0001140361-11-016882.txt : 20110315 0001140361-11-016882.hdr.sgml : 20110315 20110315171749 ACCESSION NUMBER: 0001140361-11-016882 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20101231 FILED AS OF DATE: 20110315 DATE AS OF CHANGE: 20110315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLONY BANKCORP INC CENTRAL INDEX KEY: 0000711669 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 581492391 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12436 FILM NUMBER: 11689410 BUSINESS ADDRESS: STREET 1: 115 SOUTH GRANT STREET STREET 2: . CITY: FITZGERALD STATE: GA ZIP: 31750 BUSINESS PHONE: 229-426-6000 MAIL ADDRESS: STREET 1: 115 SOUTH GRANT STREET STREET 2: . CITY: FITZGERALD STATE: GA ZIP: 31750 10-K 1 form10k.htm COLONY BANKCORP 10-K 12-31-2010 form10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-K 


x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Fee Required)
For the Fiscal Year Ended December 31, 2010

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(No Fee Required)
For the Transition Period from _____________to ______________

Commission File Number 000-12436

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


Georgia
  
58-1492391
(State or Other Jurisdiction of Incorporation or Organization)
  
(I.R.S. Employer Identification Number)

115 South Grant Street
    
Fitzgerald, Georgia
  
31750
(Address of Principal Executive Offices)
  
(Zip Code)

(229) 426-6000
Issuer’s Telephone Number, Including Area Code

Securities Registered Pursuant to Section 12(b) of the Act:  None.

Securities Registered Pursuant to Section 12(g) of the Act:

 
Title of Each Class
  
Name of Each Exchange on Which Registered
  
 
Common Stock, Par Value $1.00
  
The NASDAQ Stock Market
  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o  No  x

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  o  No  x

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x   No  o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer    o
  
Accelerated Filer    o
Nonaccelerated Filer    o  (Do not check if a smaller reporting company)
  
Smaller Reporting Company    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):   Yes o  No  x

State the aggregate market value of the voting and non-voting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of June 30, 2010:  $38,403,456 based on stock price of $7.00.

Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date:  8,442,958 shares of $1.00 par value common stock as of March 14, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the information required by Part III of this Annual Report are incorporated by reference from the Registrant’s definitive Proxy Statement for the 2011 annual meeting of shareholders to be filed with Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report.
 
 
- 1 -
 

     
Page
PART I      
       
 
3
       
 
Item 1.
5
 
Item 1A.
24
 
Item 1B.
24
 
Item 2.
24
 
Item 3.
24
 
Item 4.
24
       
PART II
      
       
 
Item 5.
25
 
Item 6.
26
 
Item 7.
28
 
Item 7A.
61
 
Item 8.
61
 
Item 9.
62
 
Item 9A.
63
 
Item 9B.
64
       
PART III      
       
 
Item 10.
64
 
Item 11.
64
 
Item 12.
65
 
Item 13.
65
 
Item 14.
65
       
PART IV      
       
 
Item 15.
66
       
 
69



Certain statements contained in this Annual Report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act), notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Colony Bankcorp, Inc. or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 
·
Local and regional economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.

 
·
Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

 
·
The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board.

 
·
Inflation, interest rate, market and monetary fluctuations.

 
·
Political instability.

 
·
Acts of war or terrorism.

 
·
The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

 
·
Changes in consumer spending, borrowings and savings habits.

 
·
Technological changes.

 
·
Acquisitions and integration of acquired businesses.

 
·
The ability to increase market share and control expenses.


Forward-Looking Statements and Factors that Could Affect Future Results (Continued)

 
·
The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiary must comply.

 
·
The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters.

 
·
Changes in the Company’s organization, compensation and benefit plans.

 
·
The costs and effects of litigation and of unexpected or adverse outcomes in such litigation.

 
·
Greater than expected costs or difficulties related to the integration of new lines of business.

 
·
The Company’s success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made.  The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission (SEC).


Part I

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 Federal Bank Holding Company Act of 1956, as amended, and the bank holding company laws of Georgia (Georgia Laws 1976, p. 168, et. seq.). On July 22, 1983, the Company, after obtaining the requisite regulatory approvals, acquired 100 percent of the issued and outstanding common stock of Colony Bank (formerly Colony Bank of Fitzgerald and The Bank of Fitzgerald), Fitzgerald, Georgia, 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 subsidiary, which provides a broad range of banking services to its retail and commercial customers.  The company headquarters are located at 115 South Grant Street, Fitzgerald, Georgia 31750, its telephone number is 229-426-6000 and its Internet address is http://www.colonybank.com.  We operate twenty-nine domestic banking offices and one mortgage company office and at December 31, 2010, we had approximately $1.28 billion in total assets, $784.91 million in total loans, $1.06 billion in total deposits and $92.96 million in stockholder’s equity.  Deposits are insured, up to applicable limits, by the Federal Deposit Insurance Corporation.

The Parent Company

Because Colony Bankcorp, Inc. is a bank holding company, its principal operations are conducted through its subsidiary bank, Colony Bank (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 stockholder 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.  Colony Bank conducts a general full service commercial, consumer and mortgage banking business through thirty offices located in the middle and south Georgia cities of Fitzgerald, Warner Robins, Centerville, Ashburn, Leesburg, Cordele, Albany, Thomaston, Columbus, Sylvester, Tifton, Moultrie, Douglas, Broxton, Savannah, Eastman, Chester, Soperton, Rochelle, Pitts, Quitman and Valdosta, Georgia.

For additional discussion of our loan portfolio and deposit accounts, see “Management’s Discussion of Financial Condition and Results of Operations - Loans and Deposits.”


Part I (Continued)
Item 1 (Continued)

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.

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.

Corporate Restructuring and Business Combinations

On April 30, 1984, after acquiring the requisite regulatory approvals, the Company acquired 100 percent of the issued and outstanding stock of Colony Bank Wilcox (formerly Community Bank of Wilcox and Pitts Banking Company), Pitts, Wilcox County, Georgia.  As part of the transaction, Colony issued an additional 17,872 shares of its $10.00 par value common stock, all of which was exchanged with the holders of shares of common stock of Pitts Banking Company for 100 percent of the 250 issued and outstanding shares of common stock of Pitts Banking Company.  Since the date of acquisition, Colony Bank Wilcox operated as a wholly-owned subsidiary of the Company until it was merged into Colony Bank effective August 1, 2008.

On November 1, 1984, after obtaining the requisite regulatory approvals, the Company acquired 100 percent of the issued and outstanding common stock of Colony Bank Ashburn (formerly Ashburn Bank), Ashburn, Turner County, Georgia, for a combination of cash and interest-bearing promissory notes.  Since the date of acquisition, Colony Bank Ashburn operated as a wholly-owned subsidiary of the Company until it was merged into Colony Bank effective August 1, 2008.

On September 30, 1985, after obtaining the requisite regulatory approvals, the Company acquired 100 percent of the issued and outstanding common stock of Colony Bank of Dodge County, (formerly The Bank of Dodge County), Chester, Dodge County, Georgia.  The stock was acquired in exchange for the issuance of 3,500 shares of common stock of Colony.  Since the date of acquisition, Colony Bank of Dodge County operated as a wholly-owned subsidiary of the Company until it was merged into Colony Bank effective August 1, 2008.


Part I (Continued)
Item 1 (Continued)

On July 31, 1991, after obtaining the requisite regulatory approvals, the Company acquired 100 percent of the issued and outstanding common stock of Colony Bank Worth, (formerly Worth Federal Savings and Loan Association and Bank of Worth), Sylvester, Worth County, Georgia.  The stock was acquired in exchange for cash and the issuance of 7,661 shares of common stock of Colony for an aggregate purchase price of approximately $718,000.  Since the date of acquisition, Colony Bank Worth operated as a wholly-owned subsidiary of the Company until it was merged into Colony Bank effective August 1, 2008.

On November 8, 1996, Colony organized Colony Management Services, Inc. to provide support services to each subsidiary.  Services provided include loan and compliance review, internal audit and data processing. Colony Management Services, Inc. operated as a wholly-owned subsidiary of the Company until it was merged into Colony Bank effective August 1, 2008.

On November 30, 1996, after obtaining the requisite regulatory approvals, the Company acquired 100 percent of the issued and outstanding common stock of Colony Bank Southeast (formerly Broxton State Bank), Broxton, Coffee County, Georgia in a business combination accounted for as a pooling of interests.  Broxton State Bank became a wholly-owned subsidiary of the Company through the exchange of 157,735 shares of the Company’s common stock for all of the outstanding stock of Broxton State Bank.  Since the date of acquisition, Colony Bank Southeast operated as a wholly-owned subsidiary of the Company until it was merged into Colony Bank effective August 1, 2008.

On March 2, 2000, Colony Bank Ashburn purchased the capital stock of Colony Mortgage Corp (formerly Georgia First Mortgage Company) in a business combination accounted for as a purchase.  The purchase price of $346,725 was the fair value of the net assets of Georgia First Mortgage Company at the date of purchase.  Colony Mortgage Corp is primarily engaged in residential real estate mortgage lending in the state of Georgia. Colony Mortgage Corp operates as a subsidiary of Colony Bank effective with the August 1, 2008 merger.

On March 29, 2002, after obtaining the requisite regulatory approvals, the Company acquired 100 percent of the issued and outstanding stock of Colony Bank Quitman, FSB, (formerly Quitman Federal Saving Bank), Quitman, Brooks County, Georgia.  Quitman Federal Savings Bank became a wholly-owned subsidiary of the Company through the exchange of 367,093 shares of the Company’s common stock and cash for an aggregate acquisition price of $7,446,163.  Since the date of acquisition, Colony Bank Quitman, FSB operated as a wholly-owned subsidiary of the Company until it was merged into Colony Bank effective August 1, 2008.

On March 19, 2004, Colony Bank Ashburn purchased Flag Bank - Thomaston office in a business combination accounted for as a purchase.  Since the date of acquisition, the Thomaston office operated as an office of Colony Bank Ashburn until August 1, 2008 when it became an office of Colony Bank.

On August 1, 2008, the Company effected a merger of its seven banking subsidiaries and its one nonbank subsidiary into one surviving bank subsidiary, Colony Bank (formerly Colony Bank of Fitzgerald).


Part I (Continued)
Item 1 (Continued)

Markets and Competition

The banking industry in general is highly competitive.  Our market areas of middle and south Georgia have experienced good economic and population growth the past several years, however the current downturn in the housing and real estate market that began in late 2007 along with recessionary fears has proven to be quite challenging - not only for Colony but the entire banking industry.  In our markets, we face competitive pressures in attracting deposits and making loans from larger regional banks and smaller community banks, thrift institutions, credit unions, consumer finance companies, mortgage bankers, brokerage firms and insurance companies.  The principal factors in competing for deposits and loans include interest rates, fee structures, range of products and services offered and convenience of office and ATM locations.  The banking industry is also experiencing increased competition for deposits from less traditional sources such as money market and mutual funds.  In addition, intense market demands, economic concerns, volatile interest rates and customer awareness of product and services have forced banks to be more competitive – often resulting in margin compression and a decrease in operating efficiency.

In response to competitive issues, the Company merged all of its operations into one operating subsidiary, Colony Bank, effective August 1, 2008.  This consolidation effort enabled the Company to align products, pricing and marketing efforts while re-allocating resources to support management’s future growth strategies.

Correspondents

Colony Bank has correspondent relationships with the following banks: Federal Reserve Bank in Atlanta, Georgia; SunTrust Bank in Atlanta, Georgia; FTN Financial in Memphis, Tennessee, CenterState Bank in Lake Wales, Florida and Federal Home Loan Bank in Atlanta, Georgia.  The correspondent relationships facilitate the transactions of business by means of loans, collections, investment services, lines of credit and exchange services.  As compensation for these services, the Bank maintains balances with its correspondents in noninterest-bearing accounts and pays some service charges.

Employees

On December 31, 2010, the Company had a total of 285 full-time and 23 part-time employees.  We consider our relationship with our employees to be satisfactory.

The Company has a noncontributory profit-sharing plan covering all employees subject to certain minimum age and service requirements.  No Company contributions were made in 2010 due to performance, though funds in a forfeiture account where employees terminated with unvested balances were allocated for all eligible employees in 2010.  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.


Part I (Continued)
Item 1 (Continued)

SUPERVISION AND REGULATION
BANK HOLDING COMPANY REGULATION

General

Colony is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (BHCA).  As a bank holding company registered with the Federal Reserve under the BHCA and the Georgia Department of Banking and Finance (“the Georgia Department”) under the Financial Institutions Code of Georgia, it is subject to supervision, examination and reporting by the Federal Reserve and the Georgia Department.  Its activities are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries, or engaging in any other activity that the Federal Reserve determines to be so closely related to banking, or managing or controlling banks, as to be a proper incident to these activities.

Colony is required to file with the Federal Reserve and the Georgia Department periodic reports and any additional information as they may require.  The Federal Reserve and Georgia Department will also regularly examine the Company.  The Federal Deposit Insurance Corporation (“FDIC”) and Georgia Department also examine the Bank.

Activity Limitations

The BHCA requires prior Federal Reserve approval for, among other things:

 
·
the acquisition by a bank holding company of direct or indirect ownership or control of more than 5 percent of the voting shares or substantially all of the assets of any bank, or

 
·
a merger or consolidation of a bank holding company with another bank holding company.

Similar requirements are imposed by the Georgia Department.

A bank holding company may acquire direct or indirect ownership or control of voting shares of any company that is engaged directly or indirectly in banking, or managing or controlling banks, or performing services for its authorized subsidiaries.  A bank holding company may also engage in or acquire an interest in a company that engages in activities that the Federal Reserve has determined by regulation or order to be so closely related to banking as to be a proper incident to these activities.  The Federal Reserve normally requires some form of notice or application to engage in or acquire companies engaged in such activities.  Under the BHCA, Colony will generally be prohibited from engaging in or acquiring direct or indirect control of more than 5 percent of the voting shares of any company engaged in activities other than those referred to above.

The BHCA permits a bank holding company located in one state to lawfully acquire a bank located in any other state, subject to deposit percentage, aging requirements and other restrictions.  The Riegle-Neal Interstate Banking and Branching Efficiency Act also generally provides that national and state chartered banks may, subject to applicable state law, branch interstate through acquisitions of banks in other states.


