UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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For the Fiscal Year Ended December 31 , 2021
OR
For the Transition Period from _____________to ______________
Commission File Number 000-12436
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| Securities Registered Pursuant to Section 12(b) of the Act: | ||||||||
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Securities Registered Pursuant to Section 12(g) of the Act: None.
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Accelerate Filer ☐ Non-accelerated Filer ☒ Smaller Reporting Company ☒ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ☒
The aggregate market value of Colony Bankcorp, Inc. common stock held by non-affiliates, computed by reference to the price at which the stock was last sold on June 30, 2021, (the last business day of the registrant’s most recently completed second fiscal quarter and based upon the closing price of $17.86, as reported on Nasdaq on June 30, 2021) as reported on the NASDAQ Global Market was $151.3 million.
The number of shares outstanding of Colony Bankcorp, Inc. common stock, par value $1.00 per share, as of March 16, 2022, was 17,586,333 shares.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
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| PART I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| PART III | ||||||||
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| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
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In this Annual Report on Form 10-K (this “Annual Report”), references to “we,” “our,” “us,” “Colony” or “the Company” refer to Colony Bankcorp, Inc., a Georgia corporation, and our wholly-owned banking subsidiary, Colony Bank, a Georgia-state chartered bank, unless otherwise indicated or the context otherwise requires. References to “Bank” refer to Colony Bank, our wholly-owned banking subsidiary.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to ongoing 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 Annual Report and the following:
•business and economic conditions, particularly those affecting the financial services industry and our primary market areas;
•the impact of the continuing COVID-19 pandemic on our business, including the impact of the actions taken by governmental authorities to try and contain the virus 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;
•the risk that a future economic downturn and contraction could have a material adverse effect on our capital, financial condition, credit quality, results of operations and future growth, including the risk that the strength of the current economic recovery could be weakened by the continued impact of COVID-19 and by current supply chain challenges;
•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 Paycheck Protection Program;
•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;
•the adequacy of our reserves (including allowance for loan losses) 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;
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•our ability to manage our growth;
•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;
•inflation, interest rate, securities market and monetary fluctuations and the respective impact on our financial condition and results of operation;
•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;
•risks that our expected revenue synergies and cost savings from our 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 with 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;
•uncertainty related to the transition away from the London Inter-bank Offered Rate (“LIBOR”);
•continued or increasing competition from other financial institutions (including fintech companies), credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;
•challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;
•restraints on the ability of the Bank to pay dividends to us, which could limit our liquidity;
•increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;
•a failure in the internal controls we have implemented to address the risks inherent to the business of banking;
•inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance;
•changes in our management personnel or our inability to retain motivate and hire qualified management personnel;
•the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets, which may be impacted as a result of labor shortages;
•our ability to identify and address cyber-security risks, fraud and systems errors;
•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;
•disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;
•an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies;
•fraudulent and negligent acts by our clients, employees or vendors and our ability to identify and address such acts;
•risks related to potential acquisitions;
•the impact of any claims or legal actions to which we may be subject, including any effect on our reputation;
•compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations;
•changes in the scope and cost of FDIC insurance and other coverage;
•changes in our accounting standards;
•changes in tariffs and trade barriers;
•changes in federal tax law or policy;
•the effects of war or other conflicts (including the military conflict between Russia and Ukraine), acts of terrorism, natural disasters, health emergencies, epidemics or pandemics, or other catastrophic events that may affect general economic conditions; and
•other risks and factors identified in this Form 10-K under the heading “Risk Factors”.
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The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Annual Report on Form 10-K. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this Annual Report on Form 10-K. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
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Part I
Item 1
Business
COLONY BANKCORP, INC.
General
Colony Bankcorp, Inc. (the “Company” or “Colony”) is a Georgia business corporation which was incorporated on November 8, 1982. The Company was organized for the purpose of operating as a bank holding company under the Bank Holding Company Act of 1956, as amended, and the bank holding company laws of Georgia. On July 22, 1983, the Company, after obtaining the requisite regulatory approvals, acquired 100% of the issued and outstanding common stock of Colony Bank (formerly Colony Bank of Fitzgerald and The Bank of Fitzgerald), Fitzgerald, Georgia (the “Bank” or “Colony Bank”), through the merger of the Bank with a subsidiary of the Company which was created for the purpose of organizing the Bank into a one-bank holding company. Since that time, Colony Bank has operated as a wholly-owned subsidiary of the Company. Our business is conducted primarily through our wholly-owned bank subsidiary, which provides a broad range of banking services to its retail and commercial customers. We operate twenty-eight domestic banking offices and two corporate operations offices. At December 31, 2021, we had approximately $2.7 billion in total assets, $1.4 billion in total loans, $2.4 billion in total deposits and $217.7 million in stockholder’s equity. Deposits are insured, up to applicable limits, by the Federal Deposit Insurance Corporation.
The Parent Company
Because the Company is a bank holding company, its principal operations are conducted through the Bank. It has 100 percent ownership of its subsidiary and maintains systems of financial, operational and administrative controls that permit centralized evaluation of the operations of the subsidiary bank in selected functional areas including operations, accounting, marketing, investment management, purchasing, human resources, computer services, auditing, compliance and credit review. As a bank holding company, we perform certain shareholder and investor relations functions.
Colony Bank - Banking Services
Our principal subsidiary is the Bank. The Bank, headquartered in Fitzgerald, Georgia, offers traditional banking products and services to commercial and consumer customers in our markets. Our product line includes, among other things, loans to small and medium-sized businesses, residential and commercial construction and land development loans, commercial real estate loans, commercial loans, agri-business and production loans, residential mortgage loans, home equity loans, consumer loans and a variety of demand, savings and time deposit products. We also offer internet banking services, electronic bill payment services, safe deposit box rentals, telephone banking, credit and debit card services, remote depository products and access to a network of ATMs to our customers. The Bank conducts a general full service commercial, consumer and mortgage banking business through twenty-eight offices located in central, south and coastal Georgia cities of Fitzgerald, Warner Robins, Centerville, Ashburn, Leesburg, Cordele, Albany, LaGrange, Columbus, Sylvester, Tifton, Moultrie, Douglas, Broxton, Savannah, Eastman, Soperton, Rochelle, Quitman, Valdosta and Statesboro, Georgia.
For additional discussion of our loan portfolio and deposit accounts, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Loans" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Deposits.”
Subordinated Debentures (Trust Preferred Securities)
During the second quarter of 2004, the Company formed Colony Bankcorp Statutory Trust III for the sole purpose of issuing $4,500,000 in Trust Preferred Securities through a pool sponsored by FTN Financial Capital Market. The securities have a maturity of thirty years and are redeemable after five years with certain exceptions.
During the second quarter of 2006, the Company formed Colony Bankcorp Capital Trust I for the sole purpose of issuing $5,000,000 in Trust Preferred Securities through a pool sponsored by SunTrust Bank Capital Markets. The securities have a maturity of thirty years and are redeemable after five years with certain exceptions.
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During the first quarter of 2007, the Company formed Colony Bankcorp Capital Trust II for the sole purpose of issuing $9,000,000 in Trust Preferred Securities through a pool sponsored by Trapeza Capital Management, LLC. The securities have a maturity of thirty years and are redeemable after five years with certain exceptions. Proceeds from this issuance were used to pay off trust preferred securities issued on March 26, 2002 through Colony Bankcorp Statutory Trust I.
During the third quarter of 2007, the Company formed Colony Bankcorp Capital Trust III for the sole purpose of issuing $5,000,000 in Trust Preferred Securities through a pool sponsored by Trapeza Capital Management, LLC. The securities have a maturity of thirty years and are redeemable after five years with certain exceptions. Proceeds from this issuance were used to pay off trust preferred securities issued on December 19, 2002 through Colony Bankcorp Statutory Trust II.
The Company is not in default of any outstanding Trust Preferred Securities as of December 31, 2021.
Recent Developments
On August 1, 2021, the Company acquired SouthCrest Financial Group, Inc. (“SouthCrest”), a bank holding company headquartered in Atlanta, Georgia. Upon consummation of the acquisition, SouthCrest was merged with and into the Company, with Colony Bankcorp, Inc. as the surviving entity in the merger. Immediately following the holding company merger, SouthCrest’s wholly owned bank subsidiary, SouthCrest Bank, N.A. was also merged with and into the Bank. The acquisition expanded the Company’s market presence, as SouthCrest Bank, N.A. had eight full-service banking locations, one in Cedartown, Chickamauga, Cumming, Fayetteville, Luthersville, Manchester, Rockmart and Thomaston, Georgia. Under the terms of the Agreement and Plan of Merger, each SouthCrest shareholder had the option to receive either $10.45 in cash or 0.7318 of a share of the Company’s common stock in exchange for each share of SouthCrest stock, subject to certain proration and allocation procedures. As a result, the Company issued approximately 4.0 million shares of its common stock at a fair value of $71.4 million and paid $21.6 million in cash to the former shareholders of SouthCrest as merger consideration.
On August 1, 2021, September 1, 2021 and October 1, 2021, the Company acquired several insurance agencies and formed Colony Insurance.
The Company paid dividends to its shareholders throughout 2021 and 2020 on a quarterly basis. In 2021, we had a quarterly dividend of $0.1025 per common stock and in 2020, we had a quarterly dividend of $0.10 per common stock.
On February 10, 2022, the Company completed a public offering of 3,848,485 shares of its common stock at a public offering price of $16.50 per share, with aggregate proceeds of approximately $63.5 million.
Markets and Competition
The banking industry in general is highly competitive. Our market areas consist of central, south and coastal Georgia. In contrast to our rural markets, in which we typically rank in the top three in terms of market share, we face competitive pressures in attracting deposits and making loans from larger regional banks and smaller community banks. The Bank's competition includes not only other banks of comparable or larger size in the same markets, but also various other nonbank financial institutions, including savings and loan associations, credit unions, mortgage companies, personal and commercial financial companies, peer to peer lending businesses, fintech companies, investment brokerage and financial advisory firms and mutual fund companies. The Bank competes for deposits, commercial, fiduciary and investment services and various types of loans and other financial services. The Bank also competes for interest-bearing funds with a number of other financial intermediaries, including brokerage and insurance firms, as well as investment alternatives, including mutual funds, governmental and corporate bonds, and other securities. Continued consolidation and rapid technological changes within the financial services industry will likely change the nature and intensity of competition, but also will create opportunities for the Company to demonstrate and leverage its competitive advantages. The continuing consolidation within the financial services industry is leading to larger, better capitalized and geographically diverse institutions with enhanced product and technology capabilities. Additionally, competition from fintechs, is increasing. In addition to fintechs, certain technology companies are working to provide financial services directly to their customers. These nontraditional financial service providers have been successful in developing digital and other products and services that effectively compete with traditional banking services, but are in some cases subject to fewer regulatory restrictions than banks and bank holding companies, allowing them to operate with greater flexibility and lower cost structures. Although digital products and services have been important competitive features of financial institutions for some time, the COVID-19 pandemic has accelerated the move toward digital financial services products and we expect that trend to continue.
Competitors include not only financial institutions based in Georgia, but also a number of large out-of-state and foreign banks, bank holding companies and other financial institutions that have an established market presence in Georgia or that offer
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internet-based products. Many of the Company's competitors are engaged in local, regional, national and international operations and have greater assets, personnel and other resources. Some of these competitors are subject to less regulation and/or more favorable tax treatment. Many of these institutions have greater resources, broader geographic markets and higher lending limits, and may offer services that the Company does not offer. In addition, these institutions may be able to better afford and make broader use of media advertising, support services, and electronic and other technology. To offset these potential competitive disadvantages, the Company depends on its reputation for superior service, ability to make credit and other business decisions quickly, and the delivery of an integrated distribution of traditional branches and bankers, with digital technology.
Correspondents
Colony Bank has correspondent relationships with the following banks: Federal Reserve Bank of Atlanta; FHN Financial in Memphis, Tennessee; SouthState Bank in Lake Wales, Florida, ServisFirst in Birmingham, Alabama and the Federal Home Loan Bank of Atlanta. These correspondent relationships facilitate the transactions of business by means of loans, collections, investment services, lines of credit and exchange services, particularly in markets in which Colony Bank does not have a physical presence. As compensation for these services, the Bank maintains balances with its correspondents in primarily interest-bearing accounts and pays some service charges.
Human Capital Resources
On December 31, 2021, the Company had a total of 502 employees, 492 of which are full-time equivalent employees. We consider our relationship with our employees to be satisfactory.
In response to the COVID-19 pandemic, the Company prioritized the health and safety of its teammates, and took protective measures, such as implementing remote work arrangements, to the full extent possible and adjusted banking center hours and operational measures to promote social distancing, and it will continue to do so throughout the duration of the pandemic. We believe employees to be our greatest asset and that our future success depends on our ability to attract, retain and develop employees. Professional development is a key priority, which is facilitated through our many corporate development initiatives including extensive training programs, corporate mentoring, leadership programs, educational reimbursement and professional speaker series.
Our culture emphasizes our longstanding dedication to being respectful to others and having a workforce that is representative of the communities we serve. Diversity and inclusion are fundamental to our culture. We believe in attracting, retaining and promoting quality talent and recognize that diversity makes us stronger as a company. Our talent acquisition teams partner with hiring managers in sourcing and presenting a diverse slate of qualified candidates to strengthen our organization.
As part of our effort to attract and retain employees, we offer a broad range of benefits, including a profit-sharing plan covering all employees, subject to certain minimum age and service requirements. In addition, the Company maintains a comprehensive employee benefit program providing, among other benefits, hospitalization, major medical, life insurance and disability insurance. Management considers these benefits to be competitive with those offered by other financial institutions in our market area. Colony’s employees are not represented by any collective bargaining group.
Corporate Information
The Company’s headquarters is located at 115 South Grant Street, Fitzgerald, Georgia 31750, its telephone number is 229-426-6000 and its internet address is www.colonybank.com. The information contained on or accessible from our website does not constitute a part of this Annual Report on Form 10-K and is not incorporated by reference herein.
SUPERVISION AND REGULATION
General
We are extensively regulated under federal and state law. The following is a brief summary that does not purport to be a complete description of all regulations that affect us or all aspects of those regulations. This discussion is qualified in its entirety by reference to the particular statutory and regulatory provisions described below and is not intended to be an exhaustive description of the statutes or regulations applicable to the Company’s and the Bank’s business. In addition, proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal levels. The likelihood and timing of any changes in these laws and regulations, and the impact such changes may have on us and the Bank, are difficult to predict. In addition, bank regulatory agencies may issue enforcement actions, policy statements, interpretive letters
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and similar written guidance applicable to us or the Bank. Changes in applicable laws, regulations or regulatory guidance, or their interpretation by regulatory agencies or courts may have a material adverse effect on our and the Bank’s business, operations, and earnings. Supervision and regulation of banks, their holding companies and affiliates is intended primarily for the protection of depositors and customers, the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”), and the U.S. banking and financial system rather than holders of our capital stock.
Regulation of the Company
We are registered as a bank holding company with the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and have elected to be treated as a financial holding company. As such, we are subject to comprehensive supervision and regulation by the Federal Reserve and are subject to its regulatory reporting requirements. Federal law subjects bank holding companies, such as the Company, to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. Violations of laws and regulations, or other unsafe and unsound practices, may result in regulatory agencies imposing fines or penalties, cease and desist orders, or taking other enforcement actions. Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and other parties participating in the affairs of a bank or bank holding company.
Activity Limitations. As a financial holding company, we are permitted to engage directly or indirectly in a broader range of activities than those permitted for a bank holding company that has not elected to be a financial holding company. Bank holding companies are generally restricted to engaging in the business of banking, managing or controlling banks and certain other activities determined by the Federal Reserve to be closely related to banking. Financial holding companies may also engage in activities that are considered to be financial in nature, as well as those incidental or, if determined by the Federal Reserve, complementary to financial activities. We and Colony Bank must each remain “well-capitalized” and “well-managed” and Colony Bank must receive a CRA rating of at least “Satisfactory” at its most recent examination in order for us to maintain our status as a financial holding company. If Colony Bank ceases to be “well capitalized” or “well managed” under applicable regulatory standards, or if Colony Bank receives a rating of less than satisfactory under the CRA, the Federal Reserve Board may, among other things, place limitations on our ability to conduct these broader financial activities or, if the deficiencies persist, require us to divest the banking subsidiary or the businesses engaged in activities permissible only for financial holding companies.
In addition, the Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any nonbanking activity or terminate its ownership or control of any nonbank subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company.
Source of Strength Obligations. A financial holding company is required to act as a source of financial and managerial strength to its subsidiary bank and to maintain resources adequate to support its bank. The term “source of financial strength” means the ability of a company, such as us, that directly or indirectly owns or controls an insured depository institution, such as the Bank, to provide financial assistance to such insured depository institution in the event of financial distress. The appropriate federal banking agency for the depository institution (in the case of the Bank, this agency is the FDIC) may require reports from us to assess our ability to serve as a source of strength and to enforce compliance with the source of strength requirements by requiring us to provide financial assistance to the Bank in the event of financial distress. If we were to enter bankruptcy or become subject to the orderly liquidation process established by the Dodd-Frank Act, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee or the FDIC, as appropriate, and entitled to a priority of payment.
Acquisitions. The BHC Act permits acquisitions of banks by bank holding companies, such that we and any other bank holding company, whether located in Georgia or elsewhere, may acquire a bank located in any other state, subject to certain deposit-percentage, age of bank charter requirements, and other restrictions. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any additional bank or bank holding company, (ii) taking any action that causes an additional bank or bank holding company to become a subsidiary of the bank holding company, or (iii) merging or consolidating with any other bank holding company. The Federal Reserve may not approve any such transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider: (1) the financial and managerial resources of the companies involved,
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including pro forma capital ratios; (2) the risk to the stability of the United States banking or financial system; (3) the convenience and needs of the communities to be served, including performance under the Community Reinvestment Act, further described below; and (4) the effectiveness of the companies in combatting money laundering.
Change in Control. Federal law restricts the amount of voting stock of a bank holding company or a bank that a person may acquire without the prior approval of banking regulators. Under the Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company, such as the Company, and the FDIC before acquiring control of the Bank. Upon receipt of such notice, the bank regulatory agencies may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a person or group acquires the power to vote 10% or more of our outstanding common stock. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Investors should be aware of these requirements when acquiring shares of our stock.
Governance and Financial Reporting Obligations. We are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board, and the Nasdaq Stock Market. In particular, we are required to include management reports on internal controls as part of our Annual Report on Form 10-K in order to comply with Section 404 of the Sarbanes-Oxley Act. We have evaluated our controls, including compliance with the SEC rules on internal controls, and have and expect to continue to spend significant amounts of time and money on compliance with these rules. Our failure to comply with these internal control rules may materially adversely affect our reputation, ability to obtain the necessary certifications to financial statements, and the values of our securities.
Corporate Governance. The Dodd-Frank Act addresses many investor protections, corporate governance, and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act (1) grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for Compensation Committee members; and (3) requires companies listed on national securities exchanges to adopt incentive-based compensation claw-back policies for executive officers.
Incentive Compensation. The Dodd-Frank Act required the banking agencies and the SEC to establish joint rules or guidelines for financial institutions with more than $1 billion in assets, such as us and the Bank, which prohibit incentive compensation arrangements that the agencies determine to encourage inappropriate risks by the institution. The federal banking agencies issued proposed rules in 2011 and previously issued guidance on sound incentive compensation policies. In 2016, the federal banking agencies also proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2021, these rules have not been implemented. We and the Bank have undertaken efforts to ensure that our incentive compensation plans do not encourage inappropriate risks, consistent with three key principles - that incentive compensation arrangements should appropriately balance risk and financial rewards, be compatible with effective controls and risk management, and be supported by strong corporate governance.
Shareholder Say-On-Pay Votes. The Dodd-Frank Act requires public companies to take shareholders’ votes on proposals addressing compensation (known as say-on-pay), the frequency of a say-on-pay vote, and the golden parachutes available to executives in connection with change-in-control transactions. Public companies must give shareholders the opportunity to vote on the compensation at least every three years and the opportunity to vote on frequency at least every six years, indicating whether the say-on-pay vote should be held annually, biennially, or triennially. The say-on-pay, the say-on-parachute and the say-on-frequency votes are explicitly nonbinding and cannot override a decision of our board of directors.
Other Regulatory Matters. We and our subsidiaries are subject to oversight by the SEC, the Financial Industry Regulatory Authority, (“FINRA”), the PCAOB, the Nasdaq Stock Market and various state securities regulators. We and our subsidiaries have from time to time received requests for information from regulatory authorities in various states, including state attorneys general, securities regulators and other regulatory authorities, concerning our business practices. Such requests are considered incidental to the normal conduct of business.
Capital Requirements. The Bank is required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in
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interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account in assessing an institution’s overall capital adequacy. The following is a brief description of the relevant provisions of these capital rules and their potential impact on our capital levels.
The Bank is subject to the following risk-based capital ratios: a common equity Tier 1 (“CET1”) risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total risk-based capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock, plus retained earnings, and certain qualifying minority interests, less certain adjustments and deductions, including with respect to goodwill, intangible assets, mortgage servicing assets and deferred tax assets subject to temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital consists of instruments disqualified from Tier 1 capital, including qualifying subordinated debt, other preferred stock and certain hybrid capital instruments, and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The capital rules also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules, including, for example, certain “high volatility” commercial real estate, past due assets, structured securities and equity holdings.
The leverage capital ratio, which serves as a minimum capital standard, is the ratio of Tier 1 capital to quarterly average total consolidated assets net of goodwill, certain other intangible assets, and certain required deduction items. The required minimum leverage ratio for all banks is 4%.
In addition, as of January 1, 2019, the capital rules require a capital conservation buffer of 2.5%, constituted of CET1, above each of the minimum capital ratio requirements (CET1, Tier 1, and total risk-based capital), which is designed to absorb losses during periods of economic stress. These buffer requirements must be met for a bank to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five regulatory capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDICIA imposes progressively more restrictive restraints on operations, management and capital distributions, depending on the category in which an institution is classified.
To be well-capitalized, the Bank must maintain at least the following capital ratios:
•6.5% CET1 to risk-weighted assets;
•8.0% Tier 1 capital to risk-weighted assets;
•10.0% Total capital to risk-weighted assets; and
•5.0% Leverage ratio.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. For example, only a well-capitalized depository institution may accept brokered deposits without prior regulatory approval. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other restrictions on its growth.
As of December 31, 2021, our Bank's regulatory capital ratios were above the applicable well-capitalized standards and met the then-applicable capital conservation buffer.
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The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”) signed into law in May 2018 scaled back certain requirements of the Dodd-Frank Act and provided other regulatory relief. Among the provisions of the Economic Growth Act was a requirement that the Federal Reserve raise the asset threshold for those bank holding companies subject to the Federal Reserve’s Small Bank Holding Company Policy Statement (“Policy Statement”) to $3 billion. As a result, as of the effective date of that change in 2018, the Company was no longer required to comply with the risk-based capital rules applicable to the Bank as described above. The Federal Reserve may, however, require smaller bank holding companies subject to the Policy Statement to maintain certain minimum capital levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans.
As a result of the Economic Growth Act, the federal banking agencies were also required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s Tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action statutes. The federal banking agencies may consider a financial institutions risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the minimum capital for the new Community Bank Leverage Ratio at 9%. The Bank has not opted into the Community Bank Leverage Ratio Framework.
On December 21, 2018, federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of the “current expected credit losses” (“CECL”) accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations. In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, which introduced CECL as the methodology to replace the current “incurred loss” methodology for financial assets measured at amortized cost, and changed the approaches for recognizing and recording credit losses on available-for-sale debt securities and purchased credit impaired financial assets. Under the incurred loss methodology, credit losses are recognized only when the losses are probable or have been incurred; under CECL, companies are required to recognize the full amount of expected credit losses for the lifetime of the financial assets, based on historical experience, current conditions and reasonable and supportable forecasts. This change will result in earlier recognition of credit losses that the Company deems expected but not yet probable. For SEC reporting companies with smaller reporting company designation and December 31 fiscal-year ends, such as the Company, CECL will become effective beginning with the first quarter of 2023.
Payment of Dividends. We are a legal entity separate and distinct from the Bank and our other subsidiaries. Our primary source of cash, other than securities offerings, is dividends from the Bank. Under the laws of the State of Georgia, we, as a business corporation, may declare and pay dividends in cash or property unless the payment or declaration would be contrary to restrictions contained in our Articles of Incorporation, as amended, or unless, after payment of the dividend, we would not be able to pay our debts when they become due in the usual course of our business or our total assets would be less than the sum of our total liabilities. In addition, we are also subject to federal regulatory capital requirements that effectively limit the amount of cash dividends that we may pay.
The primary sources of funds for our payment of dividends to our shareholders are cash on hand and dividends from the Bank and our non-bank subsidiaries. Various federal and state statutory provisions and regulations limit the amount of dividends that the Bank and our non-bank subsidiaries may pay. The Bank is a Georgia bank. Under the regulations of the Georgia Department of Banking and Finance, a Georgia bank must have approval of the Georgia Department of Banking and Finance to pay cash dividends if, at the time of such payment:
•the ratio of Tier 1 capital to average total assets is less than 6%;
•the aggregate amount of dividends to be declared or anticipated to be declared during the current calendar year exceeds 50% of its net after-tax profits before dividends for the previous calendar year; or
•its total adversely classified assets in its most recent regulatory examination exceeded 80% of its Tier 1 capital plus its allowance for loan and lease losses.
The Georgia Financial Institutions Code contains restrictions on the ability of a Georgia bank to pay dividends other than from retained earnings without the approval of the Georgia Department of Banking and Finance. As a result of the foregoing restrictions, the Bank may be required to seek approval from the Georgia Department of Banking and Finance to pay dividends.
In addition, we and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an
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unsafe or unsound practice and to prohibit payment thereof. The FDIC and the Federal Reserve have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. The FDIC and the Federal Reserve have each indicated that depository institutions and their holding companies should generally pay dividends only out of current operating earnings. Prior approval by the FDIC is required if the total of all dividends declared by a bank in any calendar year exceeds the bank’s profits for that year combined with its retained net profits for the preceding two calendar years.
