2020
Operating Activities
Net income	$	8,917	$	3,817
Adjustments reconciling net income to net cash provided by operating activities:
Provision for loan losses	500		4,156
Depreciation, amortization, and accretion	3,231		2,042
Share-based compensation expense	17		17
Net change in servicing asset	(485)		(46)
Gain on sales of securities	(137)		(293)
Gain on sales of SBA loans	(2,735)		(255)
Gain on sales of other real estate owned	(36)		—
(Recovery)/Writedown on other real estate owned	80		(98)
Loss on sales of premises & equipment	—		104

Originations of loans held for sale	(207,531)		(83,007)
Proceeds from sales of loans held for sale	231,742		76,802
Change in bank-owned life insurance	(258)		(334)
Deferred tax benefit	(518)		—
Change in other assets	2,261		(2,165)
Change in other liabilities	(760)		2,651
Net cash provided by operating activities	34,288		3,391
Investing Activities
Purchases of investment securities available for sale	(166,995)		(79,988)
Proceeds from maturities, calls, and paydowns of investment securities available for sale	53,620		46,302
Proceeds from sales of investment securities available for sale	17,559		15,314

Change in loans, net	36,671		(147,129)
Purchase of premises and equipment	(1,764)		(2,011)
Proceeds from sales of other real estate owned	837		1,125

Redemption of Federal Home Loan Bank Stock	593		334


Net cash used in investing activities	(59,479)		(166,053)
Financing Activities
Change in noninterest-bearing customer deposits	66,678		96,215
Change in interest-bearing customer deposits	30,509		31,801
Dividends paid for common stock	(1,947)		(1,900)
Proceeds from Paycheck Protection Program Liquidity Fund	—		134,500
Repayment on Paycheck Protection Program Liquidity Fund	(106,789)		—
Repayments on Federal Home Loan Bank Advances	—		(24,500)
Proceeds from Federal Home Loan Bank Advances	—		14,000
Repayments on Other borrowings	(500)		(500)

Net cash provided by (used in) financing activities	(12,049)		249,616
Net (decrease) increase in cash and cash equivalents	(37,240)		86,954
Cash and cash equivalents at beginning of period	183,506		104,092
Cash and cash equivalents at end of period	$	146,266	$	191,046

COLONY BANKCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(UNAUDITED)

(DOLLARS IN THOUSANDS)


	Six Months Ended
	June 30, 2021		June 30, 2020
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	2,377	$	5,179
Cash paid during the period for income taxes	3,600		—
Noncash Investing and Financing Activities
Goodwill adjustment	—		485
Acquisition of real estate through foreclosure	145		1,476

See accompanying notes to consolidated financial statements (unaudited).

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1) Summary of Significant Accounting Policies

Presentation

Colony Bankcorp, Inc. (the “Company”) is a bank holding company located in Fitzgerald, Georgia. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Colony Bank, Fitzgerald, Georgia (the “Bank”). The “Company” or “our,” as used herein, includes Colony Bank, except where the content requires otherwise.

In July 2019, a new subsidiary of the Company was incorporated under the name Colony Risk Management, Inc. 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.

All adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary for fair presentation of the interim consolidated financial statements, have been included and fairly and accurately present the financial position, results of operations and cash flows of the Company. All significant intercompany accounts have been eliminated in consolidation.

The accounting and reporting policies of the Company conform to generally accepted accounting principles and practices utilized in the commercial banking industry for interim financial information and Regulation S-X. Accordingly, the accompanying unaudited interim consolidated financial statements do not include all of the information or notes required for complete financial statements.

The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results which may be expected for the year ending December 31, 2021. These statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 10-K”).

Nature of Operations

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

Use of Estimates

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

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to statement presentations selected for 2021. Such reclassifications have not materially affected previously reported stockholders’ equity or net income.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Concentrations of Credit Risk

Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions. The Company has a concentration in real estate loans as well as a geographic concentration that could pose an adverse credit risk. At June 30, 2021, approximately 82% 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. Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis.

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

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

Changes in Accounting Principles and Effects of New Accounting Pronouncements

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 is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update removes several exceptions related to intraperiod tax allocation when there is a loss from continuing operations and income from other items, foreign subsidiaries becoming equity method investments and vice versa, and calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The guidance also amends requirements related to franchise tax that is partially based on income, a step up in the tax basis of goodwill, allocation of consolidated tax expense to a legal entity not subject to tax in its separate financial statements, the effects of enacted changes in tax laws and other minor codification improvements regarding employee stock ownership plans and investments in qualified affordable housing projects. For public entities, this guidance is effective for fiscal years beginning after December 15, 2020. The Company adopted this standard as of January 1, 2021. The adoption of this standard did not have a material impact on the consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force). This update clarifies whether an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative and how to account for certain forward contracts and purchased options to purchase securities. For public entities, this guidance is effective for fiscal years beginning after December 15, 2020. The Company adopted this standard as of January 1, 2021. The adoption of this standard did not have a material impact on the consolidated financial statements.

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"). ASU 2020-04 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. The amendments are effective for the Company as of March 12, 2020 through December 31, 2022. The provisions of ASU 2020-04 did not have a material impact on the consolidated financial statements.

Operating, Accounting and Reporting Considerations Related to COVID-19

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The COVID-19 pandemic has negatively impacted the global economy, including the Company’s primary metropolitan markets. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act initially provided approximately $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. The CARES Act was later amended to provide additional funding and to make additional changes to the programs it implemented. Some of the provisions applicable to the Company include, but are not limited to:

•Accounting for Loan Modifications - The CARES Act provides that financial institutions may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise by categorized as a troubled debt restructure (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

•Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA.

Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

•Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., three months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment, as long as such modifications are (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the national emergency declaration or (b) December 31, 2020.

•Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due reporting during the period of the deferral.

•Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

As such, beginning in late March 2020, the Company provided relief programs consisting primarily of 90-day payment deferral relief of principal and interest to borrowers negatively impacted by COVID-19 and has accounted for these loan modifications in accordance with ASC 310-40. In addition, the Company also provided principal only payment deferral relief to borrowers of which interest income has been recognized during the deferment period on these interest-only loans.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(2) Investment Securities

The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses are summarized as follows:


(dollars in thousands)
June 30, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale:

U.S. agency	18,234		51		(113)		18,172

State, county & municipal securities	82,805		688		(1,090)		82,403
Corporate debt securities	4,750		20		—		4,770
Other securities	8,058		—		(20)		8,038
Mortgage-backed securities	352,894		5,303		(1,866)		356,331
	$	466,741	$	6,062	$	(3,089)	$	469,714

December 31, 2020
Securities Available for Sale:
U.S. treasury securities	$	245	$	—	$	—	$	245
U.S. agency	1,000		4		—		1,004
State, county & municipal securities	61,298		1,155		(65)		62,388
Corporate debt securities	4,250		1		(1)		4,250
Mortgage-backed securities	305,438		7,837		(348)		312,927
	$	372,231	$	8,997	$	(414)	$	380,814

The amortized cost and fair value of investment securities as of June 30, 2021, by contractual maturity, are shown hereafter. Expected maturities may differ from contractual maturities for certain investments because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This is often the case with mortgage-backed securities, which are disclosed separately in the table below.


	Securities Available for Sale
(dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	4,058	$	4,038
Due after one year through five years	1,897		1,937
Due after five years through ten years	44,757		44,615
Due after ten years	63,135		62,793
	$	113,847	$	113,383

Mortgage-backed securities	352,894		356,331
	$	466,741	$	469,714

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Proceeds from the sale of investment securities totaled $17.6 million and $15.3 million for the six months ended June 30, 2021 and 2020, respectively. The sale of investment securities for the six months ended June 30, 2021 and 2020 resulted in gross realized gains of $209,000 and $355,000 and losses of $72,000 and $62,000, respectively.

Investment securities having a carrying value approximating $113.5 million and $126.5 million were pledged to secure public deposits and for other purposes as of June 30, 2021 and December 31, 2020, respectively.

Information pertaining to securities with gross unrealized losses at June 30, 2021 and December 31, 2020 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:


	Less Than 12 Months				12 Months or Greater				Total
(dollars in thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
June 30, 2021
U.S. agency	$	11,992	$	(113)	$	—	$	—	$	11,992	$	(113)
State, county & municipal securities	40,321		(1,081)		593		(9)		40,914		(1,090)
Corporate debt securities	1,750		—		—		—		1,750		—
Other securities	4,058		(20)		—		—		4,058		(20)
Mortgage-backed securities	126,644		(1,637)		6,042		(229)		132,686		(1,866)
	$	184,765	$	(2,851)	$	6,635	$	(238)	$	191,400	$	(3,089)

December 31, 2020
State, county & municipal securities	$	8,282	$	(65)	$	—	$	—	$	8,282	$	(65)
Corporate debt securities	999		(1)		—		—		999		(1)
Mortgage-backed securities	28,835		(77)		3,949		(271)		32,784		(348)
	$	38,116	$	(143)	$	3,949	$	(271)	$	42,065	$	(414)

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 June 30, 2021, 94 securities have unrealized losses. 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.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(3) Loans

The following table presents the composition of loans segregated by legacy and purchased loans and by class of loans, as of June 30, 2021 and December 31, 2020. Purchased loans are defined as loans that were acquired in bank acquisitions.


	June 30, 2021
(dollars in thousands)	Legacy Loans		Purchased Loans		Total
Construction, land and land development	$	112,843	$	6,097	$	118,940
Other commercial real estate	514,225		31,658		545,883
Total commercial real estate	627,068		37,755		664,823
Residential real estate	159,527		10,646		170,173
Commercial, financial, & agricultural (*)	161,295		6,422		167,717
Consumer and other	17,974		1,931		19,905
Total Loans	$	965,864	$	56,754	$	1,022,618


	December 31, 2020
(dollars in thousands)	Legacy Loans		Purchased Loans		Total
Construction, land and land development	$	109,577	$	11,516	$	121,093
Other commercial real estate	477,445		42,946		520,391
Total commercial real estate	587,022		54,462		641,484
Residential real estate	167,714		15,307		183,021
Commercial, financial, & agricultural (*)	200,800		12,580		213,380
Consumer and other	19,037		2,581		21,618
Total Loans	$	974,573	$	84,930	$	1,059,503

(*) Includes $58.8 million and $101.1 million in PPP loans at June 30, 2021 and December 31, 2020

Commercial and industrial 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.

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 an eight category risk grading system to assign a risk grade to each loan in the portfolio. The following is a description of the general characteristics of the grades:

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

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

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

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

•Grades 7 and 8 – These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively. In practice, any loan with these grades would be for a very short period of time, of which the Company has no loans with these assigned grades at June 30, 2021. Management manages the Company’s problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

The following table presents the loan portfolio, excluding purchased loans, by credit quality indicator (risk grade) as of June 30, 2021 and December 31, 2020. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.