Part I (Continued)
Item 1 (Continued)

In November 1999, Congress enacted the Gramm-Leach-Bliley Act, which made substantial revisions to the statutory restrictions separating banking activities from other financial activities.  Under the Gramm-Leach-Bliley Act, bank holding companies that are well capitalized, well managed and meet other conditions can elect to become “financial holding companies.”  As financial holding companies, they and their subsidiaries are permitted to acquire or engage in activities that were not previously allowed bank holding companies, such as insurance underwriting, securities underwriting and distribution, travel agency activities, broad insurance agency activities, merchant banking and other activities that the Federal Reserve determines to be financial in nature or complementary to these activities.  Financial holding companies continue to be subject to the overall oversight and supervision of the Federal Reserve, but the Gramm-Leach-Bliley Act applies the concept of functional regulation to the activities conducted by subsidiaries.  For example, insurance activities would be subject to supervision and regulation by state insurance authorities.  While Colony has not elected to become a financial holding company in order to exercise the broader activity powers provided by the Gramm-Leach-Bliley Act, it may elect to do so in the future.

Limitations on Acquisitions of Bank Holding Companies

As a general proposition, other companies seeking to acquire control of a bank holding company would require the approval of the Federal Reserve under the BHCA.  In addition, individuals or groups of individuals seeking to acquire control of a bank holding company would need to file a prior notice with the Federal Reserve (which the Federal Reserve may disapprove under certain circumstances) under the Change in Bank Control Act.  Control is conclusively presumed to exist if an individual or company acquires 25 percent or more of any class of voting securities of the bank holding company.  Control may exist under the Change in Bank Control Act if the individual or company acquires 10 percent or more of any class of voting securities of the bank holding company.

Source of Financial Strength

Federal Reserve policy requires a bank holding company to act as a source of financial strength and to take measures to preserve and protect bank subsidiaries in situations where additional investments in a troubled bank may not otherwise be warranted,  In addition, if a bank holding company has more than one bank or thrift subsidiary, each of the bank holding company’s subsidiary depository institutions is responsible for any losses to the FDIC as a result of an affiliated depository institution’s failure.  As a result, a bank holding company may be required to loan money to its subsidiaries in the form of capital notes or other instruments that qualify as capital of the subsidiary bank under regulatory rules.  However, any loans from the bank holding company to those subsidiary banks will likely be unsecured and subordinated to that of bank’s depositors and perhaps to other creditors of that bank.

Recent Legislation

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted (“EESA”) to restore confidence and stabilize the volatility in the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. Initially introduced as the Troubled Asset Relief Program (“TARP”), the EESA authorized the United States Department of the Treasury (“U.S. Treasury”) to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program. Initially, $350 billion or half of the $700 billion was made immediately available to the U.S. Treasury. On January 15, 2009, the remaining $350 billion was released to the U.S. Treasury.

 
- 10 -

Part I (Continued)
Item 1 (Continued)

On October 14, 2008, the U.S. Treasury announced its intention to inject capital into nine large U.S. financial institutions under the TARP Capital Purchase Program (the “TARP CPP”), and since has injected capital into many other financial institutions, including the Company. The U.S. Treasury initially allocated $250 billion towards the TARP CPP. On January 9, 2009, the Company entered into a Securities Purchase Agreement – Standard Terms with the U.S. Treasury (“Stock Purchase Agreement”), pursuant to which, among other things, the Company sold to the U.S. Treasury for an aggregate purchase price of $28 million, preferred stock and warrants. Under the terms of the TARP CPP, the Company is prohibited from increasing dividends on its common stock, and from making certain repurchases of equity securities, including its common stock, without the U.S. Treasury’s consent. Furthermore, as long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including the Company’s common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions.

In order to participate in the TARP CPP, financial institutions were required to adopt certain standards for executive compensation and corporate governance. These standards generally apply to the Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers. The standards include (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate;  (3) prohibition on making golden parachute payments to senior executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. The Company has complied with these requirements.

The bank regulatory agencies, U.S. Treasury and the Office of Special Inspector General, also created by the EESA, have issued guidance and requests to the financial institutions that participate in the TARP CPP to document their plans and use of TARP CPP funds and their plans for addressing the executive compensation requirements associated with the TARP CPP.

On February 10, 2009, the U.S. Treasury and the federal bank regulatory agencies announced in a Joint Statement a new Financial Stability Plan which would include additional capital support for banks under a Capital Assistance Program, a public-private investment fund to address existing bank loan portfolios and expanded funding for the FRB’s pending Term Asset-Backed Securities Loan Facility to restart lending and the securitization markets.

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law by President Obama. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, the ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including the Company, until the institution has repaid the U.S. Treasury, which is now permitted under the ARRA without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation with the recipient’s appropriate regulatory agency.


 
- 11 -

Part I (Continued)
Item 1 (Continued)

The executive compensation standards are more stringent than those currently in effect under the TARP CPP or those previously proposed by the U.S. Treasury. The new standards include (but are not limited to) (i) prohibitions on bonuses, retention awards and other incentive compensation, other than restricted stock grants which do not fully vest during the TARP period up to one-third of an employee’s total annual compensation, (ii) prohibitions on golden parachute payments for departure from a company, (iii) an expanded clawback of bonuses, retention awards, and incentive compensation if payment is based on materially inaccurate statements of earnings, revenues, gains or other criteria, (iv) prohibitions on compensation plans that encourage manipulation of reported earnings, (v) retroactive review of bonuses, retention awards and other compensation previously provided by TARP recipients if found by the U.S. Treasury to be inconsistent with the purposes of TARP or otherwise contrary to public interest, (vi) required establishment of a company-wide policy regarding “excessive or luxury expenditures,” and (vii) inclusion in a participant’s proxy statements for annual shareholder meetings of a nonbinding “Say on Pay” shareholder vote on the compensation of executives.

On February 23, 2009, the U.S. Treasury and the federal bank regulatory agencies issued a Joint Statement providing further guidance with respect to the Capital Assistance Program (“CAP”) announced February 10, 2009, including: (i) that the CAP will be initiated on February 25, 2009 and will include “stress test” assessments of major banks and that should the “stress test” indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital; otherwise the temporary capital buffer will be made available from the government; (ii) such additional government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory; and (iii) previous capital injections under the TARP CPP will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion of preferred shares to common equity shares would enable institutions to maintain or enhance the quality of their capital by increasing their tangible common equity capital ratios; however, such conversions would necessarily dilute the interests of existing shareholders.

On February 25, 2009, the first day the CAP program was initiated, the U.S. Treasury released the actual terms of the program, stating that the purpose of the CAP is to restore confidence throughout the financial system that the nation’s largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. Under the CAP terms, eligible U.S. banking institutions with assets in excess of $100 billion on a consolidated basis are required to participate in coordinated supervisory assessments, which are forward-looking “stress test” assessments to evaluate the capital needs of the institution under a more challenging economic environment. Should this assessment indicate the need for the bank to establish an additional capital buffer to withstand more stressful conditions, these institutions may access the CAP immediately as a means to establish any necessary additional buffer or they may delay the CAP funding for six months to raise the capital privately.  Eligible U.S. banking institutions with assets below $100 billion may also obtain capital from the CAP. The CAP program is an additional program from the TARP CCP and is open to eligible institutions regardless of whether they participated in the TARP CCP. The deadline to apply to the CAP was May 25, 2009.  The Company did not participate in the CAP program.

 
- 12 -

Part I (Continued)
Item 1 (Continued)

The EESA also increased Federal Deposit Insurance Corporation (“FDIC”) deposit insurance on most accounts from $100,000 to $250,000. This increase is currently in place until the end of 2013 and is not covered by deposit insurance premiums paid by the banking industry.  In addition, the FDIC implemented two temporary programs under the Temporary Liquidity Guaranty Program (“TLGP”) to provide deposit insurance for the full amount of most noninterest bearing transaction accounts through December 31, 2010 and to guarantee certain unsecured debt of financial institutions and their holding companies through June 2012. Financial institutions had until December 5, 2008 to opt out of these two programs. The Company and the Bank opted to remain in the unlimited insurance coverage for non-interest bearing accounts, but opted out of the debt guarantee portion of the program. The FDIC charges “systemic risk special assessments” to depository institutions that participate in the TLGP. The FDIC has recently proposed that Congress give the FDIC expanded authority to charge fees to the holding companies which benefit directly and indirectly from the FDIC guarantees.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Dodd-Frank Act is intended to restructure the regulation of the financial services sector by, among other things, (i) establishing a framework to identify systemic risks in the financial system implemented by a newly created Financial Stability Oversight Council and other federal banking agencies; (ii) expanding the resolution authority of the federal banking agencies over troubled financial institutions; (iii) authorizing changes to capital and liquidity requirements; (iv) changing deposit insurance assessments; and (v) enhancing regulatory supervision to improve the safety and soundness of the financial services sector. The Dodd-Frank Act is expected to have a significant impact upon our business as its provisions are implemented over time. Below is a summary of certain provisions of the Dodd-Frank Act which, directly or indirectly, may affect us.

 
·
Changes to Capital Requirements. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies which will not be lower and could be higher than current regulatory capital and leverage standards for insured depository institutions. Under these requirements, trust preferred securities will excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. The Dodd-Frank Act requires capital requirements to be counter cyclical so that the required amount of capital increases in times of economic expansion and decreases in time of economic contraction consistent with safety and soundness.

 
·
Enhance Regulatory Supervision. The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

 
·
Consumer Protection. The Dodd-Frank Act creates the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve System. The CFPB is responsible for establishing and implementing rules and regulations under various federal consumer protections laws governing certain consumer products and services. The CFPB has primary enforcement authority over large financial institutions with assets of $10 billion or more, while smaller institutions will be subject to the CFPB’s rules and regulations through the enforcement authority of the federal banking agencies. States are permitted to adopt consumer protection laws and regulations that are more stringent than those laws and regulations adopted by the CFPB and state attorneys general are permitted to enforce consumer protection laws and regulations adopted by the CFPB.

 
- 13 -

Part I (Continued)
Item 1 (Continued)

 
·
Deposit Insurance. The Dodd-Frank Act permanently increases the deposit insurance limit for insured deposits to $250,000 per depositor and extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. Other deposit insurance changes under the Dodd-Frank Act include (i) amendment of the assessment base used to calculate an insured depository institution’s deposit’s insurance premiums paid to the Deposit Insurance Fund (“DIF”) by elimination of deposits and substitution of average consolidated total assets less average tangible equity during the assessment period as the revised assessment base; (ii) increasing the minimum designated reserved ration of the DIF from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits; (iii) eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds; and (iv) repeal of the prohibition upon the payment of interest on demand deposits to be effective one year after the date of enactment of the Dodd-Frank Act. In December 2010, pursuant to the Dodd-Frank Act, the FDIC increased the reserve ration of the DIF to 2.0 percent effective January 1, 2011.

 
·
Transactions with Affiliates. The Dodd-Frank Act enhances the requirements of certain transactions with affiliates under Section23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time of which collateral requirements regarding covered transactions must be maintained.

 
·
Transactions with Insiders. Insider transactions limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also place on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

 
·
Enhanced Lending Limitations. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

 
·
Debit Card Interchange Fees. The Dodd-Frank Act requires that the amount of any interchange fee charges by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. Within nine months of enactment of the Dodd-Frank Act, the Federal Reserve Board is required to establish standards for reasonable and proportional fees which may take into account the costs of preventing fraud. The restrictions on interchange fees, however, do not apply to banks that, together with their affiliates, have assets of less than $10 billion.

 
·
Interstate Branching. The Dodd-Frank Act authorizes national and state banks to establish branch offices in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branch offices in other states if the host state expressly permitted out-of-state banks to establish branch offices in that state. Accordingly, banks may be able to enter markets more freely.

 
·
Chapter Conversions. Effective one year after enactment of the Dodd-Frank Act, depository institutions that are subject to a cease and desist order or certain other enforcement actions issued with respect to a significant supervisory matter are prohibited from changing their federal or state charters, except in accordance with certain notice, application and other procedures involving the applicable regulatory agencies.

 
- 14 -

Part I (Continued)
Item 1 (Continued)

 
·
Compensation Practices. The Dodd-Frank Act provides that the appropriate federal banking regulators must establish standard prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm. In June 2010, prior to the enactment of the Dodd-Frank Act, the federal bank regulatory agencies jointly issued the Interagency Guidance on Sound Incentive Compensation Policies (“Guidance”), which requires that financial institutions establish metrics for measuring the risk to the financial institution establish metrics for measuring the risk to the financial institution of such loss from incentive compensation arrangements and implement policies to prohibit inappropriate risk taking that may lead to material financial loss to the institution. Together, the Dodd-Frank Act and the Guidance may impact our compensation policies and arrangements.

 
·
Corporate Governance. The Dodd-Frank Act will enhance corporate governance requirements to include (i) requiring publicly traded companies to give shareholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least ever three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders (ii) authorizing the SEC to promulgate rules that would allow shareholders to nominate their own candidates for election as directors using a company’s proxy materials; (iii) directing the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether or not the company is publicly traded; and (iv) authorizing the SEC to prohibit broker discretionary voting on the election of directors and on executive compensation matters.

Many of the requirements under the Dodd-Frank Act will be implemented over an extended period of time. Therefore, the nature and extend of regulations that will be issued by various regulatory agencies and the impact such regulations will have on the operations of financial institutions such as ours is unclear. Such regulations resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

On November 9, 2010, the FDIC board of directors issued a final rule to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) that provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts at all FDIC-insured depository institutions (“DFA Provision”).  The separate coverage for noninterest-bearing transaction accounts became effective on December 31, 2010 and terminates December 31, 2012.  Under the Dodd-Frank rule, all funds in “noninterest-bearing transaction accounts” will be insured in full by the FDIC from December 31, 2010 through December 31, 2012.  The Dodd-Frank rule does not cover any transaction account that may earn interest, such as a NOW account or a money market deposit account.  Effective with this change, low-interest NOW accounts will no longer be eligible for unlimited coverage previously provided under the Transaction Account Guarantee Program (“TAGP”), which expired December 31, 2010.  In issuing the final rule, the FDIC board of directors confirmed it would not extend the TAGP beyond its sunset date of December 31, 2010.