Under a Federal Reserve policy adopted in 2009, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:
•its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
•its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or
•it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Regulation of the Bank
The Bank is subject to comprehensive supervision and regulation by the FDIC and is subject to its regulatory reporting requirements. The Bank also is subject to certain Federal Reserve regulations. In addition, as discussed in more detail below, the Bank and any other of our subsidiaries that offer consumer financial products and services are subject to regulation and potential supervision by the Consumer Financial Protection Bureau ("CFPB"). Authority to supervise and examine the Company and the Bank for compliance with federal consumer laws remains largely with the Federal Reserve and the FDIC, respectively. However, the CFPB may participate in examinations on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. The CFPB also may participate in examinations of our other direct or indirect subsidiaries that offer consumer financial products or services. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB, and state attorneys general are permitted to enforce certain federal consumer financial protection rules adopted by the CFPB.
Broadly, regulations applicable to the Bank include limitations on loans to a single borrower and to its directors, officers and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital and liquidity ratios; the granting of credit under equal and fair conditions; the disclosure of the costs and terms of such credit; requirements to maintain reserves against deposits and loans; limitations on the types of investment that may be made by the Bank; and requirements governing risk management practices. The Bank is permitted under federal law to branch on a de novo basis across state lines where the laws of that state would permit a bank chartered by that state to open a de novo branch.
Transactions with Affiliates and Insiders. The Bank is subject to restrictions on extensions of credit and certain other transactions between the Bank and the Company or any nonbank affiliate. Generally, these covered transactions with either the Company or any affiliate are limited to 10% of the Bank’s capital and surplus, and all such transactions between the Bank and the Company and all of its nonbank affiliates combined are limited to 20% of the Bank’s capital and surplus. Loans and other extensions of credit from the Bank to the Company or any affiliate generally are required to be secured by eligible collateral in specified amounts. In addition, any transaction between the Bank and the Company or any affiliate are required to be on an arm’s length basis. Federal banking laws also place similar restrictions on certain extensions of credit by insured banks, such as the Bank, to their directors, executive officers and principal shareholders.
Reserves. Federal Reserve rules require depository institutions, such as the Bank, to maintain reserves against their transaction accounts, primarily interest bearing and non-interest bearing checking accounts. Effective March 26, 2020, reserve requirement ratios were reduced to zero percent. These reserve requirements are subject to annual adjustment by the Federal Reserve.
FDIC Insurance Assessments and Depositor Preference. The Bank’s deposits are insured by the FDIC’s DIF up to the limits under applicable law, which currently are set at $250,000 per depositor, per insured bank, for each account ownership category. The Bank is subject to FDIC assessments for its deposit insurance. The FDIC calculates quarterly deposit insurance assessments based on an institution’s average total consolidated assets less its average tangible equity, and applies one of four risk categories determined by reference to its capital levels, supervisory ratings, and certain other factors. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.
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Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency. In addition, the Federal Deposit Insurance Act provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution, including those of the parent bank holding company.
Standards for Safety and Soundness. The Federal Deposit Insurance Act requires the federal bank regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (1) internal controls; (2) information systems and audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate risk exposure; and (6) asset quality.
The federal banking agencies have adopted regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
Anti-Money Laundering. A continued focus of governmental policy relating to financial institutions in recent years has been combating money laundering and terrorist financing. The USA PATRIOT Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions such as broker-dealers, investment advisors and insurance companies, and strengthened the ability of the U.S. Government to help prevent, detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA PATRIOT Act require that regulated financial institutions, including state member banks: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. Failure of a financial institution to comply with the USA PATRIOT Act’s requirements could have serious legal and reputational consequences for the institution. The Bank has augmented its systems and procedures to meet the requirements of these regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by law.
FinCEN has adopted rules that require financial institutions to obtain beneficial ownership information with respect to legal entities with which such institutions conduct business, subject to certain exclusions and exemptions. Bank regulators are focusing their examinations on anti-money laundering compliance, and we continue to monitor and augment, where necessary, our anti-money laundering compliance programs.
Banking regulators will consider compliance with the Act’s money laundering provisions in acting upon acquisition and merger proposals. Bank regulators routinely examine institutions for compliance with these obligations and have been active in imposing cease and desist and other regulatory orders and money penalty sanctions against institutions found to be violating these obligations. Sanctions for violations of the Act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to $1 million. On January 1, 2021, Congress passed federal legislation that made sweeping changes to federal anti-money laundering laws, including changes that will be implemented in 2021 and subsequent years.
Economic Sanctions. The Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and acts of Congress. OFAC publishes, and routinely updates, lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, including the Specially Designated Nationals and Blocked Persons List. If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must undertake certain specified activities, which could include blocking or freezing the account or transaction requested, and we must notify the appropriate authorities.
Concentrations in Lending. During 2006, the federal bank regulatory agencies released guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) and advised financial institutions of the risks posed by commercial real estate (“CRE”) lending concentrations. The Guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. Higher allowances for loan losses and capital levels may also be required. The Guidance is triggered when CRE loan concentrations exceed either:
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•total reported loans for construction, land development, and other land of 100% or more of a bank’s total risk-based capital; or
•total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land of 300% or more of a bank’s total risk-based capital.
The Guidance also applies when a bank has a sharp increase in CRE loans or has significant concentrations of CRE secured by a particular property type. We have always had exposures to loans secured by commercial real estate due to the nature of our markets and the loan needs of both retail and commercial customers. We believe our long term experience in CRE lending, underwriting policies, internal controls, and other policies currently in place, as well as our loan and credit monitoring and administration procedures, are generally appropriate to managing our concentrations as required under the Guidance.
Community Reinvestment Act. The Bank is subject to the provisions of the Community Reinvestment Act (“CRA”), which imposes a continuing and affirmative obligation, consistent with their safe and sound operation, to help meet the credit needs of entire communities where the bank accepts deposits, including low- and moderate-income neighborhoods. The FDIC’s assessment of the Bank’s CRA record is made available to the public. Further, a less than satisfactory CRA rating will slow, if not preclude, expansion of banking activities and prevent a company from becoming or remaining a financial holding company. Following the enactment of the Gramm-Leach-Bliley Act (“GLB”), CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal regulator. A bank holding company will not be permitted to become or remain a financial holding company and no new activities authorized under GLB may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “satisfactory” CRA rating in its latest CRA examination. Federal CRA regulations require, among other things, that evidence of discrimination against applicants on a prohibited basis, and illegal or abusive lending practices be considered in the CRA evaluation. The Bank has a rating of “Satisfactory” in its most recent CRA evaluation.
Privacy and Data Security. The GLB generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, will be required to comply with state law if it is more protective of consumer privacy than the GLB. The GLB also directed federal regulators, including the FDIC, to prescribe standards for the security of consumer information. The Bank is subject to such standards, as well as standards for notifying customers in the event of a security breach. Under federal law, the Bank must disclose its privacy policy to consumers, permit customers to opt out of having nonpublic customer information disclosed to third parties in certain circumstances and allow customers to opt out of receiving marketing solicitations based on information about the customer received from another subsidiary. States may adopt more extensive privacy protections. We are similarly required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused. On November 18, 2021, the federal banking agencies issued a new rule effective in 2022 that requires banks to notify their regulators within 36 hours of a “computer-security incident” that rises to the level of a “notification incident.”
Consumer Regulation. Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. These laws and regulations include, among numerous other things, provisions that:
•limit the interest and other charges collected or contracted for by the Bank, including new rules respecting the terms of credit cards and of debit card overdrafts;
•govern the Bank’s disclosures of credit terms to consumer borrowers;
•require the Bank to provide information to enable the public and public officials to determine whether it is fulfilling its obligation to help meet the housing needs of the community it serves;
•prohibit the Bank from discriminating on the basis of race, creed or other prohibited factors when it makes decisions to extend credit;
•govern the manner in which the Bank may collect consumer debts; and
•prohibit unfair, deceptive or abusive acts or practices in the provision of consumer financial products and services.
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Mortgage Regulation. The CFPB adopted a rule that implements the ability-to-repay and qualified mortgage provisions of the Dodd-Frank Act (the “ATR/QM rule”), which requires lenders to consider, among other things, income, employment status, assets, payment amounts, and credit history before approving a mortgage, and provides a compliance “safe harbor” for lenders that issue certain “qualified mortgages.” The ATR/QM rule defines a “qualified mortgage” to have certain specified characteristics, and generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. The rule also establishes general underwriting criteria for qualified mortgages, including that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the borrower have a total debt-to-income ratio that is less than or equal to 43%. While “qualified mortgages” will generally be afforded safe harbor status, a rebuttable presumption of compliance with the ability-to-repay requirements will attach to “qualified mortgages” that are “higher priced mortgages” (which are generally subprime loans). In addition, the securitizer of asset-backed securities must retain not less than 5% of the credit risk of the assets collateralizing the asset-backed securities, unless subject to an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages.”
The CFPB has also issued rules to implement requirements of the Dodd-Frank Act pertaining to mortgage loan origination (including with respect to loan originator compensation and loan originator qualifications) as well as integrated mortgage disclosure rules. In addition, the CFPB has issued rules that require servicers to comply with new standards and practices with regard to: error correction; information disclosure; force-placement of insurance; information management policies and procedures; requiring information about mortgage loss mitigation options be provided to delinquent borrowers; providing delinquent borrowers access to servicer personnel with continuity of contact about the borrower’s mortgage loan account; and evaluating borrowers’ applications for available loss mitigation options. These rules also address initial rate adjustment notices for adjustable-rate mortgages (ARMs), periodic statements for residential mortgage loans, and prompt crediting of mortgage payments and response to requests for payoff amounts.
In 2020, the CARES Act granted certain forbearance rights and protection against foreclosure to borrowers with a “federally backed mortgage loan,” including certain first or subordinate lien loans designed principally for the occupancy of one to four families. These consumer protections continued during the COVID 19 pandemic emergency.
Non-Discrimination Policies. The Bank is also subject to, among other things, the provisions of the Equal Credit Opportunity Act (the “ECOA”) and the Fair Housing Act (the “FHA”), both of which prohibit discrimination based on race or color, religion, national origin, sex, and familial status in any aspect of a consumer or commercial credit or residential real estate transaction. The Department of Justice (the “DOJ”), and the federal bank regulatory agencies have issued an Interagency Policy Statement on Discrimination in Lending that provides guidance to financial institutions in determining whether discrimination exists, how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices. The DOJ has increased its efforts to prosecute what it regards as violations of the ECOA and FHA.
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Item 1A.
Risk Factors
In addition to the other information contained in this Annual Report, you should carefully consider the risks described below, as well as the risk factors and uncertainties discussed in our other public filings with the SEC under the caption “Risk Factors” in evaluating us and our business and making or continuing an investment in our stock. Our operations and financial results are subject to various risks and uncertainties, including, but not limited to, the material risks described below. Many of these risks are beyond our control although efforts are made to manage those risks while simultaneously optimizing operational and financial results. The occurrence of any of the following risks, as well as risks of which we are currently unaware or currently deem immaterial, could materially and adversely affect our assets, business, cash flows, condition (financial or otherwise), liquidity, prospects, results of operations and the trading price of our common stock. It is impossible to predict or identify all such factors and, as a result, you should not consider the following factors to be a complete discussion of the risks, uncertainties and assumptions that could materially and adversely affect our assets, business, cash flows, condition (financial or otherwise), liquidity, prospects, results of operations and the trading price of our common stock. These risks may also be heightened by the disruption and uncertainty resulting from COVID-19.
In addition, certain statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” beginning on page 1 of this Annual Report.
Risks Related to Our Business
Our business may be adversely affected by downturns in our national and local economies and our concentration in Georgia makes us vulnerable to local weather catastrophes, public health issues, and other external events, which could adversely affect our results of operations and financial condition.
Our operations are significantly affected by national and local economic conditions. Substantially all of our loans are to businesses and individuals in Georgia, and all of our branches and most of our deposit customers are also located in this area. As a result, local economic conditions significantly affect the demand for loans and other products we offer to our customers (including real estate, commercial and construction loans), the ability of borrowers to repay these loans and the value of the collateral securing these loans. A decline in the economies in which we operate could have a material adverse effect on our business, financial condition and results of operations, including, but not limited to the following:
•demand for our loans, deposits and services may decline;
•loan delinquencies, problem assets and foreclosures may increase;
•weak economic conditions may continue to limit the demand for loans by creditworthy borrowers, limiting our capacity to leverage our retail deposits and maintain our net interest income;
•collateral for our loans may decline further in value; and
•the amount of our low-cost or non-interest bearing deposits may decrease.
Strong competition and changing banking environment may limit growth and profitability.
Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms operating locally and elsewhere, and non-traditional financial institutions, including fintech companies, non-depository financial services providers. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Additionally, non-traditional financial institutions may not have the same regulatory requirements or burdens as we do, despite playing a rapidly increasing role in the financial services industry including providing services previously limited to commercial banks. Such competition could ultimately limit our growth, profitability and shareholder value, as increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees, gains on sales, servicing fees, as well as reduced net interest margin and profitability. If we are unable to successfully compete in our market areas and adapt to the ever changing banking environment, we may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected. We also compete with many forms of payments offered by both bank and non-bank providers, including a variety of new and evolving alternative payment mechanisms, systems and products, such as aggregators and web-based and wireless payment platforms or technologies, digital or “crypto” currencies, prepaid systems and payment services targeting users of social networks, communications platforms and online gaming. Our future success may depend, in part, on our ability to use technology competitively to offer products and services that provide convenience to customers and create additional efficiencies in our operations.
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Some of our competitors have reduced or eliminated certain service charges on deposit accounts, including overdraft fees, and additional competitors may be willing to reduce or eliminate service or other fees in order to attract additional customers. If the Company chooses to reduce or eliminate certain categories of fees, including those related to deposit accounts, fee income related to these products and services would be reduced. If the Company chooses not to take such actions, we may be at a competitive disadvantage in attracting customers for certain fee producing products.
Fluctuations in interest rates may impact net interest income and otherwise negatively impact our financial condition and results of operations.
Net interest income, which is the difference between the interest income that we earn on interest-earning assets and the interest expense that we pay on interest-bearing liabilities, is a major component of our income and our primary source of revenue from our operations. A further narrowing of interest rate spreads could adversely affect our earnings and financial condition. We cannot control or predict with certainty changes in interest rates. Regional and local economic conditions, competitive pressures and the policies of regulatory authorities, including monetary policies of the Federal Reserve, affect interest income and interest expense.
Effective March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent in response to the economic disruption that occurred at the outset of the COVID-19 pandemic, which has continued into 2022. We expect a long duration of reduced interest rates to negatively impact our net interest income, margin, cost of borrowing and future profitability and to have a material adverse effect on our financial results. However, we expect the Federal Reserve to raise rates more than once in the next twelve months. Increasing interest rates can have a negative impact on our business by reducing the amount of money our customers borrow or by adversely affecting their ability to repay outstanding loan balances that may increase due to adjustments in their variable rates. In addition, in a rising interest rate environment we may have to offer more attractive interest rates to depositors to compete for deposits, or pursue other sources of liquidity, such as wholesale funds. Higher income volatility from changes in interest rates and spreads to benchmark indices could result in a decrease in net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates impacts both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition. A prolonged period of volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies.
We have ongoing policies and procedures designed to manage the risks associated with changes in market interest rates and actively manage these risks through hedging and other risk mitigation strategies. However, if our assumptions are wrong or overall economic conditions are significantly different than anticipated, our risk mitigation techniques may be ineffective or costly.
The COVID-19 pandemic has adversely impacted, and will likely continue to adversely impact, our business, financial condition, liquidity, capital and results of operations.
The extent and duration to which the continuing COVID-19 pandemic will impact our business in the future is unknown and will depend on future developments, which are highly uncertain and outside our control. These developments include the duration and severity of the pandemic (including the possibility of further surges of new or existing COVID-19 variants of concern), supply chain disruptions, decreased demand for our products and services or those of our borrowers, which could increase our credit risk, rising inflation, our ability to maintain sufficient qualified personnel due to labor shortages, talent attrition, employee illness, quarantine, willingness to return to work, face-coverings and other safety requirements, or travel and other restrictions, and the actions taken by governments, businesses and individuals to contain the impact of COVID-19, as well as further actions taken by governmental authorities to limit the resulting economic impact. It is also possible that the pandemic and its aftermath will lead to a prolonged economic slowdown in sectors disproportionately affected by the pandemic or recession in the U.S. economy or the world economy in general.
Inflation could negatively impact our business, our profitability and our stock price.
Prolonged periods of inflation may impact our profitability by negatively impacting our fixed costs and expenses, including increasing funding costs and expense related to talent acquisition and retention, and negatively impacting the demand for our products and services. Additionally, inflation may lead to a decrease in consumer and clients purchasing power and negatively affect the need or demand for our products and services. If significant inflation continues, our business could be negatively affected by, among other things, increased default rates leading to credit losses which could decrease our appetite for new credit extensions. These inflationary pressures could result in missed earnings and budgetary projections causing our stock price to suffer.
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Interest rates on our outstanding financial instruments might be subject to change based on developments related to LIBOR, which could adversely affect our revenue, expenses, and the value of our financial instruments.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The ICE Benchmark Administration (IBA), the administrator of LIBOR, announced on November 30, 2020, that it would cease publishing the one-week and two-month LIBOR rates on December 31, 2021, but would continue publishing the one-, three-, six-, and twelve-month LIBOR rates until June 30, 2023. Regardless, the federal banking agencies also issued guidance on November 30, 2020, encouraging banks to (i) stop using LIBOR in new financial contracts no later than December 31, 2021; and (ii) either use a rate other than LIBOR or include clear language defining the alternative rate that will be applicable after LIBOR’s discontinuation. At this time, it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark prior to its 2023 retirement, what rate or rates may become accepted alternatives to LIBOR, or the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.
In particular, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments.
The uncertainty regarding the future of LIBOR as well as the transition from LIBOR to another benchmark rate or rates is complex and could have a range of adverse effects on our business, financial condition and results of operations. In particular, any such transition could:
•adversely affect the interest rates paid or received on, and the revenue and expenses associated with, and the value of Colony’s floating rate obligations, loans, deposits, derivatives and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;
•prompt inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with an alternative reference rate;
•result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language, or the absence of such language, in LIBOR-based securities and loans;
•result in customer uncertainty and disputes around how variable rates should be calculated in light of the foregoing, thereby damaging our reputation and resulting in a loss of customers and additional costs to us; and
•require the transition to or development of appropriate systems and analytics to effectively transition Colony’s risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark, such as SOFR.
The manner and impact of this transition, as well as the effect of these developments on Colony’s funding costs, loan, and investment and trading securities portfolios, asset liability management and business is uncertain.
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and through other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits. Such deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.
Other primary sources of funds consist of cash from operations, investment maturities and sales, sale of loans and proceeds from the issuance and sale of our equity securities to investors. Additional liquidity is provided by our ability to borrow from the Federal Reserve Bank of Atlanta and the Federal Home Loan Bank of Atlanta. We also may borrow from third-party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
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Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including our ability to originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
Our business depends on our ability to successfully manage credit risk.
We are subject to the risk of losses resulting from the failure of borrowers, guarantors and related parties to pay us the interest and principal amounts due on their loans. Although we maintain well-defined credit policies and credit underwriting and monitoring and collection procedures, these policies and procedures may not prevent losses, particularly during periods in which the local, regional or national economy suffers a general decline. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. If borrowers fail to repay their loans, our financial condition and results of operations would be adversely affected.
Our commercial real estate, real estate construction, and commercial business loans increase our exposure to credit risks.
Over the last several years, we have increased our non-residential lending in order to improve the yield and reduce the average duration of our assets. At December 31, 2021, our portfolio of commercial real estate and commercial, financial and agricultural loans totaled $1.1 billion or 82.7% of total loans compared $854.9 million, or 80.7% of total loans of total loans at December 31, 2020. At December 31, 2021, the amount of nonperforming commercial real estate and commercial, financial and agricultural loans was $1.6 million , or 28.9% of total nonperforming loans. These loans may expose us to a greater risk of non-payment and loss than residential real estate loans because, in the case of commercial loans, repayment often depends on the successful operation and earnings of the borrower's businesses and, in the case of consumer loans, the applicable collateral is subject to rapid depreciation. Additionally, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest due on the loan, which could cause us to increase our provision for loan losses and adversely affect our financial condition and operating results. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may also require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.
Our allowance for loan losses may not cover actual losses, and we may be required to materially increase our allowance, which may adversely affect our capital, financial condition and results of operations.
We derive the most significant portion of our revenues from our lending activities. When we lend money, commit to lend money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, which is the risk of losses if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their contracts. We estimate and maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expenses, which represents management's best estimate of probable credit losses that have been incurred within the existing portfolio of loans, as described under Note 5 of Notes to Consolidated Financial Statements in this Report and under “Allowance for Loan Losses” under “Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Report.
The allowance, in the judgment of management, is established to reserve for estimated loan losses and risks inherent in the loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes, as we have experienced as a result of the COVID-19 pandemic and continue to experience the after-effects of the pandemic through supply chain disruptions. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, risk ratings, and other factors, both within and outside of our control, including the impact of COVID-19, may require an increase in the allowance for loan losses.
Because the risk rating of the loans is dependent on some subjective information and subject to changes in the borrower's credit risk profile, evolving local market conditions and other factors, it can be difficult for us to predict the effects that those factors
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will have on the classifications assigned to the loan portfolio, and thus difficult to anticipate the velocity or volume of the migration of loans through the classification process and effect on the level of the allowance for loan losses. An increase in the allowance for loan losses would result in a decrease in net income and capital, and could have a material adverse effect on our capital, financial condition and results of operations. Accordingly, we monitor our credit quality and our reserve requirements and use that as a basis for capital planning and other purposes. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Requirements” of this Report for further information.
We may not be able to continue growing our business, particularly if we cannot increase loans and deposits through organic growth.
Our ability to continue to grow successfully will depend to a significant extent on our capital resources. It also will depend, in part, upon our ability to attract deposits and grow our loan portfolio and investment opportunities and on whether we can continue to fund growth while maintaining cost controls and asset quality, as well as on other factors beyond our control, such as national, regional and local economic conditions and interest rate trends.
We hold certain intangible assets that in the future could be classified as either partially or fully impaired, which would reduce our earnings and the book values of these assets.
Pursuant to applicable accounting requirements, we are required to periodically test our goodwill and core deposit intangible assets for impairment. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. Future impairment testing may result in a partial or full impairment of the value of our goodwill or core deposit intangible assets, or both. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment.
The current expected credit loss standard established by the Financial Accounting Standards Board will require significant data requirements and changes to methodologies.
In the aftermath of the 2007-2008 financial crisis, the Financial Accounting Standards Board, or FASB, decided to review how banks estimate losses in the allowance for loan losses calculation, and it issued the final Current Expected Credit Loss, or CECL, standard on June 16, 2016. Currently, the impairment model used by financial institutions is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the CECL model that will become effective for us for the fiscal year beginning after December 15, 2022 in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will require significantly greater data requirements and changes to methodologies to accurately account for expected loss. There can be no assurance that we will not be required to increase our reserves and allowance for loan losses as a result of the implementation of CECL.
Acquisitions could disrupt our business and adversely affect our operating results.
To the extent that we grow through acquisitions, we may not be able to adequately or profitably manage this growth. In addition, such acquisitions may involve the issuance of securities, which may have a dilutive effect on earnings per share. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:
•potential exposure to unknown or contingent liabilities we acquire;
•exposure to potential asset quality problems of the acquired financial institutions, businesses or branches;
•difficulty and expense of integrating the operations and personnel of financial institutions, businesses or branches we acquire;
•higher than expected deposit attrition;
•potential diversion of our management’s time and attention;
•the possible loss of key employees and customers of financial institutions, businesses or branches we acquire;
•difficulty in safely investing any cash generated by the acquisition;
•inability to utilize potential tax benefits from such transactions;
•difficulty in estimating the fair value of the financial institutions, businesses or branches to be acquired which affects the profits we generate from the acquisitions; and
•potential changes in banking or tax laws or regulations that may affect the financial institutions or businesses to be acquired.
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In addition, we face significant competition from numerous other financial services institutions, many of which will have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not be available to us. Furthermore, we may not be able to complete future acquisitions and, if we do complete such acquisitions, we may not be able to successfully integrate the operations, management, products and services of the entities that we acquire and eliminate redundancies.
Reductions in service charge income or failure to comply with payment network rules could negatively impact our earnings.
We derive significant revenue from service charges on deposit accounts, the bulk of which comes from overdraft-related fees. We have seen a slight increase in our service charge income, which is primarily attributable to an increase in insufficient funds and overdraft fees due to a general increase in customer spending activity driven by the winding down of the economic impact of COVID-19.
In addition, changes in banking regulations could have an adverse impact on our ability to derive income from service charges. Increased competition from other financial institutions or changes in consumer behavior could lead to declines in our deposit balances, which would result in a decline in service charge fees. Such a reduction could have a material impact on our earnings.
Reductions in interchange income could negatively impact our earnings.
Interchange income is derived from fees paid by merchants to the interchange network in exchange for the use of the network's infrastructure and payment facilitation. These fees are paid to card issuers to compensate them for the costs associated with issuance and operation. We earn interchange fees on card transactions from debit cards, including $6.9 million during the year ended December 31, 2021. Merchants have attempted to negotiate lower interchange rates, and the Durbin Amendment to the Dodd-Frank Act limits the amount of interchange fees that may be charged for certain debit card transactions. Merchants may also continue to pursue alternative payment platforms, such as Apple Pay, to lower their processing costs. Any such new payment system may reduce our interchange income. Our failure to comply with the operating regulations set forth by payment card networks, which may change, could subject us to penalties, fees or the termination of our license to use the networks. Any of these scenarios could have a material impact on our business, financial condition and results of operations.
Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.
We are exposed to many types of operation risks, including reputational risk, legal and regulatory and compliance risk, the risk of fraud, theft, illegal, wrongful or suspicious activities, and/or activities resulting in consumer harm that adversely affects our customers and/or our business by employees or persons outside our Company, including the execution of unauthorized transactions by employees or operational errors, clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. The precautions we take to detect and prevent such misconduct may not always be effective and regulatory sanctions and/or penalties, serious harm to our reputation, financial condition, customer relationships and ability to attract new customers. In addition, improper use or disclosure of confidential information by our employees, even if inadvertent, could result in serious harm to our reputation, financial condition and current and future business relationships. The precautions we take to detect and prevent such misconduct may not always be effective. Actual or alleged conduct by Colony Bank can result in negative public opinion about our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and keep customers and can expose us to litigation and regulatory action. Negative public opinion could also affect our credit ratings, which are important to our access to unsecured wholesale borrowings.
Our business involves storing and processing sensitive consumer and business customer data. If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who were not permitted to have that information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties. Furthermore, a cybersecurity breach could result in theft of such data.