(dollars in thousands)	Pass		Special Mention		Substandard		Total Loans
June 30, 2021
Construction, land and land development	$	102,379	$	2,812	$	7,652	$	112,843
Other commercial real estate	478,547		19,132		16,546		514,225
Total commercial real estate	580,926		21,944		24,198		627,068
Residential real estate	150,077		2,787		6,663		159,527
Commercial, financial, & agricultural	157,574		2,139		1,582		161,295
Consumer and other	17,726		117		131		17,974
Total Loans	$	906,303	$	26,987	$	32,574	$	965,864

(dollars in thousands)
December 31, 2020
Construction, land and land development	$	99,430	$	2,940	$	7,207	$	109,577
Other commercial real estate	430,515		33,579		13,351		477,445
Total commercial real estate	529,945		36,519		20,558		587,022
Residential real estate	157,927		3,855		5,932		167,714
Commercial, financial, & agricultural	196,749		2,870		1,181		200,800
Consumer and other	18,734		124		179		19,037
Total Loans	$	903,355	$	43,368	$	27,850	$	974,573

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the purchased loan portfolio by credit quality indicator (risk grade) as of June 30, 2021 and December 31, 2020. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes. For the period ending June 30, 2021, the Company did not have any loans classified as “doubtful” or a “loss”.


(dollars in thousands)	Pass		Special Mention		Substandard		Total Loans
June 30, 2021
Construction, land and land development	$	5,936	$	161	$	—	$	6,097
Other commercial real estate	27,392		3,403		863		31,658
Total commercial real estate	33,328		3,564		863		37,755
Residential real estate	10,258		299		89		10,646
Commercial, financial, & agricultural	6,076		—		346		6,422
Consumer and other	1,832		3		96		1,931
Total Loans	$	51,494	$	3,866	$	1,394	$	56,754

December 31, 2020
Construction, land and land development	$	11,275	$	241	$	—	$	11,516
Other commercial real estate	40,825		53		2,068		42,946
Total commercial real estate	52,100		294		2,068		54,462
Residential real estate	14,909		312		86		15,307
Commercial, financial, & agricultural	10,198		1,803		579		12,580
Consumer and other	2,364		25		192		2,581
Total Loans	$	79,571	$	2,434	$	2,925	$	84,930

A loan’s risk grade is assigned at loan origination and is based on the financial strength of the borrower and the type of collateral. Loan risk grades are subject to review at various times throughout the year as part of the Company’s ongoing loan review process. Loans with an assigned risk grade of six or below and an outstanding balance of $250,000 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

In assessing the overall economic condition of the markets in which it operates, the Company monitors the unemployment rates for its major service areas. The unemployment rates are reviewed on a quarterly basis as part of the allowance for loan loss determination.

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 guidelines. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the aging of the amortized cost basis in legacy loans by aging category and accrual status as of June 30, 2021 and December 31, 2020:


(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
June 30, 2021
Construction, land and land development	$	25	$	—	$	25	$	47	$	112,771	$	112,843
Other commercial real estate	161		—		161		4,870		509,194		514,225
Total commercial real estate	186		—		186		4,917		621,965		627,068
Residential real estate	383		—		383		3,237		155,907		159,527
Commercial, financial, & agricultural	164		—		164		654		160,477		161,295
Consumer and other	15		—		15		88		17,871		17,974
Total Loans	$	748	$	—	$	748	$	8,896	$	956,220	$	965,864

December 31, 2020
Construction, land and land development	$	1,314	$	—	$	1,314	$	80	$	108,183	$	109,577
Other commercial real estate	229		—		229		2,545		474,671		477,445
Total commercial real estate	1,543		—		1,543		2,625		582,854		587,022
Residential real estate	667		—		667		2,873		164,174		167,714
Commercial, financial, & agricultural	150		—		150		1,010		199,640		200,800
Consumer and other	48		—		48		102		18,887		19,037
Total Loans	$	2,408	$	—	$	2,408	$	6,610	$	965,555	$	974,573

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the aging of the amortized cost basis in purchased loans by aging category and accrual status as of June 30, 2021 and December 31, 2020:


(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
June 30, 2021
Construction, land and land development	$	—	$	—	$	—	$	—	$	6,097	$	6,097
Other commercial real estate	—		—		—		87		31,571		31,658
Total commercial real estate	—		—		—		87		37,668		37,755
Residential real estate	—		—		—		79		10,567		10,646
Commercial, financial, & agricultural	—		—		—		47		6,375		6,422
Consumer and other	—		—		—		96		1,835		1,931
Total Loans	$	—	$	—	$	—	$	309	$	56,445	$	56,754

December 31, 2020
Construction, land and land development	$	—	$	—	$	—	$	117	$	11,399	$	11,516
Other commercial real estate	544		—		544		2,068		40,334		42,946
Total commercial real estate	544		—		544		2,185		51,733		54,462
Residential real estate	15		—		15		85		15,207		15,307
Commercial, financial, & agricultural	125		—		125		55		12,400		12,580
Consumer and other	—		—		—		193		2,388		2,581
Total Loans	$	684	$	—	$	684	$	2,518	$	81,728	$	84,930

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table details impaired loan data, including purchased credit impaired loans, as of June 30, 2021.


	June 30, 2021
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With No Related Allowance Recorded
Construction, land and land development	$	6,968	$	6,967	$	—	$	7,143
Commercial real estate	7,383		6,510		—		9,245
Residential real estate	1,036		1,036		—		1,075
Commercial, financial & agriculture	85		85		—		43
Consumer & other	—		—		—		—
	15,472		14,598		—		17,506

With An Allowance Recorded
Construction, land and land development	—		—		—		—
Commercial real estate	5,283		5,283		1,350		5,619
Residential real estate	1,130		1,130		224		1,197
Commercial, financial & agriculture	—		—		—		132
Consumer & other	—		—		—		2
	6,413		6,413		1,574		6,950

Purchased Credit Impaired Loans
Construction, land and land development	115		91		—		85
Commercial real estate	863		862		38		415
Residential real estate	12		12		9		9
Commercial, financial & agriculture	55		47		4		43
Consumer & other	192		96		96		64
	1,237		1,108		147		616
Total
Construction, land and land development	7,083		7,058		—		7,228
Commercial real estate	13,529		12,655		1,388		15,279
Residential real estate	2,178		2,178		233		2,281
Commercial, financial & agriculture	140		132		4		218
Consumer & other	192		96		96		66
	$	23,122	$	22,119	$	1,721	$	25,072

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table details impaired loan data as of December 31, 2020.


	December 31, 2020
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
With No Related Allowance Recorded
Construction, land and land development	$	6,969	$	6,982	$	—	$	2,841
Commercial real estate	11,978		11,105		—		12,190
Residential real estate	1,140		1,122		—		2,142
Commercial, financial & agriculture	42		40		—		203
Consumer & other	—		—		—		—
	20,129		19,249		—		17,376

With An Allowance Recorded
Construction, land and land development	—		—		—		—
Commercial real estate	6,292		6,325		1,436		5,945
Residential real estate	1,274		1,230		226		703
Commercial, financial & agriculture	310		310		263		1,118
Consumer & other	—		—		—		—
	7,876		7,865		1,925		7,766
Purchased Credit Impaired Loans
Construction, land and land development	118		94		—		96
Commercial real estate	—		—		—		63
Residential real estate	14		11		4		13
Commercial, financial & agriculture	55		46		—		49
Consumer & other	192		96		81		113
	379		247		85		334
Total
Construction, land and land development	7,087		7,076		—		2,937
Commercial real estate	18,270		17,430		1,436		18,198
Residential real estate	2,428		2,363		230		2,858
Commercial, financial & agriculture	407		396		263		1,370
Consumer & other	192		96		81		113
	$	28,384	$	27,361	$	2,010	$	25,476

Interest income recorded on impaired loans during the three and six months ended June 30, 2021 and 2020 were $325,000, , $563,000, $104,000 and $154,000 respectively.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Troubled Debt Restructurings

The restructuring of a loan is considered a troubled debt restructuring ("TDRs") if both the borrower is experiencing financial difficulties and the Company has granted a concession to the terms of the loan. Concessions may include interest rate reductions to below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

As discussed in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2020, which are included in the Company’s 2020 Form 10-K, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of June 30, 2021. The Company had one construction, land and land development loan restructured during the six month period ended June 30, 2021 with outstanding principal balance of $511,000. 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 loans that subsequently defaulted during the six months ended June 30, 2021 and 2020.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(4) Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the six month periods ended June 30, 2021 and June 30, 2020. 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
Three Months Ended June 30, 2021
Beginning Balance	$	1,053	$	7,128	$	2,411	$	1,666	$	435	$	12,693
Charge-offs	—		(36)		—		—		(32)		(68)
Recoveries	70		95		44		15		22		246
Provision	2		90		(182)		92		(2)		—
Ending balance	1,125		7,277		2,273		1,773		423		12,871

Six Months Ended June 30, 2021
Beginning Balance	$	1,013	$	6,880	$	2,278	$	1,713	$	243	$	12,127
Charge-offs	—		(36)		—		(15)		(43)		(94)
Recoveries	85		95		110		18		30		338
Provision	27		338		(115)		57		193		500
Ending balance	1,125		7,277		2,273		1,773		423		12,871


Period end amount allocated to
Individually evaluated for impairment	—		1,350		224		—		—		1,574
Collectively evaluated for impairment	1,125		5,889		2,040		1,769		327		11,150
Purchase credit impaired	—		38		9		4		96		147
Ending Balance	1,125		7,277		2,273		1,773		423		12,871

Loans
Individually evaluated for impairment	6,968		11,793		2,166		85		—		21,012
Collectively evaluated for impairment	111,881		533,228		167,995		167,585		19,809		1,000,498
Purchase credit impaired	91		862		12		47		96		1,108
Ending balance	$	118,940	$	545,883	$	170,173	$	167,717	$	19,905	$	1,022,618

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


(dollars in thousands)	Construction, land and land development		Other commercial real estate		Residential real estate		Commercial, financial & agricultural		Consumer and other		Total
Three Months Ended June 30, 2020
Beginning Balance	$	354	$	4,821	$	1,203	$	1,780	$	226	$	8,384
Charge-offs	(4)		—		(16)		—		(364)		(384)
Recoveries	12		21		6		19		31		89
Provision	397		869		438		114		382		2,200
Ending balance	759		5,711		1,631		1,913		275		10,289
Six Months Ended June 30, 2020
Beginning Balance	$	215	$	3,908	$	980	$	1,657	$	103	$	6,863
Charge-offs	(4)		(30)		(80)		(68)		(715)		(897)
Recoveries	25		26		10		20		86		167
Provision	523		1,807		721		304		801		4,156
Ending balance	759		5,711		1,631		1,913		275		10,289

December 31, 2020
Period end amount allocated to
Individually evaluated for impairment	—		1,436		226		263		—		1,925
Collectively evaluated for impairment	1,013		5,444		2,048		1,450		162		10,117
Purchase credit impaired	—		—		4		—		81		85
Ending Balance	1,013		6,880		2,278		1,713		243		12,127

Loans
Individually evaluated for impairment	6,982		17,430		2,352		350		—		27,114
Collectively evaluated for impairment	114,017		502,961		180,658		212,984		21,522		1,032,142
Purchase credit impaired	94		—		11		46		96		247
Ending Balance	$	121,093	$	520,391	$	183,021	$	213,380	$	21,618	$	1,059,503

Management continually evaluates the allowance for loan losses methodology seeking to refine and enhance this process as appropriate, and it is likely that the methodology will continue to evolve over time.