 
- 15 -

Part I (Continued)
Item 1 (Continued)

BANK REGULATION

General

The Bank is a commercial bank chartered under the laws of the State of Georgia, and as such is subject to supervision, regulation and examination by the Georgia Department.  The Bank is a member of the FDIC, and their deposits are insured by the FDIC’s Deposit Insurance Fund up to the amount permitted by law.  The FDIC and the Georgia Department routinely examine the Bank and monitor and regulate all of the Bank’s operations, including such things as adequacy of reserves, quality and documentation of loans, payments of dividends, capital adequacy, adequacy of systems and controls, credit underwriting and asset liability management, compliance with laws and establishment of branches.  Interest and other charges collected or contracted for by the Bank is subject to state usury laws and certain federal laws concerning interest rates.  The Bank files periodic reports with the FDIC and the Georgia Department.

BUSINESS
Recent Developments

On October 21, 2010, the Board of Directors of the Company’s subsidiary bank, Colony Bank (the “Bank”), received notification from its primary regulators, the Georgia Department of Banking and Finance (“the Georgia Department”) and the FDIC that the Bank’s latest examination results require a program of corrective action as outlined in a proposed Memorandum of Understanding (“MOU”).  An MOU is characterized by the supervising authorities as an informal action that is neither published nor made publically available by the supervising authorities and is used when circumstances do not warrant formal supervisory action.  An MOU is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act.  The Board of Directors entered into the MOU at its regularly scheduled monthly meeting on November 16, 2010 with the effective date of the MOU being November 23, 2010.

The MOU requires the Bank to develop, implement and maintain various processes to improve the Bank’s risk management of its loan portfolio, reduce adversely classified loans subject to certain exceptions, adopt a written plan to properly monitor and reduce the Bank’s commercial real estate concentration, continue to maintain the Bank’s loan loss provision and review its adequacy at least quarterly, and formulate and implement a written plan to improve and maintain earnings to be forwarded for review by the Georgia Department and FDIC.  The Bank is also required to obtain approval before any cash dividends can be paid.

The Bank has also agreed to have and maintain minimum capital ratios at specified levels higher than those otherwise required by applicable regulations as follows:  Tier 1 capital to total average assets of 8% and total risk-based capital to total risk-weighted assets of 10%.  At December 31, 2010, the Bank’s capital ratios were 8.30% and 14.39%, respectively.

 
- 16 -

Part I (Continued)
Item 1 (Continued)

Transactions with Affiliates and Insiders

The Company is a legal entity separate and distinct from the Bank.  Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company and other nonbank subsidiaries of the Company, all of which are deemed to be “affiliates” of the Bank for the purposes of these restrictions.  The Company and the Bank are subject to Section 23A of the Federal Reserve Act.  Section 23A defines “covered transactions,” which include extensions of credit, and limits a bank’s covered transactions with any affiliate to 10 percent of such bank’s capital and surplus and with all affiliates to 20 percent of such bank’s capital and surplus.  All covered and exempt transactions between a bank and its affiliates must be on terms and conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets from the bank’s affiliates.  Finally, Section 23 A requires that all of a bank’s extensions of credit to an affiliate be appropriately secured by acceptable collateral, generally United States government or agency securities.  The Company and the Bank are also subject to Section 23B of the Federal Reserve Act, which generally limits covered and other transactions between a bank and its affiliates to terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the bank as prevailing at the time for transactions with unaffiliated companies.

Dividends

The Company is a legal entity separate and distinct from the Bank.  The principal source of the Company’s cash flow, including cash flow to pay dividends to its stockholders, is dividends that the Bank pays to it.  Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company as well as to the Company’s payment of dividends to its stockholders.  Pursuant to MOU entered into with the Georgia Department and the FDIC, the Bank is required to obtain approval from these regulators before any cash dividends can be paid.  The Company is also a participant in the U.S. Treasury Capital Program and certain restrictions on the payment of dividends to stockholders apply.

Under the terms of the TARP CPP, for so long as any preferred stock issued under the TARP CPP remains outstanding, the Company is prohibited from increasing dividends on its common stock, and from making certain repurchases of equity securities, including its common stock, without the U.S. Treasury’s consent until the third anniversary of the U.S. Treasury’s investment or until the U.S. Treasury has transferred all of the preferred stock it purchased under the TARP CPP to third parties. As long as the preferred stock issued to the U.S. Treasury is outstanding, as well as the Company’s Series A Preferred Stock, dividend payments and repurchases or redemptions relating to certain equity securities, including the Company’s common stock, are also prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions.

A variety of federal and state laws and regulations affect the ability of the Bank and the Company to pay dividends.  A depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized.  The federal banking agencies may prevent the payment of a dividend if they determine that the payment would be unsafe and unsound banking practice.  Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.  In addition, regulations promulgated by the Georgia Department limit the Bank’s payment of dividends.

 
- 17 -

Part I (Continued)
Item 1 (Continued)

Mortgage Banking Regulation

Colony Mortgage Corp is licensed and regulated as a “mortgage banker” by the Georgia Department.  It is also qualified as a Fannie Mae and Freddie Mac seller/servicer and must meet the requirements of such corporations and of the various private parties with which it conducts business, including warehouse lenders and those private entities to which it sells mortgage loans.

Enforcement Policies and Actions

Federal law gives the Federal Reserve and FDIC substantial powers to enforce compliance with laws, rules and regulations.  Bank or individuals may be ordered to cease and desist from violations of law or other unsafe or unsound practices.  The agencies have the power to impose civil money penalties against individuals or institutions of up to $1,000,000 per day for certain egregious violations.  Persons who are affiliated with depository institutions can be removed from any office held in that institution and banned from participating in the affairs of any financial institution.  The banking regulators have not hesitated to use the enforcement authorities provided in federal law.

Capital Regulations

The federal bank regulatory authorities have adopted capital guidelines for banks and bank holding companies.  In general, the authorities measure the amount of capital an institution holds against its assets.  There are three major capital tests: (i) the Total Capital ratio (the total of Tier 1 Capital and Tier 2 Capital measured against risk-adjusted assets), (ii) the Tier 1 Capital ratio (Tier 1 Capital measured against risk-adjusted assets) and (iii) the leverage ratio (Tier 1 Capital measured against average (i.e., nonrisk-weighted) assets).

Tier 1 Capital consists of common equity, retained earnings and a limited amount of qualifying preferred stock, less goodwill and core deposit intangibles.  Tier 2 Capital consists of nonqualifying preferred stock, qualifying subordinated, perpetual and/or mandatory convertible debt, term subordinated debt and intermediate term preferred stock and up to 45 percent of the pretax unrealized holding gains on available-for-sale equity securities with readily determinable market values that are prudently valued, and a limited amount of any loan loss allowance.

In measuring the adequacy of capital, assets are generally weighted for risk.  Certain assets, such as cash and U.S. government securities, have a zero risk weighting.  Others, such as commercial and consumer loans, have a 100 percent risk weighting.  Risk weightings are also assigned for off-balance sheet items such as loan commitments.  The various assets are multiplied by the appropriate risk-weighting to determine risk-adjusted assets for the capital calculations.  For the leverage ratio mentioned above, average assets are not risk-weighted.

 
- 18 -

Part I (Continued)
Item 1 (Continued)

The federal banking agencies must take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements.  There are five tiers for financial institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”  Under these regulations, a bank will be:

 
·
“well capitalized” if it has a Total Capital ratio of 10 percent or greater, a Tier 1 Capital ratio of 6 percent or greater, a leverage ratio of 5 percent or better - or 4 percent in certain circumstances - and is not subject to any written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure;

 
·
“adequately capitalized” if it has a Total Capital ratio of 8 percent or greater, a Tier 1 Capital ratio of 4 percent or greater, and a leverage ratio of 4 percent or greater - or 3 percent in certain circumstances - and is not well capitalized;

 
·
“undercapitalized” if it has a Total Capital ratio of less that 8 percent, a Tier 1 Capital ratio of less that 4 percent - or 3 percent in certain circumstances;

 
·
“significantly undercapitalized” if it has a Total Capital ratio of less than 6 percent or a Tier 1 Capital ratio of less than 3 percent, or a leverage ratio of less than 3 percent; or

 
·
“critically undercapitalized” if its tangible equity is equal to or less than 2 percent of average quarterly assets.

Federal law generally prohibits a depository institution from making any capital distribution, including the payment of a dividend or paying any management fee to its holding company if the depository institution would be undercapitalized as a result.  Undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations and are required to submit a capital restoration plan for approval.  For a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan.  The aggregate liability of the parent holding company is limited to the lesser of 5 percent of the depository institution’s total assets at the time it became undercapitalized, and the amount necessary to bring the institution into compliance with applicable capital standards.  If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.  If the controlling holding company fails to fulfill its obligations under this law and files, or has filed against it, a petition under the federal Bankruptcy Code, the FDIC claim related to the holding company’s obligations would be entitled to a priority in such bankruptcy proceeding over third party creditors of the bank holding company.

Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks.  Critically undercapitalized institutions are subject to the appointment of a receiver or conservator.

 
- 19 -

Part I (Continued)
Item 1 (Continued)

At December 31, 2010, the Company exceeded the minimum Tier 1, risk-based and leverage ratios and qualified as “well capitalized” under current Federal Reserve Board criteria.  The following table sets forth certain capital information for the Company as of December 31, 2010.  As of December 31, 2010, Colony had Tier 1 Capital and Total Capital of approximately 13.57 percent and 14.85 percent, respectively, of risk-weighted assets. As of December 31, 2010, Colony had a leverage ratio of Tier 1 Capital to total average assets of approximately 8.59 percent.

   
December 31, 2010
  
   
Amount
    
Percent
  
             
Leverage Ratio
            
Actual
   $ 106,845       8.59 %
Well-Capitalized Requirement
     62,185       5.00  
Minimum Required (1)
     49,748       4.00  
Risk Based Capital:
                
Tier 1 Capital
                
Actual
     106,845       13.57  
Well-Capitalized Requirement
     47,236       6.00  
Minimum Required (1)
     31,491       4.00  
Total Capital
                
Actual
     116,914       14.85  
Well-Capitalized Requirement
     78,727       10.00  
Minimum Required (1)
     62,981       8.00  

 
(1)
Represents the minimum requirement.  Institutions that are contemplating acquisitions or anticipating or experiencing significant growth may be required to maintain a substantially higher leverage ratio.

The guidelines also provide that institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets.  Higher capital may be required in individual cases, depending upon a bank or bank holding company’s risk profile.  All bank holding companies and banks are expected to hold capital commensurate with the level and nature of their risks, including the volume and severity of their problem loans.  Lastly, the Federal Reserve’s guidelines indicate that the Federal Reserve will continue to consider a “Tangible Tier 1 Leverage Ratio,” calculated by deducting all intangibles, in evaluating proposals for expansion or new activity.

FDIC Insurance Assessments

Deposit Insurance Assessments.  Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF of the FDIC and the Bank must pay deposit insurance assessments to the FDIC for such deposit insurance protection.  The FDIC maintains the DIF by designating a required reserve ratio.  If the reserve ratio falls below the designated level, the FDIC must adopt a restoration plan that provides that the DIF will return to an acceptable level generally within 5 years.  The designated reserve ratio is currently set at 2.00 percent. The FDIC has the discretion to price deposit insurance according to the risk for all insured institutions regardless of the level of the reserve ratio.

 
- 20 -
 
Part I (Continued)
Item 1 (Continued)

The DIF reserve ratio is maintained by assessing depository institutions an insurance premium based upon statutory factors.  Under its current regulations, the FDIC imposes assessments for deposit insurance according to a depository institution’s ranking in one of four risk categories based upon supervisory and capital evaluations.  The assessment rate for an individual institution is determined according to a formula based on a combination of weighted average CAMELS component ratings, financial ratios and, for institutions that have long-term debt ratings, the average ratings of its long-term debt.  Well-capitalized institutions (generally those with CAMELS composite ratings of 1 or 2) are grouped in Risk Category I and the initial base assessment rate for deposit insurance is set at an annual rate of between 12 and 16 basis points.  The initial base assessment rate for institutions in Risk Categories II, III and IV is set at annual rates of 22, 32 and 50 basis points, respectively.  These initial base assessment rates are adjusted to determine an institution’s final assessment rate based on its brokered deposits, secured liabilities and unsecured debt. Total base assessment rates after adjustments range from 7 to 24 basis points for Risk Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points for Risk Category III, and 40 to 77.5 basis points for Risk Category IV.

In November, 2009, the FDIC adopted a rule that required all insured institutions with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.  The assessment, which for the Company totaled $35.6 million, was calculated by taking the institution’s actual September 30, 2009 assessment base and adjusting it quarterly by an estimated 5 percent annual growth rate through the end of 2012.  Each institution records the entire amount of its prepaid assessment as a prepaid expense, an asset on its balance sheet, as of December 30, 2009.  As of December 31, 2009, and each quarter thereafter, each institution records an expense, or a charge to earnings, for its quarterly assessment invoiced on its quarterly statement and an offsetting credit to the prepaid assessment until the asset is exhausted.

On February 7, 2011, the FDIC approved a final rule that amends its existing DIF restoration plan and implements certain provisions of the Dodd-Frank Act.  Effective April 1, 2011 the assessment base will be determined using average consolidated total assets minus average tangible equity rather than the current assessment base of adjusted domestic deposits.  Since the change will result in a much larger assessment base, the final rule also lowers the assessment rates in order to keep the total amount collected from financial institutions relatively unchanged from the amounts currently being collected.  The new assessment rates, calculated on the revised assessment base, will generally range from 2.5 to 9 basis points for Risk Category I institutions, 9 to 24 basis points for Risk Category II institutions, 18 to 33 basis points for Risk Category III institutions, and 30 to 45 basis points for Risk Category IV institutions.  For large institutions (generally those with total assets of $10 billion or more), which as of December 31, 2010 did not include the Bank, the initial base assessment rate will range from 5 to 35 basis points on an annualized basis.  After the effect of potential base-rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis.  Assessment rates for large institutions will be calculated using a scorecard that combines CAMELS ratings and certain forward-looking financial measures to assess the risk a large institution poses to the DIF.  The new assessment rates will be calculated for the quarter beginning April 1, 2011 and reflected in invoices for assessments due September 30, 2011.