Because we operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary
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dependence upon automated systems to record and process transactions, and our large transaction volume, may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers, computer break-ins, phishing and other disruptions or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may result in violations of consumer privacy laws including the Gramm-Leach-Bliley Act, cause significant liability to us and give reason for existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage and potential liability, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of us to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition or operations results, perhaps materially.
As an issuer of debit cards, we are exposed to losses in the event that holders of our cards experience fraud on their card accounts.
Our customers regularly use Colony Bank-issued debit cards to pay for transactions with retailers and other businesses. There is the risk of data security breaches at these retailers and other businesses that could result in the misappropriation of our customers’ debit card information. When our customers use Colony Bank-issued cards to make purchases from those businesses, card account information is provided to the business. If the business’s systems that process or store card account information are subject to a data security breach, holders of our cards who have made purchases from that business may experience fraud on their card accounts. Colony Bank may suffer losses associated with reimbursing our customers for such fraudulent transactions on customers’ card accounts, as well as for other costs related to data security compromise events, such as replacing cards associated with compromised card accounts.
The implementation of other new lines of business or new products and services may subject us to additional risk.
We continuously evaluate our service offerings and may implement new lines of business or offer new products and services within existing lines of business in the future. There are substantial risks and uncertainties associated with these efforts. In developing and marketing new lines of business and/or new products and services, we undergo a new product process to assess the risks of the initiative, and invest significant time and resources to build internal controls, policies and procedures to mitigate those risks, including hiring experienced management to oversee the implementation of the initiative. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could require the establishment of new key and other controls and have a significant impact on our existing system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
As a community bank, our recruitment and retention efforts may not be sufficient enough to implement our business strategy and execute successful operations.
Our financial success depends upon our ability to attract and retain highly motivated, well-qualified personnel. We face significant competition in the recruitment of qualified employees from financial institutions and others. As we continue to grow, we may find our recruitment and retention efforts more challenging. If we do not succeed in attracting, hiring, and integrating experienced or qualified personnel, we may not be able to successfully implement our business strategy, and we may be required to substantially increase our overall compensation or benefits to attract and retain such employees. Furthermore, in June 2010, the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the FDIC jointly issued comprehensive final guidance designed to ensure that incentive compensation policies do not undermine the safety and soundness of banking organizations by encouraging employees to take imprudent risks. This regulation significantly restricts the amount, form, and context in which we pay incentive-based compensation and may put us at a competitive disadvantage compared to non-financial institutions in terms of attracting and retaining senior level employees.
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We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
Our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we will not be able to effectively compete.
The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. These trends were accelerated by the COVID-19 pandemic, increasing demand for mobile banking solutions. Our future success will depend, in part, on our ability to keep pace with the technological changes and to use technology to satisfy and grow customer demand for our products and services and to create additional efficiencies in our operations. We expect that we will need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological changes. Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more heavily in developing and adopting new technologies, which may put us at a competitive disadvantage. In addition, we may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and the failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business, financial condition and results of operations.
We face significant cyber and data security risk that could result in the dissemination of confidential and sensitive information, adversely affecting our business or reputation and exposing us to material liabilities.
As a financial institution, we are under continuous threat of loss due to the swiftness and sophistication of hacking and cyber-attacks. This risk, although considerable at the present, will only increase in the future. Two of the most significant cyber-attack risks that we face are electronic fraud and loss of sensitive customer data. Loss from electronic fraud occurs when cybercriminals breach and extract funds directly from customer accounts or our own accounts. The attempts to breach sensitive customer data, such as account numbers, social security numbers, or other personal information are less frequent but would present significant legal and/or regulatory costs to us if successful, as well as potentially damage our reputation among the markets we serve. Our risk and exposure to these matters will remain relevant because of the evolving nature and complexity of the threats posed by cybercriminals and hackers along with our plans to continue to provide internet banking and mobile banking avenues for transacting business. While we have not experienced material losses relating to cyber-attacks or other information security breaches to date, we have been the subject of attempted hacking and cyber-attacks and there can be no assurance that we will not suffer such losses in the future.
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The occurrence of any cyber-attack or information security breach could result in material adverse consequences including damage to our reputation and the loss of current or potential customers. We also could face litigation or additional regulatory scrutiny due to such an occurrence. Litigation or regulatory actions in turn could lead to material liability, including, but not limited to, fines and penalties or reimbursement to customers adversely affected by a data breach. Even if we do not suffer any material adverse consequences as a result of events affecting us directly, successful attacks or systems failures at other financial institutions could lead to a general loss of customer confidence in our Company.
We rely on third-party vendors for key components of our business.
Many key components of our operations, including data processing, recording and monitoring transactions, online interfaces and services, internet connections and network access are provided by other companies. Our vendor management process selects third-party vendors carefully, but we do not control their actions. Problems, including disruptions in communication, security breaches, or failure of a vendor to provide services, could hurt our operations or our relationships with customers. If our vendors suffer financial or operational issues, our operations and reputation could suffer if it harms the vendors’ ability to serve us and our customers. Third-party vendors are also a source of operational and information security risk to us. Replacing or renegotiating contracts with vendors could entail significant operational expense and delays. The use of third-party vendors represents an unavoidable inherent risk to our Company.
Our accounting estimates and risk management processes rely on analytical and forecasting models.
Processes that management uses to estimate our probable incurred credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances, as we have experienced as a result of the COVID-19 pandemic. Even if these assumptions are accurate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models that management uses for interest rate risk and asset liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models that management uses for determining our probable credit losses are inadequate, the allowance for loan losses may not be sufficient to support future charge offs. If the models that management uses to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in management’s analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.
Changes in accounting standards could materially impact our financial statements.
From time to time, the FASB or the Securities and Exchange Commission, or SEC, may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements. Restating or revising our financial statements may result in reputational harm or may have other adverse effects on us.
Any deficiencies in our financial reporting or internal controls could materially and adversely affect us, including resulting in material misstatements in our financial statements, and could materially and adversely affect the market price of our common stock.
If we fail to maintain effective internal controls over financial reporting, our operating results could be harmed and it could result in a material misstatement in our financial statements in the future. Inferior controls and procedures or the identification of accounting errors could cause our investors to lose confidence in our internal controls and question our reported financial information, which, among other things, could have a negative impact on the trading price of our common stock. Additionally, we could become subject to increased regulatory scrutiny and a higher risk of shareholder litigation, which could result in significant additional expenses and require additional financial and management resources.
We may be adversely affected by the soundness of other financial institutions.
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Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings.
Hurricanes or other adverse weather events would negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.
Our market area is located in the southeastern region of the United States and is susceptible to natural disasters, such as hurricanes, tornadoes, tropical storms, other severe weather events and related flooding and wind damage, and man-made disasters. These natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us, damage our banking facilities and offices and negatively impact our growth strategy. Climate change may be increasing the nature, severity and frequency of adverse weather conditions, making the impact from these types of natural disasters on us or our customers worse. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where they operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes or tornadoes will affect our operations or the economies in our current or future market areas, but such weather events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of natural or man-made disasters.
We may need to rely on the financial markets to provide needed capital.
Our common stock is listed and traded on the NASDAQ Global Market. If our capital resources prove in the future to be inadequate to meet our capital requirements, we may need to raise additional debt or equity capital. If conditions in the capital markets are not favorable, we may be constrained in raising capital, and an inability to raise additional capital on acceptable terms when and if needed could have a material adverse effect on our business, financial condition or results of operations.
The interest rates that we pay on our securities are also influenced by, among other things, the credit ratings that we, our affiliates and/or our securities receive from recognized rating agencies. Our credit ratings are based on a number of factors, including our financial strength and some factors not entirely within our control such as conditions affecting the financial services industry generally, and remain subject to change at any time. A downgrade to the credit rating of us or our affiliates could affect our ability to access the capital markets, increase our borrowing costs and negatively impact our profitability. A downgrade to us, our affiliates or our securities could create obligations or liabilities to us under the terms of our outstanding securities that could increase our costs or otherwise have a negative effect on our results of operations or financial condition. Additionally, a downgrade to the credit rating of any particular security issued by us or our affiliates could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.
Because our decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future. In addition, geopolitical and worldwide market conditions may cause disruption or volatility in the U.S. equity and debt markets, which could hinder our ability to issue debt and equity securities in the future on favorable terms.
The costs and effects of litigation, investigations or similar matters involving us or other financial institutions or counterparties, or adverse facts and developments related thereto, could materially affect our business, operating results and financial condition.
We may be involved from time to time in a variety of litigation, investigations or similar matters arising out of our business, including litigation related to our participation in stimulus programs associated with the government’s response to the COVID-19 pandemic. It is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. Our insurance may not cover all claims that may be asserted against us and indemnification rights to which we are entitled may not be honored, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation or investigation significantly exceed our insurance coverage or to the extent that we incur civil money penalties that are not covered by insurance, they could have a
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material adverse effect on our business, financial condition and results of operations. In addition, premiums for insurance covering the financial and banking sectors are rising. We may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms or at historic rates, if at all. Finally, in recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. We could become subject to claims based on this or other evolving legal theories in the future.
Risks Related to Legislative and Regulatory Events
We are subject to extensive government regulation that could limit or restrict our activities, which in turn may adversely impact our ability to increase our assets and earnings.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve, the Georgia Department of Banking and Finance (“DBF”) and the FDIC. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels, and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business, profitability or growth strategy. Increased regulation could increase our cost of compliance and adversely affect profitability. Moreover, certain of these regulations contain significant punitive sanctions for violations, including monetary penalties and limitations on a bank’s ability to implement components of its business plan, such as expansion through mergers and acquisitions or the opening of new branch offices. In addition, changes in regulatory requirements may add costs associated with compliance efforts. Furthermore, government policy and regulation, particularly as implemented through the Federal Reserve System, significantly affect credit conditions. Negative developments in the financial industry and the impact of new legislation and regulation in response to those developments could negatively impact our business operations and adversely impact our financial performance.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings.
The Federal Reserve, the FDIC, and the DBF periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, interest rate sensitivity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, Consumer Financial Protection Bureau (“CFPB”) and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
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We could face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act of 1970, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. FinCEN, established by the U.S. Department of the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and engages in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and IRS. There is also increased scrutiny of compliance with the rules enforced by OFAC related to U.S. sanctions regimes. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
Risks Related to Our Common Stock
Our management team’s strategies for the enhancement of shareholder value may not succeed.
Our management team is taking and considering actions to enhance shareholder value, including reviewing personnel, developing new products, issuing dividends and exploring acquisition opportunities. These actions may not enhance shareholder value. For example, holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. We are not legally required to do so. Further, the Federal Reserve could decide at any time that paying any dividends on our common stock could be an unsafe or unsound banking practice. The reduction or elimination of dividends paid on our common stock could adversely affect the market price of our common stock.
An investment in our common stock is not an insured deposit and may lose value.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described herein, and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.
Our stock price may be volatile due to limited trading volume.
Our common stock is traded on the NASDAQ Global Market. However, the average daily trading volume in the Company’s common stock has been relatively small, averaging approximately 391 total trades per day during 2021. As a result, trades involving a relatively small number of shares may have a significant effect on the market price of the common stock, and it may be difficult for investors to acquire or dispose of large blocks of stock without significantly affecting the market price.
ESG risks could adversely affect our reputation and shareholder, employee, client and third party relationships and may negatively affect our stock price.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as diversity, equity, inclusion, environmental stewardship, human capital management, support for our local communities, corporate governance and transparency, or fail to consider ESG factors in our business operations.
Furthermore, as a result of our diverse base of clients and business partners, we may face potential negative publicity based on the identity of our clients or business partners and the public’s (or certain segments of the public’s) view of those entities. Such publicity may arise from traditional media sources or from social media and may increase rapidly in size and scope. If our client or business partner relationships were to become intertwined in such negative publicity, our ability to attract and retain clients, business partners, and employees may be negatively impacted, and our stock price may also be negatively impacted. Additionally, we may face pressure to not do business in certain industries that are viewed as harmful to the environment or are otherwise negatively perceived, which could impact our growth.
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Additionally, investors and shareholder advocates are placing ever increasing emphasis on how corporations address ESG issues in their business strategy when making investment decisions and when developing their investment theses and proxy recommendations. We may incur meaningful costs with respect to our ESG efforts and if such efforts are negatively perceived, our reputation and stock price may suffer.
Our ability to deliver and pay dividends depends primarily upon the results of operations of our subsidiary Bank, and we may not pay, or be permitted to pay, dividends in the future.
We are a bank holding company that conducts substantially all of our operations through our subsidiary Bank. As a result, our ability to make dividend payments on our common stock will depend primarily upon the receipt of dividends and other distributions from the Bank. The ability of the Bank to pay dividends or make other payments to us, as well as our ability to pay dividends on our common stock, is limited by the Bank’s obligation to maintain sufficient capital and by other general regulatory restrictions on its dividends, which have tightened since the financial crisis.
The Federal Reserve has stated that bank holding companies should not pay dividends from sources other than current earnings. If these requirements are not satisfied, we will be unable to pay dividends on our common stock. We may also decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business, which could adversely affect the market value of our common stock. There can be no assurance of whether or when we may pay dividends in the future.
Securities analysts might not continue coverage on our common stock, which could adversely affect the market for our common stock.
The trading price of our common stock depends in part on the research and reports that securities analysts publish about us and our business. We do not have any control over these analysts, and they may not continue to cover our common stock. If securities analysts do not continue to cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. If securities analysts continue to cover our common stock, and our common stock is the subject of an unfavorable report, the price of our common stock may decline. If one or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline.
Future equity issuances could result in dilution, which could cause our common stock price to decline.
We are generally not restricted from issuing additional shares of our common stock, up to the 20 million shares of voting common stock and 10 million shares of preferred stock authorized in our articles of incorporation (subject to Nasdaq shareholder approval rules), which in each case could be increased by a vote of a majority of our shares. We may issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any reason, the issuance could have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.
We have the ability to incur debt and pledge our assets, including our stock in the Bank, to secure that debt.
We have the ability to incur debt and pledge our assets to secure that debt. Absent special and unusual circumstances, a holder of indebtedness for borrowed money has rights that are superior to those of holders of common stock. For example, interest must be paid to the lender before dividends can be paid to the shareholders, and loans must be paid off before any assets can be distributed to shareholders if we were to liquidate. Furthermore, we would have to make principal and interest payments on our indebtedness, which could reduce our profitability or result in net losses on a consolidated basis even if the Bank were profitable.
Item 1B
Unresolved Staff Comments
None.
Item 2
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Properties
The principal properties of the Company consist of the properties of the Bank. The Company's headquarters is located at 115 South Grant Street, Fitzgerald, Georgia 31750. The Bank currently operates thirty-one domestic banking offices and two corporate operations offices in Georgia. The Bank owns all of the banking offices occupied except for nine which are leased. In addition, the Company owns the corporate operation offices located in Fitzgerald, Georgia and Warner Robins Georgia. We believe that our banking offices are in good condition and are suitable and adequate to our needs.
Item 3
Legal Proceedings
The Company and its subsidiary may become parties to various legal proceedings arising from the normal course of business. As of December 31, 2021, there are no material pending legal proceedings to which Colony or its subsidiary are a party or of which any of its or its subsidiaries' assets or properties are subject.
Item 4
Mine Safety Disclosures
Not applicable.
Part II
Item 5
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
Since April 2, 1998, Colony Bankcorp, Inc.'s common stock has been quoted on the NASDAQ Global Market under the symbol “CBAN.” Prior to this date, there was no public market for the common stock of the Company.
As of March 16, 2022, there were 17,586,333 shares of our common stock outstanding held by 1,019 holders of record.
During 2021, the Company paid $4.5 million in cash dividends on its common stock. During 2020, the Company paid $3.8 million in cash dividends on its common stock. We have no obligation to pay dividends and we may change our dividend policy at any time without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.
As a Georgia corporation, the Company is subject to certain restrictions on dividends under the Georgia Business Corporation Code. We are also subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies. See “Item 1 – Business – Supervision and Regulation – Regulation of the Company – Payment of Dividends.”
Issuer Purchase of Equity Securities
The Company did not purchase any shares of the Company’s common stock during the year ended December 31, 2021.
Securities Authorized for Issuance Under Equity Compensation Plans
See the information included under Part III, Item 12, which is incorporated in response to this item by reference.
Performance Graph
The performance graph below compares the cumulative total shareholder return on the Company’s Common Stock with the cumulative total return on the equity securities of companies included in the NASDAQ Composite Index and the SNL Southeast Bank Index, measured at the last trading day of each year shown. The graph assumes an investment of $100 on December 31, 2016 through December 31, 2021, and assumes the reinvestment of dividends, if any. The performance graph represents past performance and should not be considered to be an indication of future performance.
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| Colony Bankcorp, Inc. | ||
| Period Ending | ||||||||||||||||||||||||||||||||||||||
| Index | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | ||||||||||||||||||||||||||||||||
| Colony Bankcorp, Inc. | 100.00 | 111.41 | 112.78 | 129.83 | 119.07 | 142.25 | ||||||||||||||||||||||||||||||||
| NASDAQ Composite Index | 100.00 | 129.64 | 125.96 | 172.18 | 249.51 | 304.85 | ||||||||||||||||||||||||||||||||
| SNL Southeast Bank Index | 100.00 | 123.70 | 102.20 | 144.05 | 129.15 | 184.47 | ||||||||||||||||||||||||||||||||
Source: S&P Global Market Intelligence
Pursuant to the regulations of the SEC, this performance graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act.
Item 6
Reserved.
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and, assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors,” and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected in the forward looking statements. We assume no obligation to update any of these forward-looking statements.
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The Company
Colony Bankcorp, Inc. is a bank holding company headquartered in Fitzgerald, Georgia that provides, through its wholly-owned subsidiary Colony Bank (collectively referred to as the Company), a broad array of products and services throughout central, south and coastal Georgia markets. The Company offers commercial, consumer and mortgage banking services.
Recent Developments
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 stock was converted into the right to receive either $10.45 in cash or 0.7318 of a share of the Company's common stock, subject to certain proration and allocation procedures. In aggregate, the Company issued approximately 4.0 million shares of its common stock at a fair value of $71.4 million and paid approximately $21.6 million cash in the Merger.
The Company paid dividends to its shareholders throughout 2021 and 2020 on a quarterly basis. In 2021, we had a quarterly dividend of $0.1025 per common stock and in 2020, we had a quarterly dividend of $0.10 per common stock.
On February 10, 2022, the Company completed a public offering of 3,848,485 shares of its common stock at a public offering price of $16.50 per share, with aggregate proceeds of approximately $63.5 million.
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Our accounting and reporting policies conform to generally accepted accounting principles (GAAP) in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the fully-taxable equivalent measures: tax-equivalent net interest income, tax-equivalent net interest margin and tax-equivalent net interest spread, which include the effects of taxable-equivalent adjustments using a federal income tax rate of 19% and 21% to increase tax-exempt interest income to a tax-equivalent basis for the year ended December 31, 2021 and 2020, respectively. Tax-equivalent adjustments are reported in Notes 1 and 2 to the Average Balances with Average Yields and Rates table under Rate/Volume Analysis. Management believes that non-GAAP financial measures provide additional useful information that allows investors to evaluate the ongoing performance of the company and provide meaningful comparisons to its peers. Management believes these non-GAAP financial measures also enhance investors' ability to compare period-to-period financial results and allow investors and company management to view our operating results excluding the impact of items that are not reflective of the underlying operating performance.
Tax-equivalent net interest income, net interest margin and net interest spread. Net interest income on a tax-equivalent basis is a non-GAAP measure that adjusts for the tax-favored status of net interest income from loans and investments. We believe this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin on a tax-equivalent basis is net interest income on a tax-equivalent basis divided by average interest-earning assets on a tax-equivalent basis. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread on a tax-equivalent basis is the difference in the average yield on average interest-earning assets on a tax equivalent basis and the average rate paid on average interest-bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread.
These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements, and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently.
A reconciliation of these performance measures to GAAP performance measures is included in the tables below.
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Non-GAAP Performance Measures Reconciliation
| Years Ended December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| (dollars in thousands, except per share data) | ||||||||||||||
| Operating noninterest expense reconciliation | ||||||||||||||
| Operating net income reconciliation | ||||||||||||||
| Net income (GAAP) | $ | 18,659 | $ | 11,815 | ||||||||||
| Acquisition-related expenses | 4,617 | 862 | ||||||||||||
| Gain on sale of Thomaston branch | — | (1,026) | ||||||||||||
| Writedown of Building | — | 582 | ||||||||||||
| Income tax benefit of expenses | (874) | (88) | ||||||||||||
| Operating net income | $ | 22,402 | $ | 12,145 | ||||||||||
| Weighted average diluted shares | 11,254,130 | 9,498,783 | ||||||||||||
| Adjusted earnings per diluted share | $ | 1.99 | $ | 1.28 | ||||||||||
| Tangible book value per common share reconciliation | ||||||||||||||
| Book value per common share (GAAP) | $ | 15.92 | $ | 15.21 | ||||||||||
| Effect of goodwill and other intangibles | (4.41) | (1.95) | ||||||||||||
| Tangible book value per common share | 11.51 | 13.26 | ||||||||||||
COVID-19 and Recent Events
The U.S. economy contracted in the first half of 2020, ending the longest expansionary period in U.S. history, due to the COVID-19 pandemic. During March 2020, in an effort to lessen the impact of COVID-19 on consumers and businesses, the Federal Reserve reduced the federal funds rate 1.5 percentage points to 0.00 to 0.25 percent and the U.S. government enacted the CARES Act, the largest economic stimulus package in the nation’s history. The Company responded to the pandemic, beginning in March 2020, by supporting our clients, employees, and communities with such measures as remote work capabilities and branch service enhancements, loan payment deferrals, and accelerated investments in several technology initiatives that provided more convenience and a better digital experience as clients adapted to this highly virtual environment. The Company participated in the PPP and funded approximately 2,600 loans totaling approximately $193.2 million under the programs available in both 2020 and 2021, and $144.0 million in PPP loans related to CARES Act were forgiven.
Additional government spending measures and the availability of vaccines improved consumer confidence and demand, and the economy largely reopened in 2021, leading to a reduction in the unemployment rate and accelerated GDP growth. While 2021 has seen a recovery in the U.S. economy compared to 2020, uncertainty and market disruptions such as additional coronavirus variants, pandemic-related supply chain issues and labor shortages persist. The economic expansion has been met with inflationary pressures that are expected to result in the Federal Open Market Committee policy-tightening in 2022, likely including multiple interest rate hikes. With a strong asset-sensitive balance sheet and our strong position in our market markets, we expect increases in loan demand and interest rates will improve returns going forward.
Critical Accounting Estimates
The consolidated financial statements of Colony are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industry in which it operates. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the valuation of loan acquisition transactions, as well as the determination of the allowance for loan losses and income taxes and, therefore, are critical accounting policies. In addition to the discussion that follows, the accounting policies related to these estimates are further described in Note 1, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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Business Combinations and Valuation of Loans Acquired in Business Combinations
We account for acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at the estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation. Management finalized the fair values of acquired assets and assumed liabilities within this 12-month period and management currently considers such values to be the Day 1 Fair Values for the acquisition transactions.
In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Loans acquired in a business combination transaction are evaluated either individually or in pools of loans with similar characteristics; including consideration of a credit component. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.
Allowance for Loan Losses
The allowance for loan losses is a critical accounting estimate that requires significant judgments and assumptions, which are inherently subjective. The use of different estimates or assumptions could have a significant impact on the provision for credit losses, allowance for loan losses, financial condition, and results of operations. The economic and business climate in any given industry or market is difficult to gauge and can change rapidly, and the effects of those changes can vary by borrower.
The allowance consists of specific, historical and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The historical component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. A general component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and historical losses in the portfolio. General valuation allowances are based on internal and external qualitative risk factors such as (1) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices, (2) changes in international, national, regional, and local conditions, (3) changes in the nature and volume of the portfolio and terms of loans, (4) changes in the experience, depth, and ability of lending management, (5) changes in the volume and severity of past due loans and other similar conditions, (6) changes in the quality of the organization's loan review system, (7) changes in the value of underlying collateral for collateral dependent loans, (8) the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and (9) the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.
Consolidated net income and stockholders’ equity could be affected if management’s estimate of the allowance necessary to cover loan losses is subsequently materially different, requiring a change in the level of provision for loan losses to be recorded. While management uses currently available information to recognize losses on loans, future adjustments may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions or forecasts that affect the Company's customers.
Income Taxes
The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.
Colony files a consolidated federal income tax return and a combined state income tax return (both of which include Colony and its wholly owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed quarterly for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates
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applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Colony may also recognize a liability for unrecognized tax benefits from uncertainty in income taxes. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
Overview
The following discussion and analysis present the more significant factors affecting the Company’s financial condition as of December 31, 2021 and 2020 and results of operations for each of the two year-periods ended December 31, 2021. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements, notes thereto and other financial information appearing elsewhere in this report.
Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 19% federal tax rate for 2021 and a 21% federal rate for 2020, thus making tax-exempt yields comparable to taxable asset yields.
Dollar amounts in tables are stated in thousands, except for per share amounts.
Results of Operations
The Company’s results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since market forces and economic conditions beyond the control of the Company determine interest rates, the ability to generate net interest income is dependent upon the Company’s ability to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average interest-earning assets. Net income available to common shareholders totaled $18.7 million, or $1.66 per diluted shares in 2021, compared to $11.8 million, or $1.24 per diluted shares in 2020.
Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company’s largest source of revenue, representing 64.3% of total revenue during 2021 and 66.76% of total revenue during 2020.
Net interest margin is the taxable-equivalent net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin.
The Company’s loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, was 3.25% as of December 31, 2021 and 2020. The Federal Reserve Board sets general market rates of interest, including the deposit and loan rates offered by many financial institutions. During 2021, the prime interest rate remained the same. During 2020, the prime interest rate decreased by 100 basis points.
The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of interest-earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each. The Company’s consolidated average balance sheets along with an analysis of taxable-equivalent net interest earnings are presented in the Rate/Volume Analysis.