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

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5) 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. 2016-02 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 2027. All 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

June 30, 2021

December 31, 2020

Assets

Operating lease right-of-use assets

Other assets

324

511

Liabilities

Operating lease liabilities

Other liabilities

332

517

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, 2020, the rate for the remaining lease term as of January 1, 2020 was used.

Operating lease cost was $39,000, $64,000, $98,000, and $116,000 for the three and six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, the weighted average remaining lease term was 1.74 years and the weighted average discount rate was 1.34%.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table represents the future maturities of the operating lease liabilities and other lease information as of June 30, 2021.


(dollars in thousands)			Lease Liability
2021			$	165
2022			116
2023			54



Total lease payments			$	335
Less: interest			(3)
Present value of lease liabilities			$	332

Supplemental lease information:
Cash paid for amounts included in the measurement of lease liabilities:	June 30, 2021		June 30, 2020
Operating cash flows from operating leases (cash payments)	$	92	$	116
Operating cash flows from operating leases (lease liability addition)	—		110
Operating lease right-of-use assets obtained in exchange for leases entered into during the period	170		196

(6) Borrowings

The following table presents information regarding the Company’s outstanding borrowings at June 30, 2021 and December 31, 2020:


(dollars in thousands)	June 30, 2021		December 31, 2020
Federal Home Loan Bank advances	$	22,500	$	22,500
Paycheck Protection Program (PPP) Liquidity Facility	—		106,789
Other borrowings	37,292		37,792
	$	59,792	$	167,081

Advances from the Federal Home Loan Bank (“FHLB”) have maturities ranging from 2021 to 2029 and interest rates ranging from 1.05% to 3.51%. 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. At June 30, 2021, the lendable collateral of those loans pledged is $88.6 million. At June 30, 2021, the Company had remaining credit availability from the FHLB of $426.5 million. The Company may be required to pledge additional qualifying collateral in order to utilize the full amount of the remaining credit line.

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 June 30, 2021, the outstanding balance of the term note and the line of credit totaled $7.8 million and $5.3 million, respectively.

On April 20, 2020 the Company completed a Paycheck Protection Program Liquidity Facility (PPPLF) credit arrangement with the Federal Reserve. This line of credit was secured by PPP loans and bore a fixed interest rate of 0.35% with a maturity date equal to the maturity date of the related PPP loans, with the PPP loans maturing either two or five years from the origination date of the PPP loan. An advance of $140.7 million through the PPPLF was used for the funding of PPP loans. The Company's PPPLF was paid off in second quarter of 2021.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The aggregate stated maturities of other borrowed money at June 30, 2021 are as follows:


(dollars in thousands)
Year	Amount

2021	$	5,313
2022	—
2023	3,000
2024	7,750
2025	4,500
2026 and After	39,229
PPPLF	—
	$	59,792

The Company also has available federal funds lines of credit with various financial institutions totaling $41.5 million, none of which were outstanding at June 30, 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 June 30, 2021, the Company had borrowing capacity available under this arrangement, with no outstanding balances. The Company would be required to pledge certain available-for-sale investment securities as collateral under this agreement.

The Company's debentures issued in connection with trust preferred securities are recorded as subordinated debentures on the consolidated balance sheets, but, subject to certain limitations, qualify as Tier 1 capital for regulatory capital purposes. At June 30, 2021 and December 31, 2020, $24.2 million of debentures underlying trust preferred securities were outstanding. The proceeds from the offerings were used to fund certain acquisitions, pay off holding company debt and inject capital into the bank subsidiary. The debentures underlying the trust preferred securities require quarterly interest payments.

(8) Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted earnings per share reflects the potential dilution of restricted stock.

The following table presents earnings per share for the three and six months ended June 30, 2021 and 2020.


(in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Numerator
Net income available to common stockholders	$	3,997	$	2,214	$	8,917	$	3,817

Denominator
Weighted average number of common shares
Outstanding for basic earnings per common share	9,499		9,499		9,499		9,499




Weighted-average number of shares outstanding for diluted earnings per common share	9,499		9,499		9,499		9,499

Earnings per share - basic	$	0.42	$	0.23	$	0.94	$	0.40

Earnings per share - diluted	$	0.42	$	0.23	$	0.94	$	0.40

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(8) Commitments and Contingencies

Credit-Related Financial Instruments. The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include cash or cash equivalents, negotiable instruments, real estate, accounts receivable, inventory, oil, gas and mineral interests, property, plant, and equipment.

At June 30, 2021 and December 31, 2020 the following financial instruments were outstanding whose contract amounts represent credit risk:


	Contract Amount
(dollars in thousands)	June 30, 2021		December 31, 2020
Loan commitments	$	238,679	$	198,029
Letters of credit	5,200		3,634

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 the Company and the Bank. As of June 30, 2021, the aggregate liabilities, if any, arising from such proceedings would not, in the opinion of management, have a material adverse effect on the Company’s consolidated financial position.

(9) 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 the Company and the Bank’s financial instruments are detailed hereafter. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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.

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 as 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, at cost– The fair value of Federal Home Loan Bank stock approximates carrying value and is 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.

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. Most 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 2. The fair value of deposits 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.

Paycheck Protection Liquidity Facility– The fair value of Paycheck Protection Liquidity Facility is estimated by discounting the future cash flows using the current rates at which similar advances would be obtained. Paycheck Protection Liquidity Facility 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.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 as of June 30, 2021 and December 31, 2020 are as follows:


	Fair Value Measurements
(dollars in thousands)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
June 30, 2021
Assets
Cash and short-term investments	$	146,266	$	146,266	$	146,266	$	—	$	—
Investment securities available for sale	469,714		469,714		—		469,714		—
Other investments, at cost	2,703		2,703		—		2,703		—
Loans held for sale	30,910		30,910		—		30,910		—
Loans, net	1,009,747		1,021,651		—		—		1,021,651

Liabilities
Deposits	1,542,214		1,542,836		—		1,542,836		—

Federal Home Loan Bank advances	22,500		21,257		—		21,257		—
Other borrowings	37,292		37,267		—		37,267		—


	Fair Value Measurements
(dollars in thousands)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
December 31, 2020
Assets
Cash and short-term investments	$	183,506	$	183,506	$	183,506	$	—	$	—
Investment securities available for sale	380,814		380,814		245		380,569		—
Other investments, at cost	3,296		3,296		—		3,296		—
Loans held for sale	52,386		52,386		—		52,386		—
Loans, net	1,047,376		1,063,785		—		—		1,063,785

Liabilities
Deposits	1,445,027		1,445,984		—		1,445,984		—
Paycheck Protection Program Liquidity Facility	106,789		106,789		—		106,789
Federal Home Loan Bank advances	22,500		20,817		—		20,817		—
Other borrowings	37,792		37,792		—		37,792		—

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.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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.

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:

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

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

Other Real Estate Owned – 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% 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.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020. 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		(Level 1)		(Level 2)		(Level 3)
June 30, 2021
Nonrecurring
Collateral dependent impaired loans	$	4,839	$	—	$	—	$	4,839
Other real estate owned	270		—		—		270
Total nonrecurring assets	$	5,109	$	—	$	—	$	5,109


			Fair Value Measurements at Reporting Date Using
(dollars in thousands)	Total Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2020
Nonrecurring
Collateral dependent impaired loans	$	5,939	$	—	$	—	5,939
Other real estate owned	1,006		—		—		1,006
Total nonrecurring assets	$	6,945	$	—	$	—	$	6,945

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

The following table presents 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 June 30, 2021 and December 31, 2020. This table is comprised primarily of collateral dependent impaired loans and other real estate owned:


(dollars in thousands)	June 30, 2021		Valuation Techniques	Unobservable Inputs	Range Weighted Avg
Collateral dependent impaired loans	$	4,839	Appraised Value	Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell	25	%	100	%
Other real estate owned	270		Appraised Value/Comparable Sales	Discounts to reflect current market conditions and estimated costs to sell	—	%	20	%


(dollars in thousands)	December 31, 2020		Valuation Techniques	Unobservable Inputs	Range Weighted Avg
Collateral dependent impaired loans	$	5,939	Appraised Value	Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell	25	%	100	%
Other real estate owned	1,006		Appraised Value/Comparable Sales	Discounts to reflect current market conditions and estimated costs to sell	—	%	20	%

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The table below 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 six months ended June 30, 2020.


	Available for Sale Securities
	June 30, 2020
Balance, Beginning	$	2,022
Transfers out of Level 3	—
Sales	—
Paydowns	(16)
Realized Loss on Sale of Security	—
Unrealized gains (losses) included in Other Comprehensive Income	—
Balance, Ending	$	2,006

The Company’s policy is to recognize transfers in and transfers out of levels 1, 2 and 3 as of the end of a reporting period. There were no transfers of securities between levels for the six months ended June 30, 2020.