 
- 21 -

Part I (Continued)
Item 1 (Continued)

Community Reinvestment Act

The Bank is subject to the provisions of the Community Reinvestment Act of 1977, as amended (the CRA), and the federal banking agencies’ related regulations.  Under the CRA, all banks and thrifts have a continuing and affirmative obligation, consistent with safe and sound operation, to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods.  The CRA requires a depository institution’s primary federal regulator, in connection with its examination of the institution or its evaluation of certain regulatory applications, to assess the institution’s record in assessing and meeting the credit needs of the community served by that institution, including low- and moderate-income neighborhoods.  The regulatory agency’s assessment of the institution’s record is made available to the public.

Current CRA regulations rate institutions based on their actual performance in meeting community credit needs. The Bank received a “satisfactory” rating on its most recent examination in 2008.

Consumer Regulations

Interest and other charges collected or contracted for by the Bank is subject to state usury laws and certain federal laws concerning interest rates.  The Bank’s loan operations are also subject to federal laws and regulations applicable to credit transactions, such as those:

 
·
Governing disclosures of credit terms to consumer borrowers;

 
·
Requiring financial institutions provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 
·
Prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 
·
Governing the use and provision of information to credit reporting agencies; and

 
·
Governing the manner in which consumer debts may be collected by collection agencies.

The deposit operations of the Bank is also subject to laws and regulations that:

 
·
Impose a duty to maintain the confidentiality of consumer financial records and prescribe procedures for complying with administrative subpoenas of financial records; and

 
·
Govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

 
- 22 -

Part I (Continued)
Item 1 (Continued)

Fiscal and Monetary Policy

Banking is a business that depends on interest rate differentials.  In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank’s earnings.  Thus, Colony’s earnings and growth and that of the Bank will be subject to the influence of economic conditions, generally both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve.  The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the discount rate at which banks may borrow from the Federal Reserve and the reserve requirements on deposits.

The monetary policies of the Federal Reserve historically have had a significant effect on the operating results of commercial banks and mortgage banking operations and will continue to do so in the future.  The Company cannot predict the conditions in the national and international economies and money markets, the actions and changes in policy by monetary and fiscal authorities or their effect on the Bank.

Anti-Terrorism Legislation

In the wake of the tragic events of September 11th, on October 26, 2001, the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.  Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers.  For example, the enhanced due diligence policies, procedures and controls generally require financial institutions to take reasonable steps to:

 
·
conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;

 
·
ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;

 
·
ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each owner; and

 
·
ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

 
- 23 -
 
Part I (Continued)
Item 1 (Continued)

The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs.  The USA PATRIOT Act sets forth minimum standards for these programs, including:

 
·
The development of internal policies, procedures and controls;

 
·
The designation of a compliance officer;

 
·
An ongoing employee training program; and

 
·
An independent audit function to test the programs.

In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities.  Any financial institution complying with these rules will not be deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above.


Risk Factors

Not Applicable.


Unresolved Staff Comments

Not Applicable.


Properties

The principal properties of the Registrant consist of the properties of the Bank.  The Bank owns all of the offices occupied except two offices in Tifton, one office in Valdosta, one office in Douglas and one office in Albany that are leased.


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, 2010, there are no material pending legal proceedings to which Colony or its subsidiary are a party or of which any of its property is the subject.


Not Applicable.

 
- 24 -

Part II

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities

Effective April 2, 1998, Colony Bankcorp, Inc. common stock is 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 registrant.

The following table sets forth the high, low and close sale prices per share of the common stock as reported on the NASDAQ Global Market, and the dividends declared per share for the periods indicated.

 
Year Ended December 31, 2010
  
High
    
Low
    
Close
    
Dividends Per Share
  
                         
Fourth Quarter
     4.97       3.76       4.03       0.000  
Third Quarter
     7.00       4.50       4.50       0.000  
Second Quarter
     9.25       5.90       7.00       0.000  
First Quarter
     6.06       3.50       5.84       0.000  
                                 
Year Ended December 31, 2009
                                
                                 
Fourth Quarter
     6.38       3.55       4.61       0.000  
Third Quarter
     8.83       5.90       6.69       0.000  
Second Quarter
     8.90       6.13       7.11       0.049  
First Quarter
     9.50       4.51       6.39       0.098  

The Company paid cash dividends on its common stock of $1,057,464 or $0.15 per share in 2009.  No cash dividends were paid on its common stock in 2010.  The Company’s board of directors suspended the payment of dividends in the third quarter of 2009.  For a description of the restrictions and limitations on the Company’s ability to pay dividends, please see “Dividends” on Page 17.

As of December 31, 2010, the Company had approximately 2,141 stockholders of record.

On March 30, 2010, Colony Bankcorp, Inc. accepted the subscriptions of several investors in a private placement offering to accredited investors under an exemption from registration contained in Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D under the Securities Act.  The Company offered a maximum of 1,216,545 shares of its common stock at a price of $4.11-$4.50 per share.  The price for non-affiliates was determined using a twenty day average trading price as quoted on NASDAQ Stock Market immediately prior to the beginning of the offering.  All of the shares were purchased for a total of $5.08 million, less offering expenses of approximately $20,000.  The offering was closed March 30, 2010.

Issuer Purchase of Equity Securities

The Company purchased no shares of the Company’s common stock during the quarter ended December 31, 2010.

 
- 25 -

Part II (Continued)

Selected Financial Data

   
Year Ended December 31,
  
    2010     2009     2008     2007     2006  
      (Dollars in Thousands, except per share data)  
Selected Balance Sheet Data
                              
Total Assets
   $ 1,275,658     $ 1,307,089     $ 1,252,782     $ 1,208,777     $ 1,213,504  
Total Loans, Net of Unearned Interest and Fees
     813,189       931,252       960,857       944,978       941,772  
Total Deposits
     1,059,124       1,057,586       1,006,991       1,018,602       1,042,446  
Investment Securities
     303,886       267,300       207,704       167,191       149,307  
Federal Home Loan Bank Stock
     6,064       6,345       6,272       5,533       5,087  
Stockholders’ Equity
     92,959       89,275       83,215       83,743       76,611  
Selected Income Statement Data
                                        
Interest Income
     58,738       65,847       75,297       90,159       83,280  
Interest Expense
     21,523       26,281       37,922       47,701       41,392  
                                         
Net Interest Income
     37,215       39,566       37,375       42,458       41,888  
Provision for Loan Losses
     13,350       43,445       12,938       5,931       3,987  
Other Income
     10,006       9,544       9,005       7,817       7,350  
Other Expense
     33,856       34,844       30,856       31,579       29,882  
                                         
Income (Loss) Before Tax
     15       (29,179 )     2,586       12,765       15,369  
Income Tax Expense (Benefit)
     (459 )     (9,995 )     557       4,218       5,217  
                                         
Net Income (Loss)
     474       (19,184 )     2,029       8,547       10,152  
Preferred Stock Dividends
     1,400       1,365       -       -       -  
                                         
Net Income (Loss) Available to Common Stockholders
   $ (926 )   $ (20,549 )   $ 2,029     $ 8,547     $ 10,152  
                                         
Weighted Average Common Shares Outstanding
     8,149       7,213       7,199       7,189       7,177  
Shares Outstanding
     8,443       7,229       7,212       7,201       7,190  
Intangible Assets
   $ 295     $ 331     $ 2,779     $ 2,815     $ 2,851  
Dividends Declared
     -       1,057       2,814       2,629       2,337  
Average Assets
     1,269,607       1,286,418       1,204,846       1,204,165       1,160,718  
Average Stockholders’ Equity
     94,452       105,655       84,372       80,595       71,993  
Net Charge-Offs
     16,471       29,060       11,435       2,407       2,760  
Reserve for Loan Losses
     28,280       31,401       17,016       15,513       11,989  
OREO
     20,208       19,705       12,812       1,332       970  
Nonperforming Loans
     28,921       33,566       35,374       15,016       8,078  
Nonperforming Assets
     49,262       53,403       48,186       16,348       9,048  
Average Interest-Earning Assets
     1,199,216       1,218,153       1,144,927       1,141,652       1,097,716  
Noninterest-Bearing Deposits
     102,959       84,239       77,497       86,112       77,336  

 
- 26 -

Part II (Continued)
Item 6 (Continued)

    Year Ended December 31,  
    2010     2009     2008     2007     2006  
    (Dollars in Thousands, except per share data)  
                               
Per Share Data:
                              
Net Income (Loss) Per Common Share (Diluted)
   $ (0.11 )   $ (2.85 )   $ 0.28     $ 1.19     $ 1.41  
Common Book Value Per Share
     7.75       8.57       11.54       11.63       10.66  
Tangible Common Book Value Per Share
     7.72       8.52       11.15       11.24       10.26  
Dividends Per Common Share
     0.00       0.15       0.39       0.365       0.325  
Profitability Ratios:
                                        
Net Income (Loss) to Average Assets
     (0.07 )%     (1.60 )%     0.17 %     0.71 %     0.87 %
Net Income (Loss) to Average Stockholders’ Equity
     (0.98 )     (19.45 )     2.40       10.60       14.10  
Net Interest Margin
     3.12       3.27       3.30       3.75       3.84  
Loan Quality Ratios:
                                        
Net Charge-Offs to Total Loans
     2.03       3.12       1.19       0.25       0.29  
Reserve for Loan Losses to Total Loans and OREO
     3.39       3.30       1.75       1.64       1.27  
Nonperforming Assets to Total Loans and OREO
     5.91       5.62       4.95       1.73       0.96  
Reserve for Loan Losses to Nonperforming Loans
     97.78       93.55       48.10       103.31       148.42  
Reserve for Loan Losses to Total Nonperforming Assets
     57.41       58.80       35.31       94.89       132.50  
Liquidity Ratios:
                                        
Loans to Total Deposits
     76.78       88.06       95.42       92.77       90.34  
Loans to Average Earning Assets
     67.81       76.45       83.92       82.77       85.79  
Noninterest-Bearing Deposits to Total Deposits
     9.72       7.97       7.70       8.45       7.42  
Capital Adequacy Ratios:
                                        
Common Stockholders’ Equity to Total Assets
     5.13       4.74       6.64       6.93       6.31  
Total Stockholders’ Equity to Total Assets
     7.29       6.83       6.64       6.93       6.31  
Dividend Payout Ratio
  
NM(1)
    
NM(1)
       139.29       30.67       23.05  

(1)           Not meaningful due to net loss recorded.

 
- 27 -

Part II (Continued)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Annual Report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act), notwithstanding that such statements are not specifically identified.  In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act.  Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Colony Bankcorp, Inc. or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements.  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 
·
Local and regional economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.

 
·
Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

 
·
The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board.

 
·
Inflation, interest rate, market and monetary fluctuations.

 
·
Political instability.

 
·
Acts of war or terrorism.

 
·
The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

 
·
Changes in consumer spending, borrowings and savings habits.

 
·
Technological changes.

 
·
Acquisitions and integration of acquired businesses.

 
·
The ability to increase market share and control expenses.

 
- 28 -

Part II (Continued)
Item 7 (Continued)

 
·
The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply.

 
·
The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters.

 
·
Changes in the Company’s organization, compensation and benefit plans.

 
·
The costs and effects of litigation and of unexpected or adverse outcomes in such litigation.

 
·
Greater than expected costs or difficulties related to the integration of new lines of business.

 
·
The Company’s success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made.  The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

The Company

Colony Bankcorp, Inc. (Colony) is a bank holding company headquartered in Fitzgerald, Georgia that provides, through its wholly-owned subsidiary (collectively referred to as the Company), a broad array
of products and services throughout 18 Georgia markets. The Company offers commercial, consumer and mortgage banking services.

Application of Critical Accounting Policies and Accounting Estimates

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry.  The Company’s financial position and results of operations are affected by management’s application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures.  Different assumptions in the application of these policies could result in material changes in the Company’s financial position and/or results of operations.  Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results of operations, and they require management to make estimates that are difficult and subjective or complete.

Allowance for Loan Losses - The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio.  Management evaluates the adequacy of the allowance for loan losses quarterly based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors.  This evaluation is inherently subjective, as it requires the use of significant management estimates.  Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, collateral values, rating migrations, loss severity and economic and political conditions.  The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

 
- 29 -

Part II (Continued)
Item 7 (Continued)

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio.  The allowance recorded for loans is based on reviews of individual credit relationships and historical loss experience.  The allowance for losses relating to impaired loans is based on the loan’s observable market price, the discounted cash flows using the loan’s effective interest rate, or the value of collateral for collateral dependent loans.

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio.  This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends.  Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger nonhomogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogeneous groups of loans are among other factors.  The Company estimates a range of inherent losses related to the existence of these exposures.  The estimates are based upon the Company’s evaluation of risk associated with the commercial and consumer levels and the estimated impact of the current economic environment.

Goodwill and Other Intangibles – The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value.  The Company did not have any goodwill on its books at December 31, 2010.  Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.  The initial goodwill and other intangibles recorded and subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired asset will perform in the future.  Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.

Overview

The following discussion and analysis presents the more significant factors affecting the Company’s financial condition as of December 31, 2010 and 2009, and results of operations for each of the years in the three-year period ended December 31, 2010. 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 34 percent  federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.

Dollar amounts in tables are stated in thousands, except for per share amounts.

 
- 30 -

Part II (Continued)
Item 7 (Continued)

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 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 earning assets.  Net income (loss) available to common shareholders totaled $(0.93) million, or $(0.11) per diluted common share in 2010 compared to $(20.55) million, or $(2.85) diluted per common share in 2009 compared to $2.03 million, or $0.28 diluted per common share in 2008.