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Rate/Volume Analysis
The rate/volume analysis presented hereafter illustrates the change from year to year for each component of the taxable equivalent net interest income separated into the amount generated through volume changes and the amount generated by changes in the yields/rates.
| Changes from 2020 to 2021 (a) | ||||||||||||||||||||
| (dollars in thousands) | Volume | Rate | Total | |||||||||||||||||
| Interest income | ||||||||||||||||||||
| Loans, net of unearned fees | $ | 4,850 | $ | (272) | $ | 4,578 | ||||||||||||||
| Investment securities, taxable | 4,329 | (1,861) | 2,468 | |||||||||||||||||
| Investment securities, exempt | 861 | (31) | 830 | |||||||||||||||||
| Interest-bearing deposits | 85 | (309) | (224) | |||||||||||||||||
| Total interest income | 10,125 | (2,473) | 7,652 | |||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Interest-Bearing Demand and Savings Deposits | 681 | (1,622) | (941) | |||||||||||||||||
| Time Deposits | (94) | (1,963) | (2,057) | |||||||||||||||||
| FHLB Advances | 36 | (88) | (52) | |||||||||||||||||
| Paycheck Protection Program Liquidity Facility ("PPPLF") | (147) | 35 | (112) | |||||||||||||||||
| Other Borrowings | (202) | (119) | (321) | |||||||||||||||||
| Total interest expense | 274 | (3,757) | (3,483) | |||||||||||||||||
| Net interest income | $ | 9,851 | $ | 1,284 | $ | 11,135 | ||||||||||||||
(a)Changes in net interest income for the periods, based on either changes in average balances or changes in average rates for interest-earning assets and interest-bearing liabilities, are shown on this table. During each year there are numerous and simultaneous balance and rate changes; therefore, it is not possible to precisely allocate the changes between balances and rates. For the purpose of this table, changes that are not exclusively due to balance changes or rate changes have been attributed to rates.
The Company maintains about 22.36% of its loan portfolio in adjustable rate loans that reprice with prime rate changes, while the bulk of its other loans mature within 3 years. The liabilities to fund assets are primarily in non-maturing core deposits and short term certificates of deposit that mature within one year. During 2021, Federal Reserve rates remained stable. The Federal Reserve rates decreased 150 basis points in 2020. We have seen the net interest margin decrease to 3.39% for 2021, compared to 3.50% for 2020.
Taxable-equivalent net interest income for 2021 increased by $11.1 million or 20.0%, compared to 2020, due to an increase in loan fee income generated through PPP loan originations during 2021, which was approximately $5.4 million and increase in investment securities income, along with decreases in interest expense. The average volume of interest-earning assets during 2021 increased $378.5 million compared to 2020 while over the same period the net interest margin decreased 11 basis points to 3.39% from 3.50%. The change in the net interest margin in 2021 and 2020 was primarily driven by a continued higher level of low yielding assets offset by a decrease in the cost of funds, as well as downward pressure exerted from lower yielding PPP loans offset by lowering our borrowing costs during the year as well as lower interest on the level of deposits on our balance sheet. Growth in average earning assets during 2021 was primarily in loans and interest-bearing deposits in other banks related to the acquisition of SouthCrest Financial Group, Inc ("SouthCrest").
The average volume of loans increased $94.9 million in 2021 compared to 2020, which reflects both organic loan growth, growth from acquisition of SouthCrest offset by $144.0 million in loans PPP loans forgiven. The average yield on loans remained stable from 2021 compared to 2020, and only decreased two basis points. The average volume of interest-bearing deposits increased $279.1 million in 2021 compared to 2020. Average demand deposits increased $286.8 million while average time deposits decreased $7.7 million in 2021 compared to 2020.
Accordingly, the ratio of average interest-bearing deposits to total average deposits was 75.3% in 2021 and 78.8% in 2020. For 2021, this deposit mix, combined with a general decrease in interest rates, had the effect of (i) decreasing the average cost of
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total deposits by 32 basis points in 2021 compared to 2020 and (ii) offsetting a portion of the impact of decreasing yields on interest-earning assets on the Company’s net interest income.
The Company’s net interest spread, which represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities, remained stable and only decreasing to 3.32% in 2021 from 3.37% in 2020. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in "Market Risk and Interest Rate Sensitivity" included elsewhere in this report.
AVERAGE BALANCE SHEETS
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| Average | Income/ | Yields/ | Average | Income/ | Yields/ | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | Balances | Expense | Rates | Balances | Expense | Rates | ||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Loans, net of unearned fees (1) | $ | 1,186,919 | $ | 60,380 | 5.09 | % | $ | 1,092,009 | $ | 55,802 | 5.11 | % | ||||||||||||||||||||||||||
| Investment securities, taxable | 547,793 | 9,343 | 1.71 | 336,140 | 6,875 | 2.05 | ||||||||||||||||||||||||||||||||
| Investment securities, exempt (2) | 61,476 | 1,161 | 1.89 | 17,070 | 331 | 1.94 | ||||||||||||||||||||||||||||||||
| Deposits in banks and short term investments | 169,188 | 214 | 0.13 | 141,641 | 438 | 0.31 | ||||||||||||||||||||||||||||||||
| Total interest-earning assets | 1,965,376 | 71,098 | 3.62 | 1,586,860 | 63,446 | 4.00 | ||||||||||||||||||||||||||||||||
| Total noninterest-earning assets | 135,916 | 104,375 | ||||||||||||||||||||||||||||||||||||
| Total assets | $ | 2,101,292 | $ | 1,691,235 | ||||||||||||||||||||||||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||
| Savings and interest-bearing demand deposits | 1,073,824 | 929 | 0.09 | % | 787,030 | 1,870 | 0.24 | % | ||||||||||||||||||||||||||||||
| Time deposits | 297,704 | 1,672 | 0.56 | 305,374 | 3,729 | 1.22 | ||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | $ | 1,371,528 | $ | 2,601 | 0.19 | $ | 1,092,404 | $ | 5,599 | 0.51 | ||||||||||||||||||||||||||||
| FHLB advances | 34,849 | 691 | 1.98 | 33,249 | 743 | 2.23 | ||||||||||||||||||||||||||||||||
| Paycheck Protection Program Liquidity Facility | 25,546 | 93 | 0.36 | 90,768 | 205 | 0.23 | ||||||||||||||||||||||||||||||||
| Other borrowings | 32,686 | 1,012 | 3.10 | 38,527 | 1,333 | 3.46 | ||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,464,609 | 4,397 | 0.30 | 1,254,948 | 7,880 | 0.63 | ||||||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 449,445 | 294,008 | ||||||||||||||||||||||||||||||||||||
| Other liabilities | 11,195 | 4,325 | ||||||||||||||||||||||||||||||||||||
| Stockholders' equity | 176,043 | 137,954 | ||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 2,101,292 | $ | 1,691,235 | ||||||||||||||||||||||||||||||||||
| Interest rate spread | 3.32 | % | 3.37 | % | ||||||||||||||||||||||||||||||||||
| Net interest income | $ | 66,701 | $ | 55,566 | ||||||||||||||||||||||||||||||||||
| Net interest margin | 3.39 | % | 3.50 | % | ||||||||||||||||||||||||||||||||||
(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 $268,000 and $252,000 for the year ended December 31, 2021 and 2020, respectively, are included in income and fees on loans. Accretion income of $470,000 and $763,000 for the year ended December 31, 2021 and 2020 are also included in income and fees on loans.
(2)Taxable-equivalent adjustments totaling $244,000 and $69,000 for the year ended December 31, 2021 and 2020, respectively, are included in tax-exempt interest on investment securities. The adjustments are based on federal tax rate of 19% and 21% with appropriate reductions for the effect of disallowed interest expense incurred in carrying tax-exempt obligations for the year ended December 31, 2021 and 2020, respectively.
Provision for Loan Losses
The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb
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probable losses within the existing loan portfolio. The provision for loan losses totaled $700,000 in 2021 compared to $6.6 million in 2020. See the section captioned “Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses. The decrease in provision for loan losses for the year ended December 31, 2021 compared to 2020 is largely due to the reserve levels that have already been established in response to 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. Net recoveries for the year ended December 31, 2021 were $83,000 compared to net charge-offs of $1.3 million for the same period in 2020. As of December 31, 2021, Colony’s allowance for loan losses was $12.9 million, or 0.96% of total loans, compared to $12.1 million, or 1.14% of total loans, at December 31, 2020. At December 31, 2021 and 2020, nonperforming assets were $5.8 million and $10.2 million, or 0.21% and 0.58% 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 the year ended 2021.
Noninterest Income
The components of noninterest income were as follows:
| $ | % | |||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | Variance | Variance | ||||||||||||||||||||||
| Service charges on deposit accounts | $ | 6,213 | $ | 5,293 | $ | 920 | 17.38 | % | ||||||||||||||||||
| Mortgage fee income | 13,213 | 9,149 | 4,064 | 44.42 | ||||||||||||||||||||||
| Gain on sales of SBA loans | 7,547 | 1,600 | 5,947 | 100.00 | ||||||||||||||||||||||
| Gain (loss) on sales of securities | (87) | 926 | (1,013) | -109.40 | ||||||||||||||||||||||
| Gain on sales of assets | — | 1,082 | (1,082) | 100.00 | ||||||||||||||||||||||
| Interchange fees | 6,929 | 4,988 | 1,941 | 38.91 | ||||||||||||||||||||||
| BOLI income | 1,041 | 743 | 298 | 40.11 | ||||||||||||||||||||||
| Other | 1,434 | 463 | 971 | 209.81 | ||||||||||||||||||||||
| Total | $ | 36,290 | $ | 24,244 | $ | 12,046 | 49.69 | % | ||||||||||||||||||
Noninterest income increased $12.0 million, or 49.69% from 2020. The Company saw considerable increases in mortgage fee income, gain on sale of SBA loans, and interchange fees, off-set slightly by losses on sales of securities and the absence of a gain on sale of assets in 2021. The increase in mortgage fee income is primarily attributed to the increase in volume of mortgage activity as well as the acquisition of SouthCrest in August 2021. Furthermore, during the years ended December 31, 2020 and 2021, there was an 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 during the year ended December 31, 2020 and remained in effect for 2021 in response to the COVID-19 pandemic. Gain on sale of SBA loans increased $5.9 million in 2021 from 2020. The increase in 2021 is primarily attributable to the continued growth in the Small Business Specialty Lending division. The increase of $1.9 million in interchange fees was a result of the perks program the Company offered from Discover® and the program becoming the Bank's primary program late in 2020.
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Noninterest Expense
The components of noninterest expense were as follows:
| $ | % | |||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | Variance | Variance | ||||||||||||||||||||||
| Salaries and employee benefits | $ | 45,596 | $ | 34,141 | $ | 11,455 | 33.55 | % | ||||||||||||||||||
| Occupancy and equipment | 6,149 | 5,311 | 838 | 15.78 | ||||||||||||||||||||||
| Acquisition related expenses | 4,617 | 862 | 3,755 | 435.61 | ||||||||||||||||||||||
| Information technology | 7,673 | 5,746 | 1,927 | 33.54 | ||||||||||||||||||||||
| Professional Fees | 2,951 | 2,250 | 701 | 31.16 | ||||||||||||||||||||||
| Advertising and public relations | 2,657 | 2,111 | 546 | 25.86 | ||||||||||||||||||||||
| Communications | 1,373 | 835 | 538 | 64.43 | ||||||||||||||||||||||
| Writedown of building | 90 | 582 | (492) | 100.00 | ||||||||||||||||||||||
| FHLB prepayment penalty | — | 925 | (925) | 100.00 | ||||||||||||||||||||||
| Other | 7,609 | 5,538 | 2,071 | 37.40 | ||||||||||||||||||||||
| Total | $ | 78,715 | $ | 58,301 | $ | 20,414 | 35.01 | % | ||||||||||||||||||
Increases in salaries and employee benefits, acquisition related expenses, information technology expenses accounted for the majority of the increase in noninterest expense, offset by the writedown of the Thomaston building and FHLB prepayment penalties in 2020. The increase in salaries and employee benefits of $11.5 million in 2021 was primarily attributable to merit pay increases and salaries from the SouthCrest and insurance acquisitions completed in the last half of 2021, as well as commissions paid to mortgage employees due to an increase in volume. Information technology expenses increased $1.9 million primarily due to the Company's additional processing needs due to growth, as well as implementation of new software. Other noninterest expense increased due to increases in FDIC insurance from acquisition of SouthCrest and deposit charge-offs.
Sources and Uses of Funds
The following table illustrates, during the years presented, the mix of the Company’s funding sources and the assets in which those funds are invested as a percentage of the Company’s average total assets for the period indicated. Average assets totaled $2.1 billion in 2021 compared to $1.7 billion in 2020.
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| (dollars in thousands) | 2021 | 2020 | ||||||||||||||||||||||||
| Sources of Funds: | ||||||||||||||||||||||||||
| Noninterest-bearing deposits | $ | 449,445 | 21.39 | % | $ | 294,008 | 17.38 | % | ||||||||||||||||||
| Interest-bearing deposits | 1,371,528 | 65.27 | % | 1,092,404 | 64.59 | |||||||||||||||||||||
| FHLB advances | 34,849 | 1.66 | % | 33,249 | 1.97 | |||||||||||||||||||||
| PPPLF | 25,546 | 1.22 | % | 90,768 | 5.37 | |||||||||||||||||||||
| Other borrowings | 32,685 | 1.56 | % | 38,527 | 2.28 | |||||||||||||||||||||
| Other noninterest-bearing liabilities | 11,196 | 0.53 | % | 4,325 | 0.26 | |||||||||||||||||||||
| Equity capital | 176,043 | 8.37 | % | 137,954 | 8.15 | |||||||||||||||||||||
| Total | $ | 2,101,292 | 100.00 | % | $ | 1,691,235 | 100.00 | % | ||||||||||||||||||
| Uses of Funds: | ||||||||||||||||||||||||||
| Loans held for sale and loans | $ | 1,186,919 | 56.49 | % | $ | 1,092,009 | 64.57 | % | ||||||||||||||||||
| Investment securities | 609,269 | 28.99 | % | 353,210 | 20.88 | |||||||||||||||||||||
| Deposits in banks and short term investments | 169,188 | 8.05 | % | 141,641 | 8.38 | |||||||||||||||||||||
| Other noninterest-bearing assets | 135,916 | 6.47 | % | 104,375 | 6.17 | |||||||||||||||||||||
| Total | $ | 2,101,292 | 100.00 | % | $ | 1,691,235 | 100.00 | % | ||||||||||||||||||
Deposits continue to be the Company’s primary source of funding. Over the comparable periods, interest-bearing deposits continues to be the largest component of the Company's mix of deposits. Average interest-bearing deposits totaled 75.3% in 2021 compared to 78.8%% of total average deposits in 2020.
The Company primarily invests funds in loans and securities. Loans continue to be the largest component of the Company’s mix of invested assets.
Loans
The following table presents the composition of the Company’s loan portfolio as of December 31 for the past five years.
| (dollars in thousands) | December 31, 2021 | December 31, 2020 | December 31, 2019 | December 31, 2018 | December 31, 2016 | |||||||||||||||||||||||||||
| Construction, land & land development | $ | 165,446 | $ | 121,093 | $ | 96,097 | $ | 60,310 | $ | 53,762 | ||||||||||||||||||||||
| Other commercial real estate | 787,392 | 520,391 | 540,239 | 435,961 | 418,669 | |||||||||||||||||||||||||||
| Total commercial real estate | 952,838 | 641,484 | 636,336 | 496,271 | 472,431 | |||||||||||||||||||||||||||
| Residential real estate | 212,527 | 183,021 | 194,796 | 187,592 | 193,924 | |||||||||||||||||||||||||||
| Commercial , financial, & agricultural | 154,048 | 213,380 | 114,360 | 74,166 | 64,523 | |||||||||||||||||||||||||||
| Consumer & other | 18,564 | 21,618 | 23,322 | 23,497 | 33,911 | |||||||||||||||||||||||||||
| Total loans, net of unearned fees | 1,337,977 | 1,059,503 | 968,814 | 781,526 | 764,789 | |||||||||||||||||||||||||||
| Allowance for loan losses | (12,910) | (12,127) | (6,863) | (7,277) | (7,508) | |||||||||||||||||||||||||||
| Loans, net | $ | 1,325,067 | $ | 1,047,376 | $ | 961,951 | $ | 774,249 | $ | 757,281 | ||||||||||||||||||||||
Maturity and Repricing Opportunity
The following table presents total loans as of December 31, 2021 according to maturity distribution and/or repricing opportunity on adjustable rate loans.
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| (dollars in thousands) | One year or less | After one year through five years | After five years through fifteen years | After fifteen years | Total | |||||||||||||||||||||||||||
| Construction, land & land development | $ | 99,837 | $ | 35,389 | $ | 12,953 | $ | 17,267 | $ | 165,446 | ||||||||||||||||||||||
| Other commercial real estate | 85,737 | 258,403 | 403,288 | 39,964 | 787,392 | |||||||||||||||||||||||||||
| Total commercial real estate | 185,574 | 293,792 | 416,241 | 57,231 | 952,838 | |||||||||||||||||||||||||||
| Residential real estate | 10,093 | 58,650 | 87,000 | 56,784 | 212,527 | |||||||||||||||||||||||||||
| Commercial, financial, & agricultural | 29,889 | 70,186 | 51,757 | 2,216 | 154,048 | |||||||||||||||||||||||||||
| Consumer & other | 4,236 | 12,813 | 1,515 | — | 18,564 | |||||||||||||||||||||||||||
| Total loans, net of unearned fees | 229,792 | 435,441 | 556,513 | 116,231 | 1,337,977 | |||||||||||||||||||||||||||
Overview. Loans totaled $1.3 billion at December 31, 2021, up 26.3% from $1.1 billion at December 31, 2020. The majority of the Company’s loan portfolio is comprised of the real estate loans. Commercial and residential real estate which is primarily 1-4 family residential properties, nonfarm nonresidential properties and real estate construction loans made up 87.1% and 77.8% of total loans at December 31, 2021 and December 31, 2020, respectively. Commercial, financial, & agriculture represents another 11.5% of the population of the loans at December 31, 2021 down from 20.1% of the population at December 31, 2020. The reason for the decrease is primarily due to the PPP loan production during 2020. These loans were at gross $9.0 million at December 31, 2021 compared to a gross of $101.1 million at December 31, 2020. The PPP loans are included in our commercial, financial and agricultural loans.
Loan origination/risk management. In accordance with the Company’s decentralized banking model, loan decisions are made at the local bank level. The Company utilizes both an Executive Loan Committee and a Director Loan Committee to assist lenders with the decision making and underwriting process of larger loan requests. Due to the diverse economic markets served by the Company, evaluation and underwriting criterion may vary slightly by market. Overall, loans are extended after a review of the borrower’s repayment ability, collateral adequacy, and overall credit worthiness.
Commercial purpose, commercial real estate, and agricultural loans are underwritten similarly to how other loans are underwritten throughout the Company. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. In addition, the Company restricts total loans to $10 million per borrower, subject to exception and approval by the Director Loan Committee. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans monthly based on collateral, geography, and risk grade criteria. The Company also utilizes information provided by third-party agencies to provide additional insight and guidance about economic conditions and trends affecting the markets it serves.
The Company extends loans to builders and developers that are secured by non-owner occupied properties. In such cases, the Company reviews the overall economic conditions and trends for each market to determine the desirability of loans to be extended for residential construction and development. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim mini-perm loan commitment from the Company until permanent financing is obtained. In some cases, loans are extended for residential loan construction for speculative purposes and are based on the perceived present and future demand for housing in a particular market served by the Company. These loans are monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and trends, the demand for the properties, and the availability of long-term financing.
The Company originates consumer loans at the bank level. Due to the diverse economic markets served by the Company, underwriting criterion may vary slightly by market. The Company is committed to serving the borrowing needs of all markets served and, in some cases, adjusts certain evaluation methods to meet the overall credit demographics of each market. Consumer loans represent relatively small loan amounts that are spread across many individual borrowers to help minimize risk. Additionally, consumer trends and outlook reports are reviewed by management on a regular basis.
The Company utilizes an independent third party company for loan review and validation of the credit risk program on an ongoing quarterly basis. Results of these reviews are presented to management and the audit committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
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Commercial, financial and agricultural. Commercial and agricultural loans at December 31, 2021 decreased by $59.3 million, or 27.8% to $154.0 million from December 31, 2020 at $213.4 million. This decrease was primarily attributable to the PPP loans which was $101.1 million at December 31, 2020 versus $9.0 million at December 31, 2021, offset by growth from the SouthCrest acquisition. The Company’s commercial and agricultural loans are a diverse group of loans to small, medium and large businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment. These agricultural lines typically reduce in size at year end as crops are sold. While some short-term loans may be made on an unsecured basis, most are secured by the assets being financed with collateral margins that are consistent with the Company’s loan policy guidelines.
Construction, land and land development. Construction, land and land development loans increased by $44.4 million, or 36.6%, at December 31, 2021 to $165.4 million from $121.1 million at December 31, 2020. This increase was primarily attributable to the acquisition of SouthCrest and the continued growth of the business during 2021.
Other commercial real estate. Other commercial real estate loans increased by $267.0 million, or 51.3%, at December 31, 2021 to $787.4 million from $520.4 million at December 31, 2020. This increase was primarily attributable due to the acquisition of SouthCrest and the continued growth of the business during 2021.
Residential Real Estate Loans. Residential real estate loans increased by $29.5 million or 16.1%, at December 31, 2021 to $212.5 million from $183.0 million at December 31, 2020. This increase was primarily attributable due to the acquisition of SouthCrest and the continued growth of the business during 2021. Residential real estate loans consist of revolving, open-end and closed-end loans as well as those secured by closed-end first and junior liens.
Consumer and other. Consumer and other loans include loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit. Consumer and other loans at December 31, 2021 decreased $3.1 million or 14.1% to $18.6 million from $21.6 million at December 31, 2020. This decrease was primarily attributable to payoffs and amortization of the portfolio.
Industry concentrations. As of December 31, 2021 and December 31, 2020, there were no concentrations of loans within any single industry in excess of 10% of total loans, as segregated by Standard Industrial Classification code (“SIC code”). The SIC code is a federally designed standard industrial numbering system used by the Company to categorize loans by the borrower’s type of business. The Company has established industry-specific guidelines with respect to maximum loans permitted for each industry with which the Company does business.
Collateral concentrations. Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions. The Company has a concentration in real estate loans as well as a geographic concentration that could pose an adverse credit risk. At December 31, 2021, approximately 87.1% of the Company’s loan portfolio was concentrated in loans secured by real estate. A substantial portion of borrowers’ ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector. In addition, a large portion of the Company’s foreclosed assets are also located in these same geographic markets, making the recovery of the carrying amount of foreclosed assets susceptible to changes in market conditions. Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis. In recent years, we have seen real estate values stabilizing in our markets. The stabilization of rates has resulted in a decrease in the number of loans being classified as impaired over the past several years.
Large credit relationships. The Company currently operates 31 branches in north, central, south and coastal Georgia and includes metropolitan markets in Forsyth, Fulton, Fayette, Dougherty, Lowndes, Houston, Chatham and Muscogee counties. As a result, the Company originates and maintains large credit relationships with several commercial customers in the ordinary course of business. The Company considers large credit relationships to be those with commitments equal to or in excess of $5.0 million prior to any portion being sold. Large relationships also include loan participations purchased if the credit relationship with the agent is equal to or in excess of $5.0 million. In addition to the Company’s normal policies and procedures related to the origination of large credits, the Company’s Executive Loan Committee and Director Loan Committee must approve all new and renewed credit facilities which are part of large credit relationships. At December 31, 2021, our largest 20 relationships consisted of loans and loan commitments, where the total committed balance was $203.6 million with $160.6 million outstanding. At December 31, 2020, our largest 20 relationships had total committed balance of $174.8 million with $156.2 million outstanding.
Maturities and sensitivities of loans to changes in interest rates. The following table presents the maturity distribution of the Company’s loans at December 31, 2021. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index such as the prime rate.
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| (dollars in thousands) | Due in One Year or Less | After One, but within Five Years | After Five Years, but within Fifteen Years | After Fifteen Years | Total | |||||||||||||||||||||||||||
| Loans with fixed interest rates | $ | 134,376 | $ | 393,599 | $ | 460,333 | $ | 50,558 | $ | 1,038,866 | ||||||||||||||||||||||
| Loans with floating interest rates | 95,416 | 41,842 | 97,222 | 64,631 | 299,111 | |||||||||||||||||||||||||||
| Total | $ | 229,792 | $ | 435,441 | $ | 557,555 | $ | 115,189 | $ | 1,337,977 | ||||||||||||||||||||||
The Company may renew loans at maturity when requested by a customer whose financial strength appears to support such renewal or when such renewal appears to be in the Company’s best interest. In such instances, the Company generally requires payment of accrued interest and may adjust the rate of interest, require a principal reduction or modify other terms of the loan at the time of renewal.
Nonperforming Assets and Potential Problem Loans
Although asset quality experienced some recovery during the year December 31, 2021, the continuing effects of the COVID-19 pandemic will likely have an impact on our asset quality, but it is unknown to what extent 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"). Nonaccrual loans totaled $5.4 million at December 31, 2021, a decrease of $3.68 million, or 40.3%, from $9.1 million at December 31, 2020. There were no loans contractually past due 90 days or more and still accruing for either period presented. At December 31, 2021, OREO totaled $281,000, a decrease of $725,000, or 72.1%, compared with $1.0 million at December 31, 2020. The change in OREO is a combination of sales of assets during 2020 offset by asset additions and additions from the acquisition of SouthCrest. At the end of the year ended December 31, 2021, total nonperforming assets as a percent of total assets decreased to 0.21% compared with 0.58% at December 31, 2020.
At December 31, 2021, 4.7% of the Company’s loan portfolio, or $62.9 million, is in the hotel sector which we expected to be the most sensitive to the COVID-19 pandemic, of which $5.5 million in loans are guaranteed. While our entire loan portfolio is being continuously assessed, enhanced monitoring for these 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.