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(10) 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. Information reported internally for performance assessment follows. The following tables present information reported internally for performance assessment for the three and six months ended June 30, 2021 and 2020:


(dollars in thousands)	Bank		Mortgage Banking		Small Business Specialty Lending Division		Totals
Three months ended June 30, 2021
Net Interest Income	$	14,864	$	123	$	82	$	15,069
Provision for Loan Losses	—		—		—		—
Noninterest Income	3,354		2,997		1,400		7,751
Noninterest Expenses	13,366		2,887		1,212		17,465
Income Taxes	1,241		60		57		1,358
Segment Profit	$	3,611	$	173	$	213	$	3,997

Segments Assets at June 30, 2021	$	1,710,345	$	25,149	$	20,024	$	1,755,518

Full time employees at June 30, 2021	291		51		23		365


(dollars in thousands)	Bank		Mortgage Banking		Small Business Specialty Lending Division		Totals
Three months ended June 30, 2020
Net Interest Income	$	13,440	$	82	$	19	$	13,541
Provision for Loan Losses	2,200		—		—		2,200
Noninterest Income	2,901		1,821		121		4,843
Noninterest Expenses	10,158		1,697		1,520		13,375
Income Taxes	842		43		(290)		595
Segment Profit (Loss)	$	3,141	$	163	$	(1,230)	$	2,214

Segments Assets at December 31, 2020	$	1,709,696	$	50,266	$	4,012	$	1,763,974

Full time employees at June 30, 2020	321		40		13		374

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


	Bank		Mortgage Banking		Small Business Specialty Lending Division		Totals
Six months ended June 30, 2021
Net Interest Income	$	28,797	$	291	$	212	$	29,300
Provision for Loan Losses	500		—		—		500
Noninterest Income	6,384		6,983		2,985		16,352
Noninterest Expenses	25,298		5,680		2,241		33,219
Income Taxes	2,401		414		201		3,016
Segment Profit	$	6,982	$	1,180	$	755	$	8,917


	Bank		Mortgage Banking		Small Business Specialty Lending Division		Totals
Six months ended June 30, 2020
Net Interest Income	$	26,096	$	116	$	33	$	26,245
Provision for Loan Losses	4,156		—		—		4,156
Noninterest Income	5,950		3,074		380		9,404
Noninterest Expenses	21,825		2,892		2,036		26,753
Income Taxes	1,210		54		(341)		923
Segment Profit (Loss)	$	4,855	$	244	$	(1,695)	$	3,817

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(11) Regulatory Capital Matters

The amount of dividends payable to the parent company from the subsidiary bank is limited by various banking regulatory agencies. Upon approval by regulatory authorities, the Bank may pay cash dividends to the parent company in excess of regulatory limitations.

The Company is subject to various regulatory capital requirements administered by 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 classifications 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 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of June 30, 2021, 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 June 30, 2021, 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 events or conditions since prior notification of capital adequacy from the regulators that have changed the institution’s category.

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

The Bank participated in the PPP and the PPPLF to fund PPP Loans. In accordance with regulatory guidance, PPP loans pledged as collateral for PPPLF, and PPPLF advances, are excluded from leverage capital ratios. PPP loans will also carry a 0% risk-weight for risk-based capital rules. All PPPLF advances were repaid in full during the second quarter of 2021.

The Board of Governors of the Federal Reserve raised the threshold for determining applicable of the Small Bank Holding Company and Savings and Loan Company Policy Statement in August 2018 from $1 billion to $3 billion in consolidated total assets to provide regulatory burden relief, therefore, the Company is no longer subject to the minimum capital requirements on a consolidated basis.

The following table summarizes regulatory capital information as of June 30, 2021 and December 31, 2020 on a consolidated basis and for the subsidiary, as defined. Regulatory capital ratios for June 30, 2021 and December 31, 2020 were calculated

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

in accordance with the Basel III rules.


(dollars in thousands)	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2021
Total Capital to Risk-Weighted Assets
Consolidated	$	163,144	14.56	%	$	89,640	8.00	%	N/A		N/A
Colony Bank	163,639		14.99		87,332		8.00		$	109,165	10.00	%

Tier 1 Capital to Risk-Weighted Assets
Consolidated	150,273		13.41		67,236		6.00		N/A		N/A
Colony Bank	150,946		13.85		65,392		6.00		87,189		8.00

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated	126,773		11.31		50,440		4.50		N/A		N/A
Colony Bank	150,946		13.85		49,044		4.50		70,841		6.50

Tier 1 Capital to Average Assets
Consolidated	150,273		8.45		71,135		4.00		N/A		N/A
Colony Bank	150,946		8.84		68,301		4.00		85,377		5.00


(dollars in thousands)	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2020
Total Capital to Risk-Weighted Assets
Consolidated	$	155,447	13.78	%	$	90,245	8.00	%	N/A		N/A
Colony Bank	164,050		14.55		90,199		8.00		$	112,749	10.00	%

Tier 1 Capital to Risk-Weighted Assets
Consolidated	143,320		12.71		67,657		6.00		N/A		N/A
Colony Bank	151,923		13.48		67,622		6.00		90,162		8.00

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated	119,820		10.62		50,771		4.50		N/A		N/A
Colony Bank	151,923		13.48		50,716		4.50		73,257		6.50

Tier 1 Capital to Average Assets
Consolidated	143,320		8.49		67,524		4.00		N/A		N/A
Colony Bank	151,923		9.12		66,633		4.00		83,291		5.00

COLONY BANKCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(13) Subsequent Events

Effective August 1, 2021, the Company completed its acquisition (the “Merger”) of SouthCrest Financial Group, Inc. ("SouthCrest"), the holding company for SouthCrest Bank, N.A., pursuant to the Agreement and Plan of Merger, dated April 22, 2021 (the “Merger Agreement”). On August 1, 2021, SouthCrest was merged with and into the Company, and SouthCrest Bank, N.A. was merged with and into Colony Bank.

Pursuant to the terms of the Merger Agreement, each share of SouthCrest common and preferred stock was converted into the right to receive either $10.45 in cash or 0.7318 shares of the Company’s common stock, subject to customary proration and allocation procedures such that approximately 27.5% of SouthCrest shares were converted to cash consideration and the remaining 72.5% of SouthCrest shares were converted to Company common stock. Based on the Company’s closing stock price of $17.90 per share as of July 30, 2021, the last trading day prior to consummation of the Merger, the value of the merger consideration is estimated to be $96 million. In aggregate, the Company issued approximately 4.0 million shares of its common stock in the Merger.

Dividend

On July 22, 2021, the Board of Directors declared a quarterly cash dividend of $0.1025 per share, to be paid on its common stock on August 17, 2021, to shareholders of record as of the close of business on August 3, 2021.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion and analysis is to focus on significant changes in the financial condition of Colony Bankcorp, Inc. and our wholly owned subsidiary, Colony Bank, from December 31, 2020 through June 30, 2021 and on our results of operations for the three months ended June 30, 2021 and 2020. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto in the Company's 2020 Form 10-K, and information presented elsewhere in this Quarterly Report on Form 10-Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1.

Forward-looking Statements

This Quarterly Report on Form 10-Q 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, particularly with regard to developments related to the COVID-19 pandemic. 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 quarterly report and the following:

•business and economic conditions, particularly those affecting the financial services industry and our primary market areas;

•the economic impact of the COVID-19 pandemic on our business, including the impact of the actions taken by governmental authorities to try and contain the virus (including variants) or address the impact of the virus on the United States economy (including, without limitations, the CARES Act), 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;

•adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions related to the COVID-19 pandemic, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic, including, but not limited to, the PPP;

•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;

•credit and lending risks associated with our construction and development, commercial real estate, commercial and industrial and residential real estate loan portfolios;

•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;

•changes in interest rate environment, including changes to the federal funds rate, and competition in our markets may result in increased funding costs or reduced earning assets yields, thus reducing our margins and net interest income;

•our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses (“ALL”);

•the adequacy of our reserves (including ALL) and the appropriateness of our methodology for calculating such reserves;

•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;

•risks that our expected revenue synergies and cost savings from our recent acquisition of SouthCrest Financial Group, Inc. (“SouthCrest”) are not fully realized or may take longer than anticipated to be realized;

• failure to successfully integrate SouthCrest’s business with our business;

• the risk of lower than expected revenue following the acquisition of SouthCrest;

• our ability to manage the combined company’s growth following the acquisition of SouthCrest;

• the dilution caused by the Company’s issuance of additional shares of its common stock in connection with the acquisition of SouthCrest;

•our ability to increase our operating efficiency;

•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;

•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, 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;

•continued or increasing competition from other financial institutions, 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;

•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; and

•other risks and factors identified in our 2020 Form 10-K, and this Quarterly Report on Form 10-Q for the period ended June 30, 2021, and in any of the Company's subsequent reports filed with the SEC and available on its website at www.sec.gov.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. 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.

COVID-19 Pandemic

During March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic in response to the rapidly growing outbreak of the virus. COVID-19 has significantly impacted local, national and global economies due to stay-at-home orders and social distancing guidelines, and has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on March 27, 2020 as a $2 trillion legislative package. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The legislative package also includes extensive emergency funding for hospitals and providers. In addition to the

general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had and continue to have a material impact on our operations.

On December 27, 2020, the Economic Aid to Hard-Hit Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was signed into law, and authorized the SBA to reopen the PPP for first draw loans, as well as guarantee second draw PPP loans of up to $2 million for certain eligible borrowers that previously received a PPP loan. These loans carry a fixed rate of 1.00% and a term of five years, if not forgiven, in whole or in part. The loans are guaranteed by the SBA. The SBA pays the originating bank a processing fee based on the size of the loan.

On March 11, 2021, the American Rescue Plan Act of 2021 was enacted which primarily expanded and clarified eligibility for first and second draw PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness.

In response to the COVID-19 pandemic, the Company has prioritized the health and safety of its teammates and customers, and has taken protective measures such as implementing remote work arrangements to the full extent possible and by adjusting banking center hours and operational measures to promote social distancing, and it will continue to do so throughout the duration of the pandemic. At the same time, the Company is closely monitoring the effects of the COVID-19 pandemic on our loan and deposit customers, and is assessing the risks in our loan portfolio and working with our customers to reduce the pandemic’s impact on them while minimizing losses for the Company. In addition, the Company remains focused on improving shareholder value, managing credit exposure, challenging expenses, enhancing the customer experience and supporting the communities it serves.

We implemented loan programs to allow customers who are experiencing hardships from the COVID-19 pandemic to defer loan principal and interest payments for up to 90 days. The Small Business Administration ("SBA") has also guaranteed the principal and interest payments of all our SBA loan customers for six months.

In addition, we have been participating in the SBA Paycheck Protection Program (“PPP”) under CARES Act to help provide loans to our business customers in need. As of June 30, 2021, the Company has closed with the SBA $46.9 million of PPP loans related to Economic Aid Act. During the quarter ended June 30, 2021, $45.4 million in PPP loans related to CARES Act were forgiven. Loan fees collected related to these loans is approximately $3.6 million. In accordance with U.S. generally accepted accounting principles ("GAAP"), recognition of these fees was deferred and recognized over the life of the loans, with all fees to be recognized when the loan is repaid in full, including as a result of forgiveness.

Despite recent improvements in certain economic indicators, significant constraints to commerce remain in place, and significant uncertainty remains over the timing and scope of additional government stimulus packages, and the full economic impact resulting from the outcome of the November 2020 elections. The duration and extent of the downturn and speed of the related recovery on our business, customers and the economy as a whole remains uncertain.