Selected income statement data, returns on average assets and average equity and dividends per share for the comparable periods were as follows:

   
2010
    
2009
    
2008
  
                   
Taxable-Equivalent Net Interest Income
   $ 37,393     $ 39,848     $ 37,740  
Taxable-Equivalent Adjustment
     178       282       365  
                         
Net Interest Income
     37,215       39,566       37,375  
Provision for Possible Loan Losses
     13,350       43,445       12,938  
Noninterest Income
     10,006       9,544       9,005  
Noninterest Expense
     33,856       34,844       30,856  
                         
Income (Loss) Before Income Taxes
     15       (29,179 )     2,586  
Income Taxes (Benefits)
     ( 459 )     (9,995 )     557  
                         
Net Income (Loss)
   $ 474     $ (19,184 )   $ 2,029  
                         
Preferred Stock Dividends
     1,400       1,365       ---  
Net Income (Loss) Available to Common Stockholders
   $ ( 926 )   $ (20,549 )   $ 2,029  
                         
Basic per Common Share:
                        
Net Income (Loss)
   $ (0.11 )   $ (2.85 )   $ 0.28  
Diluted per Common Share:
                        
Net Income (Loss)
   $ (0.11 )   $ (2.85 )   $ 0.28  
Return on Average Assets:
                        
Net Income (Loss)
     (0.07 )%     (1.60 )%     0.17 %
Return on Average Equity:
                        
Net Income (Loss)
     (0.98 )%     (19.45 )%     2.40 %

 
- 31 -

Part II (Continued)
Item 7 (Continued)

Net income (loss) available to common shareholders for 2010 increased $19.62 million, or 95.49 percent, compared to 2009.  The increase was primarily the result of a $30.10 million decrease in provision for loan losses, an increase of $462 thousand in noninterest income and a decrease of $988 thousand in noninterest expense.  The impact of these items was partly offset by a $2.35 million decrease in net interest income, a $35 thousand increase in preferred stock dividends, and an increase of $9.54 million in income tax expense.  The increase in income tax expense resulted in an income tax benefit of $459 thousand.

Net income (loss) available to common shareholders for 2009 decreased $22.58 million, or 1,112.85 percent, compared to 2008.  The decrease was primarily the result of a $30.51 million increase in provision for loan losses, an increase of $3.99 million in noninterest expense, and $1.37 million in preferred stock dividends.  The impact of these items was partly offset by a $2.19 million increase in net interest income, an increase of $540 thousand in noninterest income and a decrease of $10.55 million in income tax expense.  The decrease in income tax expense resulted in an income tax benefit of $10 million.

Details of the changes in the various components of net income are further discussed below.

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 78.81 percent of total revenue during 2010 and 80.57 percent during 2009.

Net interest margin is the taxable-equivalent net interest income as a percentage of average earning assets for the period.  The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.

The Federal Reserve Board influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions.  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 has ranged from 3.25 percent to 7.25 percent during 2008 to 2010.  At year end 2007, the prime rate was 7.25 percent and with the 400 basis point reduction during 2008 the prime rate ended the year at 3.25 percent and remained at 3.25 percent for all of 2010.  The federal funds rate moved similar to prime rate with interest rates ranging from 0.25 percent to 4.25 percent during 2008 to 2010.  At year end 2007, the federal funds rate was 4.25 percent and with the 400 basis point reduction during 2008 the federal funds rate ended the year at 0.25 percent and remained at 0.25 percent for all of 2010.  We anticipate the Federal Reserve tightening interest rate policy in 2011, which should benefit Colony’s net interest margin.

The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of 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 Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

 
- 32 -

Part II (Continued)
Item 7 (Continued)

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
                
Changes From
        
   
2009 to 2010 (a)
    
2008 to 2009 (a)
  
   
Volume
    
Rate
    
Total
    
Volume
    
Rate
    
Total
  
                                     
Interest Income
                                    
Loans, Net-taxable
   $ (5,850 )   $ (67 )   $ (5,917 )   $ 286     $ (9,410 )   $ (9,124 )
                                                 
Investment Securities
                                                
Taxable
     1,088       (2,260 )     (1,172 )     3,559       (3,207 )     352  
Tax-exempt
     (226 )     (8 )     (234 )     (220 )     12       (208 )
Total Investment Securities
     862       (2,268 )     (1,406 )     3,339       (3,195 )     144  
                                                 
Interest-Bearing Deposits in Other banks
     27       (6 )     21       (10 )     (16 )     (26 )
Federal Funds Sold
     76       (5 )     71       (29 )     (220 )     (249 )
Other Interest - Earning Assets
     ---       18       18       12       (290 )     (278 )
Total Interest Income
     (4,885 )     (2,328 )     (7,213 )     3,598       (13,131 )     (9,533 )
                                                 
Interest Expense
                                                
Interest-Bearing Demand and Savings Deposits
     106       (206 )     (100 )     236       (1,685 )     (1,449 )
Time Deposits
     (218 )     (4,113 )     (4,331 )     686       (10,396 )     (9,710 )
Total Interest Expense On Deposits
     (112 )     (4,319 )     (4,431 )     922       (12,081 )     (11,159 )
                                                 
Other Interest-Bearing Liabilities
                                                
Federal Funds Purchased and Repurchase Agreements
     (337 )     308       (29 )     684       (322 )     362  
Subordinated Debentures
     ---       (143 )     (143 )     ---       (612 )     (612 )
Other Debt
     (173 )     18       (155 )     197       (430 )     (233 )
                                                 
Total Interest Expense
     (622 )     (4,136 )     (4,758 )     1,803       (13,445 )     (11,642 )
Net Interest Income (Loss)
   $ (4,263 )   $ 1,808     $ (2,455 )   $ 1,795     $ 314     $ 2,109  

(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.

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.

 
- 33 -

Part II (Continued)
Item 7 (Continued)

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 Asset & Liability Management Committee (ALCO) which includes senior management representatives. The ALCO 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 the ALCO. 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 2-5 year range.

The Company maintains about 28.6 percent 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 short term certificates of deposit that mature within one year. This balance sheet composition allowed the Company to be relatively constant with its net interest margin until 2008.  During 2007 interest rates decreased 100 basis points and this decrease by the Federal Reserve in 2007 followed by 400 basis point decrease in 2008 resulted in significant pressure in net interest margins.  While the Federal Reserve rates have remained unchanged since 2008, we have seen the net interest margin decrease to 3.12 percent for 2010 compared to 3.27 percent for 2009 and to 3.30 percent for 2008.  Given the Federal Reserve’s aggressive posture during 2008 that ended the year with a range of 0 - 0.25 percent federal funds target rate and remained the same for all of 2010, we have seen our net interest margin reach a low of 3.02 percent for fourth quarter of 2010 to a high of 3.20 percent for second quarter 2010.

 
- 34 -

Part II (Continued)
Item 7 (Continued)

Taxable-equivalent net interest income for 2010 decreased $2.45 million, or 6.16 percent, compared to 2009, while taxable-equivalent net interest income for 2009 increased by $2.11 million, or 5.59 percent, compared to 2008.  The fluctuation between the comparable periods resulted from the negative impact of the significant decrease in interest rates.  The average volume of earning assets during 2010 decreased $18.94 million compared to 2009 while over the same period the net interest margin decreased to 3.12 from 3.27 percent.  Similarly, the average volume of earning assets during 2009 increased $73.23 million compared to 2008 while over the same period the net interest margin decreased to 3.27 percent from 3.30 percent.  Growth in average earning assets during 2010 and 2009 was primarily in fed funds sold, investment securities and interest bearing deposits.  The reduction in the net interest margin in 2010 was primarily the result of the decrease in average earning assets and maintenance of a higher liquidity level.

The average volume of loans decreased $97.49 million in 2010 compared to 2009 and increased $4.1 million in 2009 compared to 2008.  The average yield on loans decreased 1 basis point in 2010 compared to 2009 and decreased 98 basis points in 2009 compared to 2008. The average volume of other borrowings decreased $21.5 million in 2010 compared to 2009 while average deposits increased $17.3 million in 2010 compared to 2009.  The average volume of deposits increased $30.4 million while other borrowings increased $29.3 million in 2009 compared to 2008.  Interest-bearing deposits made up 38.9 percent of the increase in average deposits in 2010 and 106.6 percent of the increase in average deposits in 2009. Accordingly, the ratio of average interest-bearing deposits to total average deposits was 92.1 percent in 2010, 93.0 percent in 2009 and 92.5 percent in 2008. This deposit mix, combined with a general decrease in interest rates, had the effect of (i) decreasing the average cost of total deposits by 47 basis points in 2010 compared to 2009 and decreasing the average cost of total deposits by 120 basis points in 2009 compared to 2008, and (ii) mitigating a portion of the impact of decreasing yields on 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 earning assets and the average rate paid on interest-bearing liabilities, was 2.94 percent in 2010 compared to 3.05 percent in 2009 and 2.97 percent in 2008. 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 Quantitative and Qualitative Disclosures About Interest Rate Sensitivity included elsewhere in this report.

Provision for Possible Loan Losses

The provision for possible loan losses is determined by management as the amount to be added to the allowance for possible loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for possible loan losses totaled $13.35 million in 2010 compared to $43.45 million in 2009 and $12.94 million in 2008.  See the section captioned “Allowance for Possible Loan Losses” elsewhere in this discussion for further analysis of the provision for possible loan losses.

 
- 35 -

Part II (Continued)
Item 7 (Continued)

Noninterest Income

The components of noninterest income were as follows:

   
2010
    
2009
    
2008
  
                   
Service Charges on Deposit Accounts
   $ 3,597     $ 4,198     $ 4,700  
Other Charges, Commissions and Fees
     1,140       986       981  
Other
     1,335       1,146       1,508  
Mortgage Fee Income
     313       448       609  
Securities Gains
     2,617       2,626       1,195  
SBA Premiums
     1,005       140       12  
                         
    $ 10,007     $ 9,544     $ 9,005  

Total noninterest income for 2010 increased $463 thousand, or 4.85 percent, compared to 2009 while total noninterest income for 2009 increased $539 thousand, or 5.99 percent, compared to 2008.  The increase in 2010 noninterest income compared to 2009 was primarily in SBA premiums and other charges, commissions and fees, while the increase in 2009 noninterest income compared to 2008 was primarily in securities gains.  Changes in these items and the other components of noninterest income are discussed in more detail below.

Service Charges on Deposit Accounts.  Service charges on deposit accounts for 2010 decreased $601 thousand, or 14.32 percent, compared to 2009.  The decrease was primarily due to a decrease in volume of consumer and business account overdraft fees.  Service charges on deposit accounts for 2009 decreased $502 thousand, or 10.68 percent, compared to 2008.  The decrease was primarily due to a decrease in overdraft fees, which were related to consumer and business accounts.

Mortgage Fee Income.  Mortgage fee income for 2010 decreased $135 thousand, or 30.13 percent, compared to 2009.  The decrease was primarily due to decreased mortgage loan activity with the housing and real estate downturn.  Mortgage fee income for 2009 decreased $161 thousand, or 26.44 percent, compared to 2008 due to decreased mortgage loan activity.

Security Gains.  The Company realized gains from the sale of securities of $2.62 million for 2010 compared to $2.63 million in 2009 and $1.20 million in 2008.

All Other Noninterest Income.  Other charges, commissions and fees, other income and SBA premiums for 2010 increased $1.21 million, or 53.13 percent, compared to 2009.  The increase was primarily due to the premiums realized on SBA guaranteed loans of $1.01 million for 2010 compared to $140 thousand for 2009 and from a death benefit on BOLI insurance plan in the amount of $212 thousand for 2010.  In 2009 other charges, commissions and fees, other income, and SBA premiums decreased $229 thousand, or 9.16 percent compared to 2008.

 
- 36 -

Part II (Continued)
Item 7 (Continued)

Noninterest Expense

The components of noninterest expense were as follows:

   
2010
    
2009
    
2008
  
                   
Salaries and Employee Benefits
   $ 14,097     $ 14,483     $ 16,238  
Occupancy and Equipment
     4,422       4,287       4,191  
Other
     15,337       16,074       10,427  
                         
    $ 33,856     $ 34,844     $ 30,856  

Total noninterest expense for 2010 decreased $988 thousand, or 2.84 percent compared to 2009 while total noninterest expense for 2009 increased $3.99 million, or 12.93 percent, compared to 2008.  Reduction in noninterest expense in 2010 was primarily in salaries and employee benefits and other noninterest expense while the Company had an increase in occupancy and equipment.  Growth in noninterest expense in 2009 was primarily in other noninterest expense and occupancy and equipment while the Company had a decrease in salaries and employee benefits.
 
Salaries and Employee Benefits.  Salaries and employee benefits expense for 2010 decreased $386 thousand, or 2.66 percent, compared to 2009.  The slowing economy and lack of growth resulted in decreases in headcount as a result of normal attrition.  Restructuring due to consolidation efforts initiated during 2008 also reduced salaries and benefits.  The Company did not payout any profit sharing in 2010 due to Company performance.  Salaries and employee benefits expense for 2009 decreased $1.76 million, or 10.81 percent, compared to 2008.  The slowing economy and lack of growth resulted in decreases in headcount as a result of normal attrition and restructuring due to consolidation efforts initiated in 2008.  In addition the Company did not payout any bonuses or profit sharing based on Company performance being significantly below targeted goals in 2009.

Occupancy and Equipment.  Net occupancy expense for 2010 increased $135 thousand compared to 2009, or an increase of 3.15 percent.  Net occupancy expense for 2009 increased $96 thousand compared to 2008, or an increase of 2.29 percent.  The purchase of new data processing software and equipment resulted in additional depreciation expense of $48 thousand for 2010 compared to 2009 and $65 thousand for 2009 compared to 2008.

All Other Noninterest Expense.  All other noninterest expense for 2010 decreased $737 thousand, or 4.59 percent.  Significant changes in noninterest expense were:  FDIC insurance assessment fees decreased to $1.87 million for 2010 compared to $2.66 million for 2009, or a decrease of $795 thousand and goodwill impairment expense was $0 for 2010 in comparison to $2.41 million for 2009.  The impact of these items was partly offset by an increase to legal and professional fees of $7 thousand, or 0.54 percent in 2010 compared to 2009 and an increase to foreclosed property and repossession expense of $2.67 million, or 117.70 percent in 2010 compared to 2009.  All other noninterest expense for 2009 increased $5.65 million, or 54.16 percent.  Significant changes in noninterest expense were:  FDIC insurance assessment fees increased to $2.66 million for 2009 compared to $603 thousand for 2008, or an increase of $2.06 million; foreclosed property and repossession expense increased to $2.27 million for 2009 compared to $382 thousand for 2008, or an increase of $1.89 million and goodwill impairment expense was $2.41 million for 2009 compared to $0 for 2008.

 
- 37 -

Part II (Continued)
Item 7 (Continued)

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 $1.27 billion in 2010 compared to $1.29 billion in 2009 and $1.20 billion in 2008.