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Year-end nonperforming assets and accruing past due loans were as follows:
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Loans accounted for on nonaccrual | $ | 5,449 | $ | 9,128 | $ | 9,827 | ||||||||||||||
| Loans accruing past due 90 days or more | — | — | — | |||||||||||||||||
| Other real estate foreclosed | 281 | 1,006 | 1,320 | |||||||||||||||||
| Repossessed assets | 49 | 30 | 13 | |||||||||||||||||
| Total nonperforming assets | $ | 5,779 | $ | 10,164 | $ | 11,160 | ||||||||||||||
| Nonperforming loans by segment | ||||||||||||||||||||
| Construction, land & land development | $ | 31 | $ | 197 | $ | 128 | ||||||||||||||
| Commercial real estate | 837 | 4,613 | 3,772 | |||||||||||||||||
| Residential real estate | 3,839 | 2,958 | 3,728 | |||||||||||||||||
| Commercial, financial & agricultural | 708 | 1,065 | 2,061 | |||||||||||||||||
| Consumer & other | 34 | 295 | 138 | |||||||||||||||||
| Total nonperforming loans | $ | 5,449 | $ | 9,128 | $ | 9,827 | ||||||||||||||
| Nonperforming assets as a percentage of: | ||||||||||||||||||||
| Total loans, other real estate and foreclosed assets | 0.43 | % | 0.96 | % | 1.15 | % | ||||||||||||||
| Total assets | 0.21 | % | 0.58 | % | 0.74 | % | ||||||||||||||
| Nonperforming loans as a percentage of: | ||||||||||||||||||||
| Total loans | 0.41 | % | 0.86 | % | 1.01 | % | ||||||||||||||
| Supplemental data: | ||||||||||||||||||||
Trouble debt restructured loans in compliance with modified terms (1) | $ | 7,326 | $ | 12,320 | $ | 12,337 | ||||||||||||||
| Trouble debt restructured loans | ||||||||||||||||||||
Past due 30-89 days (1) | — | 273 | — | |||||||||||||||||
| Accruing past due loans: | ||||||||||||||||||||
30-89 days past due (1) | $ | 4,567 | $ | 3,092 | $ | 2,615 | ||||||||||||||
| 90 or more days past due | — | — | — | |||||||||||||||||
| Total accruing past due loans | $ | 4,567 | $ | 3,092 | $ | 2,615 | ||||||||||||||
| Allowance for loan losses | $ | 12,910 | $ | 12,127 | $ | 6,863 | ||||||||||||||
| Allowance for loan losses as a percentage of: | ||||||||||||||||||||
| Total loans | 0.96 | % | 1.14 | % | 0.71 | % | ||||||||||||||
| Nonperforming loans | 236.92 | 132.85 | 69.84 | |||||||||||||||||
(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 December 31, 2021 and December 31, 2020.
Nonperforming assets include nonaccrual loans, loans past due 90 days or more, foreclosed real estate, repossessed assets and nonaccrual securities. Nonperforming assets at December 31, 2021 decreased 43.1% from December 31, 2020, as a result of the decrease in nonaccrual loans and the sale of other real estate owned property.
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Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Loans to a customer whose financial condition has deteriorated are considered for nonaccrual status whether or not the loan is 90 days or more past due. For consumer loans, collectability and loss are generally determined before the loan reaches 90 days past due. Accordingly, losses on consumer loans are recorded at the time they are determined. Consumer loans that are 90 days or more past due are generally either in liquidation/payment status or bankruptcy awaiting confirmation of a plan. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Classification of a loan as nonaccrual does not preclude the ultimate collection of loan principal or interest.
The restructuring of a loan is considered a "troubled debt restructuring ("TDR")" if both (i) the borrower is experiencing financial difficulties, and (ii) the Company has granted the borrower a concession that we would not consider otherwise. At December 31, 2021, TDRs totaled $7.3 million, a decrease from $12.3 million reported December 31, 2020. At December 31, 2021 and 2020, all TDRs were performing according to their modified terms and were therefore not considered to be nonperforming assets.
Troubled debt restructured loans are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven.
Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The allowance for loan losses includes allowance allocations calculated in accordance with current U.S. accounting standards. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
The Company’s allowance for loan losses consists of specific valuation allowances established for probable losses on specific loans and historical valuation allowances for other loans with similar risk characteristics. The allowances established for probable losses on specific loans are the result of management’s quarterly review of substandard loans with an outstanding balance of $250,000 or more and impaired troubled debt restructured loans. This review process usually involves the Chief Credit Officer and Director of Credit Administration along with local lending officers reviewing the loans for impairment. Specific valuation allowances are determined after considering the borrower’s financial condition, collateral deficiencies, and economic conditions affecting the borrower’s industry, among other things. In the case of collateral dependent loans, collateral shortfall is most often based upon local market real estate value estimates. This review process is performed at the subsidiary bank level and is reviewed at the parent Company level.
Once the loan becomes impaired, it is removed from the pool of loans covered by the general reserve and reviewed individually for exposure as described above. In cases where the individual review reveals no exposure, no reserve is recorded for that loan, either through an individual reserve or through a general reserve. If, however, the individual review of the loan does indicate some exposure, management often charges off this exposure, rather than recording a specific reserve. In these instances, a loan which becomes nonperforming could actually reduce the allowance for loan losses. Those loans deemed uncollectible are transferred to our problem loan department for workout, foreclosure and/or liquidation. The problem loan department obtains a current appraisal on the property in order to record the fair market value (less selling expenses) when the property is foreclosed on and moved into other real estate.
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The allowances established for the remainder of the loan portfolio are based on historical loss factors, adjusted for certain qualitative factors, which are applied to groups of loans with similar risk characteristics. Loans are segregated into fifteen separate groups based on call codes. Most of the Company’s charge-offs during the past two years have been real estate dependent loans. The historical loss ratios applied to these groups of loans are updated quarterly based on actual charge-off experience. The historical loss ratios are further adjusted by qualitative factors.
Management evaluates the adequacy of the allowance for each of these components on a quarterly basis. Peer comparisons, industry comparisons, and regulatory guidelines are also used in the determination of the general valuation allowance. Loans identified as losses by management, internal loan review, and/or bank examiners are charged off. Additional information about the Company’s allowance for loan losses is provided in the Notes to the Consolidated Financial Statements for Allowance for Loan Losses.
The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. The allocation of the allowance to each category is subjective and is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category.
| December 31, | December 31, | December 31, | December 31, | December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reserve | %(1) | Reserve | %(1) | Reserve | %(1) | Reserve | %(1) | Reserve | %(1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction, land & land development | $ | 1,127 | 12.4 | % | $ | 1,013 | 11.4 | % | $ | 215 | 9.9 | % | $ | 131 | 7.7 | % | $1,216 | 7.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 7,691 | 58.8 | 6,880 | 49.1 | 3,908 | 55.8 | 5,251 | 55.8 | 4,654 | 54.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential real estate | 1,805 | 15.9 | 2,278 | 17.3 | 980 | 20.1 | 1,181 | 24.0 | 968 | 25.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial , financial, & agricultural | 1,083 | 11.5 | 1,713 | 20.1 | 1,657 | 11.8 | 618 | 9.5 | 633 | 8.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer & other | 1,204 | 1.4 | 243 | 2.1 | 103 | 2.4 | 96 | 3.0 | 37 | 4.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 12,910 | 100.0 | % | $ | 12,127 | 100.0 | % | $ | 6,863 | 100.0 | % | $ | 7,277 | 100.0 | % | $ | 7,508 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||
(1) Percentage represents the loan balance in each category expressed as a percentage of total end of period loans.
The following table presents an analysis of the Company’s loan loss experience for the periods indicated.
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| (dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Allowance for loan losses at beginning of year | $ | 12,127 | $ | 6,863 | $ | 7,277 | $ | 7,508 | $ | 8,923 | ||||||||||||||||||||||
| Charge-offs | ||||||||||||||||||||||||||||||||
| Construction, land & land development | — | 4 | 29 | — | 52 | |||||||||||||||||||||||||||
| Commercial real estate | 568 | 226 | 119 | 257 | 1,027 | |||||||||||||||||||||||||||
| Residential real estate | 3 | 206 | 758 | 162 | 1,048 | |||||||||||||||||||||||||||
| Commercial , financial, & agricultural | 274 | 242 | 403 | 247 | 458 | |||||||||||||||||||||||||||
| Consumer & other | 68 | 1,103 | 784 | 299 | 330 | |||||||||||||||||||||||||||
| Total charge-offs | $ | 913 | $ | 1,781 | $ | 2,093 | $ | 965 | $ | 2,915 | ||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Construction, land & land development | 466 | 45 | 82 | 155 | 266 | |||||||||||||||||||||||||||
| Commercial real estate | 118 | 153 | 218 | 52 | 544 | |||||||||||||||||||||||||||
| Residential real estate | 274 | 142 | 174 | 91 | 82 | |||||||||||||||||||||||||||
| Commercial , financial, & agricultural | 91 | 43 | 36 | 161 | 141 | |||||||||||||||||||||||||||
| Consumer & other | 47 | 104 | 65 | 74 | 77 | |||||||||||||||||||||||||||
| Total recoveries | 996 | 487 | 575 | 533 | 1,110 | |||||||||||||||||||||||||||
| Net (recoveries)/ charge-offs | (83) | 1,294 | 1,518 | 432 | 1,805 | |||||||||||||||||||||||||||
| Provision for loans losses | 700 | 6,558 | 1,104 | 201 | 390 | |||||||||||||||||||||||||||
| Allowance for loan losses at end of year | $ | 12,910 | $ | 12,127 | $ | 6,863 | $ | 7,277 | $ | 7,508 | ||||||||||||||||||||||
| Ratio of net (recoveries)/charge-offs to average loans | (0.01) | % | 0.12 | % | 0.11 | % | 0.04 | % | 0.15 | % | ||||||||||||||||||||||
The allowance for loan losses increased from $12.1 million or 1.14% of total loans at December 31, 2020 to $12.9 million, or 0.96% of total loans at December 31, 2021. Excluding outstanding PPP loans of $9.0 million and $101.1 million as of December 31, 2021 and December 31, 2020, the allowance for loan losses as a percentage of total loans was 0.96% and 1.27%, respectively. The allowance for loan losses allocated 0.10% of the balance to our PPP loan portfolio at December 31, 2020. The provision for loan losses reflects loan quality trends, including the level of net charge-offs or recoveries, among other factors.
Social and economic disruption in response to the COVID-19 pandemic continue to result in businesses closures and job losses during the year ended 2021. Net (recoveries)/charge-off’s continued to improve by $1.4 million from 2020 resulting in net recovery of $83,000. As such, additional qualitative measures were incorporated as part of the December 31, 2021 allowance for loan losses calculation for the economic uncertainties caused by the COVID-19 pandemic, which was the primary cause for the increase to the provision for loan losses during the year ended December 31, 2021 compared to the same period 2020. Additional reserves were also allocated to the non-owner occupied commercial real estate pools due to economic impacts in the retail and hospitality sectors.
Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio as of December 31, 2021. The continuing impact of the COVID-19 pandemic during 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.
Investment Portfolio
The following table presents carrying values of investment securities held by the Company as of December 31, 2021, 2020 and 2019.
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| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| U.S. treasury securities | $ | 87,551 | $ | 245 | $ | — | ||||||||||||||
| U.S. agency | 17,781 | 1,004 | — | |||||||||||||||||
| State, county and municipal securities | 250,153 | 62,388 | 5,115 | |||||||||||||||||
| Corporate debt securities | 48,408 | 4,250 | 2,806 | |||||||||||||||||
| Mortgage-backed securities | 534,271 | 312,927 | 339,411 | |||||||||||||||||
| Total debt securities | $ | 938,164 | $ | 380,814 | $ | 347,332 | ||||||||||||||
The following table represents expected maturities and weighted-average yields of investment securities held by the Company as of December 31, 2021 (mortgage-backed securities are based on the average life at the projected speed, while State and Political Subdivisions reflect anticipated calls being exercised).
| After 1 Year But | After 5 Years But | |||||||||||||||||||||||||||||||||||||||||||||||||
| Within 1 Year | Within 5 Years | Within 10 Years | After 10 Years | |||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||||||||||||||
| U.S. treasury securities | $ | — | — | % | $ | 33,405 | 1.06 | % | $ | 54,146 | 1.02 | % | $ | — | — | % | ||||||||||||||||||||||||||||||||||
| U.S. agency | — | — | 6,812 | 1.13 | 10,969 | 1.40 | — | — | ||||||||||||||||||||||||||||||||||||||||||
| State, county and municipal securities | 453 | 3.47 | 1,036 | 1.84 | 41,753 | 1.73 | 206,911 | 1.92 | ||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | — | — | 8,369 | 3.45 | 36,143 | 3.97 | 3,896 | 5.13 | ||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | 1,789 | — | 47,094 | 4.45 | 94,723 | 4.94 | 390,665 | 1.65 | ||||||||||||||||||||||||||||||||||||||||||
| Total debt securities | $ | 2,242 | 3.51 | % | $ | 96,716 | 2.93 | % | $ | 237,734 | 3.17 | % | $ | 601,472 | 1.76 | % | ||||||||||||||||||||||||||||||||||
Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. The Company has 100% of its portfolio classified as available for sale.
At December 31, 2021, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of the Company’s stockholders’ equity.
The average yield of the securities portfolio was 1.72% in 2021 and 2.04% in 2020. The decrease in the average yield from 2021 to 2020 was primarily attributed to the purchase of new securities which have a lower yield.
Deposits
The following table presents the average amount outstanding and the average rate paid on deposits by the Company for the years 2021, 2020, and 2019.
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Average Amount | Average Rate | Average Amount | Average Rate | Average Amount | Average Rate | ||||||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | $ | 449,445 | — | $ | 294,008 | — | $ | 208,320 | — | |||||||||||||||||||||||||||||
| Interest-bearing demand and savings deposits | 1,073,824 | 0.09 | % | 787,030 | 0.24 | % | 640,180 | 0.67 | % | |||||||||||||||||||||||||||||
| Time deposits | 297,704 | 0.56 | % | 305,374 | 1.22 | % | 361,319 | 1.60 | % | |||||||||||||||||||||||||||||
| Total deposits | $ | 1,820,973 | 0.14 | % | $ | 1,386,412 | 0.40 | % | $ | 1,209,819 | 0.83 | % | ||||||||||||||||||||||||||
The following table presents the maturities of the Company’s time deposits as of December 31, 2021.
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| (dollars in thousands) | Time Deposits $250,000 or Greater | Time Deposits Less than $250,000 | Total | |||||||||||||||||
| Months to Maturity | ||||||||||||||||||||
| 3 or less | $ | 18,171 | $ | 56,628 | $ | 74,799 | ||||||||||||||
| Over 3 through 6 | 19,808 | 47,154 | 66,962 | |||||||||||||||||
| Over 6 through 12 | 17,415 | 91,676 | 109,091 | |||||||||||||||||
| Over 12 Months | 18,013 | 80,363 | 98,376 | |||||||||||||||||
| $ | 73,407 | $ | 275,821 | $ | 349,228 | |||||||||||||||
Average deposits increased $434.6 million in 2021 compared to 2020. The increase in 2021 included $286.8 million or 36.4% in interest-bearing demand and savings deposits while, at the same time, noninterest bearing deposits increased $155.4 million, or 52.9% and time deposits decreased $7.7 million, or 2.5%. The growth in our deposits is due primarily to acquisition of SouthCrest, 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.
The Company supplements deposit sources with brokered deposits. As of December 31, 2021, the Company had $883,000, or 0.04% of total deposits, in brokered certificates of deposit attracted by external third parties. Additional information is provided in the Notes to Consolidated Financial Statements for Deposits.
Off-Balance-Sheet Arrangements and Contractual Obligations
In the ordinary course of business, our Bank has granted commitments to extend credit to approved customers. Generally, these commitments to extend credit have been granted on a temporary basis for seasonal or inventory requirements or for construction period financing and have been approved within the Bank’s credit guidelines. Our Bank has also granted commitments to approved customers for financial standby letters of credit. These commitments are recorded in the financial statements when funds are disbursed or the financial instruments become payable. The Bank uses the same credit policies for these off-balance-sheet commitments as it does for financial instruments that are recorded in the consolidated financial statements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The following table summarizes commitments and contractual obligations outstanding at December 31, 2021.
| (dollars in thousands) | Payments Due by Period | |||||||||||||||||||||||||||||||
| Total | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | ||||||||||||||||||||||||||||
| Contractual Obligations: | ||||||||||||||||||||||||||||||||
| Borrowings | $88,448 | $5,313 | $3,000 | $11,750 | $68,385 | |||||||||||||||||||||||||||
| Operating lease liabilities | 665 | 493 | 172 | — | — | |||||||||||||||||||||||||||
| Time Deposits | 349,228 | 250,852 | 83,224 | 14,264 | 888 | |||||||||||||||||||||||||||
| $ | 438,341 | $ | 256,658 | $ | 86,396 | $ | 26,014 | $ | 69,273 | |||||||||||||||||||||||
| Other Commitments: | ||||||||||||||||||||||||||||||||
| Loan commitments | $ | 318,853 | $ | 191,067 | $ | 48,363 | $ | 7,105 | $ | 72,318 | ||||||||||||||||||||||
| Standby letters of credit | 4,869 | 2,923 | 1,946 | — | — | |||||||||||||||||||||||||||
| 323,722 | 193,990 | 50,309 | 7,105 | 72,318 | ||||||||||||||||||||||||||||
| Total Contractual Obligations and Other Commitments | $ | 762,063 | $ | 450,648 | $ | 136,705 | $ | 33,119 | $ | 141,591 | ||||||||||||||||||||||
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In the ordinary course of business, the Company has entered into off-balance sheet financial instruments which are not reflected in the consolidated financial statements. These instruments include commitments to extend credit, standby letters of credit, performance letters of credit, guarantees and liability for assets held in trust.
Such financial instruments are recorded in the financial statements when funds are disbursed or the instruments become payable. The Company uses the same credit policies for these off-balance sheet financial instruments as they do for instruments that are recorded in the consolidated financial statements.
Loan Commitments. The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Loan commitments outstanding at December 31, 2021 are included in the preceding table.
Standby Letters of Credit. Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. Standby letters of credit outstanding at December 31, 2021 are included in the preceding table.
Capital Requirements
The Bank is required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy. For more information, see “Item 1. Business – Supervision and Regulation – Regulation of the Company – Capital Requirements.”
At December 31, 2021, shareholders’ equity totaled $217.7 million compared to $144.5 million at December 31, 2020. In addition to net income of $18.7 million, other significant changes in shareholders’ equity during 2020 included $71.4 million issuance of common stock from SouthCrest acquisition, and $4.5 million of dividends declared on common stock. The accumulated other comprehensive loss component of stockholders’ equity totaled $6.2 million at December 31, 2021 compared to accumulated other comprehensive income $6.8 million at December 31, 2020. This fluctuation was mostly related to the after-tax effect of changes in the fair value of securities available for sale. Under regulatory requirements, the unrealized gain or loss on securities available for sale does not increase or reduce regulatory capital and is not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure Tier 1 and total capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items.
Tier 1 capital consists of common stock and qualifying preferred securities less goodwill, intangibles and disallowed deferred tax assets. Tier 2 capital consists of certain convertible, subordinated and other qualifying debt and the allowance for loan losses up to 1.25% of risk-weighted assets. The Company has no Tier 2 capital other than the allowance for loan losses.
Using the capital requirements presently in effect, the Tier 1 ratio as of December 31, 2021 was 11.28% and total Tier 1 and 2 risk-based capital was 12.05%. Both of these measures compare favorably with the regulatory minimum of 6.0% for Tier 1 and 8% for total risk-based capital. The Company’s common equity Tier 1 ratio as of December 31, 2021 was 9.87%, which exceeds the regulatory minimum of 4.50%. The Company’s Tier 1 leverage ratio as of December 31, 2021 was 7.25%, which exceeds the required ratio standard of 4.0%.
The Bank participate 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.
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For the year ended December 31, 2021, average capital was $176.0 million representing 8.4% of average assets for the year. This compares to average capital of $138.0 million, representing 8.2% of average assets for 2020.
For the years ended December 31, 2021 and 2020, the Company did not have any material commitments for capital expenditures.
In 2021, the Company granted 187,600 restricted shares of common stock and these restricted shares vest over a three year period.
A cash dividend of $4.5 million and $3.8 million was paid for the year ended December 31, 2021 and 2020, respectively.
Additional information is provided in the Notes to the Consolidated Financial Statements for Preferred Stock and Warrants.
Liquidity
The Company, primarily through the actions of its subsidiary bank, engages in liquidity management to ensure adequate cash flow for deposit withdrawals, credit commitments and repayments of borrowed funds. Needs are met through loan repayments, net interest and fee income and the sale or maturity of existing assets. In addition, liquidity is continuously provided through the acquisition of new deposits, the renewal of maturing deposits and external borrowings.
Cash and cash equivalents at December 31, 2021 and 2020 were $197.2 million and $183.5 million, respectively. Management believes the various funding sources discussed above are adequate to meet the Company’s liquidity needs in these unsettled times without any material adverse impact on our operating results.
Management monitors deposit flow and evaluates alternate pricing structures to retain and grow deposits. To the extent needed to fund loan demand, traditional local deposit funding sources are supplemented by the use of FHLB borrowings, brokered deposits and other wholesale deposit sources outside the immediate market area. Internal policies have been updated to monitor the use of various core and non-core funding sources, and to balance ready access with risk and cost. Through various asset/liability management strategies, a balance is maintained among goals of liquidity, safety and earnings potential. Internal policies that are consistent with regulatory liquidity guidelines are monitored and enforced by the Bank.
The investment portfolio provides a ready means to raise cash if liquidity needs arise. As of December 31, 2021, the available for sale bond portfolio totaled $938.2 million At December 31, 2020, the available for sale bond portfolio totaled $380.8 million. Only marketable investment grade bonds are purchased. Although approximately 26% of the Bank’s bond portfolio is encumbered as pledges to secure various public funds deposits, repurchase agreements, and for other purposes, management can restructure and free up investment securities for sale if required to meet liquidity needs.
Management continually monitors the relationship of loans to deposits as it primarily determines the Company’s liquidity posture. Colony had ratios of loans to deposits of 56.3% as of December 31, 2021 and 73.3% as of December 31, 2020. Management employs alternative funding sources when deposit balances will not meet loan demands. The ratios of loans to all funding sources (excluding Subordinated Debentures) at December 31, 2021 and December 31, 2020 were 54.9% and 71.5%, respectively. Management continues to emphasize programs to generate local core deposits as our Company’s primary funding sources. The stability of the Banks’ core deposit base is an important factor in Colony’s liquidity position. A heavy percentage of the deposit base is comprised of accounts of individuals and small businesses with comprehensive banking relationships and limited volatility. At December 31, 2021 and December 31, 2020, the Bank had $73.4 million and $34.9 million, respectively, in certificates of deposit of $250,000 or more. These larger deposits represented 3.1% and 2.4% of total deposits as of December 31, 2021 and 2020, respectively. Management seeks to monitor and control the use of these larger certificates, which tend to be more volatile in nature, to ensure an adequate supply of funds as needed. Relative interest costs to attract local core relationships are compared to market rates of interest on various external deposit sources to help minimize the Company’s overall cost of funds.
The Company supplemented deposit sources with brokered deposits. As of December 31, 2021, the Company had $883,000 or 0.1% of total deposits in CDARS. Additional information is provided in the Notes to the Consolidated Financial Statements regarding these brokered deposits. Additionally, the Company uses external deposit listing services to obtain out-of-market certificates of deposit at competitive interest rates when funding is needed. The deposits obtained from listing services are often referred to as wholesale or internet CDs. As of December 31, 2021, the Company had $99,000 in internet certificates of deposit obtained through deposit listing services.
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To plan for contingent sources of funding not satisfied by both local and out-of-market deposit balances, Colony and its subsidiary have established multiple borrowing sources to augment their funds management. The Company has borrowing capacity through membership of the Federal Home Loan Bank program. The Bank has also established overnight borrowing for Federal Funds Purchased through various correspondent banks. Management believes the various funding sources discussed above are adequate to meet the Company’s liquidity needs in the future without any material adverse impact on operating results. At December 31, 2021 and 2020, we had $51.7 million and $22.5 million, respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had $574.7 million and $416.1 million of additional borrowing availability with the FHLB at December 31, 2021 and 2020, respectively.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of balance sheet structure, the ability to liquidate assets, and the availability of alternative sources of funds. The Company seeks to ensure its funding needs are met by maintaining a level of liquid funds through asset/liability management.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, securities available for sale and federal funds sold and securities purchased under resale agreements.
Liability liquidity is provided by access to funding sources which include core deposits. Should the need arise, the Company also maintains relationships with the Federal Home Loan Bank, Federal Reserve Bank, two correspondent banks and repurchase agreement lines that can provide funds on short notice.
Since Colony is a bank holding Company and does not conduct operations, its primary sources of liquidity are dividends up streamed from the subsidiary bank and borrowings from outside sources.
The liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented, would have a material adverse effect on the Company.
Impact of Inflation and Changing Prices
The Company’s financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). GAAP presently requires the Company to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Company is reflected in increased operating costs, though given recent economic conditions, the Company has not experienced any material effects of inflation during the last three fiscal years. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities, among other things, as further discussed in the next section.
Regulatory and Economic Policies
The Company’s business and earnings are affected by general and local economic conditions and by the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities, among other things. The Federal Reserve Board regulates the supply of money in order to influence general economic conditions. Among the instruments of monetary policy available to the Federal Reserve Board are (i) conducting open market operations in United States government obligations, (ii) changing the discount rate on financial institution borrowings, (iii) imposing or changing reserve requirements against financial institution deposits, and (iv) restricting certain borrowings and imposing or changing reserve requirements against certain borrowings by financial institutions and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the Federal Reserve Board have a material effect on the earnings of the Company.
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Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future; however, the Company cannot accurately predict the nature, timing or extent of any effect such policies may have on its future business and earnings.
Recently Issued Accounting Pronouncements
See Note 1 - Summary of Significant Accounting Policies included in the Notes to the Consolidated Financial Statements.
Market Risk and Interest Rate Sensitivity
Our financial performance is impacted by, among other factors, interest rate risk and credit risk. We do not utilize derivatives to mitigate our credit risk, relying instead on an extensive loan review process and our allowance for loan losses.
Interest rate risk is the change in value due to changes in interest rates. The Company is exposed only to U.S. dollar interest rate changes and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of its investment portfolio as held for trading. The Company does not engage in any hedging activity or utilize any derivatives. The Company has no exposure to foreign currency exchange rate risk, commodity price risk and other market risks. Interest rate risk is addressed by our Risk Management Committee which includes senior management representatives. The Risk Management Committee monitors interest rate risk by analyzing the potential impact to the net portfolio of equity value and net interest income from potential changes to interest rates and considers the impact of alternative strategies or changes in balance sheet structure.
Interest rates play a major part in the net interest income of financial institutions. The repricing of interest earnings assets and interest-bearing liabilities can influence the changes in net interest income. The timing of repriced assets and liabilities is Gap management and our Company has established its policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.