SouthCrest Acquisition

On August 1, 2021, the Company completed its previously announced acquisition (the “Merger”) of SouthCrest Financial Group, Inc. (“SouthCrest”), a Georgia corporation and the parent holding company of SouthCrest Bank, N.A.

The Merger was completed pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated April 22, 2021, by and between the Company and SouthCrest. In accordance with the terms of the Merger Agreement, at the effective time, SouthCrest was merged with and into the Company, with the Company surviving the Merger. Immediately following the holding company Merger, SouthCrest Bank, N.A. was merged with and into Colony Bank, with Colony Bank as the surviving bank.

Pursuant to the terms of the Merger Agreement, each issued and outstanding share of SouthCrest common stock was converted into the right to receive either $10.45 in cash or 0.07318 shares of Colony common stock. In aggregate, Colony issued approximately 4.0 million shares of its common stock in the Merger.

Overview

The following discussion and analysis presents the more significant factors affecting the Company’s financial condition as of June 30, 2021 and December 31, 2020, and results of operations for each of the six month periods ended June 30, 2021 and 2020. 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.

At June 30, 2021, the Company had total consolidated assets of $1.8 billion, total loans of $1.0 billion, total deposits of $1.5 billion, and stockholders’ equity of $146.9 million. The Company reported net income of $8.9 million, or $0.94 per diluted share, for the first six months of 2021, compared to net income of $3.8 million, or $0.40 per diluted share, for the six months of 2020. The Company reported net income of $4.0 million, or $0.42 per diluted share, for the second quarter of 2021, compared to net income of $2.2 million, or $0.23 per diluted share, for the second quarter of 2020. The increase in net income for the three and six months ended June 30, 2021 was driven by a decrease in provision for loan loss and an increase in mortgage fee income, interchange fees and gain on sale of SBA loans.

Net interest income on a tax equivalent basis increased to $29.6 million for the first six months of 2021, compared to $26.3 million for the six months of 2020, due to a decrease in interest expense on deposits. The net interest margin increased to 3.57% for the six months ended June 30, 2021 from 3.53% for the same period in 2020. The reason for the decrease in net interest margin is primarily due to a decrease in yield on investments, which was offset by lower borrowing and deposit rates. Net interest income on a tax equivalent basis increased to $15.2 million for the second quarter of 2021, compared to $13.6 million for the second quarter of 2020, due to a decrease in interest expense on deposits. The net interest margin increased to 3.68% for the second quarter of 2021 from 3.46% for the same period in 2020. The reason for the increase in net interest margin is primarily due to a decrease in yield on borrowings and deposits, which was offset by lower yield on investments.

The provision for loan losses was $500,000 for the first six months of 2021, compared to $4.2 million for the first six months of 2020. The provision for loan losses was zero for the second quarter of 2021, compared to $2.2 million for the second quarter of 2020. Net recoveries for the first six months of 2021 were $244,000 compared to net charge-offs of $730,000 for the same period in 2020. Net recoveries for the second quarter of 2021 were $178,000 compared to net charge-offs of $295,000 for the same period in 2020. As of June 30, 2021, Colony’s allowance for loan losses was $12.9 million, or 1.26% of total loans, compared to $12.1 million, or 1.19% of total loans, at December 31, 2020. At June 30, 2021 and December 31, 2020, nonperforming assets were $9.5 million and $10.2 million, or 0.54% and 0.69% of total assets, respectively. While asset quality remains stable period over period, social and economic disruption in response to the COVID-19 pandemic continued to result in business closures and job losses during 2021. As such, additional qualitative measures were incorporated in first and second quarter of 2021 allowance for loan losses calculation.

Noninterest income of $16.4 million first six months of 2021 was up $6.9 million, or 73.88%, from the first six months of 2020. Noninterest income of $7.8 million for the second quarter of 2021 was up $2.9 million or 60.0%, from the second quarter of 2020. The increase was primarily due to increases in mortgage fee income, gain on sale of SBA loans, and interchange fees.

For the first six months of 2021, noninterest expense of $33.2 million increased $6.5 million, or 24.17%, from the same period in 2020. For the second quarter of 2021, noninterest expense of $17.5 million increased $4.1 million, or 30.58%, from the same period in 2020. Increases in noninterest expense are in part due to the growth experienced by Colony and changes to organizational structure that are associated with that growth. Those expenses that were the primary contributors to the increase year over year include salaries and employee benefits. See "Table 6 - Noninterest expense" for more detail and discussion on the primary drivers to the increase in noninterest expense.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. There have been no significant changes to the Significant Accounting Policies as described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2020, which are included in the Company’s 2020 Annual Report on Form 10-K.

Non-GAAP Reconciliation and Explanation

Management uses non-GAAP financial measures in its analysis of the Company's performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company's performance, and if not provided would be requested by the investor community. The Company believes the non-GAAP measures enhance investors' understanding of the Company's business and performance. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently.

The measures entitled operating net income, adjusted earnings per diluted share and tangible common book value per share are not measures recognized under GAAP and therefore are considered non-GAAP financial measures. The most comparable GAAP measures are net income, earnings per diluted share, and common book value per share, respectively. These measures should be considered supplemental and should not be considered an alternative to the Company’s results reported in accordance with GAAP for the periods presented. These non-GAAP financial measures should not be considered in isolation and do not purport to be an alternative to the most directly comparable measures as reported in accordance with GAAP. To the extent applicable, reconciliation of these non-GAAP measures to the most directly comparable measures as reported in accordance with GAAP are included in the table below.


Table 1 - Non-GAAP Performance Measures Reconciliation
(dollars in thousands, except per share data)
	2021		2020
	Second Quarter	First Quarter	Fourth Quarter	Third Quarter	Second Quarter
Non-GAAP Measures





Operating net income reconciliation
Net income (GAAP)	$3,997	$4,919	$4,900	$3,098	$2,214
Acquisition-related expenses	865	176	148	207	220
Thomaston building writedown	—	—	—	582	—
Gain on sale of Thomaston Branch	—	—	(1,026)	—	—
Income tax benefit of acquisition-related expenses	(225)	(46)	184	(166)	(46)
Operating net income	$4,637	$5,049	$4,206	$3,721	$2,388
Weighted average diluted shares	9,498,783	9,498,783	9,498,783	9,498,783	9,498,783
Adjusted earnings per diluted share	$0.49	$0.53	$0.44	$0.39	$0.25

Tangible common book value per share reconciliation
Common book value per share (GAAP)	$15.46	$15.11	$15.21	$14.78	$14.59
Effect of goodwill and other intangibles	(1.89)	(1.97)	(1.95)	(1.96)	(1.96)
Tangible common book value per share	$13.57	$13.14	$13.26	$12.82	$12.63

Results of Operations

We reported net income and diluted earnings per share of $8.9 million and $0.94, respectively, for the first six months of 2021. This compared to net income and diluted earnings per share of $3.8 million and $0.40, respectively, for the same period in 2020.We reported net income and diluted earnings per share of $4.0 million and $0.42, respectively, for the second quarter of 2021. This compared to net income and diluted earnings per share of $2.2 million and $0.23, respectively, for the same period in 2020.

We reported operating net income of $9.7 million for the first six months of 2021, compared to $4.2 million for the same period in 2020. For the first six months of 2021, operating net income excludes acquisition-related expenses, which, net of tax, totaled $1.0 million. For the first six months of 2020, operating net income excludes acquisition-related expenses, which, net of tax, totaled $770,000. We reported operating net income of $4.6 million for the second quarter 2021, compared to $2.4 million for the same period in 2020. For the second quarter 2021, operating net income excludes acquisition-related expenses, which, net of tax, totaled $865,000. For the second quarter of 2020, operating net income excludes acquisition-related expenses, which, net of tax, totaled $640,000. See reconciliation of non-GAAP financial measures provided above.


Table 2 - Selected Financial Information
	2021				2020
(dollars in thousands, except per share data)	Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter
EARNINGS SUMMARY
Net interest income	$15,069		$14,283		$15,151		$13,848		$13,541
Provision for loan losses	—		500		1,296		1,106		2,200
Non-interest income	7,751		8,576		8,039		7,554		4,843
Non-interest expense	17,465		15,782		15,986		16,313		13,375
Income taxes	1,358		1,658		1,008		884		595
Net income	$3,997		$4,919		$4,900		$3,098		$2,214
PERFORMANCE MEASURES
Per common share:
Common shares outstanding	9,498,783		9,498,783		9,498,783		9,498,783		9,498,783
Weighted average basic shares	9,498,783		9,498,783		9,498,783		9,498,783		9,498,783
Weighted average diluted shares	9,498,783		9,498,783		9,498,783		9,498,783		9,498,783
Earnings per basic share	$0.42		$0.52		$0.52		$0.33		$0.23
Earnings per diluted share	0.42		0.52		0.52		0.33		0.23
Adjusted earnings per diluted share(a)	0.49		0.53		0.44		0.39		0.25
Cash dividends declared per share	0.10		0.10		0.10		0.10		0.10
Book value per common share	15.46		15.11		15.21		14.78		14.59
Tangible book value per common share (a)	13.50		13.22		13.29		12.83		12.63

Performance ratios:
Net interest margin	3.68%		3.50%		3.58%		3.34%		3.46%
Return on average assets	0.91		1.12		1.08		0.70		0.52
Return on average total equity	11.14		13.71		13.73		8.80		6.47
Average total equity to average assets	76.53		8.20		7.87		7.91		8.06


ASSET QUALITY
Nonperforming loans (NPLs)	$	9,205	$	10,676	$	9,128	$	9,926	$	11,459
Other real estate owned	270		518		1,006		1,875		1,769
Repossessions	29		29		30		11		17
Total nonperforming assets (NPAs)	9,504		11,223		10,164		11,812		13,245
Classified loans	30,852		35,182		30,404		21,388		20,619
Criticized loans	64,818		80,288		75,633		72,076		52,200


Net loan (recoveries)/charge-offs	(244)	(66)	189	375	295
Allowance for loan losses to total loans	1.26%	1.19%	1.14%	1.00%	0.92%
Allowance for loan losses to total NPLs	140.15	118.89	132.85	111.02	89.79
Allowance for loan losses to total NPAs	135.73	113.10	119.31	93.29	77.68
Net (recoveries)/charge-offs to average loans (annualized)	(0.09)	(0.02)	0.07	0.13	0.12
NPLs to total loans	0.90	1.00	0.86	0.90	1.03
NPAs to total assets	0.54	0.62	0.58	0.67	0.75
NPAs to total loans and other real estate owned	0.93	1.06	0.96	1.07	1.19

AVERAGE BALANCES
Total assets	$1,777,559	$1,774,123	$1,797,749	$1,766,717	$1,702,902
Loans, net	1,076,784	1,079,007	1,151,872	1,130,231	1,094,299
Deposits	1,547,139	1,475,944	1,456,287	1,140,487	1,384,739
Total stockholders’ equity	144,761	145,515	141,570	139,721	137,213

























(a) Non-GAAP measure - see “Non-GAAP Reconciliation and Explanation” for more information and reconciliation to GAAP

Net Interest Income

Net interest income, which is the difference between interest earned on assets and the interest paid on deposits and borrowed funds, is the single largest component of total revenue. Management strives to optimize this income while balancing interest rate, credit and liquidity risks.