   
2010
    
2009
    
2008
  
Sources of Funds:
                                    
Deposits:
                                    
Noninterest-Bearing
   $ 82,160       6.5 %   $ 71,561       5.5 %   $ 73,569       6.1 %
Interest-Bearing
     952,095       75.0       945,360       73.5       912,932       75.8  
Federal Funds Purchased and Repurchase Agreements
     26,070       2.0       42,452       3.3       18,200       1.5  
Subordinated Debentures and Other Borrowed Money
     110,149       8.7       115,229       9.0       110,141       9.1  
Other Noninterest-Bearing Liabilities
     4,681       0.4       6,161       0.5       5,632       0.5  
Equity Capital
     94,452       7.4       105,655       8.2       84,372       7.0  
                                                 
Total
   $ 1,269,607       100.0 %   $ 1,286,418       100.0 %   $ 1,204,846       100.0 %


Uses of Funds:
                                    
Loans
   $ 834,739       65.8 %   $ 943,164       73.3 %   $ 941,794       78.2 %
Investment Securities
     267,015       21.0       238,968       18.6       168,532       14.0  
Federal Funds Sold
     38,809       3.1       9,392       0.7       10,499       0.9  
Interest-Bearing Deposits
     21,911       1.7       788       0.1       1,235       0.1  
Other Interest-Earning Assets
     6,297       0.5       6,328       0.5       6,079       0.5  
Other Noninterest-Earning Assets
     100,836       7.9       87,778       6.8       76,707       6.3  
                                                 
Total
   $ 1,269,607       100.0 %   $ 1,286,418       100.0 %   $ 1,204,846       100.0 %

Deposits continue to be the Company’s primary source of funding.  Over the comparable periods, the relative mix of deposits continues to be high in interest-bearing deposits.  Interest-bearing deposits totaled 92.06 percent of total average deposits in 2010 compared to 92.96 percent in 2009 and 92.54 percent in 2008.

The Company primarily invests funds in loans and securities.  Loans continue to be the largest component of the Company’s mix of invested assets.  Loan demand was sluggish in 2010 as total loans were $813.3 million at December 31, 2010, down 12.7 percent, compared to loans of $931.4 million at December 31, 2009, while total loans at December 31, 2009 were down 3.08 percent compared to loans of $961.0 million at December 31, 2008.  See additional discussion regarding the Company’s loan portfolio in the section captioned “Loans” included below.  The majority of funds provided by deposit growth have been invested in loans.

 
- 38 -

Part II (Continued)
Item 7 (Continued)

Loans

The following table presents the composition of the Company’s loan portfolio as of December 31 for the past five years.

   
2010
    
2009
    
2008
    
2007
    
2006
  
                               
Commercial, Financial and Agricultural
   $ 63,772     $ 80,984     $ 86,379     $ 52,323     $ 61,887  
Real Estate
                                        
Construction
     76,682       113,117       160,374       211,484       193,952  
Mortgage, Farmland
     52,778       54,965       54,159       42,439       40,936  
Mortgage, Other
     570,350       626,993       600,653       544,655       549,601  
Consumer
     33,564       38,383       44,163       72,350       76,930  
Other
     16,104       16,950       15,308       22,028       18,967  
      813,250       931,392       961,036       945,279       942,273  
                                         
Unearned Interest and Fees
     (61 )     (140 )     (179 )     (301 )     (501 )
Allowance for Loan Losses
     (28,280 )     (31,401 )     (17,016 )     (15,513 )     (11,989 )
                                         
Loans
   $ 784,909     $ 899,851     $ 943,841     $ 929,465     $ 929,783  

The following table presents total loans as of December 31, 2010 according to maturity distribution and/or repricing opportunity on adjustable rate loans.

Maturity and Repricing Opportunity

One Year or Less
   $ 517,287  
After One Year through Three Years
     261,981  
After Three Years through Five Years
     24,163  
Over Five Years
     9,819  
    $ 813,250  

Overview. Loans totaled $813.3 million at December 31, 2010, down 12.68 percent from December 31, 2009 loans of $931.4 million.  The majority of the Company’s loan portfolio is comprised of the real estate loans-other, real estate construction and commercial financial and agricultural loans.  Real estate-other, which is primarily 1-4 family residential properties and nonfarm nonresidential properties, made up 70.13 percent and 67.32 percent of total loans, real estate construction made up 9.43 percent and 12.15 percent while commercial financial and agricultural loans made up 7.84 percent and 8.70 percent of total loans at December 31, 2010 and December 31, 2009, respectively.  Real estate loans-other include both commercial and consumer balances.

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 an Executive 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.

 
- 39 -

Part II (Continued)
Item 7 (Continued)

Commercial purpose, commercial real estate, and industrial loans are underwritten similar to other loans throughout the company.  The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location.  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 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 nonowner 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 began utilizing an independent third party company for loan review during fourth quarter 2009.  This third party engagement will be on-going.  The Loan Review Company reviews and validates the credit risk program on a periodic basis.  Results of these reviews are presented to management and the audit committee.  The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Commercial, Financial and Agricultural.  Commercial, financial and agricultural loans at December 31, 2010 decreased 21.25 percent from December 31, 2009 to $63.8 million. The Company’s commercial and industrial 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. 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.

Industry Concentrations. As of December 31, 2010 and December 31, 2009, there were no concentrations of loans within any single industry in excess of 10 percent 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.

 
- 40 -

Part II (Continued)
Item 7 (Continued)

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, particularly with the current economic downturn in the real estate market.  At December 31, 2010, approximately 86 percent of the Company’s loan portfolio was concentrated in loans secured by real estate.  A substantial portion of borrowers’ ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector.  The continued downturn of the housing and real estate market that began in 2007 has resulted in an increase of problem loans secured by real estate.  These loans are centered primarily in the Company’s larger MSA markets.  Declining collateral real estate values that secure land development, construction and speculative real estate loans in the Company’s larger MSA markets have resulted in high loan loss provisions in 2010.  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.

Large Credit Relationships.   The Company is currently in eighteen counties in south and central Georgia and include metropolitan markets in 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.  The following table provides additional information on the Company’s large credit relationships outstanding at December 31, 2010 and December 31, 2009.

   
December 31, 2010
    
December 31, 2009
  
   
Number of
    
Period End Balances
    
Number of
    
Period End Balances
  
   
Relationships
    
Committed
    
Outstanding
    
Relationships
    
Committed
    
Outstanding
  
                                     
Large Credit Relationships:
                                    
$10 million and greater
     1     $ 15,025     $ 15,025       3     $ 43,142     $ 40,332  
$5 million to $9.9 million
     7       46,794       45,588       6       39,159       38,965  

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, 2010.  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.

   
Due in One Year or Less
    
After One, but Within Three Years
    
After Three, but Within Five Years
    
After Five Years
    
Total
  
                               
Loans with Fixed Interest Rates
   $ 287,475     $ 260,753     $ 22,531     $ 9,603     $ 580,362  
Loans with Floating Interest Rates
     229,812       1,228       1,632       216       232,888  
                                         
Total
   $ 517,287     $ 261,981     $ 24,163     $ 9,819     $ 813,250  

 
- 41 -

Part II (Continued)
Item 7 (Continued)

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

Year-end nonperforming assets and accruing past due loans were as follows:

   
2010
    
2009
    
2008
    
2007
    
2006
  
                               
Loans Accounted for on Nonaccrual
   $ 28,902     $ 33,535     $ 35,124     $ 14,956     $ 8,069  
Loans Past Due 90 Days or More
     19       31       250       60       9  
Other Real Estate Foreclosed
     20,208       19,705       12,812       1,332       970  
Securities Accounted for on Nonaccrual
     132       132       ---       ---       ---  
Total Nonperforming Assets
   $ 49,261     $ 53,403     $ 48,186     $ 16,348     $ 9,048  
                                         
Nonperforming Assets as a Percentage of:
                                        
Total Loans and Foreclosed Assets
     5.91 %     5.62 %     4.95 %     1.73 %     0.96 %
Total Assets
     3.86 %     4.09 %     3.85 %     1.35 %     0.75 %
Supplemental Data:
                                        
Trouble Debt Restructured Loans
                                        
In Compliance with Modified Terms
     26,556       9,269       ---       ---       ---  
Trouble Debt Restructured Loans
                                        
Past Due 30-89 Days
     1,048       459       ---       ---       ---  
Accruing Past Due Loans:
                                        
30-89 Days Past Due
     19,740       25,547       18,675       15,681       10,593  
90 or More Days Past Due
     19       31       250       60       9  
Total Accruing Past Due Loans
   $ 19,759     $ 25,578     $ 18,925     $ 15,741     $ 10,602  

Nonperforming assets include nonaccrual loans, loans past due 90 days or more, foreclosed real estate and nonaccrual securities.  Nonperforming assets at December 31, 2010 decreased 7.76 percent from December 31, 2009.  The decrease in nonperforming assets was primarily attributable to the decrease in loans accounted for on nonaccrual.

Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectibility 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, collectibility 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.

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.

 
- 42 -

Part II (Continued)
Item 7 (Continued)

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 possible 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 noninterest expense along with other expenses related to maintaining the properties.

Allowance for Possible Loan Losses

The allowance for possible loan losses is a reserve established through a provision for possible 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 possible 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 possible 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 based on a regular analysis and evaluation of classified loans.  Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates.  This analysis is performed at the subsidiary bank level and is reviewed at the parent company level.  Once a loan is classified, it is reviewed to determine whether the loan is impaired and, if impaired, a portion of the allowance for possible loan losses is specifically allocated to the loan.  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.
 
 
- 43 -

Part II (Continued)
Item 7 (Continued)

Historical valuation allowances are calculated from loss factors applied to loans with similar risk characteristics.  The loss factors are based on loss ratios for groups of loans with similar risk characteristics.  The loss ratios are derived from the proportional relationship between actual loan losses and the total population of loans in the risk category.  The historical loss ratios are periodically updated based on actual charge-off experience.  The Company’s groups of similar loans include similarly risk-graded groups of loans not reviewed for individual impairment.  In addition, the Company has also segmented its’ real estate portfolio into thirteen separate categories and captured loan loss experience for each category.  Most of the company’s charge-offs the past two years have been real estate dependent loans and we believe this segmentation provides more accuracy in determining allowance for loan loss adequacy.  During fourth quarter 2009, the Company changed the methodology in calculating its loan loss reserve.  Previously the look back period for charge-off experience was the average of the charge-offs for the prior five years, however due to the current housing and real estate downturn, management deemed prudent to lower the look back period for charge-off experience to a one year look back.  This change resulted in an approximate $12 million dollar addition to the loan loss reserve during fourth quarter 2009.  We maintained the same methodology in 2010.

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.

An allocation for loan losses has been made according to the respective amounts deemed necessary to provide for the possibility of incurred losses within the various loan categories.  The allocation is based primarily on previous charge-off experience adjusted for changes in experience among each category.  Additional amounts are allocated by evaluating the loss potential of individual loans that management has considered impaired.  The reserve for loan loss allocation is subjective since it is based on judgment and estimates, and therefore is not necessarily indicative of the specific amounts or loan categories in which the charge-offs may ultimately occur.  The following table shows a comparison of the allocation of the reserve for loan losses for the periods indicated.

   
2010
    
2009
    
2008
    
2007
    
2006
  
   
Reserve
       %*    
Reserve
       %*    
Reserve
       %*    
Reserve
       %*    
Reserve
       %*  
                                                                       
                                                                       
Commercial, Financial and Agricultural
   $ 5,113       8 %   $ 4,710       9 %   $ 4,254       9 %   $ 3,645       6 %   $ 3,597       7 %
Real Estate - Construction
     4,646       9       7,850       12       2,808       17       2,560       22       719       21  
Real Estate - Farmland
     944       7       942       6       681       6       621       4       599       4  
Real Estate - Other
     13,972       70       13,816       67       5,955       62       5,430       58       3,896       58  
Loans to Individuals
     3,074       4       2,826       4       2,467       4       2,404       8       2,398       8  
All other loans
     531       2       1,257       2       851       2       853       2       780       2  
Total
   $ 28,280       100 %   $ 31,401       100 %   $ 17,016       100 %   $ 15,513       100 %   $ 11,989       100 %

*  Loan balance in each category expressed as a percentage of total end of period loans.

Activity in the allowance for loan losses is presented in the following table. There were no charge-offs or recoveries related to foreign loans during any of the periods presented.

 
- 44 -

Part II (Continued)
Item 7 (Continued)

The following table presents an analysis of the Company’s loan loss experience for the periods indicated.
 
   
2010
    
2009
    
2008
    
2007
    
2006
  
                               
Allowance for Loan Losses at Beginning of Year
   $ 31,401     $ 17,016     $ 15,513     $ 11,989     $ 10,762  
                                         
Charge-Offs
                                        
Commercial, Financial and Agricultural
     725       768       1,680       957       1,351  
Real Estate
     15,309       27,545       9,190       1,862       854  
Consumer
     549       908       994       793       697  
All Other
     1,040       272       103       296       471  
      17,623       29,493       11,967       3,908       3,373  
                                         
Recoveries
                                        
Commercial, Financial and Agricultural
     82       73       73       109       420  
Real Estate
     774       156       285       992       20  
Consumer
     246       191       155       312       156  
All Other
     50       13       19       88       17  
      1,152       433       532       1,501       613  
                                         
Net Charge-Offs
     16,471       29,060       11,435       2,407       2,760  
                                         
Provision for Loans Losses
     13,350       43,445       12,938       5,931       3,987  
                                         
Allowance for Loan Losses at End of Year
   $ 28,280     $ 31,401     $ 17,016     $ 15,513     $ 11,989  
                                         
Ratio of Net Charge-Offs to Average Loans
     1.90 %     3.02 %     1.19 %     0.25 %     0.30 %
 
The allowance for loan losses is maintained at a level considered appropriate by management, based on estimated probable losses within the existing loan portfolio.  The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.  The provision for loan losses reflects loan quality trends, including the level of net charge-offs or recoveries, among other factors.  The provision for loan losses decreased $30.10 million from $43.45 million in 2009 to $13.35 million in 2010.  The provision for loan losses charged to earnings was based upon management’s judgment of the amount necessary to maintain the allowance at an adequate level to absorb losses inherent in the loan portfolio at year end.  The amount each period is dependent upon many factors, including changes in the risk ratings of the loan portfolio, net charge-offs, past due ratios, the value of collateral, and other environmental factors that include portfolio loan quality indicators; portfolio growth and composition of commercial real estate and concentrations; portfolio policies, procedures, underwriting standards, loss recognition, collection and recovery practices; local economic business conditions; and the experience, ability, and depth of lending management and staff.  Of significance to changes in the allowance during 2010 was the provision of $13.35 million.