Our exposure to interest rate risk is reviewed at least quarterly by our Board of Directors and by our Risk Management Committee. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net portfolio value in the event of assumed changes in interest rates. In order to reduce the exposure to interest rate fluctuations, we have implemented strategies to more closely match our balance sheet composition. The Company has engaged FTN Financial to run a quarterly asset/liability model for interest rate risk analysis. We are generally focusing our investment activities on securities with terms or average lives in the 3 ½ - 5 ½ year range.
Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either reduced current market values or reduced current and potential net income. Colony’s most significant market risk is interest rate risk. This risk arises primarily from Colony’s extension of loans and acceptance of deposits.
Managing interest rate risk is a primary goal of the asset liability management function. Colony attempts to achieve stability in net interest income while limiting volatility arising from changes in interest rates. Colony seeks to achieve this goal by balancing the maturity and repricing characteristics of assets and liabilities. Colony manages its exposure to fluctuations in interest rates through policies established by the Risk Management Committee and approved by the Board of Directors. The Risk Management Committee meets at least quarterly and has responsibility for developing asset liability management policies, reviewing the interest rate sensitivity of Colony, and developing and implementing strategies to improve balance sheet structure and interest rate risk positioning.
Colony measures the sensitivity of net interest income to changes in market interest rates through the utilization of Asset/Liability simulation modeling. On at least a quarterly basis, the following twenty-four month time period is simulated to determine a baseline net interest income forecast and the sensitivity of this forecast to changes in interest rates. These simulations include all of Colony’s earning assets and liabilities. Forecasted balance sheet changes, primarily reflecting loan and deposit growth and forecasts, are included in the periods modeled. Projected rates for loans and deposits are based on management’s outlook and local market conditions.
The magnitude and velocity of rate changes among the various asset and liability groups exhibit different characteristics for each possible interest rate scenario; additionally, customer loan and deposit preferences can vary in response to changing interest rates. Simulation modeling enables Colony to capture the expected effect of these differences. Assumptions utilized in the model are updated on an ongoing basis and are reviewed and approved by the Risk Management Committee of the Board of Directors.
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Colony has modeled its baseline net interest income forecast assuming a flat interest rate environment with the federal funds rate at the Federal Reserve's targeted range of 0.25% and the prime rate of 3.25% at December 31, 2021. Colony has modeled the impact of a gradual increase in short-term rates of 100 and 200 basis points and a decline of 100 basis points to determine the sensitivity of net interest income for the next twelve months. As illustrated in the table below, the net interest income sensitivity model indicates that, compared with a net interest income forecast assuming stable rates, net interest income is projected to increase by 6.83% and 13.80% if interest rates increased by 100 and 200 basis points, respectively. Net interest income is projected to decline by 3.18% if interest rates decreased by 100 basis points. These changes were within Colony’s policy limit of a maximum 15% negative change.
| Twelve Month Net Interest Income Sensitivity | ||||||||||||||
| Estimated Change in Net Interest Income as of December 31, | ||||||||||||||
| Change in Short-term Interest Rates (in basis points) | 2021 | 2020 | ||||||||||||
| +200 | 13.80% | 12.55% | ||||||||||||
| +100 | 6.83% | 6.71% | ||||||||||||
| Flat | —% | —% | ||||||||||||
| -100 | -3.18% | -2.91% | ||||||||||||
The measured interest rate sensitivity indicates an asset sensitive position over the next year, which could serve to improve net interest income in a rising interest rate environment. The actual realized change in net interest income would depend on several factors, some of which could serve to reduce or eliminate the asset sensitivity noted above. These factors include a higher than projected level of deposit customer migration to higher cost deposits, such as certificates of deposit, which would increase total interest expense and serve to reduce the realized level of asset sensitivity. Another factor which could impact the realized interest rate sensitivity in a rising rate environment is the repricing behavior of interest bearing non-maturity deposits. Assumptions for repricing are expressed as a beta relative to the change in the prime rate. For instance, a 25% beta would correspond to a deposit rate that would increase 0.25% for every 1% increase in the prime rate. Projected betas for interest bearing non-maturity deposit repricing are a key component of determining the Company's interest rate risk position. Should realized betas be higher than projected betas, the expected benefit from higher interest rates would be reduced.
Colony is also subject to market risk in certain of its fee income business lines. Mortgage banking income is subject to market risk. Mortgage loan originations are sensitive to levels of mortgage interest rates and therefore, mortgage banking income could be negatively impacted during a period of rising interest rates. The extension of commitments to customers to fund mortgage loans also subjects Colony to market risk. This risk is primarily created by the time period between making the commitment and closing and delivering the loan. Colony seeks to minimize this exposure by utilizing various risk management tools, the primary of which are forward sales commitments and best efforts commitments.
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is located in Item 7 under the heading Market Risk and Interest Rate Sensitivity.
Item 8
Financial Statements and Supplemental Data
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Colony Bankcorp, Inc. and Subsidiaries
Fitzgerald, Georgia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Colony Bankcorp, Inc. and Subsidiaries (the “Company”) as of December 31, 2021 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgement. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
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as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
Description of the Matter
The Company’s loan portfolio totaled $1.338 billion as of December 31, 2021, and the associated allowance for loan losses (“ALL”) was $12.9 million. As discussed in Notes 1, 4, and 5 to the consolidated financial statements, the ALL is established to absorb probable credit losses inherent in the Company’s loan portfolio. Management’s estimate for the probable credit losses is established through quantitative, as well as qualitative, factors. The Company attributes portions of the allowance to loans that it evaluates individually and determines to be impaired. For non-impaired loans, the ALL is estimated based on historical default and/or loss information for pools of loans with similar risk characteristics and product types. The Company’s methodology for determining the appropriate ALL also considers the imprecision inherent in the estimation process. As a result, management adjusts the ALL for consideration of the potential impact of qualitative factors, which include levels of and trends in delinquencies and impaired loans (including TDRs); levels of and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentration.
Auditing management’s estimate of the ALL involved a high degree of subjectivity in evaluating the qualitative factors that management assessed and the measurement of each qualitative factor. Management’s assessment and measurement of the qualitative factors is highly judgmental and has a significant effect on the ALL.
How We Addressed the Matter in Our Audit
Our audit procedures related to the qualitative factors of the ALL included the following procedures, among others. We gained an understanding of the Company’s process for establishing the ALL, including the identification and measurement of qualitative factors. We evaluated the design and documented the operating effectiveness of controls relevant to that process, including controls over the reliability of data from the loan systems, the completeness and accuracy of quantitative data, and the ALL methodology and assumptions. In doing so, we tested review and approval controls in the Company’s governance process designed to identify and assess the need for and measurement of qualitative factors to estimate inherent credit losses associated with factors not captured fully in the quantitative components of the ALL.
With respect to the identification of qualitative factors, we evaluated 1) the potential impact of imprecision in the quantitative models (and hence the need to consider a qualitative adjustment to the ALL); 2) changes, assumptions and adjustments to the models; 3) sufficiency, availability, and relevance of historical loss data used in the models; and 4) the risk factors used in the models. Regarding measurement of the qualitative factors, we evaluated internal data utilized by management to estimate the appropriate level of the qualitative factors, as well as internal/external data produced by the Company’s Credit Review functions, with consideration given to the reliability of the factors and existence of new and potentially contradictory information. We also evaluated the overall ALL balance taken as a whole inclusive of such qualitative factors.
We have served as the Company’s auditor since 2021.
Albany, Georgia
March 17, 2022
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 |  | ||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Colony Bankcorp, Inc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Colony Bankcorp, Inc. and its subsidiaries (the Company) as of December 31, 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
As described in Notes 1 and 5 to the Company’s consolidated financial statements, the Company has a gross loan balance of $1.06 billion and related allowance for loan losses balance of $12.1 million as of December 31, 2020. As described by the Company in Note 1, the evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a regular basis and is based upon the Company’s review of the collectability of the loans in light of historical experience, the
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nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.
We identified the Company’s estimate of the allowance for loan losses as a critical audit matter. The principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgement due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included the following:
• We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.
• We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered.
McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC
We served as the Company’s auditor from 1995 through 2021.
Macon, Georgia
March 23, 2021
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COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(DOLLARS IN THOUSANDS)
| 2021 | 2020 | ||||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Fed Funds sold and interest-bearing deposits in banks | |||||||||||
| Cash and cash equivalents | |||||||||||
| Investment securities available for sale, at fair value | |||||||||||
| Other investments | |||||||||||
| Loans held for sale | |||||||||||
| Loans | |||||||||||
| Allowance for loan losses | ( | ( | |||||||||
| Net loans | |||||||||||
| Premises and equipment | |||||||||||
| Other real estate owned | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets | |||||||||||
| Bank-owned life insurance | |||||||||||
| Deferred income taxes, net | |||||||||||
| Other assets | |||||||||||
Total assets | $ | $ | |||||||||
Liabilities and stockholders’ equity | |||||||||||
| Deposits | |||||||||||
| Noninterest-bearing | $ | $ | |||||||||
| Interest-bearing | |||||||||||
| Total deposits | |||||||||||
| Federal Home Loan Bank advances | |||||||||||
| Paycheck Protection Program Liquidity Facility | |||||||||||
| Other borrowed money | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (Note 15) | |||||||||||
| Stockholders’ equity | |||||||||||
Preferred stock, stated value $ | |||||||||||
Common stock, par value $ | |||||||||||
| Paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive (loss) income, net of tax | ( | ||||||||||
Total stockholders’ equity | |||||||||||
Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes which are an integral part of these financial statements.
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COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
| 2021 | 2020 | ||||||||||
| Interest income | |||||||||||
| Loans, including fees | $ | $ | |||||||||
| Deposits with other banks and short term investments | |||||||||||
| Investment securities | |||||||||||
| Total interest income | |||||||||||
| Interest expense | |||||||||||
| Deposits | |||||||||||
| Federal Home Loan Bank advances | |||||||||||
| Paycheck Protection Program Liquidity Facility | |||||||||||
| Other borrowings | |||||||||||
| Total interest expense | |||||||||||
| Net interest income | |||||||||||
| Provision for loan losses | |||||||||||
| Net interest income after provision for loan losses | |||||||||||
Noninterest income | |||||||||||
| Service charges on deposits | |||||||||||
| Mortgage fee income | |||||||||||
| Gain on sales of SBA loans | |||||||||||
| Gain (loss) on sales of securities | ( | ||||||||||
| Gain on sales of assets | |||||||||||
| Interchange fees | |||||||||||
| BOLI income | |||||||||||
| Other | |||||||||||
| Total noninterest income | |||||||||||
Noninterest expenses | |||||||||||
| Salaries and employee benefits | |||||||||||
| Occupancy and equipment | |||||||||||
| Acquisition related expenses | |||||||||||
| Information technology expense | |||||||||||
| Professional fees | |||||||||||
| Advertising and public relations | |||||||||||
| Communications | |||||||||||
| Writedown of building | |||||||||||
| FHLB prepayment penalty | |||||||||||
| Other | |||||||||||
| Total noninterest expense | |||||||||||
| Income before income taxes | |||||||||||
| Income taxes | |||||||||||
| Net income | |||||||||||
| Net income per share of common stock | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
Cash dividends declared per share of common stock | $ | $ | |||||||||
Weighted average shares outstanding, basic | |||||||||||
Weighted average shares outstanding, diluted | |||||||||||
See accompanying notes which are an integral part of these financial statements.
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COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
| 2021 | 2020 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income: | |||||||||||
| Net unrealized gains (losses) on investment securities arising during the period | ( | ||||||||||
| Tax effect | ( | ||||||||||
| Reclassification adjustment for (gains) losses on sales of securities available for sale included in net income | ( | ||||||||||
| Tax effect | ( | ||||||||||
| Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects | ( | ||||||||||
| Comprehensive income | $ | $ | |||||||||
See accompanying notes which are an integral part of these financial statements.
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COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 and 2020
(DOLLARS IN THOUSANDS)
| Preferred Stock | Common Stock | Paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Dividends on common shares | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Goodwill adjustment | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Dividends on common shares | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
See accompanying notes which are an integral part of these financial statements.
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COLONY BANKCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
| 2021 | 2020 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Provision for loan losses | |||||||||||
| Depreciation, amortization and accretion | |||||||||||
| Stock-based compensation expense | |||||||||||
| (Gains) losses on sales of securities available for sale | ( | ||||||||||
| Net increase in servicing asset | ( | ( | |||||||||
| Loss on sales and writedowns of other real estate and repossessions | |||||||||||
| (Gain) losses on sales of premises & equipment | ( | ||||||||||
| Gain on sale of bank owned buildings | ( | ( | |||||||||
| Writedowns on sale of bank owned buildings | |||||||||||
| Increase in bank owned life insurance | ( | ( | |||||||||
| Gain on sales of SBA loans | ( | ( | |||||||||
| Origination of loans held for sale | ( | ( | |||||||||
| Proceeds from sales of loans held for sale | |||||||||||
| Change in other assets | ( | ( | |||||||||
| Change in other liabilities | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Purchases of investment securities available for sale | ( | ( | |||||||||
| Proceeds from maturities, calls, and paydowns of investment securities available for sale | |||||||||||
| Proceeds from sales of investment securities available for sale | |||||||||||
| Net change in loans | ( | ||||||||||
| Purchase of premises and equipment | ( | ( | |||||||||
| Proceeds from sales of other real estate and repossessions | |||||||||||
| Purchase of equity securities | ( | ||||||||||
| Purchase of bank-owned life insurance | ( | ||||||||||
| Proceeds from bank owned life insurance | |||||||||||
| Redemption (purchase of) Federal Home Loan Bank stock | |||||||||||
| Proceeds from sale of bank owned buildings | |||||||||||
| Proceeds from sales of premises and equipment | |||||||||||
| Net cash and cash equivalents received from bank acquisition | |||||||||||
| Net cash and cash equivalents paid in insurance acquisitions | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Change in noninterest-bearing customer deposits | |||||||||||
| Change in interest-bearing customer deposits | |||||||||||
| Dividends paid on common stock | ( | ( | |||||||||
| Proceeds from Paycheck Protection Program Liquidity Fund | |||||||||||
| Repayment of Paycheck Protection Program Liquidity Fund | ( | ( | |||||||||
| Proceeds from Federal Home Loan Bank advances | |||||||||||
| Repayments of Federal Home Loan Bank advances | ( | ||||||||||
| Repayments of other borrowings | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||||||
| Cash paid during the period for interest | $ | $ | |||||||||
| Cash paid during the period for income taxes | |||||||||||
| NONCASH INVESTING AND FINANCING ACTIVITIES | |||||||||||
| Acquisition of real estate through foreclosure | |||||||||||
| Change in goodwill | |||||||||||
See accompanying notes which are an integral part of these financial statements.
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COLONY BANKCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Colony Bankcorp, Inc. and subsidiaries (the “Company”) is a financial holding company headquartered in Fitzgerald, Georgia, whose primary business is presently conducted by Colony Bank, its wholly owned banking subsidiary (the “Bank”). Through the Bank, the Company offers a broad range of retail and commercial banking services to its customers concentrated in central, south and coastal Georgia. The Bank also engages in mortgage banking and SBA lending, and, as such originates, acquires, sells and services one-to-four family residential mortgage loans and SBA loans in the Southeast. The Company is subject to the regulations of certain state and federal agencies and are periodically examined by those regulatory agencies. The Company also provides an option for its customers to purchase insurance services including vehicle, home, renters and life insurance. Additionally, Colony Risk Management, Inc. is a subsidiary of the Company and is located in Las Vegas, Nevada. It is a captive insurance subsidiary which insures various liability and property damage policies for the Company and its related subsidiaries. Colony Risk Management is regulated by the State of Nevada Division of Insurance.
Basis of Presentation and Accounting Estimates
The consolidated financial statements include the accounts of Colony Bankcorp, Inc. and its wholly owned subsidiaries, Colony Bank and Colony Risk Management. All significant intercompany transactions and balances have been eliminated in consolidation.
In preparing the consolidated financial statements in conformity with generally accepted accounting principles in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Acquisition Accounting
Acquisitions are accounted for under the acquisition method of accounting. Purchased assets and assumed liabilities are recorded at their estimated fair values as of the purchase date. Any identifiable intangible assets are also recorded at fair value. When the consideration given is less than the fair value of the net assets received, the acquisition results in a “bargain purchase gain”. If the consideration given exceeds the fair value of the net assets received, goodwill is recognized. Fair values are subject to refinement for up to one year after the closing date of an acquisition as additional information regarding the closing date fair values becomes available.
All identifiable intangible assets that are acquired in a business combination are recognized at fair value on the acquisition date. Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity).
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date and carryover of the seller's related allowance for loan losses is prohibited. When the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. The Company must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows result in a reversal of the provision for loan losses to the extent of prior provisions and adjust accretable discount if no prior provisions have been made or have been fully reversed. This increase in accretable discount will have a positive impact on future interest income.
Transfer of Financial Assets
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Cash and Cash Equivalents
For purposes of reporting cash flow, cash and cash equivalents include cash on hand, cash items in process of collection, amounts due from banks, interest-bearing deposits in banks and federal funds sold.
Investment Securities
The Company classifies its investment securities in one of three categories: (i) trading, (ii) held to maturity or (iii) available for sale. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other investment securities are classified as available for sale. At December 31, 2021 and 2020, all securities were classified as available for sale.
Trading securities are carried at fair value. Unrealized gains and losses on trading securities are recorded in earnings as a component of other noninterest income. Held to maturity securities are recorded initially at cost and subsequently adjusted for paydowns and amortization of purchase premium or accretion of purchase discount. Available for sale securities are carried at fair value. Unrealized holding gains and losses, net of the related deferred tax effect, on available for sale securities are excluded from earnings and are reported in other comprehensive income as a separate component of shareholders’ equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains or losses associated with transfers of securities from held to maturity to available for sale are recorded as a separate component of shareholders’ equity. These unrealized holding gains or losses are amortized into income over the remaining life of the security as an adjustment to the yield in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security.
The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the expected life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the trade date. A decline in the market value of any available for sale or held to maturity investment below cost that is deemed other than temporary establishes a new cost basis for the security. Other than temporary impairment deemed to be credit related is charged to earnings. Other than temporary impairment attributed to non-credit related factors is recognized in other comprehensive income.
In determining whether other-than-temporary impairment losses exist, management considers (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer or underlying collateral of the security, and (iii) the Company’s intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Other Investments
Other investments include managed investment funds which are carried at their fair value and unrealized gains or losses are recorded through earnings as a component of noninterest income.
Federal Home Loan Bank (“FHLB”) and First National Bankers Bank ("FNBB") stock are also included in other investments. These investments do not have a readily determinable market value due to restrictions placed on transferability and therefore are carried at cost.
These other investments are periodically evaluated for impairment based on ultimate recovery of par value or cost basis. Both cash and stock dividends are reported as income.
Loans Held for Sale
Mortgage and SBA loans held for sale are carried at the lower of aggregate cost or estimated fair value, as determined by outstanding commitments from third party investors in the secondary market. Adjustments to reflect unrealized gains and losses resulting from changes in fair value of mortgage loans held for sale and realized gains and losses upon ultimate sale of the mortgage loans held for sale are classified as mortgage fee income in the consolidated statements of income. Adjustments to reflect unrealized gains and losses resulting from changes in fair value of SBA loans held for sale and realized gains and losses
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Loans
Loans are reported at their outstanding principal balances less unearned income, net of deferred fees and origination costs. Interest income is accrued on the outstanding principal balance. For all classes of loans, the accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to make payments as they become due, unless the loan is well secured and in the process of collection. Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. All interest accrued, but not collected for loans that are placed on nonaccrual or charged off, is reversed against interest income. Interest income on nonaccrual loans is applied against principal until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the loan balance to be uncollectable. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.
The allowance consists of specific, historical and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The historical component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. A general component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and historical losses in the portfolio. General valuation allowances are based on internal and external qualitative risk factors such as (1) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices, (2) changes in international, national, regional, and local conditions, (3) changes in the nature and volume of the portfolio and terms of loans, (4) changes in the experience, depth, and ability of lending management, (5) changes in the volume and severity of past due loans and other similar conditions, (6) changes in the quality of the organization's loan review system, (7) changes in the value of underlying collateral for collateral dependent loans, (8) the existence and effect of any concentrations of credit and changes in the levels of such concentrations, and (9) the effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.
Loans identified as losses by management, internal loan review and/or Bank examiners are charged off. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
A significant portion of the Company’s impaired loans are deemed to be collateral dependent. Management therefore measures impairment on these loans based on the fair value of the collateral. Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company. The decision whether to obtain an external third-party appraisal usually depends on the type of property being evaluated. External appraisals are usually obtained on more complex,
67
income producing properties such as hotels, shopping centers and businesses. Less complex properties such as residential lots, farm land and single family houses may be evaluated internally by the staff appraiser and appraisal department. When the Company does obtain appraisals from external third-parties, the values utilized in the impairment calculation are “as is” or current market values. The appraisals, whether prepared internally or externally, may utilize a single valuation approach or a combination of approaches including the comparable sales, income and cost approach. Appraised amounts used in the impairment calculation are typically discounted 25 percent to account for selling and marketing costs if the repayment of the loan is to come from the sale of the collateral. Although appraisals may not be obtained each year on all impaired loans, the collateral values used in the impairment calculations are evaluated quarterly by management. Based on management’s knowledge of the collateral and the current real estate market conditions, appraised values may be further discounted to reflect facts and circumstances known to management since the initial appraisal was performed.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a level 3 classification of the inputs for determining fair value. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, we consider the fair value of impaired loans to be highly sensitive to changes in market conditions.
Commitments and Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Premises and Equipment
Land is carried at cost. Other premises and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. In general, estimated lives for buildings are up to 40 years, furniture and equipment useful lives range from to 10 years and the lives of software and computer related equipment range from to five years . Leasehold improvements are amortized over the life of the related lease, or the related assets, whichever is shorter. Expenditures for major improvements of the Company’s premises and equipment are capitalized and depreciated over their estimated useful lives. Minor repairs, maintenance and improvements are charged to operations as incurred. When assets are sold or disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Goodwill is assigned to reporting units and tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.
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Cash Value of Bank Owned Life Insurance
The Company has purchased life insurance policies on certain officers. The life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Other Real Estate
Income Taxes
The provision for income taxes is based upon income for financial statement purposes, adjusted for nontaxable income and nondeductible expenses. Deferred income taxes have been provided when different accounting methods have been used in determining income for income tax purposes and for financial reporting purposes.
Deferred tax assets and liabilities are recognized based on future tax consequences attributable to differences arising from the financial statement carrying values of assets and liabilities and their tax basis. The differences relate primarily to depreciable assets (use of different depreciation methods for financial statement and income tax purposes) and allowance for loan losses (use of the allowance method for financial statement purposes and the direct write-off method for tax purposes). In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with effects included in the income tax provision. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company and its subsidiary file a consolidated federal income tax return. The subsidiary pays its proportional share of federal income taxes to the Company based on its taxable income.
The Company’s federal and state income tax returns for tax years 2021, 2020, 2019 and 2018 are subject to examination by the Internal Revenue Service (IRS) and the Georgia Department of Revenue, generally for three years after filing.
The Company believes that its income tax filing positions taken or expected to be taken on its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.
Earnings per Share
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, represent equity changes
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Fair Value Measures
Fair values of assets and liabilities are estimated using relevant market information and other assumptions, as more fully disclosed in Note 17. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Operating Segments
The Company has three reportable segments, the Banking Division, the Retail Mortgage Division and the Small Business Specialty Lending Division. The Banking Division derives its revenues from the delivery of full service financial services to include commercial loans, consumer loans and deposit accounts. The Retail Mortgage Division derives its revenues from the origination, sales and servicing of one-to-four family residential mortgage loans. The Small Business Specialty Lending Division derives its revenues from origination, sales and servicing of SBA and USDA government guaranteed loans.
The Banking, Retail Mortgage and Small Business Specialty Lending Divisions are managed as separate business units because of the different products and services they provide. The Company evaluates performance and allocates resources based on profit or loss from operations. There are no material intersegment sales or transfers.
Reclassifications
Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on stockholders’ equity or net income.
Accounting Standards Updates Pending Adoption
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). This ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supported forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. On October 16, 2019, the Financial Accounting Standards Board ("FASB") voted to extend the delay of the effective date of this ASU for smaller reporting companies, such as the Company, until fiscal years beginning after December 15, 2022. The Company 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.
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NOTE 2. BUSINESS COMBINATIONS
Acquisition of SouthCrest Financial Group
On August 1, 2021, the Company completed its acquisition of SouthCrest Financial Group, Inc. (“SouthCrest”), a bank holding company headquartered in Atlanta, Georgia. Upon consummation of the acquisition, SouthCrest was merged with and into the Company, with Colony Bankcorp, Inc. as the surviving entity in the merger. Immediately following the holding company merger, SouthCrest’s wholly owned bank subsidiary, SouthCrest Bank, N.A. was also merged with and into the Bank. The acquisition expanded the Company’s market presence, as SouthCrest Bank, N.A. had eight full-service banking locations, one in Cedartown, Chickamauga, Cumming, Fayetteville, Luthersville, Manchester, Rockmart and Thomaston, Georgia. Under the terms of the Agreement and Plan of Merger, each SouthCrest shareholder had the option to receive either $10.45 in cash or 0.7318 shares of the Company’s common stock in exchange for each share of SouthCrest stock. As a result, the Company issued 3,987,815 common shares at a fair value of $71.4 million and paid $21.6 million in cash to the former shareholders of SouthCrest as merger consideration.
The merger was effected by the issuance of shares of the Company’s common stock along with cash consideration to shareholders of SouthCrest. The assets and liabilities of SouthCrest as of the effective date of the merger were recorded at their respective estimated fair values and combined with those of the Company. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill. Goodwill of $35.0 million was recorded as part of the SouthCrest acquisition and is not expected to be deductible for income tax purposes.
In periods following the merger, the financial statements of the combined entity will include the results attributable to SouthCrest beginning on the date the merger was completed. For the twelve month period ended December 31, 2021, the revenues attributable to SouthCrest were approximately $7.9 6.0
The supplemental consolidated pro-forma impact to 2020 revenues if the merger had occurred on January 1, 2020 would have been $114.7 million for year ended December 31, 2020. The supplemental consolidated pro-forma impact to 2020 net income if the merger had occurred on January 1, 2020 would have been $11.6 million for the year ended December 31, 2020. The supplemental consolidated pro-forma impact to 2021 revenues if the merger had occurred on January 1, 2020 would have been $121.9 million for the year ended December 31, 2021. The supplemental consolidated pro-forma impact to 2021 net income if the merger had occurred on January 1, 2020 would have been $20.8 million for the year ended December 31, 2021. While certain adjustments were made for the estimated impact of certain fair value adjustments, they are not indicative of what would have occurred had the merger taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of SouthCrest’s provision for credit losses or any adjustments to estimate any additional income that would have been recorded as a result of fair value adjustments for 2020 that may have occurred had the acquired loans been recorded at fair value as of the beginning of 2020. In addition, there are no adjustments to reflect any expenses that potentially could have been reduced for 2020 had the merger occurred on January 1, 2020.
