(

)

Fair

Value

Financial

Instruments

and

Fair

Value

Measurements

Generally accepted accounting standards in the U.S. require disclosure of fair value information about financial instruments, whether or

not

recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of Colony Bankcorp, Inc. and Subsidiary’s financial instruments are detailed hereafter. Where quoted prices are

not

available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

Generally accepted accounting principles related to Fair Value Measurements define fair value, establish a framework for measuring fair value, establish a

three

-level valuation hierarchy for disclosure of fair value measurement and enhance disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The

three

levels are defined as follows:

•

Level

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

•

Level

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

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

The following disclosures should

not

be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Cash

and

Short-Term

Investments

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

Investment

Securities

- Fair values for investment securities are based on quoted market prices where available and classified as Level

If quoted market prices are

not

available, estimated fair values are based on quoted market prices of comparable instruments and classified as Level

If a comparable is

not

available, the investment securities are classified as Level

Federal

Home

Loan

Bank

Stock

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

Loans

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

but impaired loans with a related allowance are classified as Level

Bank-Owned Life Insurance

- The carrying value of bank-owned life insurance policies approximates fair value and is classified as Level

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

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

Subordinated

Debentures

–

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

Other

Borrowed

Money

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

due to their expected maturities.

The carrying amount and estimated fair values of the Company’s financial instruments as of

December 31

are as follows:

	Carrying		Estimated		Level
201 8	Amount		Fair Value		1		2		3
	(in Thousands)
Assets
Cash and Short-Term Investments	$	60,155	$	60,155	$	60,155	$	-	$	-
Investment Securities Available for Sale		353,066		353,066		-		348,788		4,278
Federal Home Loan Bank Stock		2,978		2,978		2,978		-		-
Loans, Net		774,249		769,809		-		766,457		3,352
Bank-Owned Life Insurance		17,598		17,598		17,598		-		-

Liabilities
Deposits		1,085,125		1,086,503		744,094		342,409		-
Subordinated Debentures		24,229		24,229		-		24,229		-
Other Borrowed Money		44,000		44,032		-		44,032		-

2017

Assets
Cash and Short-Term Investments	$	57,813	$	57,813	$	57,813	$	-	$	-
Investment Securities Available for Sale		354,247		354,247		-		346,950		7,297
Federal Home Loan Bank Stock		3,043		3,043		3,043		-		-
Loans, Net		757,281		757,163		-		752,287		4,876
Bank-Owned Life Insurance		17,089		17,089		17,089		-		-

Liabilities
Deposits		1,067,985		1,068,392		727,818		340,574		-
Subordinated Debentures		24,229		24,229		-		24,229		-
Other Borrowed Money		47,500		47,626		-		47,626		-

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do

not

reflect any premium or discount that could result from offering for sale at

one

time the Company’s entire holdings of a particular financial instrument. Because

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.

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

Assets

Securities

Where quoted prices are available in an active market, securities are classified within Level

of the valuation hierarchy. Level

inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are

not

available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Examples of such instruments, which would generally be classified within level

of the valuation hierarchy, include certain collateralized mortgage and debt obligations and certain high-yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level

of the valuation hierarchy. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

Impaired

oans

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

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

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

classification of the inputs for determining fair value. Because of the high degree of judgment required in estimating the fair value of other real estate owned assets and because of the relationship between fair value and general economic conditions, we consider the fair value of other real estate owned assets to be highly sensitive to changes in market conditions.

Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis -

The following table presents the recorded amount of the Company’s assets measured at fair value on a recurring and nonrecurring basis as of

December 31, 2018

and

2017,

aggregated by the level in the fair value hierarchy within which those measurements fall. The table below includes only impaired loans with a specific reserve and only other real estate properties with a valuation allowance at

December 31, 2018

and

2017.

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

			Fair Value Measurements at Reporting Date Using
201 8	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Recurring
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed	$	346,205,172	$	-	$	342,142,079	$	4,063,093
State, County and Municipal		3,989,109		-		3,774,634		214,475
Corporate		2,871,885		-		2,871,885		-

	$	353,066,166	$	-	$	348,788,598	$	4,277,568
Nonrecurring
Impaired Loans	$	3,351,735	$	-	$	-	$	3,351,735

Other Real Estate	$	1,182,783	$	-	$	-	$	1,182,783

2017

Recurring
Securities Available for Sale
U.S. Government Agencies
Mortgage-Backed	$	346,723,419	$	-	$	341,701,288	$	5,022,131
State, County and Municipal		4,492,826		-		4,277,460		215,366
Corporate		2,060,000		-		-		2,060,000
Asset-Backed		970,659		-		970,659		-

	$	354,246,904	$	-	$	346,949,407	$	7,297,497
Nonrecurring
Impaired Loans	$	4,875,918	$	-	$	-	$	4,875,918

Other Real Estate	$	2,014,904	$	-	$	-	$	2,014,904

Liabilities

The Company did

not

identify any liabilities that are required to be presented at fair value.

Fair

Value

Measurements

Using

Significant

Unobservable

Inputs

(Level

)

The following tables present quantitative information about the significant unobservable inputs used in the fair value measurements for assets in level

of the fair value hierarchy measured on a nonrecurring basis at

December 31, 2018

and

2017.