 
- 45 -
 
Part II (Continued)
Item 7 (Continued)

Charge-offs largely consisted of seven construction and land development loans totaling $3.29 million in 2010 compared to nine construction and land development loans totaling $8.13 million in 2009, two 1-4 family residence property of $777 thousand in 2010 compared to three 1-4 family residence property of $1.61 million in 2009; two multifamily residential property loans totaling $477 thousand in 2010 compared to three multifamily residential property loan totaling $3.22 million in 2009; and eight nonfarm residential loans totaling $5.11 million in 2010 compared to eight nonfarm residential loans totaling $8.5 million in 2009.   The remainder of the charge-offs were made up of several small loans, most of which were real estate dependent loans and commercial loans.

Provisions continue to be higher than normal primarily due to the elevated risk of residential real estate and land development loans that began during 2007 with the housing and real estate downturn.  Nonperforming assets as a percentage of total loans and foreclosed assets increased to 5.91 percent at December 31, 2010 compared to 5.62 percent at December 31, 2009.  Total nonperforming assets at December 31, 2010 were $49.3 million, of which $22.0 million were construction, land development and other land loans; $5.0 million were 1-4 family residential properties; $0.3 million were multifamily residential properties; $18.9 million were nonfarm nonresidential properties; $2.0 million were farmland properties; and the remainder of nonperforming assets totaling $1.1 million were commercial and consumer loans.  All of the classified loans greater than $50 thousand, including the nonperforming loans, are reviewed throughout the quarter for impairment review.  Total nonperforming assets at December 31, 2009 were $53.4 million, of which $24.5 million were construction, land development  and other land loans; $1.4 million were farmland; $6.9 million were 1-4 family residential properties; $3.1 million were multifamily properties; $16.2 million were nonfarm nonresidential properties; and the remainder of nonperforming assets totaling $1.3 million were commercial and consumer loans.  The allowance for loan losses of $28.3 million at December 31, 2010 was 3.48 percent of total loans which compares to $31.4 million at December 31, 2009, or 3.37 percent of total loans and to $17.0 million at December 31, 2008, or 1.77 percent.  Unusually high levels of loan loss provision have been required as Company management addresses asset quality deterioration.  While the nonperforming loans as a percentage of total loans was 3.56 percent, 3.60 percent, and 3.68 percent, respectively as of December 31, 2010, December 31, 2009 and December 31, 2008, the Company’s allowance for loan losses as a percentage of nonperforming loans was 97.78 percent, 93.55 percent, and 48.10 percent, respectively as of December 31, 2010, December 31, 2009 and December 31, 2008.  We continue to identify new problem loans, though at a slower pace than the previous year.

While the allowance for loan losses decreased from $31.40 million, or 3.37 percent of total loans at December 31, 2009 to $28.28 million, or 3.48 percent of total loans at December 31, 2010, the company also reflected a decrease in nonperforming loans from $33.57 million at December 31, 2009 to $28.92 million at December 31, 2010.  The allowance for loan losses is inherently judgmental, nevertheless the Company’s methodology is consistently applied based on standards for current accounting by creditors for impairment of a loan and allowance allocations determined in accordance with accounting for contingencies.  Loans individually selected for impairment review consist of all loans classified substandard that are $50 thousand and over.  The remaining portfolio is analyzed based on historical loss data.  Loans selected for individual review where no individual impairment amount is identified do not receive a contribution to the allowance for loan losses based on historical data.  Historical loss rates are updated annually to provide the annual loss rate which is applied to the appropriate portfolio grades.  In addition, the Company has also segmented its’ real estate portfolio into thirteen separate categories and captured loan loss experience for each category.  Most of the Company’s charge-offs the past two years have been real estate dependent loans and we believe this segmentation provides more accuracy in determining allowance for loan loss adequacy.  During fourth quarter 2009, the Company changed its methodology for the look back period for determination of charge-off experience.

 
- 46 -

Part II (Continued)
Item 7 (Continued)

Previously, the Company utilized the average of the charge-off experience for the preceding five years, but changed to a one year look back.  The current methodology has resulted in significant loan loss provisions for 2010 and 2009, but was considered prudent by management to adhere to guidance by regulatory authorities to lower the look back period in light of current economic condition.  In addition, environmental factors as discussed earlier are evaluated for any adjustments needed to the allowance for loan losses determination produced by individual loan impairment analysis and remaining portfolio segmentation analysis.  The allowance for loan losses determination is based on reviews throughout the year and an environmental analysis at year end.

As part of our monitoring and evaluation of collateral values for nonperforming and problem loans in determining adequate allowance for loan losses, regional credit officers along with lending officers submit monthly problem loan reports for loans greater than $50 thousand in which impairment is identified.  This process typically determines collateral shortfall based upon local market real estate value estimates should the collateral be liquidated.  Once the loan is deemed uncollectible, it is transferred to our problem loan department for workout, foreclosure and/or liquidation.  The problem loan department gets a current appraisal on the property in order to record a fair market value (less selling expenses) when the property is foreclosed on and moved into other real estate.  Trends the past several quarters reflect a decrease in collateral values from two to three years ago on improved properties of fifteen to twenty five percent and on land development and land loans of thirty to fifty percent.  The significant reduction in collateral values on nonperforming assets has resulted in higher loan loss provisions and charge-offs particularly during 2010.

Net charge-offs in 2010 decreased $12.59 million compared to the same period a year ago.  Net charge-offs were fairly consistent during 2007, 2006 and 2005; however, the net charge-offs increased significantly beginning in 2008 primarily from the write-down of nonperforming credits to appraised values.  The increase the past three years has primarily been with real estate dependent loans as problem credits went through the collection process to resolution.

The allowance for loan losses is $3.1 million less than the prior year end, after factoring in net-charge-offs, additional provisions, and the normal determination for an adequate funding level.  Management believes the level of the allowance for loan losses was adequate as of December 31, 2010.  Should any of the factors considered by management in evaluating the adequacy of the allowance for loan losses change, the Company’s estimate of probable loan losses could also change, which could affect the level of future provisions for loan losses.

 
- 47 -

Part II (Continued)
Item 7 (Continued)

Investment Portfolio

The following table presents carrying values of investment securities held by the Company as of December 31, 2010, 2009 and 2008.
 
   
2010
    
2009
    
2008
  
                   
                   
Obligations of States and Political Subdivisions
   $ 3,305     $ 4,121     $ 9,110  
Corporate Obligations
     1,986       4,138       6,176  
Asset Backed Securities
     132       132       668  
                         
Investment Securities
     5,423       8,391       15,954  
                         
Mortgage Backed Securities
     298,463       258,909       191,750  
Total Investment Securities and
                        
Mortgage Backed Securities
   $ 303,886     $ 267,300     $ 207,704  
 
The following table represents expected maturities and weighted-average yields of investment securities held by the Company as of December 31, 2010.  (Mortgage-backed securities are based on the average life at the projected speed, while Agencies, State and Political Subdivisions and Corporate Obligations 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
  
   
Amount
    
Yield
    
Amount
    
Yield
    
Amount
    
Yield
    
Amount
    
Yield
  
                                                 
Mortgage Backed Securities
   $ 16,860       1.54 %   $ 217,411       2.55 %   $ 56,683       2.63 %   $ 7,509       3.64 %
Obligations of State and Political Subdivisions
     1,043       4.08       1,224       3.10       1,038       3.47       --       --  
Corporate Obligations
     --       --       --       --       1,101       5.67       885       3.78  
Asset-Backed Securities
     --       --       --       --       --       --       132       --  
Total Investment Portfolio
   $ 17,903       1.69 %   $ 218,635       2.55 %   $ 58,822       2.70 %   $ 8,526       3.46 %

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 99.9 percent of its portfolio classified as available for sale.

At December 31, 2010, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10 percent of the Company’s shareholders’ equity.

 
- 48 -

Part II (Continued)
Item 7 (Continued)

The average yield of the securities portfolio was 2.59 percent in 2010 compared to 3.48 percent in 2009 and 4.84 percent in 2008.  The decrease in the average yield from 2009 to 2010 primarily resulted from the turnover of the securities portfolio resulting in the investment of new funds at lower rates.  The decrease in the average yield from 2008 to 2009 primarily resulted from the investment of new funds at lower rates.  The Company has increased its securities portfolio the past two years as the sluggish economy has resulted in lower loan demand, thus more funding available for investment in the securities portfolio.

Deposits

The following table presents the average amount outstanding and the average rate paid on deposits by the Company for the years 2010, 2009 and 2008.

   
2010
    
2009
    
2008
  
   
Average
    
Average
    
Average
    
Average
    
Average
    
Average
  
   
Amount
    
Rate
    
Amount
    
Rate
    
Amount
    
Rate
  
Noninterest-Bearing Demand Deposits
   $ 82,160           $ 71,561           $ 73,569        
Interest-Bearing Demand and Savings
     251,537       0.65 %     237,045       0.73 %     220,655       1.44 %
Time Deposits
     700,558       2.22 %     708,315       2.81 %     692,277       4.28 %
                                                 
Total Deposits
   $ 1,034,255       1.66 %   $ 1,016,921       2.13 %   $ 986,501       3.33 %
 
The following table presents the maturities of the Company’s other time deposits as of December 31, 2010.

   
Other Time Deposits $100,000 or Greater
    
Other Time Deposits Less Than $100,000
    
Total
  
                   
Months to Maturity
                  
3 or Less
   $ 54,003     $ 73,297     $ 127,30056  
Over 3 through 12
     162,653       190,493       353,146  
Over 12 Months
     81,354       121,880       203,234  
                         
    $ 298,010     $ 385,670     $ 683,680  

 
- 49 -

Part II (Continued)
Item 7 (Continued)

Average deposits increased $17.33 million in 2010 compared to 2009 and increased $30.4 million in 2009 compared to 2008.  The increase in 2010 included $10.60 million, or 14.8 percent in noninterest bearing deposits and $14.49 million, or 6.1 percent in interest-bearing demand and savings while at the same time time deposits decreased $7.76 million, or 1.1 percent.  The increase in 2009 included $16.4 million or 7.4 percent in interest-bearing demand and savings and $16.0 million or 2.3 percent in time deposits while at the same time noninterest-bearing deposits decreased $2.0 million or 2.7 percent.  Accordingly the ratio of average noninterest-bearing deposits to total average deposits was 7.9 percent in 2010 and 7.0 percent in 2009 and 7.5 percent in 2008.  The general decrease in market rates in 2010 had the effect of (i) decreasing the average cost of interest-bearing deposits by 48 basis points in 2010 compared to 2009 and (ii) mitigating a portion of the impact of decreasing yields on earning assets in the Company’s net interest income in 2010.  The general decrease in market rates in 2009 had the effect of (i) decreasing the average cost of interest bearing deposits by 130 basis points in 2009 compared to 2008 and (ii) mitigating a portion of the impact of decreasing yields on earning assets on the Company’s net interest income in 2009.

Total average interest-bearing deposits increased $6.74 million, or 0.71 percent in 2010 compared to 2009 and increased $32.43 million, or 3.55 percent, in 2009 compared to 2008.  The increase in average deposits in 2010 compared to 2009 was interest-bearing demand and savings deposit accounts.  With the current interest rate environment, it appears that many customers continue to maintain time deposit accounts, with the prevalent investment period continuing to be for one year time deposits.

The Company supplements deposit sources with brokered deposits.  As of December 31, 2010, the Company had $36.33 million, or 3.43 percent of total deposits, in brokered certificates of deposit attracted by external third parties.

 
- 50 -
 
Part II (Continued)
Item 7 (Continued)

Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contractual Obligations

The following table summarizes the Company’s contractual obligations and other commitments to make future payments as of December 31, 2010.  Payments for borrowings do not include interest.  Payments related to leases are based on actual payments specified in the underlying contracts.  Loan commitments and standby letters of credit are presented at contractual amounts; however, since many of these commitments are expected to expire unused or only partially used, the total amounts of these commitments do not necessarily reflect future cash requirements.

   
Payments Due by Period
  
                               
   
1 Year or Less
    
More than 1
Year but Less
Than 3 Years
    
3 Years or
More but Less
Than 5 Years
    
5 Years or
More
    
Total
  
Contractual Obligations:
                              
Subordinated Debentures
   $ ----     $ ----     $ ----     $ 24,229     $ 24,229  
Securities Sold Under Agreements to Repurchase
     20,000       ----       ----       ----       20,000  
Other Secured Borrowings
     4,076       ----       ----       ----       4,076  
Federal Home Loan Bank Advances
     ----       41,000       ----       30,000       71,000  
Operating Leases
     129       212       10       ----       351  
Deposits with Stated Maturity Dates
     480,446       189,879       13,175       180       683,680  
                                         
      504,651       231,091       13,185       54,409       803,336  
                                         
Other Commitments:
                                        
Loan Commitments
     39,457       ----       ----       ----       39,457  
Standby Letters of Credit
     1,540       ----       ----       ----       1,540  
Standby Letters of Credit Issued by Federal Home Loan Bank for bank
     60       ----       ----       ----       60  
                                         
      41,057       ----       ----       ----       41,057  
Total Contractual Obligations and Other Commitments
   $ 545,708     $ 231,091     $ 13,185     $ 54,409     $ 844,393  

In the ordinary course of business, the Banks have 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.

 
- 51 -

Part II (Continued)
Item 7 (Continued)

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 possible loan losses.

Loan commitments outstanding at December 31, 2010 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, 2010 are included in the preceding table.