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| (dollars in thousands, except market price) | Initial Fair Value Adjustments | ||||
| Purchase price consideration: | |||||
| Shares of CBAN common stock issued to SouthCrest shareholders as of August 1, 2021 | |||||
| Market price of CBAN common stock on July 30, 2021 | $ | ||||
| Estimated fair value of CBAN common stock issued | |||||
| Cash consideration paid | |||||
| Total consideration | $ | ||||
| Assets acquired at fair value: | |||||
| Cash and cash equivalents | $ | ||||
| Investments securities available for sale | |||||
| Restricted investments | |||||
| Loans | |||||
| Premises and equipment | |||||
| Core deposit intangible | |||||
| Other real estate | |||||
| Prepaid and other assets | |||||
| Total fair value of assets acquired | $ | ||||
| Liabilities assumed at fair value: | |||||
| Deposits | $ | ( | |||
| FHLB advances | ( | ||||
| Payables and other liabilities | ( | ||||
| Total fair value of liabilities assumed | $ | ( | |||
| Net assets acquired at fair value: | $ | ||||
| Amount of goodwill resulting from acquisition | $ | ||||
In the acquisition, the Company purchased $307.5 million of loans at fair value, net of $635,000 , or 0.21 %, estimated discount to the outstanding principal balance. Of the total loans acquired, management identified $1.2 million that were considered to be credit impaired and are accounted for under ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of the acquisition date for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.
| (dollars in thousands) | |||||
| Contractually Required Principal and Interest | $ | ||||
| Non-accretable Difference | |||||
| Cash Flows Expected to be Collected | |||||
| Accretable Yield | |||||
| Total Purchased Credit-Impaired Loans Acquired | $ | ||||
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The following table presents the acquired loan data for the SouthCrest acquisition.
| Fair value of acquired loans at acquisition date | Contractually required principal and interest payments | Nonaccretable difference | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Acquired receivables subject to ASC 310-30 | $ | $ | $ | ||||||||||||||
| Acquired receivables not subject to ASC 310-30 | |||||||||||||||||
Formation of Colony Insurance
On August 1, 2021, September 1, 2021 and October 1, 2021, the Company acquired several insurance agencies and formed Colony Insurance, a division of the Bank and recorded goodwill of $1.9 million and customer deposit intangibles of $2.3 million.
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NOTE 3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses are summarized as follows:
| (dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| U.S. treasury securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| U.S. agency | ( | ||||||||||||||||||||||
| State, county and municipal securities | ( | ||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| Mortgage-backed securities | ( | ||||||||||||||||||||||
| Total debt securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| U.S. treasury securities | $ | $ | $ | $ | |||||||||||||||||||
| U.S. agency | |||||||||||||||||||||||
| State, county and municipal securities | ( | ||||||||||||||||||||||
| Corporate debt securities | ( | ||||||||||||||||||||||
| Mortgage-backed securities | ( | ||||||||||||||||||||||
| Total debt securities | $ | $ | $ | ( | $ | ||||||||||||||||||
The gross unrealized losses and estimated fair value of securities aggregated by category and length of time that securities have been in a continuous unrealized loss position are summarized as follows:
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| U.S. treasury securities | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| U.S. agency | ( | ( | |||||||||||||||||||||||||||||||||
| State, county and municipal securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | |||||||||||||||||||||||||||||||||
| Mortgage-backed securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Total debt securities | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| State, county and municipal securities | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Corporate debt securities | ( | ( | |||||||||||||||||||||||||||||||||
| Mortgage-backed securities | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Total debt securities | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
At December 31, 2021, 272 securities have unrealized losses from the Company’s amortized cost basis. These securities are guaranteed by either the U.S. Government, other governments or U.S. corporations. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.
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As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other than temporary.
The amortized cost and fair value of investment securities as of December 31, 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 | $ | $ | |||||||||
| Due after one year through five years | |||||||||||
| Due after five years through ten years | |||||||||||
| Due after ten years | |||||||||||
| $ | $ | ||||||||||
| Mortgage-backed securities | |||||||||||
| $ | $ | ||||||||||
Proceeds from sales of investments available for sale were $96.8 million in 2021 and $58.1 million in 2020. Gross realized gains totaled $391,000 in 2021 and $1,228,000 in 2020. Gross realized losses totaled $478,000 in 2021 and $302,000 in 2020.
Investment securities having a carrying value totaling $247.4 million and $126.5 million as of December 31, 2021 and 2020, respectively, were pledged to secure public deposits and for other purposes.
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NOTE 4. LOANS
The following table presents the composition of loans segregated by legacy and purchased loans and by class of loans, as of December 31, 2021 and 2020. Purchased loans are defined as loans that were acquired in bank acquisitions.
| December 31, 2021 | |||||||||||||||||
| (dollars in thousands) | Legacy Loans | Purchased Loans | Total | ||||||||||||||
| Construction, land & land development | $ | $ | $ | ||||||||||||||
| Other commercial real estate | |||||||||||||||||
| Total commercial real estate | |||||||||||||||||
| Residential real estate | |||||||||||||||||
Commercial, financial, & agricultural(*) | |||||||||||||||||
| Consumer & other | |||||||||||||||||
| Total loans | $ | $ | $ | ||||||||||||||
| December 31, 2020 | |||||||||||||||||
| (dollars in thousands) | Legacy Loans | Purchased Loans | Total | ||||||||||||||
| Construction, land & land development | $ | $ | $ | ||||||||||||||
| Other commercial real estate | |||||||||||||||||
| Total commercial real estate | |||||||||||||||||
| Residential real estate | |||||||||||||||||
| Commercial, financial, & agricultural(*) | |||||||||||||||||
| Consumer & other | |||||||||||||||||
| Total loans | $ | $ | $ | ||||||||||||||
(*) Includes $9.0 million and $101.1 million in PPP loans as of December 31, 2021 and 2020, respectively.
Commercial and agricultural loans are extended to a diverse group of businesses within the Company’s market area. These loans are often underwritten based on the borrower’s ability to service the debt from income from the business. Real estate construction loans often require loan funds to be advanced prior to completion of the project. Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans. Consumer loans are originated at the bank level. These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.
Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (1) the risk grade assigned to commercial and consumer loans, (2) the level of classified commercial loans, (3) net charge-offs, (4) nonperforming loans, and (5) the general economic conditions in the Company’s geographic markets.
The Company uses a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. A description of the general characteristics of the grades is as follows:
•Grades 1, 2 and 3 - Borrowers with these assigned risk grades range from virtual absence of risk to minimal risk. Such loans may be secured by Company-issued and controlled certificates of deposit or properly margined equity securities or bonds. Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans. Loans in this category fall into the “pass” classification.
•Grades 4 and 5 - Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to
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acceptable loans with one or more risk factors considered to be more than average. These loans are also included in into the “pass” classification.
•Grade 6 - This grade includes “special mention” loans on management’s watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.
•Grades 7 and 8 - These grades includes “substandard” loans in accordance with regulatory guidelines. This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms. Loans considered to be impaired are assigned grade 8, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses. Generally, loans on which interest accrual has been stopped would be included in this grade.
•Grades 9 and 10 - These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively. In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades. Management manages the Company’s problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 7 or 8.
The following tables present the loan portfolio, excluding purchased loans, by credit quality indicator (risk grade) as of December 31, 2021. Those loans with a risk grade of 1, 2, 3, 4, and 5 have been combined in the pass column for presentation purposes. For the periods ending December 31, 2021, the Company did not have any loans classified as “doubtful” or a “loss”.
| (dollars in thousands) | Pass | Special Mention | Substandard | Total Loans | |||||||||||||||||||
| Construction, land & land development | $ | $ | $ | $ | |||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial, & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | |||||||||||||||||||
The following table presents the purchased loan portfolio by credit quality indicator (risk grade) as of December 31, 2021.
| (dollars in thousands) | Pass | Special Mention | Substandard | Total Loans | |||||||||||||||||||
| Construction, land & land development | $ | $ | $ | $ | |||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial, & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | |||||||||||||||||||
The following tables present the loan portfolio, excluding purchased loans, by credit quality indicator (risk grade) as of 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 periods ending December 31, 2020, the Company did not have any loans classified as “doubtful” or a “loss”.
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| (dollars in thousands) | Pass | Special Mention | Substandard | Total Loans | |||||||||||||||||||
| Construction, land & land development | $ | $ | $ | $ | |||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial, & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | |||||||||||||||||||
The following table presents the purchased loan portfolio by credit quality indicator (risk grade) as of December 31, 2020.
| (dollars in thousands) | Pass | Special | Substandard | Total Loans | |||||||||||||||||||
| Construction, land & land development | $ | $ | $ | $ | |||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial, & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | |||||||||||||||||||
A loan’s risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral. Loan risk grades are subject to reassessment at various times throughout the year as part of the Company’s ongoing loan review process. Loans with an assigned risk grade of 6 or below and an outstanding balance of $250,000 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired. In assessing the overall economic condition of the markets in which it operates, the Company monitors the unemployment rates for its major service areas. The unemployment rates are reviewed on a quarterly basis as part of the allowance for loan loss determination.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provision. Loans may be placed on nonaccrual status regardless of whether such loans are considered past due.
The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, excluding purchased loans, as of December 31, 2021:
| Accruing Loans | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 30-89 Days Past Due | 90 Days or More Past Due | Total Accruing Loans Past Due | Nonaccrual Loans | Current Loans | Total Loans | |||||||||||||||||||||||||||||
| Construction, land & land development | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||||||||||||||
| Commercial, financial, & agricultural | |||||||||||||||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, for purchased loans, as of December 31, 2021:
| Accruing Loans | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 30-89 Days Past Due | 90 Days or More Past Due | Total Accruing Loans Past Due | Nonaccrual Loans | Current Loans | Total Loans | |||||||||||||||||||||||||||||
| Construction, land & land development | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||||||||||||||
| Commercial, financial, & agricultural | |||||||||||||||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, excluding purchased loans, as of December 31, 2020:
| Accruing Loans | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 30-89 Days Past Due | 90 Days or More Past Due | Total Accruing Loans Past Due | Nonaccrual Loans | Current Loans | Total Loans | |||||||||||||||||||||||||||||
| Construction, land & land development | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||||||||||||||
| Commercial, financial, & agricultural | |||||||||||||||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, for purchased loans, as of December 31, 2020:
| Accruing Loans | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 30-89 Days Past Due | 90 Days or More Past Due | Total Accruing Loans Past Due | Nonaccrual Loans | Current Loans | Total Loans | |||||||||||||||||||||||||||||
| Construction, land & land development | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||||||||||||||
| Commercial, financial, & agricultural | |||||||||||||||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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The following table details impaired loan data, including purchased credit impaired loans, as of December 31, 2021:
| (dollars in thousands) | Unpaid Contractual Principal Balance | Recorded investment | Related allowance | Average Recorded Investment | |||||||||||||||||||
| With No Related Allowance Recorded | |||||||||||||||||||||||
| Construction, land & land development | $ | $ | $ | — | $ | ||||||||||||||||||
| Other commercial real estate | — | ||||||||||||||||||||||
| Residential real estate | — | ||||||||||||||||||||||
| Commercial, financial & agricultural | — | ||||||||||||||||||||||
| Consumer & other | — | ||||||||||||||||||||||
| Total Impaired Loans with no Allowance | — | ||||||||||||||||||||||
| With An Allowance Recorded | |||||||||||||||||||||||
| Construction, land & land development | |||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| Total Impaired Loans with Allowance | |||||||||||||||||||||||
| Purchased Credit Impaired Loans | |||||||||||||||||||||||
| Construction, land & land development | |||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| Total Purchased Credit Impaired Loans | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Construction, land & land development | |||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
Interest income recorded on impaired loans during the year ended December 31, 2021 was $570,000 , and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on TDRs. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.2 million for the year ended December 31, 2021.
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The following table details impaired loan data as of December 31, 2020, including purchased credit impaired loans.
| (dollars in thousands) | Unpaid Contractual Principal Balance | Recorded Investment | Related Allowance | Average Recorded Investment | |||||||||||||||||||
| With No Related | |||||||||||||||||||||||
| Allowance Recorded | |||||||||||||||||||||||
| Construction, land & land development | $ | $ | $ | — | $ | ||||||||||||||||||
| Other commercial real estate | — | ||||||||||||||||||||||
| Residential real estate | — | ||||||||||||||||||||||
| Commercial, financial & agricultural | — | ||||||||||||||||||||||
| Consumer & other | — | ||||||||||||||||||||||
| — | |||||||||||||||||||||||
| With An Allowance Recorded | |||||||||||||||||||||||
| Construction, land & land development | |||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| Purchase credit impaired | |||||||||||||||||||||||
| Construction, land & land development | |||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Construction, land & land development | |||||||||||||||||||||||
| Other commercial real estate | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Commercial, financial & agricultural | |||||||||||||||||||||||
| Consumer & other | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
Interest income recorded on impaired loans during the year ended December 31, 2020 was $761,000 , and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on TDRs. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $518,000 for the year ended December 31, 2020.
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Troubled Debt Restructurings (TDRs) are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower’s financial condition. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time. Not all loan modifications are TDRs. Loan modifications are reviewed and approved by the Company’s senior lending staff, who then determine whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:
•Interest rate reductions - Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.
•Amortization or maturity date changes - Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.
•Principal reductions - These are often the result of commercial real estate loan workouts where two new notes are created. The primary note is underwritten based upon the Company’s normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note. The terms of the secondary note vary by situation and often involve that note being charged off, or the principal and interest payments being deferred until after the primary note has been repaid. In situations where a portion of the note is charged off during modification, there is often no specific reserve allocated to those loans. This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is no additional exposure on those loans.
As discussed in Note 1, Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of December 31, 2021. The Company had four loan contracts totaling $647,000 restructured and one of these loans which was a construction, land and development loan for $511,000 was subsequently paid off during 2021.
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.
There were two loan contracts restructured at December 31, 2021. Both modifications were payment deferral modifications. The loans consisted of two residential real estate loans totaling $136,000 . Both residential real estate loans were also placed on non-accrual status as of December 31, 2021. A TDR may cease being classified as impaired if the loan is subsequently modified at market terms and, has performed according to the modified terms for at least six months, and there has not been any prior principal forgiveness on a cumulative basis. The Company had four loan contracts totaling $494,000 restructured during the year ended December 31, 2020, all four modifications were payment deferral modifications. The loans consisted of two commercial real estate loans totaling $132,000 , one commercial loan totaling $89,000 and one residential real estate loan totaling $273,000 . The two commercial real estate loans were also placed on non-accrual status as of December 31, 2020; the remaining TDR loans were accruing. During 2021 and 2020, the Company had no
Modifications in Response to COVID-19
Certain borrowers were unable to meet their contractual payment obligations because of the adverse effects of the COVID-19 pandemic. To help mitigate these effects, loan customers applied for a deferral of payments, or portions thereof, for up to three months. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to the COVID-19 pandemic reported as past due or placed on nonaccrual status (provided the loans were not past due or on nonaccrual status prior to the deferral).
As of December 31, 2021, the Company had no loans under modified terms. As of December 31, 2020, the Company had approximately $1.9 million in loans still under their modified terms. The Company’s modification program included payment deferrals, interest only, and other forms of modifications. See Note 1 - Summary of Significant Accounting Policies for more information.
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NOTE 5. ALLOWANCE FOR LOAN LOSSES
The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the year ended December 31, 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other loan categories and periodically may result in reallocation within the provision categories.
| (dollars in thousands) | Construction, land and land development | Other commercial real estate | Residential real estate | Commercial, financial, & agricultural | Consumer and other | Total | |||||||||||||||||||||||||||||
| Year ended December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||||||||
| Provision | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Period-end amount allocated to: | |||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Collectively evaluated for impairment | |||||||||||||||||||||||||||||||||||
| Purchase credit impaired | |||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||
| Loans individually evaluated for impairment | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Loans collectively evaluated for impairment | |||||||||||||||||||||||||||||||||||
| Purchased credit impaired | |||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the year ended December 31, 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 | |||||||||||||||||||||||||||||
| Year ended December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||||||||
| Provision | |||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Period-end amount allocated to: | |||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Collectively evaluated for impairment | |||||||||||||||||||||||||||||||||||
| Purchase credit impaired | |||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||
| Loans individually evaluated for impairment | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Loans collectively evaluated for impairment | |||||||||||||||||||||||||||||||||||
| Purchase credit impaired | |||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following as of December 31:
| (dollars in thousands) | 2021 | 2020 | |||||||||
| Land | $ | $ | |||||||||
| Building | |||||||||||
| Furniture, fixtures and equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Construction in progress | |||||||||||
| Total cost | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Total premises and equipment | $ | $ | |||||||||
Depreciation charged to operations totaled $2.7 million in 2021 and $2.3 million in 2020. Construction in progress consists of building and land improvements to three of the Company's bank branches. Cost to complete these projects is expected not to exceed $20,000 .
NOTE 7. OTHER REAL ESTATE OWNED
The following is a summary of the activity in other real estate owned during the years ended December 31, 2021 and 2020:
| (dollars in thousands) | 2021 | 2020 | |||||||||
| Balance, Beginning of year | $ | $ | |||||||||
| Loans transferred to other real estate | |||||||||||
| Acquired in acquisitions | |||||||||||
| Sales proceeds | ( | ( | |||||||||
| Net gain/(loss) on sale and writedowns | ( | ( | |||||||||
| Ending balance | $ | $ | |||||||||
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NOTE 8. GOODWILL AND INTANGIBLE ASSETS
The following is an analysis of the core deposit intangible activity for the years ended December 31:
| 2021 | 2020 | ||||||||||||||||||||||
| (dollars in thousands) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||
| Amortizable intangible assets: | |||||||||||||||||||||||
| Core deposit intangible | $ | $ | $ | $ | |||||||||||||||||||
| Customer relationship intangible | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
| Unamortizable intangible assets: | |||||||||||||||||||||||
| Goodwill | $ | $ | |||||||||||||||||||||
Activity related to transactions since January 1, 2019 includes the following:
(1)In connection with the SouthCrest, Inc. acquisition on August 1, 2021, the Company recorded $4.0 million in core deposit intangible and $35.0 million in goodwill.
(2)In connection with insurance acquisitions that occurred on August 1, 2021, September 1, 2021, and October 1, 2021, the Company recorded $2.3 million in customer deposit intangibles and $1.9 million in goodwill.
(3)In connection with the LBC Bancshares, Inc. acquisition on May 1, 2019, the Company recorded $3.1 million in a core deposit intangible and $15.7 million in goodwill. The company recorded a subsequent adjustment within the one year period allowed after the acquisition of $485,000 in 2020.
(4)In connection with the May 1, 2019 acquisition of PFB Mortgage from Planters First Bank, the Company recorded $541,000 in goodwill.
Amortization expense related to the core deposit intangible was $1.2 million and $785,000 at December 31, 2021 and 2020, respectively. The estimated future amortization expense for intangible assets remaining as of December 31, 2021 is as follows:
| (dollars in thousands) | Amount | |||||||
| 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
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NOTE 9. INCOME TAXES
The income tax expense in the consolidated statements of income for the years ended December 31, 2021 and 2020 are as follows:
| (dollars in thousands) | 2021 | 2020 | |||||||||
| Current federal expense | $ | $ | |||||||||
| Deferred federal expense | ( | ( | |||||||||
| Federal income tax expense | |||||||||||
| Current state expense | |||||||||||
| Deferred state expense | ( | ||||||||||
| State income tax expense | $ | ( | $ | ||||||||
| Provision for income taxes | $ | $ | |||||||||
The Company's income tax expense differs from amounts computed by applying the federal statutory rates to income before income taxes. A reconciliation of the differences for the years ended December 31, 2021 and 2020 is as follows:
| (dollars in thousands) | 2021 | 2020 | |||||||||
| Tax at federal income tax rate | $ | $ | |||||||||
| Change resulting from: | |||||||||||
| State taxes | ( | ||||||||||
| Tax-exempt interest | ( | ( | |||||||||
| Income in cash value of bank owned life insurance | ( | ( | |||||||||
| Nondeductible merger expenses | |||||||||||
| Other | |||||||||||
| Provision for income taxes | $ | $ | |||||||||
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The components of deferred income taxes for the years ended December 31, 2021 and 2020 are as follows:
| (dollars in thousands) | 2021 | 2020 | |||||||||
| Deferred Tax Assets | |||||||||||
| Allowance for loan losses | $ | $ | |||||||||
| Lease liability | |||||||||||
| Net operating loss carryforwards | |||||||||||
| Other real estate | |||||||||||
| Deferred compensation | |||||||||||
| Unrealized loss on securities available for sale | |||||||||||
| Restricted stock | |||||||||||
| Purchase accounting adjustments | |||||||||||
| Investment in partnerships | |||||||||||
| Other | |||||||||||
| Gross deferred tax assets | |||||||||||
| Deferred Tax Liabilities | |||||||||||
| Premises and equipment | |||||||||||
| Right of use lease asset | |||||||||||
| Unrealized gain on securities available for sale | |||||||||||
| Purchase accounting adjustments | |||||||||||
| Core deposit intangible | |||||||||||
| Gross deferred tax liabilities | |||||||||||
| Net deferred tax assets | $ | $ | |||||||||
NOTE 10. DEPOSITS
The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $626,000 and $406,000 as of December 31, 2021 and 2020, respectively.
Components of interest-bearing deposits as of December 31 are as follows:
| (dollars in thousands) | 2021 | 2020 | |||||||||
| Interest-bearing demand | $ | $ | |||||||||
| Savings and money market deposits | |||||||||||
| Time, $250,000 and over | |||||||||||
| Other time | |||||||||||
| Total interest-bearing deposits | $ | $ | |||||||||
At December 31, 2021 and 2020, the Company had brokered deposits of $883,000 and $1.1 million, respectively. All of these brokered deposits represent Certificate of Deposit Account Registry Service (CDARS) reciprocal deposits. The CDARS deposits are ones in which customers placed core deposits into the CDARS program for FDIC insurance coverage and the Company receives reciprocal brokered deposits in a like amount. The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $250,000 was $73.4 million and $34.9 million as of December 31, 2021 and 2020, respectively.
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As of December 31, 2021, the scheduled maturities of certificates of deposit are as follows:
| (dollars in thousands) | ||||||||
| Year Ending December 31 | Amount | |||||||
| 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total time deposits | $ | |||||||
NOTE 11. BORROWINGS
The following table presents information regarding the Company’s outstanding borrowings at December 31, 2021:
| Description | Maturity Date | Amount | Interest Rate | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| FHLB Advances | February 3, 2023 | $ | |||||||||||||||||||||
| FHLB Advances | March 21, 2028 | ||||||||||||||||||||||
| FHLB Advances | August 15, 2025 | ||||||||||||||||||||||
| FHLB Advances | July 30, 2029 | ||||||||||||||||||||||
| FHLB Advances | July 11, 2029 | ||||||||||||||||||||||
| FHLB Advances | November 9, 2029 | ||||||||||||||||||||||
| Term Note | May 24, 2025 | ||||||||||||||||||||||
| Revolving Credit | July 30, 2022 | ||||||||||||||||||||||
| Subordinated debentures | (2) | (3) | |||||||||||||||||||||
| Fair Value Adjustment for FHLB Borrowings acquired from SouthCrest | ( | ||||||||||||||||||||||
| Total borrowings | $ | ||||||||||||||||||||||
The following table presents information regarding the Company’s outstanding borrowings at December 31, 2020:
| Description | Maturity Date | Amount | Interest Rate | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| FHLB Advances | February 3, 2023 | $ | |||||||||||||||||||||
| FHLB Advances | March 21, 2028 | ||||||||||||||||||||||
| FHLB Advances | August 15, 2025 | ||||||||||||||||||||||
| FHLB Advances | July 30, 2029 | ||||||||||||||||||||||
| Paycheck Protection Program Liquidity Facility | (1) | ||||||||||||||||||||||
| Term Note | May 24, 2025 | ||||||||||||||||||||||
| Revolving Credit | May 21, 2021 | ||||||||||||||||||||||
| Subordinated debentures | (2) | (3) | |||||||||||||||||||||
| Total borrowings | $ | ||||||||||||||||||||||
(1)Maturity date is equal to the maturity date of the related PPP loans.
(2) See maturity dates in table below.
(3) Interest rates for all subordinated debentures are at the three-month LIBOR plus added points as noted in table below.
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As collateral on the outstanding FHLB advances, the Company has provided a blanket lien on its portfolio of qualifying residential first mortgage loans and commercial loans. At December 31, 2021 and 2020, the lendable collateral value of those loans pledged was $130.3 million and $88.2 million, respectively. At December 31, 2021, the Company had remaining credit availability from the FHLB of $574.7 million. At December 31, 2020, the Company had remaining credit availability from the FHLB of $416.1 million. The Company may be required to pledge additional qualifying collateral in order to utilize the full amount of the remaining credit line.
At December 31, 2021 and 2020, the Company also has available federal funds lines of credit with various financial institutions totaling $64.5 million and $41.5 million, respectively, of which there were none
The Company has the ability to borrow funds from the Federal Reserve Bank (FRB) of Atlanta utilizing the discount window. The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the FRB on a short-term basis to meet temporary liquidity shortages caused by internal or external disruptions. At December 31, 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.
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 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.
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, expires on May 24, 2025, and bears a variable interest rate of Wall Street Journal Prime minus 0.40 %. The proceeds were used for the acquisition of LBC Bancshares, Inc. and its subsidiary, Calumet Bank. As of December 31, 2021, the outstanding balance on the term note and the line of credit were $7.3 million and $5.3 million, respectively. As of December 31, 2020, the outstanding balance totaled of the term note and the line of credit were $8.3 million and $5.3 million, respectively.