The banking industry uses two key ratios to measure relative profitability of net interest income. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of noninterest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company's balance sheet and is defined as net interest income as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with noninterest-bearing deposits and stockholders' equity.

Fully taxable equivalent net interest income for the first six months of 2021 and 2020 was $29.6 million and $26.3 million, respectively. The net interest margin for the first six months of 2021 and 2020 was 3.57% and 3.53%, respectively. Fully taxable equivalent net interest income for the second quarter of 2021 and 2020 was $15,197 , respectively. The net interest margin for the second quarter of 2021 and 2020 was 3.68% and 3.46% respectively. The increase in net interest margin is a result of the decreases in cost of funds from lower rates on deposits and borrowings, offset by decreases in rates on all interest earnings assets.

The following tables indicate the relationship between interest income and interest expense and the average amounts of assets and liabilities for the periods indicated. As shown in the tables, both average assets and average liabilities for the three and six months ended June 30, 2021 increased compared to the same period in 2020. The increase in average assets was primarily driven by the increase in investment securities of and $110.9 million and $87.3 million from the three and six months ended June 30, 2021. The increase in average liabilities for the three and six months ended June 30, 2021 was funded primarily through an increase in deposits offset by a decrease in borrowings.

The yield on total interest-bearing liabilities decreased from 0.82% in the first six months 2020 to 0.33% in the first six months of 2021. The yield on total interest-bearing liabilities decreased from 0.65% in the second quarter 2020 to 0.32% in the second quarter of 2021. The main driver in both of these decreases is the decrease in deposit costs associated with market driven changes impacting our cost of funds attributable to falling interest rates throughout 2020 and that remained low in 2021. In March of 2020, the Federal Reserve's Federal Open Market Committee ("FOMC") lowered interest rates twice for a total reduction of 150 basis points in response to the COVID-19 pandemic, which was the most aggressive action taken by the FOMC since the financial crisis in 2008.



	Three Months Ended June 30,
	2021						2020
(dollars in thousands)	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Interest-earning assets:
Loans, net of unearned income(1)	$	1,076,784	$	14,165	5.34	%	$	1,094,299	$	13,763	5.10	%
Investment securities, taxable	417,343		1,794		1.74		330,649		1,757		2.16
Investment securities, tax-exempt(2)	33,156		160		1.96		8,959		46		2.08
Deposits in banks and short term investments	146,591		45		0.12		159,902		48		0.12
Total interest-earning assets	1,673,874		16,164		3.92		1,593,809		15,614		3.97
Noninterest-earning assets	$	103,685					109,093
Total assets	$	1,777,559					$	1,702,902
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-earning demand and savings	$	901,978	$	146	0.07	%	$	766,692	$	407	0.22	%
Other time	253,944		423		0.68		311,334		996		1.30
Total interest-bearing deposits	1,155,922		569		0.20		1,078,026		1,403		0.53
Federal Home Loan Bank advances	22,500		116		2.09		36,500		211		2.34
Paycheck Protection Program Liquidity Facility	19,031		25		0.53		99,124		87		0.36
Other borrowings	37,536		257		2.78		38,694		299		3.13
Total other interest-bearing liabilities	79,067		398		2.04		174,318		597		1.39
Total interest-bearing liabilities	1,234,989		967		0.32		1,252,344		2,000		0.65
Noninterest-bearing liabilities:
Demand deposits	$	391,217					$	306,713
Other liabilities	6,592						6,632
Stockholders' equity	144,761						137,213
Total noninterest-bearing liabilities and stockholders' equity	$	542,570					$	450,558
Total liabilities and stockholders' equity	$	1,777,559					$	1,702,902
Interest rate spread					3.60	%					3.32	%
Net interest income			$	15,197					$	13,614
Net interest margin					3.68	%					3.46	%

(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 $67,000 and $62,000 for the quarter ended June 30, 2021 and 2020, respectively, are included in loans, net of unearned income. Accretion income of $104,000 and $82,000 for the quarter ended June 30, 2021 and 2020, respectively are also included in income and fees on loans.

(2)Taxable-equivalent adjustments totaling $43,000 and $12,000 for quarter ended June 30, 2021 and 2020, respectively, are included in tax-exempt interest on investment securities. The adjustments are based on a federal tax rate of 21% and a Georgia state tax rate of 2.5% with appropriate reductions for the effect of disallowed interest expense incurred in carrying tax-exempt obligations.


Table 3 - Average Balance Sheet and Net Interest Analysis
	Six Months Ended June 30,
	2021						2020
(dollars in thousands)	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Interest-earning assets:
Loans, net of unearned income (1)	$	1,077,859	$	27,805	5.20	%	$	1,037,242	$	27,114	5.27	%
Investment securities, taxable	394,431		3,401		1.74		335,107		3,650		2.20	%
Investment securities, tax-exempt(2)	32,887		314		1.93		4,941		54		2.20	%
Deposits in banks and short term investments	164,882		97		0.12		122,885		332		0.54	%
Total interest-earning assets	1,670,059		31,617		3.82		1,500,175		31,150		4.19	%
Noninterest-earning assets	105,746						107,661
Total assets	$	1,775,805					$	1,607,836
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-earning demand and savings	$	880,838	$	311	0.07	%	$	747,273	$	1,342	0.36	%
Other time	257,173		912		0.72		323,073		2,279		1.42
Total interest-bearing deposits	1,138,011		1,223		0.22		1,070,346		3,621		0.68

Federal Home Loan Bank advances	22,500		230		2.06		41,038		468		2.30
Paycheck Protection Program Liquidity Facility	51,516		93		0.36		49,561		87		0.35
Other borrowings	37,715		514		2.75		38,745		688		3.58
Total other interest-bearing liabilities	111,731		837		1.51		129,344		1,243		1.94
Total interest-bearing liabilities	1,249,742		2,060		0.33		1,199,690		4,864		0.82
Noninterest-bearing liabilities:
Demand deposits	373,728						266,163
Other liabilities	6,791						6,223
Stockholders' equity	145,544						135,760
Total noninterest-bearing liabilities and stockholders' equity	$	526,063					$	408,146
Total liabilities and stockholders' equity	$	1,775,805					$	1,607,836
Interest rate spread					3.49	%					3.37	%
Net interest income			$	29,557					$	26,286
Net interest margin					3.57	%					3.53	%

(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 $66,000 and $55,000 for the quarter ended June 30, 2021 and 2020, respectively, are included in loans, net of unearned income. Accretion income of $133,000 and $124,000 for the six months ended June 30, 2021 and 2020, respectively, are also included in income and fees on loans.

(2)Taxable-equivalent adjustments totaling $84,000 and $14,000 for six months ended June 30, 2021 and 2020, respectively, are included in tax-exempt interest on investment securities. The adjustments are based on a federal tax rate of 21% and a Georgia state tax rate of 2.5% with appropriate reductions for the effect of disallowed interest expense incurred in carrying tax-exempt obligations.

The following table presents the effect of net interest income for changes in the average outstanding volume amounts of interest-earning assets and interest-bearing liabilities and the rates earned and paid on these assets and liabilities from June 30, 2020 to June 30, 2021.


Table 4 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis
	Six Months Ended June 30, 2021
	Compared to Six Months Ended June 30, 2020 Increase (Decrease) Due to Changes in
(dollars in thousands)	Volume		Rate		Total
Interest-earning assets:
Loans, net of unearned fees	$	2,141	$	(1,450)	$	691
Investment securities, taxable	1,303		(1,552)		(249)
Investment securities, tax-exempt	616		(356)		260
Deposits in banks and short term investments	229		(464)		(235)
Total interest-earning assets (FTE)	4,289		(3,822)		467
Interest-bearing liabilities:
Interest-Bearing Demand and Savings Deposits	484		(1,515)		(1,031)
Time Deposits	(937)		(430)		(1,367)
Federal Home Loan Bank Advances	(426)		188		(238)
Paycheck Protection Program Liquidity Facility	7		(1)		6
Other Borrowed Money	(37)		(137)		(174)
Total interest-bearing liabilities	(909)		(1,895)		(2,804)
Increase in net interest income (FTE)	$	5,198	$	(1,927)	$	3,271

Provision for Loan Losses

The provision for loan losses is based on management's evaluation of probable, inherent losses in the loan portfolio and unfunded commitments and the corresponding analysis of the allowance for loan losses at quarter-end. Provision for loan losses for the three and six months ended June 30, 2021 was $0 and $500,000, respectively, compared to $2.2 million and $4.2 million for the same periods in 2020. The amount of provision expense recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, sufficient to cover probable, inherent loan losses in the loan portfolio. The decrease in provision for loan losses in the three and six months ended June 30, 2021 compared to the same periods in 2020 is largely due to the reserve levels that have already been established as a result of unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic. See the section captioned “Loans and Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses.

Noninterest Income

The following table represents the major components of noninterest income for the periods indicated.


Table 5 - Noninterest Income
	Three Months Ended June 30,				Change				Six months ended June 30,				Change
(dollars in thousands)	2021		2020		Amount		Percent		2021		2020		Amount		Percent
Service charges on deposits	$	1,264	$	1,091	$	173	15.9	%	$	2,486	$	2,590	$	(104)	(4.0)	%
Mortgage fee income	3,005		1,827		1,178		64.5		7,000		3,089		3,911		126.6
Gain on sale of SBA loans	1,263		46		1,217		2,645.7		2,735		255		2,480		972.5
(Loss)/gain on sale of securities	141		—		141		100.0		137		293		(156)		(53.2)
Interchange fee	1,667		1,250		417		33.4		3,197		2,283		914		40.0
BOLI income	222		160		62		38.8		430		311		119		38.3
Other noninterest income	189		469		(280)		(59.7)		367		583		(216)		(37.0)
Total noninterest income	$	7,751	$	4,843	$	2,908	60.05	%	$	16,352	$	9,404	$	6,948	73.88	%

For the three and six months ended June 30, 2021, noninterest income increased $2.9 million and $6.9 million, respectively compared to the same periods in 2020. The reason for this increase is primarily due to increases in mortgage loan fee income, interchange fees and gain on sale of non- PPP SBA loans.

Service charges on deposit accounts. For the three and six months ended June 30, 2021, remained stable $1.3 million and $2.5 million with only slight increase and decrease, respectively, compared to the same period in 2020.