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

	December 31, 201 8		Valuation Techniques	Unobservable Inputs	Range Weighted Avg

Real Estate
Commercial Construction	$	360,000	Sales Comparison	Adjustment for Differences		(6.60)%	-	1,975.00%
				Between the Comparable Sales			984.20%

				Management Adjustments for Age		0.00%	-	10.00%
				of Appraisals and/or Current			5.00%
				Market Conditions

Residential Real Estate		213,482	Sales Comparison	Adjustment for Differences		(10.86)%	-	6.70%
				Between the Comparable Sales			(2.08)%

				Management Adjustments for Age		0.00%	-	25.00%
				of Appraisals and/or Current			12.50%
				Market Conditions

Commercial Real Estate		2,415,174	Sales Comparison	Adjustment for Differences		(60.00)%	-	80.00%
				Between the Comparable Sales			10.00%

				Management Adjustments for Age		0.00%	-	35.00%
				of Appraisals and/or Current			17.50%
				Market Conditions

			Income Approach	Capitalization Rate			10.13%

Farmland		327,581	Sales Comparison	Adjustment for Differences Between the Comparable Sales		(71.00)%	-	(3.50)%
							(37.25)%
				Management Adjustments for Age		10.00%	-	80.00%
				of Appraisals and/or Current			45.00%
				Market Conditions

Commercial		35,498	Sales Contract	Adjustment for Estimated Costs to		0.00%	-	0.00%
				Sell			(0.00)%

				Management Adjustments for Age		0.00%	-	15.00%
				of Appraisals and/or Current			15.00%
				Market Conditions

Other Real Estate Owned		1,182,783	Sales Comparison	Adjustment for Differences		(30.00)%	-	25.02%
				Between the Comparable Sales			(2.49)%

				Management Adjustments for Age		9.82%	-	99.39%
				of Appraisals and/or Current			35.26%
				Market Conditions

			Income Approach	Capitalization Rate			10.00%

	December 31, 201 7		Valuation Techniques	Unobservable Inputs	Range Weighted Avg

Real Estate
Commercial Construction	$	427,433	Sales Comparison	Adjustment for Differences		(16.00)%	-	1,975.00%
				Between the Comparable Sales			979.50%

				Management Adjustments for Age		0.00%	-	10.00%
				of Appraisals and/or Current			5.00%
				Market Conditions

Residential Real Estate		81,736	Sales Comparison	Adjustment for Differences		(43.30)%	-	83.30%
				Between the Comparable Sales			20.00%

				Management Adjustments for Age		0.00%	-	25.00%
				of Appraisals and/or Current			12.50%
				Market Conditions

Commercial Real Estate		4,016,742	Income Approach	Management Adjustments for Age		0.00%	-	10.00%
				of Appraisals and/or Current			5.00%
				Market Conditions

				Capitalization Rate			10.75%

Farmland		350,007	Sales Comparison	Adjustment for Differences		(71.00)%	-	88.70%
				Between the Comparable Sales			8.85%

				Management Adjustments for Age		10.00%	-	75.00%
				of Appraisals and/or Current			42.50%
				Market Conditions

Other Real Estate Owned		2,014,904	Sales Comparison	Adjustment for Differences		(22.74)%	-	15.00%
				Between the Comparable Sales			(3.87)%

				Management Adjustments for Age		5.44%	-	87.24%
				of Appraisals and/or Current			24.44%
				Market Conditions

			Income Approach	Capitalization Rate			10.00%

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

) for the years ended

December 31, 2018,

2017

and

2016:

	Available for Sale Securities
	201 8			2017			2016

Balance, Beginning	$	7,297,497		$	576,384		$	930,311

Transfers out of Level 3		(2,009,080	)		-			-
Securities Purchased During the Year		-			7,069,649			-
Securities Matured During the Year		-			(360,000	)		(330,000	)
Paydowns on Securities		(885,082	)		-			-
Unrealized Gains(Losses) Included in Other
Comprehensive Income		(125,767	)		11,464			(23,927	)

Balance, Ending	$	4,277,568		$	7,297,497		$	576,384

The Company’s policy is to recognize transfers in and transfers out of levels

and

as of the end of a reporting period. There was

one

security totaling

$2,009,080

that was transferred from level

to level

for the year ended

December 31, 2018.

There were

transfers of securities between level

and level

or level

for the years ended

December 31, 2017

2016.

The following table presents quantitative information about recurring level

fair value measurements as of

December 31, 2018

and

2017:

December 31, 201 8	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)

State, County and Municipal	$	214,475	Discounted Cash Flow	Discount Rate or Yield		N/A*

U. S. Government Agencies Mortgage - Backed		4,063,093	Fundamental Analysis	Discount Rate or Yield		N/A*

December 31, 2017

State, County and Municipal	$	215,366	Discounted Cash Flow	Discount Rate or Yield		N/A*

U. S. Government Agencies Mortgage - Backed		5,022,131	Fundamental Analysis	Discount Rate or Yield		N/A*

Corporate		2,060,000	Option Pricing	Discount Rate or Yield		N/A*

* The Company relies on a

third

-party pricing service to value its securities. The details of the unobservable inputs and other adjustments used by the

third

-party pricing service were

not

readily available to the Company.