The following table presents the information regarding the Company's subordinated debentures at December 31, 2021 and 2020. All subordinated debentures are at three month LIBOR rat plus added points noted below at December 31, 2021 and 2020.
| Description | Date | Amount | Added Points | Maturity | 5-Year Call Option | ||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Colony Bankcorp Statutory Trust III | June 16, 2004 | $ | June 14, 2034 | June 17, 2009 | |||||||||||||
| Colony Bankcorp Capital Trust I | April 13, 2006 | April 13, 2036 | April 13, 2011 | ||||||||||||||
| Colony Bankcorp Capital Trust II | March 12, 2007 | March 12, 2037 | March 12, 2012 | ||||||||||||||
| Colony Bankcorp Capital Trust III | September 14, 2007 | September 14, 2037 | September 14, 2012 | ||||||||||||||
The Trust Preferred Securities are recorded as subordinated debentures on the consolidated balance sheets, and subject to certain limitations, qualify as Tier 1 Capital for regulatory capital purposes. The proceeds from these offerings were used to fund certain acquisitions, pay off holding company debt and inject capital into the Bank subsidiary. The Trust Preferred Securities pay interest quarterly.
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NOTE 13. LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-2 and all subsequent ASUs that modified this topic (collectively referred to as “Topic 842”). For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
Substantially all of the leases in which the Company is the lessee are comprised of real estate for branches and office space with terms extending through 2024. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. With the adoption of Topic 842, operating lease arrangements are required to be recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.
The following table represents the consolidated balance sheet classification of the Company’s ROU assets and liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet.
| (dollars in thousands) | Classification | December 31, 2021 | December 31, 2020 | ||||||||||||||
| Assets | |||||||||||||||||
| Operating lease right-of-use assets | $ | $ | |||||||||||||||
| Liabilities | |||||||||||||||||
| Operating lease liabilities | $ | $ | |||||||||||||||
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.
For the year ended December 31, 2021 and 2020, operating lease cost was $351,000 and $243,000 , respectively.
As of December 31, 2021, the weighted average remaining lease term was 1.44 years and the weighted average discount rate was 0.51 %.
The following table represents the future maturities of the Company’s operating lease liabilities and other lease information.
| (dollars in thousands) | ||||||||
| Year | Lease Liability | |||||||
| 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Total Lease Payments | ||||||||
| Less: Interest | ( | |||||||
| Present Value of Lease Liabilities | $ | |||||||
Supplemental Lease Information: (dollars in thousands) | December 31, 2021 | December 31, 2020 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases (cash payments) | $ | $ | |||||||||
| Operating lease right-of-use assets obtained in exchange for leases entered into during the period | |||||||||||
NOTE 14. COMPENSATION PLANS
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The Company offers a defined contribution 401(k) Profit Sharing Plan (the "Plan") which covers substantially all employees who meet certain age and service requirements. The Plan allows employees to make voluntary pre-tax salary deferrals to the Plan. The Company, at its discretion, may elect to make an annual contribution to the Plan equal to a percentage of each participating employee’s salary. Such discretionary contributions must be approved by the Company’s board of directors. Employees are fully vested in the Company contributions after six years of service. In 2021 and 2020, the Company made total contributions of $1.4 million and $1.1 million to the Plan, respectively.
Colony Bank, the wholly-owned subsidiary, has deferred compensation plans covering certain former directors and certain officers choosing to participate through individual deferred compensation contracts. In accordance with terms of the contracts, the Bank is committed to pay the participant’s deferred compensation over a specified number of years, beginning at age 65 . In the event of a participant’s death before age 65 , payments are made to the participant’s named beneficiary over a specified number of years, beginning on the first day of the month following the death of the participant.
Liabilities accrued under the plans totaled $1.2 million and $698,000 as of December 31, 2021 and 2020, respectively. Benefits accrued monthly under the contracts totaled $43,000 in 2021 and $75,000 in 2020. Payments were $136,000 in 2021 and were $153,000 in 2020.
The Company has purchased life insurance policies on the plans’ participants and uses the cash flow from these policies to partially fund the plan. There was no fee income recognized in 2021 and $212,000 in 2020.
On July 1, 2021, the Company granted total awards of 187,600 restricted shares of the Company's common stock to various bank employees, with a market price of $18.41 per share. The restricted shares vest in equal installments on each of July 1, 2022, 2023, and 2024, subject to continued service through each applicable vesting date, or earlier upon the occurrence of a change in control. With the restricted stock, there will be no cash consideration to the Company for the shares. The employees will have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested.
In August 2018, the Company granted an award of 5,650 restricted shares of the Company’s common stock to T. Heath Fountain, the Company’s Chief Executive Officer (“CEO”), with a market price of $17.73 per share. The restricted shares vest in equal installments on each of July 30, 2019, 2020 and 2021, subject to continued service by Mr. Fountain through each applicable vesting date, or earlier upon the occurrence of a change in control. At December 31, 2021 the shares were fully vested. With the restricted stock, there will be no cash consideration to the Company for the shares. The CEO will have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested.
Compensation expense for restricted stock is based on the market price of the Company stock at the time of the grant and amortized on a straight-line basis over the vesting period. Total compensation expense unrecognized for the restricted shares granted for the year ended December 31, 2021 was $2.8 million, which is expected to be recognized over a weighted average period of 2.5 years. Compensation expense recognized for the years ended December 31, 2021 and 2020 was $599,000 and $33,000 , respectively.
NOTE 15. 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.
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| Contract Amount | |||||||||||
| 2021 | 2020 | ||||||||||
| (dollars in thousands) | |||||||||||
| Commitments to extend credit | $ | $ | |||||||||
| Standby letters of credit | |||||||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
Standby and performance letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year . The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Legal Contingencies. In the ordinary course of business, there are various legal proceedings pending against Colony and its subsidiaries. The aggregate liabilities, if any, arising from such proceedings would not, in the opinion of management, have a material adverse effect on Colony’s consolidated financial position.
NOTE 16. RELATED PARTY TRANSACTIONS
The following table reflects the activity and aggregate balance of direct and indirect loans to directors, executive officers or principal holders of equity securities of the Company. All such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than a normal risk of collectability. A summary of activity of related party loans is shown below:
| (dollars in thousands) | 2021 | 2020 | |||||||||
| Balance, Beginning | $ | $ | |||||||||
| New loans | |||||||||||
| Repayments | ( | ( | |||||||||
| Transactions due to changes in directors | |||||||||||
| Balance, Ending | $ | $ | |||||||||
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NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Generally accepted accounting standards in the U.S. require disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of Colony Bancorp, Inc. and subsidiaries financial instruments are detailed hereafter. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.
Generally accepted accounting principles related to Fair Value Measurements define fair value, establish a framework for measuring fair value, establish a three-level valuation hierarchy for disclosure of fair value measurement and enhance disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
• Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
• Level 3 inputs to the valuation methodology are unobservable and represent the Company’s own assumptions about the
assumptions that market participants would use in pricing the assets or liabilities.
The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.
94
Cash and short-term investments - For cash, due from banks, bank-owned deposits and federal funds sold, the carrying amount is a reasonable estimate of fair value and is classified Level 1.
Investment securities - Fair values for investment securities are based on quoted market prices where available and classified as Level 1. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments and classified as Level 2. If a comparable is not available, the investment securities are classified as Level 3.
Other investments - The fair value of other bank stock approximates carrying value and is classified as Level 2. Fair values for investment funds are based on quoted market prices where available and classified as Level 1. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments and classified as Level 2 If a comparable is not available, the investment securities are classified as Level 3.
Loans held for sale – The fair value of loans held for sale is determined on outstanding commitments from third party investors in the secondary markets and is classified within Level 2 of the valuation hierarchy.
Loans - The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. Loans are classified as Level 3.
Deposit liabilities - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date and is classified as Level 1. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities and is classified as Level 2.
Federal Home Loan Bank advances – The fair value of Federal Home Loan Bank advances is estimated by discounting the future cash flows using the current rates at which similar advances would be obtained. Federal Home Loan Bank advances are classified as Level 2.
Paycheck Protection Program Liquidity Facility – The fair value of PPPLF is estimated by discounting the future cash flows using the current rates at which similar advances would be obtained. PPPLF 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.
95
Disclosures of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis, are required in the financial statements.
The carrying amount, estimated fair values, and placement in the fair value hierarchy of the Company’s financial instruments are as follows:
| Carrying | Estimated | Level | |||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Fair Value | 1 | 2 | 3 | ||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Cash and short-term investments | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Investment securities available for sale | |||||||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||
| Loans held for sale | |||||||||||||||||||||||||||||
| Loans, net | |||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Deposits | |||||||||||||||||||||||||||||
| Federal Home Loan Bank advances | |||||||||||||||||||||||||||||
| Other borrowed money | |||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Cash and short-term investments | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Investment securities available for sale | |||||||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||
| Loans held for sale | |||||||||||||||||||||||||||||
| Loans, net | |||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Deposits | |||||||||||||||||||||||||||||
| Federal Home Loan Bank advances | |||||||||||||||||||||||||||||
| PPPLF | |||||||||||||||||||||||||||||
| Other borrowed money | |||||||||||||||||||||||||||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
96
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring and nonrecurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Impaired Loans - Impaired loans are those loans which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Other Real Estate - Other real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned. Typically, an external, third-party appraisal is performed on the collateral upon transfer into the other real estate owned account to determine the asset’s fair value. Subsequent adjustments to the collateral’s value may be based upon either updated third-party appraisals or management’s knowledge of the collateral and the current real estate market conditions. Appraised amounts used in determining the asset’s fair value, whether internally or externally prepared, are discounted 10 percent to account for selling and marketing costs. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a level 3 classification of the inputs for determining fair value. Because of the high degree of judgment required in estimating the fair value of other real estate owned assets and because of the relationship between fair value and general economic conditions, we consider the fair value of other real estate owned assets to be highly sensitive to changes in market conditions.
Assets Measured at Fair Value on a Recurring and Nonrecurring Basis - The following table presents the recorded amount of the Company’s assets measured at fair value on a recurring and nonrecurring basis as of December 31, 2021 and 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 December 31, 2021 and 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 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Nonrecurring | |||||||||||||||||||||||
| Impaired loans | $ | $ | $ | $ | |||||||||||||||||||
| Other real estate | |||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Nonrecurring | |||||||||||||||||||||||
| Impaired loans | $ | $ | $ | $ | |||||||||||||||||||
| Other real estate | |||||||||||||||||||||||
97
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
The following tables present quantitative information about the significant unobservable inputs used in the fair value measurements for assets in level 3 of the fair value hierarchy measured on a nonrecurring basis at December 31, 2021 and 2020. These tables are comprised primarily of collateral dependent impaired loans and other real estate owned:
| (dollars in thousands) | December 31, 2021 | Valuation Techniques | Unobservable Inputs | Range Weighted Avg | ||||||||||||||||||||||||||||
| Impaired Loans | $ | Appraised Value | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | % | - | |||||||||||||||||||||||||||
| Other Real Estate | $ | Appraised Value/ Comparable Sales | Discounts to reflect current market conditions and estimated costs to sell | % | - | |||||||||||||||||||||||||||
| December 31, 2020 | Valuation Techniques | Unobservable Inputs | Range Weighted Avg | |||||||||||||||||||||||||||||
| Impaired Loans | $ | Appraised Value | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | % | - | |||||||||||||||||||||||||||
| Other Real Estate | $ | Appraised Value/ Comparable Sales | Discounts to reflect current market conditions and estimated costs to sell | % | - | |||||||||||||||||||||||||||
The following table presents quantitative information about recurring level 3 fair value measurements as of December 31, 2021.
| December 31, 2021 | ||||||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Valuation Techniques | Unobservable Inputs | Range (Weighted Avg) | ||||||||||||||||||||||
| Other investments | $ | Discounted Cash Flow | Discount Rate or Yield | N/A* | ||||||||||||||||||||||
* The Company relies on a third-party pricing service to value its securities. The details of the unobservable inputs and other adjustments used by the third-party pricing service were not readily available to the Company.
The following table presents a reconciliation and statement of income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the year ended December 31, 2021 and 2020:
| Other Investment | Available for Sale Securities | ||||||||||
| (dollars in thousands) | 2021 | 2020 | |||||||||
| Beginning balance | $ | $ | |||||||||
| Additions | |||||||||||
| Total unrealized/realized gains included in earnings | |||||||||||
| Unrealized loss included in other comprehensive income (loss) | ( | ||||||||||
| Transfer to Level 2 | ( | ||||||||||
| Ending balance | $ | $ | |||||||||
98
99
NOTE 18. REGULATORY CAPITAL MARKETS
The amount of dividends payable to the parent company from the subsidiary bank is limited by various banking regulatory agencies. Upon approval by regulatory authorities, the Bank may pay cash dividends to the parent company in excess of regulatory limitations.
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. As of December 31, 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 December 31, 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 conditions or events since prior notification of capital adequacy from the regulators that have changed the institution’s category.
The Basel III rules also require the implementation of a new capital conservation buffer comprised of common equity Tier 1 capital. The capital conservation buffer is 2.5 percent of risk-weighted assets.
The Bank is participating 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.
100
The following table summarizes regulatory capital information as of December 31, 2021 and December 31, 2020 on a consolidated basis and for the subsidiary, as defined. Regulatory capital ratios for December 31, 2021 and 2020 were calculated in accordance with the Basel III rules.
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Total Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
| Consolidated | $ | % | $ | % | N/A | N/A | |||||||||||||||||||||||||||||
| Colony Bank | % | ||||||||||||||||||||||||||||||||||
| Tier I Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
| Consolidated | N/A | N/A | |||||||||||||||||||||||||||||||||
| Colony Bank | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
| Consolidated | N/A | N/A | |||||||||||||||||||||||||||||||||
| Colony Bank | |||||||||||||||||||||||||||||||||||
| Tier I Capital to Average Assets | |||||||||||||||||||||||||||||||||||
| Consolidated | N/A | N/A | |||||||||||||||||||||||||||||||||
| Colony Bank | |||||||||||||||||||||||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Total Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
| Consolidated | $ | % | $ | % | N/A | N/A | |||||||||||||||||||||||||||||
| Colony Bank | % | ||||||||||||||||||||||||||||||||||
| Tier I Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
| Consolidated | N/A | N/A | |||||||||||||||||||||||||||||||||
| Colony Bank | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
| Consolidated | N/A | N/A | |||||||||||||||||||||||||||||||||
| Colony Bank | |||||||||||||||||||||||||||||||||||
| Tier I Capital to Average Assets | |||||||||||||||||||||||||||||||||||
| Consolidated | N/A | N/A | |||||||||||||||||||||||||||||||||
| Colony Bank | |||||||||||||||||||||||||||||||||||
101
NOTE 19. FINANCIAL INFORMATION OF COLONY BANKCORP, INC. (PARENT ONLY)
The parent company’s balance sheets as of December 31, 2021 and 2020 and the related statements of operations and comprehensive income (loss) and cash flows for each of the years in the two-year period then ended are as follows:
COLONY BANKCORP, INC. (PARENT ONLY)
BALANCE SHEETS
DECEMBER 31
(DOLLARS IN THOUSANDS)
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Cash | $ | $ | |||||||||
| Investment in subsidiaries | |||||||||||
| Other | |||||||||||
| Total Assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Liabilities | |||||||||||
| Other borrowed money | $ | $ | |||||||||
| Other | |||||||||||
| Subordinated debt | |||||||||||
| Total Liabilities | |||||||||||
| Stockholders’ Equity | |||||||||||
Common stock, par value $ | |||||||||||
| Paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income (loss), net of tax | ( | ||||||||||
| Total Stockholder’s Equity | |||||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | |||||||||
102
COLOY BANKCORP, INC. (PARENT ONLY)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
| 2021 | 2020 | ||||||||||
| Income | |||||||||||
| Dividends from subsidiaries | $ | $ | |||||||||
| Other | |||||||||||
| Total income | |||||||||||
| Expenses | |||||||||||
| Interest | |||||||||||
| Salaries and employee benefits | |||||||||||
| Other | |||||||||||
| Total expenses | |||||||||||
Income before income taxes and equity in undistributed earnings (distributions in excess of earnings) of subsidiaries | |||||||||||
| Income tax benefit | ( | ( | |||||||||
Income before equity in undistributed earnings (distributions in excess of earnings) of subsidiaries | |||||||||||
| Equity in undistributed earnings(distributions in excess of earnings) of subsidiaries | ( | ||||||||||
| Net income | $ | $ | |||||||||
103
COLONY BANKCORP, INC. (PARENT ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
| 2021 | 2020 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Distribution in excess of earnings (equity in undistributed earnings) of subsidiaries | ( | ||||||||||
| Change in interest payable | ( | ||||||||||
| Other | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Proceeds from sale of premises and equipment | |||||||||||
| Net cash and cash equivalents paid in bank acquisition | ( | ||||||||||
| Net cash provided by investing activities | ( | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Net decrease in other borrowed money | ( | ( | |||||||||
| Dividends paid on common stock | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
104
NOTE 20. EARNINGS PER SHARE
The following table presents earnings per share for the years ended December 31, 2021 and 2020:
| 2021 | 2020 | ||||||||||
| (dollars in thousands, except per share amounts) | |||||||||||
| Numerator | |||||||||||
| Net income available to common stockholders | $ | $ | |||||||||
| Denominator | |||||||||||
| Weighted average number of common shares outstanding for basic earnings per common share | |||||||||||
| Weighted average number of common shares outstanding for diluted earnings per common share | |||||||||||
| Earnings per share - basic | $ | $ | |||||||||
| Earnings per share - diluted | $ | $ | |||||||||
105
NOTE 21. SEGMENT INFORMATION
The Company’s operating segments include banking, mortgage banking and small business specialty lending division. The reportable segments are determined by the products and services offered, and internal reporting. The Bank segment derives its revenues from the delivery of full-service financial services, including retail and commercial banking services and deposit accounts. The Mortgage Banking segment derives its revenues from the origination and sales of residential mortgage loans held for sale. The Small Business Specialty Lending Division segment derives its revenue from the origination, sales and servicing of Small Business Administration loans and other government guaranteed loans. Segment performance is evaluated using net interest income and noninterest income. Income taxes are allocated based on income before income taxes, and indirect expenses (includes management fees) are allocated based on various internal factors for each segment. Transactions among segments are made at fair value. The following tables present information reported internally for performance assessment as of December 31, 2021 and 2020:
| December 31, 2021 | ||||||||||||||||||||||||||
| (dollars in thousands) | Bank | Mortgage | Small Business Specialty Lending Division | Totals | ||||||||||||||||||||||
| Net Interest Income | $ | $ | $ | $ | ||||||||||||||||||||||
| Provision for Loan Losses | ||||||||||||||||||||||||||
| Noninterest Income | ||||||||||||||||||||||||||
| Noninterest Expenses | ||||||||||||||||||||||||||
| Income Taxes | ||||||||||||||||||||||||||
| Net income/(loss) | $ | $ | $ | $ | ||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Full Time Employees | ||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| (dollars in thousands) | Bank | Mortgage Banking | Small Business Specialty Lending Division | Totals | ||||||||||||||||||||||
| Net Interest Income | $ | $ | $ | $ | ||||||||||||||||||||||
| Provision for Loan Losses | ||||||||||||||||||||||||||
| Noninterest Income | ||||||||||||||||||||||||||
| Noninterest Expenses | ||||||||||||||||||||||||||
| Income Taxes | ( | |||||||||||||||||||||||||
| Net income/(loss) | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Full Time Employees | ||||||||||||||||||||||||||
106
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A
Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officers 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 year ended December 31, 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.
Management’s Report on Internal Control Over Financial Reporting
Colony’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Colony’s internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Colony’s financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Colony’s management assessed the effectiveness of Colony’s internal control over financial reporting as of December 31, 2021 based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management determined that Colony maintained effective internal control over financial reporting as of December 31, 2021.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.
Colony Bankcorp, Inc.
March 18, 2022
Changes in Internal Controls
There were no changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that have materially affected, or are reasonably likely to materially affect these controls. There has also been no significant impact to internal controls over financial reporting as a result of the COVID-19 pandemic. The Company is continually monitoring and assessing changes in processes and activities to determine any potential impact on the design and operating effectiveness of internal controls over financial reporting.
See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
107
Limitations on the Effectiveness of Controls
The Company’s management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the Company have been detected.
Item 9B
Other Information
None.
Part III
Item 10
Directors and Executive Officers and Corporate Governance
Code of Ethics
Colony Bankcorp, Inc. has adopted a Code of Ethics that applies to the Company’s principal executive officer and principal accounting and financial officer. A copy of the Code of Ethics will be provided to any person without charge, upon written request mailed to Tracie Youngblood, Colony Bankcorp, Inc., 115 S. Grant Street, Fitzgerald, Georgia 31750.
The remaining information required by this item is incorporated by reference to the Directors and Nominees section of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 11
Executive Compensation
The information required by this item is incorporated by reference to the Executive Compensation section of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
The information required by this item is incorporated by reference to Security Ownership of Certain Beneficial Owners section of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report.
Item 13
Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated by reference to the Governance of the Company and Related Party Transactions with the Company sections of the Company’s definitive Proxy Statement to be filed with Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the fiscal year covered by this Annual Report.
Item 14
108
Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the Independent Public Accountants section of the Company’s definitive Proxy Statement to be filed with Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the fiscal year covered by this Annual Report.
The Independent Registered Public Accounting Firm is Mauldin & Jenkins, LLC (Public Company Accounting Oversight Board Firm ID 669 ) located in Albany, Georgia for the year ended December 31, 2021.
The Independent Registered Public Accounting Firm is McNair, McLemore, Middlebrooks & Co., LLC (Public Company Accounting Oversight Board Firm ID 404 ) located in Macon, Georgia for he year ended December 31, 2020.
Item 15
Exhibits, Financial Statement Schedules
(a)The following documents are filed as part of this report:
| (1) | The consolidated financial statements of Colony Bankcorp, Inc. and subsidiaries are filed as part of this report. | ||||
| (2) | Financial Statements Schedules: | ||||
| All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or the related notes. | |||||
| (3) | A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this report is shown on the “Exhibit Index” filed herewith. | ||||
Exhibit Index
| 2.1 | ||||||||
| -filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 0-12436), filed with the Commission on April 22, 2021 and incorporated herein by reference. | ||||||||
| 3.1 | ||||||||
| -filed as Exhibit99.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-12436), filed with the Commission on August 4, 2014 and incorporated herein by reference. | ||||||||
| 3.2 | ||||||||
| -filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 0-12436), filed with the Commission on September 18, 2020 and incorporated herein by reference. | ||||||||
| 4.1 | ||||||||
| 10.1 | Deferred Compensation Plan and Sample Director Agreement† | |||||||
| -filed as Exhibit 10(a) to the Registrant's Registration Statement on Form 10 (File No. 0-18486), filed with the Commission on April 25, 1990 and incorporated herein by reference. | ||||||||
| 10.2 | Profit-Sharing Plan Dated January 1, 1979† | |||||||
| -filed as Exhibit 10(b) to the Registrant's Registration Statement on Form 10 (File No. 0-18486), filed with the Commission on April 25, 1990 and incorporated herein by reference. | ||||||||
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| 10.3 | ||||||||
| -filed as Exhibit 10.C to the Registrant's Annual Report on Form 10-K405 (File 000-12436), filed with the Commission on March 30, 2001 and incorporated herein by reference. | ||||||||
| 10.4 | ||||||||
| -filed as Exhibit C to the Registrant's Definitive Proxy Statement for Annual Meeting of Stockholders held on April 27, 2004, filed with the Commission on March 3, 2004 (File No. 000-12436) and incorporated herein by reference. | ||||||||
| 10.5 | ||||||||
| -filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-226984), filed with the Commission on August 23, 2018 and incorporated herein by reference. | ||||||||
| 10.6 | ||||||||
| -filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on August 2, 2021 and incorporated herein by reference. | ||||||||
| 10.7 | ||||||||
| -filed as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on January 17, 2019 and incorporated herein by reference. | ||||||||
| 10.8 | ||||||||
| -filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on June 28, 2021 and incorporated herein by reference. | ||||||||
| 10.9 | ||||||||
| -filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A (File No. 000-12436), filed with the Commission on January 22, 2021 and incorporated herein by reference. | ||||||||
| 21 | ||||||||
| 23.1 | ||||||||
| 23.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101.INS | XBRL Instance Document | |||||||
| 101.SCH | XBRL Schema Document | |||||||
| 101.CAL | XBRL Calculation Linkbase Document | |||||||
| 101.DEF | XBRL Definition Linkbase Document | |||||||
| 101.PRE | XBRL Label Linkbase Document | |||||||
| 101.LAB | XBRL Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and included in Exhibit 101) | |||||||
† Represents a management contract or a compensatory plan or arrangement.
Item 16. Form 10-K Summary
None.
SIGNATURES
110
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Colony Bankcorp, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
COLONY BANKCORP, INC.
| /s/ T. Heath Fountain | |||||
| T. Heath Fountain President/Director/Chief Executive Officer (Principal Executive Officer) | |||||
| March 18, 2022 | |||||
| Date | |||||
| /s/ Tracie Youngblood | |||||
| Tracie Youngblood Executive Vice-President/Chief Financial Officer (Principal Financial and Principal Accounting Officer) | |||||
| March 18, 2022 | |||||
| Date | |||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
111
| /s/ T. Heath Fountain | March 18, 2022 | |||||||
T. Heath Fountain, President/Director/Chief Executive Officer | Date | |||||||
| /s/ Mark H. Massee | March 18, 2022 | |||||||
| Mark H. Massee, Director | Date | |||||||
| /s/ Terry L. Hester | March 18, 2022 | |||||||
| Terry L. Hester, Director | Date | |||||||
| /s/ Jonathan W. R. Ross | March 18, 2022 | |||||||
| Jonathan W. R. Ross, Director | Date | |||||||
| /s/ M. Frederick Dwozan | March 18, 2022 | |||||||
| M. Frederick Dwozan, Director | Date | |||||||
| /s/ Meagan M. Mowry | March 18, 2022 | |||||||
| Meagan M. Mowry, Director | Date | |||||||
| /s/ Scott Lowell Downing | March 18, 2022 | |||||||
| Scott Lowell Downing, Director | Date | |||||||
| /s/ Matthew D. Reed | March 18, 2022 | |||||||
| Matthew D. Reed, Director | Date | |||||||
| /s/ Edward P. Loomis | March 18, 2022 | |||||||
| Edward P. Loomis, Director | Date | |||||||
| /s/ Brian D. Schmitt | March 23, 2022 | |||||||
| Brian Schmitt, Director | Date | |||||||
| /s/ Harold W. Wyatt, III | March 23, 2022 | |||||||
| Harold Wyatt, Director | Date | |||||||
112