Mortgage Fee Income. For the three and six months ended June 30, 2021, mortgage fee income was $3.0 million and $7.0 million, an increase of $1.2 million, or 64.5%, $3.9 million, or 126.6%, compared to the same period in 2020, respectively. During the three and six months ended June 30, 2021, there was an continued increase in the demand for mortgage rate locks and mortgage closings due to a historically low interest rate environment. The decrease in mortgage rates was partially attributable to the 150 basis point decrease in the national federal funds rate in 2020 in response to the COVID-19 pandemic.

Gain on Sale of SBA loans. For the three months ended June 30, 2021 and 2020, net realized gains on the sale of the guaranteed portion of SBA loans totaled $1.3 million and $46,000, respectively. For the six months ended June 30, 2021 and 2020, net realized gains on the sale of the guaranteed portion of SBA loans totaled $2.7 million and $255,000, respectively. The increase in 2021 is primarily attributable to the growth in the Small Business Specialty Lending division compared to the same period in 2020.

Noninterest Expense

The following table represents the major components of noninterest expense for the periods indicated.


Table 6 - Noninterest Expense
	Three months ended June 30,				Change				Six months ended June 30,				Change
(dollars in thousands)	2021		2020		Amount		Percent		2021		2020		Amount		Percent
Salaries and employee benefits	$	10,126	$	7,729	$	2,397	31.0	%	$	20,081	$	15,227	$	4,854	31.9	%
Occupancy and equipment	1,245		1,316		(71)		(5.4)		2,571		2,634		(63)		(2.4)
Acquisition-related expenses	865		220		645		292.6		1,040		507		533		105.1
Information technology expenses	1,856		1,380		476		34.5		3,448		2,696		752		27.9
Professional fees	690		480		210		43.7		1,177		862		315		36.5
Advertising and public relations	566		385		181		47.1		1,146		1,020		126		12.4
Communications	308		229		79		34.5		527		420		107		25.5

FHLB prepayment penalty	—		276		(276)		100.0		—		276		(276)		100.0
Other noninterest expense	1,809		1,360		449		33.0		3,229		3,111		118		3.8
Total noninterest expense	$	17,465	$	13,375	$	4,090	30.6	%	$	33,219	$	26,753	$	6,466	24.2	%

Noninterest expense for the six months ended June 30, 2021 totaled $33.2 million, up $6.5 million, or 24.2%, from the same period in 2020. Noninterest expense for the three months ended June 30, 2021 totaled $17.5 million up $4.1 million, or 30.6%, from the same period in 2020. Increases in salaries and employee benefits, information technology expenses, and acquisition expenses accounted for the majority of increases which was offset by a FHLB prepayment penalty recognized in the prior year period.

Salaries and Employee Benefits. Salaries and employee benefits for the six months ended June 30, 2021 increased $4.9 million, or 31.9%, compared to the same period in 2020. Salaries and employee benefits for the three months ended June 30, 2021 increased $2.4 million, or 31.0%, compared to the same period in 2020. The increase in 2021 is primarily attributable to the growth in the Small Business Specialty Lending and mortgage divisions compared to the same period in 2020.

Acquisition-related Expenses. Acquisition-related expense for the six months ended June 30, 2021 increased $533,000, or 105.1%, compared to the same period in 2020. Acquisition-related expense for the three months ended June 30, 2021 increased $645,000, or 292.6%, compared to the same period in 2020. Both increases are a result of the merger that took place on August 1, 2021.

Information technology Expenses. Information technology expense for the six months ended June 30, 2021 increased $752,000, or 27.9%, compared to the same period in 2020. Information technology expense for the three months ended June 30, 2021 increased $476,000, or 34.5%, compared to the same period in 2020. The increases relate to increases in data processing costs as the bank prepares for the merger and software costs due to new software implementation.

Income Tax Expense

Income tax expense for the three and six months ended June 30, 2021 and 2020 was $1.4 million, $3.0 million, $595,000 and $923,000, respectively. The Company’s effective tax rates were a federal tax rate of 21% and a Georgia state tax rate of 2.5% for the six months ended June 30, 2021 and 2020.

Balance Sheet Review

Total assets remained stable at $1.8 billion at June 30, 2021 and December 31, 2020.

Loans and Allowance for Loan Losses

At June 30, 2021, gross loans outstanding (excluding loans held for sale) were $1.0 billion, a slight decrease of $36.9 million, or 3.5%, compared with $1.1 billion at December 31, 2020. During the three and six months ended June 30, 2021, PPP loans totaling approximately $44.6 million, and $90.0 million respectively were forgiven through the SBA.

At June 30, 2021, approximately 65.0% of our loans are secured by commercial real estate. The following table presents a summary of the loan portfolio as of June 30, 2021 and December 31, 2020.


Table 7 - Loans Outstanding
(dollars in thousands)	June 30, 2021			December 31, 2020
Construction, land and land development	$	118,940		$	121,093
Other commercial real estate	545,883			520,391
Total commercial real estate	664,823			641,484
Residential real estate	170,173			183,021
Commercial, financial, & agricultural (*)	167,717			213,380
Consumer and other	19,905			21,618
Total loans	$	1,022,618		$	1,059,503

As a percentage of total loans:
Construction, land and land development	11.6		%	11.4		%
Other commercial real estate	53.4		%	49.1		%
Total commercial real estate	65.0		%	60.5		%
Residential real estate	16.7		%	17.3		%
Commercial, financial & agricultural	16.4		%	20.1		%
Consumer and other	1.9		%	2.0		%
Total loans	100		%	100		%

(*) Includes $58.8 million and $101.1 million in PPP loans at June 30, 2021 and December 31, 2020

The Company's risk mitigation processes include an independent loan review designed to evaluate the credit risk in the loan portfolio and to ensure credit grade accuracy. The analysis serves as a tool to assist management in assessing the overall credit quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as "substandard" are loans which are inadequately protected by the current credit worthiness and paying capacity of the borrower and/or the collateral pledged. These assets exhibit well-defined weaknesses or are showing signs there is a distinct possibility the Company will sustain some loss if the deficiencies are not corrected. These weaknesses may be characterized by past due performance, operating losses and/or questionable collateral values. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans but have an increased risk of loss. Loans classified as "loss" are those loans which are considered uncollectable and are in the process of being charged off.

The Company regularly monitors the composition of the loan portfolio as part of its evaluation over the adequacy of the allowance for loan losses. The Company focuses on the following loan categories: (1) construction, land and land development; (2) commercial, financial and agricultural; (3) commercial and farmland real estate; (4) residential real estate; and (5) consumer.

The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The provision for loan losses is based on management’s evaluation of the size and composition of the loan portfolio, the level of non-performing and past-due loans, historical trends of charged off loans and recoveries, prevailing economic conditions and other factors management deems appropriate. The Company’s management has established an allowance for loan losses which it believes is adequate for the probable incurred losses in the loan portfolio. Based on a credit evaluation of the loan portfolio, management presents a quarterly review of the allowance for loan losses to the Company’s Board of Directors, which primarily focuses on risk by evaluating individual loans in certain risk categories. These categories have also been established by management and take the form of loan grades. By grading the loan portfolio in this manner the Company’s

management is able to effectively evaluate the portfolio by risk, which management believes is the most effective way to analyze the loan portfolio and thus analyze the adequacy of the allowance for loan losses.

The allowance for loan losses is established by examining (1) the large classified loans, nonaccrual loans and loans considered impaired and evaluating them individually to determine the specific reserve allocation and (2) the remainder of the loan portfolio to allocate a portion of the allowance based on past loss experience and the economic conditions for the particular loan category. The Company also considers other factors such as changes in lending policies and procedures; changes in national, regional and/or local economic and business conditions; changes in the nature and volume of the loan portfolio; changes in the experience, ability and depth of either the market president or lending staff; changes in the volume and severity of past-due and classified loans; changes in the quality of the loan review system; and other factors management deems appropriate.

The allowance for loan losses was $12.9 million at June 30, 2021 compared to $10.3 million at June 30, 2020, an increase of $2.6 million, or 25.1%. While asset quality remains stable period over period, social and economic disruption in response to the COVID-19 pandemic continue to result in businesses closures and job losses during 2020 and into 2021. The decrease in provision for loan losses in the three and six months ended June 30, 2021 compared to the same period in 2020 is largely due to the reserve levels that had been established as a result of unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic.

Additional information about the Company’s allowance for loan losses is provided in Note 4 to our consolidated financial statements as of June 30, 2021, included elsewhere in this Form 10-Q.

The following table presents an analysis of the allowance for loan losses as of and for the six months ended June 30, 2021 and 2020:


Table 8 - Analysis of Allowance for Loan Loss
	June 30, 2021				June 30, 2020
(dollars in thousands)	Reserve		%*		Reserve		%*
Construction, land and land development	$	1,125	11.6	%	$	759	11.8	%
Other commercial real estate	7,277		53.4	%	5,711		46.5	%
Residential real estate	2,273		16.7	%	1,631		16.9	%
Commercial, financial, & agricultural	1,773		16.5	%	1,913		22.6	%
Consumer and other	423		1.9	%	275		2.2	%
	$	12,871	100	%	$	10,289	100	%

*Percentage represents the loan balance in each category expressed as a percentage of total end of period loans.

The following table presents a summary of allowance for loan loss for the three and six months ended June 30, 2021 and 2020.


Table 9 - Summary of Allowance for Loan Loss
	Three Months Ended							Six Months Ended
(dollars in thousands)		June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
Allowance for loan loss - beginning balance		$	12,693		$	8,384		$	12,127		$	6,863
Charge-offs:
Construction, land and land development		—			4			—			4
Other commercial real estate		36			—			36			30
Residential real estate		—			16			—			80
Commercial, financial, & agricultural		—			—			15			68
Consumer and other		32			364			43			715
Total loans charged-off		68			384			94			897
Recoveries:
Construction, land and land development		70			12			85			25
Other commercial real estate		95			21			95			26
Residential real estate		44			6			110			10
Commercial, financial, & agricultural		15			19			18			20
Consumer and other		22			31			30			86
Total recoveries		246			89			338			167
Net (recoveries)/charge-offs		(178)			295			(244)			730
Provision for loan loss		—			2,200			500			4,156
Allowance for loan loss - ending balance		$	12,871		$	10,289		$	12,871		$	10,289

Net (recoveries)/charge-offs to average loans (annualized)		(0.07)		%	0.11		%	(0.05)		%	0.18		%
Allowance for loan losses to total loans		1.26			0.92			1.26			0.92
Allowance to nonperforming loans		139.83			89.79			139.83			89.79

Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio as of June 30, 2021; provided, however, that with the continuing economic impact of the COVID-19 pandemic during 2020 and through the first six months of 2021 leading to significant market changes, high levels of unemployment and increasing degrees of uncertainty in the U.S. economy, the impact on collectability is not currently known, and it is possible that additional provisions for credit losses could be needed in future periods.

Nonperforming Assets

Asset quality remained stable during the first six months of 2021. The continuing effects of the COVID-19 pandemic will likely have an impact on our asset quality, but the full extent is unknown at this point. Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more, repossessed personal property and other real estate owned ("OREO"). Pursuant to the provisions of the CARES Act, 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 June 30, 2021. Nonaccrual loans totaled $9.2 million at June 30, 2021, an increase of $26,000, or 0.3%, from $9.2 million at December 31, 2020. There were no loans contractually past due 90 days or more and still accruing for either period presented. At June 30, 2021, OREO totaled $270,000, a decrease of $736,000, or 73.2%, compared with $1.0 million at December 31, 2020. The change in OREO is a combination of sales of assets during first six months of 2021 offset by a few small OREO property additions. At the end of the second quarter 2021, total nonperforming assets as a percent of total assets decreased to 0.54% compared with 0.69% at December 31, 2020.

At June 30, 2021, 6.0% of the Company’s loan portfolio, or $61.0 million, is in the hotel sector which was one of the most sensitive sectors to the COVID-19 pandemic. While our entire loan portfolio is being continuously assessed, enhanced monitoring for the hotel and other sensitive sectors is ongoing. We are continuously working with these customers to evaluate how the current economic conditions are impacting, and will continue to impact, their business operations.

Generally, loans are placed on non-accrual 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 non-accrual status whether or not the loan is 90 days or more past due. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent loan payments made 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.

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell, at the time of foreclosure is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of the fair value, less estimated costs to sell, or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.

Nonperforming assets at June 30, 2021 and December 31, 2020 were as follows:


Table 10 - Nonperforming Assets(1)
(dollars in thousands)	June 30, 2021			December 31, 2020
Nonaccrual loans	$	9,205		$	9,179
Loans past due 90 days and accruing	—			—
Other real estate owned	270			1,006
Repossessed assets	9			30
Total nonperforming assets	$	9,484		$	10,215
Nonaccrual loans by loan segment
Construction, land and land development	$	47		$	32
Commercial real estate	4,957			3,738
Residential real estate	3,316			3,643
Commercial, financial & agriculture	701			1,628
Consumer & other	184			138
Total nonaccrual loans	$	9,205		$	9,179

NPAs as a percentage of total loans and OREO	0.93		%	1.08		%
NPAs as a percentages of total assets	0.54		%	0.69		%
Nonaccrual loans as a percentage of total loans	0.90		%	0.95		%

(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). There were no loans under these terms deemed past due or nonaccrual as of June 30, 2021.

The restructuring of a loan is considered a 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 June 30, 2021, TDRs decreased slightly to $12.4 million from $12.6 million reported at December 31, 2020. At June 30, 2021 and December 31, 2020, all TDRs were performing according to their modified terms and were therefore not considered to be nonperforming assets.

Deposits

Deposits at June 30, 2021 and December 31, 2020 were as follows:


Table 11 - Deposits
(dollars in thousands)	June 30, 2021		December 31, 2020
Noninterest-bearing deposits	$	393,677	$	326,999
Interest-bearing deposits	508,914		433,554
Savings	388,591		422,860
Time, $250,000 and over	38,322		34,653
Other time	212,710		226,961
Total deposits	1,542,214		$	1,445,027

Total deposits were $1.5 billion and $1.4 billion at June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, 25.5% of total deposits were comprised of noninterest-bearing accounts and 74.5% comprised of interest-bearing deposit accounts, compared to 22.6% and 77.4% as of December 31, 2020, respectively. The growth in our deposits is due primarily to the combination of government stimulus programs, PPP loan proceeds retained on deposits by corporate borrowers, and customer expense and savings habits in response to the COVID-19 pandemic.

We had $1.1 million and $1.4 million in brokered deposits at June 30, 2021 and December 31, 2020, 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.

Off-Balance Sheet Arrangements

The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit, is based on management’s credit evaluation of the borrower. The type of collateral held varies, but may include cash or cash equivalents, unimproved or improved real estate, personal property or other acceptable collateral.

See Note 8 to our consolidated financial statements as of June 30, 2021, included elsewhere in this Form 10-Q, for a table setting forth the financial instruments that were outstanding whose contract amounts represent credit risk and more information regarding our off-balance sheet arrangements as of June 30, 2021 and December 31, 2020.

Liquidity

An important part of the Bank's liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis.

The Bank's main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, FHLB advances and brokered deposits. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.

To plan for contingent sources of funding not satisfied by both local and out-of-market deposit balances, the Company and the Bank 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.

Cash and cash equivalents at June 30, 2021 and December 31, 2020 were $146.3 million and $183.5 million, respectively. Cash and cash equivalents decreased since year-end 2020. The decrease is primarily attributable to the deployment of funds that came from PPP loans and the repayment of Paycheck Protection Program Liquidity Facility (“PPPLF”).

Liquidity management involves the matching of cash flow requirements of customers and the ability of the Company to manage those requirements. These requirements of customers include, but are not limited to, deposits being withdrawn or providing assurance to borrowers that sufficient funds are available to meet their credit needs. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance we have in short-term assets at any given time will adequately cover any reasonably anticipated need for funds. Additionally, we maintain relationships with correspondent banks, which could provide funds on short notice, if needed. We have also invested in FHLB stock for the purpose of establishing credit lines with the FHLB. At June 30, 2021 and December 31, 2020, we had $22.5 million of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had $426.5 million and $416.1 million of additional borrowing availability with the FHLB at June 30, 2021 and December 31, 2020, respectively.

The Company is a separate entity from the Bank, and as such it must provide for its own liquidity. The Company is responsible for the payment of dividends declared for its common shareholders and payment of interest and principal on any outstanding debt or trust preferred securities. These obligations are met through internal capital resources such as service fees and dividends from the Bank, which are limited by applicable laws and regulations.

Capital Resources

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.

In addition, the Bank participated in the PPP and the PPPLF to fund PPP loans. In accordance with regulatory guidance, PPP loans pledged as collateral for PPPLF, and PPPLF advances, are excluded from leverage capital ratios. PPP loans also carry a 0% risk-weight for risk-based capital rules.

The table below summarizes the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of June 30, 2021 and December 31, 2020. The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of June 30, 2021 and December 31, 2020. There have been no conditions or events since December 31, 2020 that management believes would change this classification. While the Company believes that it has sufficient capital to withstand an extended economic recession brought

about by COVID-19, its reported and regulatory capital ratios could be adversely impacted in future periods.


Table 12 - Capital Ratio Requirements
	Minimum Requirement		Well-capitalized¹
Risk-based ratios:
Common equity tier 1 capital (CET1)	4.5	%	6.5	%
Tier 1 capital	6.0		8.0
Total capital	8.0		10.0
Leverage ratio	4.0		5.0
(1) The prompt corrective action provisions are only applicable at the bank level.


Table 13 - Capital Ratios
Company	June 30, 2021		December 31, 2020
CET1 risk-based capital ratio	11.31	%	10.62	%
Tier 1 risk-based capital ratio	13.41		12.71
Total risk-based capital ratio	14.56		13.78
Leverage ratio	8.45		8.49

Colony Bank
CET1 risk-based capital ratio	13.85	%	13.48	%
Tier 1 risk-based capital ratio	13.85		13.48
Total risk-based capital ratio	14.99		14.55
Leverage ratio	8.84		9.12

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposures are credit risk, interest rate risk, and to a lesser degree, liquidity risk. The Bank operates under an Asset Liability Management Policy which is approved by the ALCO, which is a Board committee that meets regularly. The policy outlines limits on interest rate risk in terms of changes in net interest income and changes in the net market values of assets and liabilities over certain changes in interest rate environments. These measurements are made through a simulation model which projects the impact of changes in interest rates on the Bank's assets and liabilities. The policy also outlines responsibility for monitoring interest rate risk and the process for the approval, implementation and monitoring of interest rate risk strategies to achieve the Bank's interest rate risk objectives.

In addition to interest rate risk, the ongoing COVID-19 pandemic and the related stay-at-home and social-distancing mandates will likely expose us to additional market value risk. Protracted closures, furloughs and lay-offs have curtailed economic activity, and will likely continue to curtail economic activity and could result in lower fair values for collateral in our loan portfolio.

The following table presents our interest sensitivity position at the dates indicated.


Table 14 - Interest Sensitivity
	Increase (Decrease) in Net Interest Income from Base Scenario at
	June 30, 2021	December 31, 2020
Changes in rates
200 basis point increase	8.15%	12.55%
100 basis point increase	4.37	6.71
100 basis point decrease	(3.07)	(2.91)

See Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2020 for additional disclosures related to market and interest rate risk.

ITEM 4 – CONTROLS AND PROCEDURES

Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated its 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, the Company's Chief Executive Officer and Chief Financial Officer have 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 Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended June 30, 2021, 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.

Part II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

ITEM 1A – RISK FACTORS

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in "Part I - Item IA - Risk Factors” of the Company’s 2020 Form 10-K, which could materially affect its business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. In addition, these risks may be heightened by the disruption and uncertainty resulting from COVID-19. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.

There are no material changes during the period covered by this Report to the risk factors previously disclosed in the Company's 2020 Form 10-K.

ITEM 2 – UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) There were no unregistered shares of the Company’s common stock sold during the three-month period ended June 30, 2021.

(b) Not applicable.

(c) There were no purchases of the Company's equity securities by the Company or its affiliates during the three-month period ended June 30, 2021.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS



3.1			Articles of Incorporation, As Amended -filed as Exhibit 99.1 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			Amended and Restated Bylaws -filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on September 18, 2020 and incorporated herein by reference.

10.1			Employment Agreement, dated as of June 24, 2021, between Colony Bankcorp, Inc. and Tracie Youngblood, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 28, 2021 and incorporated herein by reference





31.1			Certificate of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2			Certificate of Chief Financial Officer Pursuant to Section 302 of Sarbanes – Oxley Act of 2002

32.1			Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101			Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020; (ii) Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2021 and 2020; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2021 and 2020; (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020; (v) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements*

104			The cover page from Colony Bankcorp’s Quarterly Report on Form 10-Q for the three months ended June 30, 2021 (formatted in Inline XBRL and included in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			Colony Bankcorp, Inc.


			/s/ T. Heath Fountain
Date: August 13, 2021			T. Heath Fountain
			President and Chief Executive Officer
			(Principal Executive Officer)

			/s/ Tracie Youngblood
Date: August 13, 2021			Tracie Youngblood
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)