Capital and Liquidity

At December 31, 2010, shareholders’ equity totaled $93.0 million compared to $89.3 million at December 31, 2009. In addition to net income of $474 thousand, other significant changes in shareholders’ equity during 2010 included $5.08 million from proceeds of stock offering, $1.4 million of dividends declared and an increase of $87 thousand resulting from the stock grant plan. The accumulated other comprehensive income component of shareholders’ equity totaled $(600) thousand at December 31, 2010 compared to $(100) thousand at December 31, 2009. 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 stockholders’ equity less goodwill.  Tier 2 capital consists of certain convertible, subordinated and other qualifying debt and the allowance for loan losses up to 1.25 percent 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, 2010 was 13.57 percent and total Tier 1 and 2 risk-based capital was 14.85 percent.  Both of these measures compare favorably with the regulatory minimum of 4 percent for Tier 1 and 8 percent for total risk-based capital.  The Company’s Tier 1 leverage ratio as of December 31, 2010 was 8.59 percent, which exceeds the required ratio standard of 4 percent.

For 2010, average capital was $94.5 million, representing 7.44 percent of average assets for the year.  This compares to 8.21 percent for 2009.

 
- 52 -

Part II (Continued)
Item 7 (Continued)

The Company did not pay any common stock dividends in 2010.  The Company paid a quarterly dividend of $0.10, $0.05 per common share during the first and second quarter of 2009, respectively, and suspended dividend payments beginning in the third quarter of 2009.  This equates to no meaningful dividend payout ratio in 2010 or 2009.

The Company declared a quarterly dividend of $350 thousand, $350 thousand, $350 thousand and $350 thousand on preferred stock during the first, second, third and fourth quarters of 2010, respectively.  The Company declared a quarterly dividend of $315 thousand, $350 thousand, $350 thousand and $350 thousand on preferred stock during the first, second, third and fourth quarters of 2009, respectively.  The Company had no preferred stock until January 2009 when shares were issued to U.S. Treasury.

The Company, primarily through the actions of its subsidiary banks, 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.

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 noncore 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 Banks.

The investment portfolio provides a ready means to raise cash if liquidity needs arise.  As of December 31, 2010, the Company held $303.8 million in bonds (excluding FHLB stock), at current market value in the available for sale portfolio.  At December 31, 2009, the available for sale bond portfolio totaled $267.2    million.  Only marketable investment grade bonds are purchased.  Although most of the Banks’ bond portfolios are encumbered as pledges to secure various public funds deposits, repurchase agreements, and for other purposes, management can restructure and free up investment securities for a 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 76.8 percent as of December 31, 2010 and 88.1 percent at December 31, 2009.  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, 2010 and December 31, 2009 were 70.5 percent and 78.4 percent, 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, 2010 and December 31, 2009, the Banks had $298.0 million and $364.1 million, respectively, in certificates of deposit of $100,000 or more.  These larger deposits represented 28.1 percent and 34.4 percent of respective total deposits.  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.

 
- 53 -

Part II (Continued)
Item 7 (Continued)

The Company has supplemented deposit sources with brokered deposits the last several years.  As of December 31, 2010, the Company had $36.33 million, or 3.43 percent of total deposits, in brokered certificates of deposit attracted by external third parties.  Additionally, the banks use external wholesale or Internet services to obtain out-of-market certificates of deposit at competitive interest rates when funding is needed.  As of December 31, 2010, the Company had $61.11 million, or 5.77 percent of total deposits, in external wholesale or internet network deposits.

To plan for contingent sources of funding not satisfied by both local and out-of-market deposit balances, Colony and its subsidiaries 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 banks have 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.

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, maturities and cash flow from securities held to maturity, 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.

 
- 54 -
 
Part II (Continued)
Item 7 (Continued)

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. 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 borrowing by financial institutions and their affiliates. These methods are used in varying degrees and combinations to affect directly the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the Federal Reserve Board have a material effect on the earnings of the Company.

Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future; however, the Company cannot accurately predict the nature, timing or extent of any effect such policies may have on its future business and earnings.

Recently Issued Accounting Pronouncements

See Note 1 - Summary of Significant Accounting Policies under the section headed Changes in Accounting Principles and Effects of New Accounting Pronouncements included in the Notes to Consolidated Financial Statements.

 
- 55 -

Part II (Continued)
Item 7 (Continued)

Quantitative and Qualitative Disclosures About Market Risk
AVERAGE BALANCE SHEETS

         
2010
                
2009
                
2008
        
   
Average
    
Income/
    
Yields/
    
Average
    
Income/
    
Yields/
    
Average
    
Income/
    
Yields/
  
   
Balances
    
Expense
    
Rates
    
Balances
    
Expense
    
Rates
    
Balances
    
Expense
    
Rates
  
Assets
                                                      
Interest-Earning Assets
                                                      
Loans, Net of Unearned Income (1)
   $ 865,184     $ 51,859       5.99 %   $ 962,677     $ 57,776       6.00 %   $ 958,582     $ 66,900       6.98 %
Investment Securities
                                                                        
Taxable
     264,494       6,762       2.56       232,590       7,934       3.41       158,287       7,582       4.79  
Tax-Exempt (2)
     2,521       140       5.55       6,378       374       5.86       10,245       582       5.68  
Total Investment Securities
     267,015       6,902       2.59       238,968       8,308       3.48       168,532       8,164       4.84  
Interest-Bearing Deposits
     21,911       22       0.10       788       1       0.13       1,235       27       2.19  
Federal Funds Sold
     38,809       95       0.25       9,392       24       0.26       10,499       273       2.60  
Other Interest-Earning Assets
     6,297       38       0.60       6,328       20       0.32       6,079       298       4.90  
Total Interest-Earning Assets
     1,199,216       58,916       4.92       1,218,153       66,129       5.43       1,144,927       75,662       6.61  
Noninterest-Earning Assets
                                                                        
Cash
     19,347                       21,011                       20,232                  
Allowance for Loan Losses
     (30,445 )                     (19,513 )                     (16,788 )                
Other Assets
     81,489                       66,767                       56,475                  
Total Noninterest-Earning Assets
     70,391                       68,265                       59,919                  
Total Assets
   $ 1,269,607                     $ 1,286,418                     $ 1,204,846                  
Liabilities and Stockholders' Equity
                                                                        
Interest-Bearing Liabilities
                                                                        
Interest-Bearing Demand and Savings
   $ 251,537     $ 1,636       0.65 %   $ 237,045     $ 1,736       0.73 %   $ 220,655     $ 3,185       1.44 %
Other Time
     700,558       15,576       2.22       708,315       19,907       2.81       692,277       29,617       4.28  
Total Interest-Bearing Deposits
     952,095       17,212       1.81       945,360       21,643       2.29       912,932       32,802       3.59  
Other Interest-Bearing Liabilities
                                                                        
Other Borrowed Money
     85,920       3,074       3.58       91,000       3,103       3.41       85,912       3,336       3.88  
Subordinated Debentures
     24,229       516       2.13       24,229       659       2.72       24,229       1,271       5.25  
Federal Funds Purchased and
                                                                        
Repurchase Agreements
     26,070       721       2.77       42,452       876       2.06       18,200       514       2.82  
Total Other Interest Bearing Liabilities
     136,219       4,311       3.17       157,681       4,638       2.94       128,341       5,121       3.99  
Total Interest-Bearing Liabilities
     1,088,314       21,523       1.98       1,103,041       26,281       2.38       1,041,273       37,923       3.64  
Noninterest-Bearing Liabilities and Stockholders' Equity
                                                                        
Demand Deposits
     82,160                       71,561                       73,569                  
Other Liabilities
     4,681                       6,161                       5,632                  
Stockholders' Equity
     94,452                       105,655                       84,372                  
Total Noninterest-Bearing Liabilities and Stockholders' Equity
     181,293                       183,377                       163,573                  
Total Liabilities and Stockholders' Equity
   $ 1,269,607                     $ 1,286,418                     $ 1,204,846                  
Interest Rate Spread
                     2.94 %                     3.05 %                     2.97 %
Net Interest Income
           $ 37,393                     $ 39,848                       37,739          
Net Interest Margin
                     3.12 %                     3.27 %                     3.30 %

(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 $130, $155 and $168 for 2010, 2009 and 2008 respectively, are included in interest on loans.  The adjustments are based on a federal tax rate of 34 percent.

(2)
Taxable-equivalent adjustments totaling $48, $127 and $198 for 2010, 2009, and 2008 respectively, are included in tax-exempt interest on investment securities. The adjustments are based on a federal tax rate of 34 percent with appropriate reductions for the effect of disallowed interest expense incurred in carrying tax-exempt obligations.

 
- 56 -

Part II (Continued)
Item 7 (Continued)

Colony Bankcorp, Inc. and Subsidiaries
Interest Rate Sensitivity

The following table is an analysis of the Company’s interest rate-sensitivity position at December 31, 2010.  The interest-bearing rate-sensitivity gap, which is the difference between interest-earning assets and interest-bearing liabilities by repricing period, is based upon maturity or first repricing opportunity, along with a cumulative interest rate-sensitivity gap.  It is important to note that the table indicates a position at a specific point in time and may not be reflective of positions at other times during the year or in subsequent periods.  Major changes in the gap position can be, and are, made promptly as market outlooks change.

   
Assets and Liabilities Repricing Within
  
   
3 Months
    
4 to 12
          
1 to 5
    
Over 5
        
   
or Less
    
Months
    
1 Year
    
Years
    
Years
    
Total
  
                                     
EARNING ASSETS:
                                    
Interest-bearing Deposits
   $ 50,727     $ ---     $ 50,727     $ ---     $ ---     $ 50,727  
Federal Funds Sold
     32,536       ---       32,536       ---       ---       32,536  
Investment Securities
     1,017       15,171       16,188       209,532       78,166       303,886  
Loans, Net of Unearned Income
     335,774       181,483       517,257       286,113       9,819       813,189  
Other Interest-bearing Assets
     6,064       ---       6,064       ---       ---       6,064  
Securities Purchased Under Agreements To Resell
     5,000       ---       5,000       ---       ---       5,000  
                                                 
Total Interest-earning Assets
     431,118       196,654       627,772       495,645       87,985       1,211,402  
                                                 
INTEREST-BEARING LIABILITIES:
                                                
Interest-bearing Demand Deposits (1)
     235,855       ---       235,855       ---       ---       235,855  
Savings (1)
     36,630       ---       36,630       ---       ---       36,630  
Time Deposits
     127,300       353,146       480,446       203,054       180       683,680  
Other Borrowings (2)
     4,076       ---       4,076       41,000       30,000       75,076  
Subordinated Debentures
     24,229       ---       24,229       ---       ---       24,229  
Securities Sold Under Agreement To Repurchase
     ---       20,000       20,000       ---       ---       20,000  
                                                 
Total Interest-bearing Liabilities
     428,090       373,146       801,236       244,054       30,180       1,075,470  
                                                 
Interest Rate-Sensitivity Gap
     3,028       (176,492 )     (173,464 )     251,591       57,805       135,932  
                                                 
Cumulative Interest-Sensitivity Gap
   $ 3,028     $ (173,464 )   $ (173,464 )   $ 78,127     $ 135,932          
                                                 
Interest Rate-Sensitivity Gap as a Percentage of Interest-Earning Assets
     0.25 %     (14.57 )%     (14.32 )%     20.77 %     4.77 %        
                                                 
                                                 
Cumulative Interest Rate-Sensitivity as a Percentage of Interest-Earning Assets
     0.25 %     (14.32 )%     (14.32 )%     6.45 %     11.22 %        

 
(1)
Interest-bearing Demand and Savings Accounts for repricing purposes are considered to reprice within 3 months or less.

 
(2)
Short-term borrowings for repricing purposes are considered to reprice within 3 months or less.

 
- 57 -

Part II (Continued)
Item 7 (Continued)

The foregoing table indicates that we had a one year negative gap of ($173) million, or (14.32) percent of total assets at December 31, 2010.  In theory, this would indicate that at December 31, 2010, $173 million more in liabilities than assets would reprice if there were a change in interest rates over the next 365 days.  Thus, if interest rates were to decline, the gap would indicate a resulting increase in net interest margin.  However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity.  In addition, the interest rate spread between an asset and our supporting liability can vary significantly while the timing of repricing of both the assets and our supporting liability can remain the same, thus impacting net interest income.  This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposits.

Gap analysis has certain limitations.  Measuring the volume of repricing or maturing assets and liabilities does not always measure the full impact on the portfolio value of equity or net interest income.  Gap analysis does not account for rate caps on products; dynamic changes such as increasing prepay speeds as interest rates decrease, basis risk, or the benefit of non-rate funding sources.  The majority of our loan portfolio reprices quickly and completely following changes in market rates, while non-term deposit rates in general move slowly and usually incorporate only a fraction of the change in rates.  Products categorized as non-rate sensitive, such as our noninterest-bearing demand deposits, in the gap analysis behave like long term fixed rate funding sources.  Both of these factors tend to make our actual behavior more asset sensitive than is indicated in the gap analysis.  In fact, we experience higher net interest income when rates rise, opposite what is indicated by the gap analysis.  Also, during the recent period of declines in interest rates, our net interest margin has declined.  Therefore, management uses gap analysis, net interest margin analysis and market value of portfolio equity as our primary interest rate risk management tools.

The Company is now utilizing FTN Financial Asset/Liability Management Analysis for a more dynamic analysis of balance sheet structure.  The Company has established earnings at risk for net interest income in a +/- 200 basis point rate shock to be no more than a fifteen percent percentage change.  The most recent analysis as of December 31, 2010 indicates that net interest income would deteriorate 22.79 percent with a 200 basis point decrease and would improve 9.82 percent with a 200 basis point increase.  Though slightly outside policy, the increased exposure to declining rates is mitigated by the low likelihood of a further decline of 200 basis points from the current rate levels.  The Company has established equity at risk in a +/- 200 basis point rate shock to be no more than a twenty percent percentage change.  The most recent analysis as of December 31, 2010 indicates that net economic value of equity percentage change would decrease 3.91 percent with a 200 basis point increase and would decrease 12.43 percent with a 200 basis point decrease.  The Company has established its one year gap to be 0.80 percent to 1.20 percent.  The most recent analysis as of December 31, 2010 indicates a one year gap of 0.89 percent.  The analysis reflects net interest margin compression in a declining interest rate environment.  Given that interest rates have basically “bottomed-out” with the recent Federal Reserve action, the Company is anticipating interest rates to increase in the future though we believe that interest rates will remain flat most of 2011.  The Company is focusing on areas to minimize margin compression in the future by minimizing longer term fixed rate loans, shortening on the yield curve with investments, securing longer term FHLB advances, securing certificates of deposit for longer terms and focusing on reduction of nonperforming assets.

 
- 58 -

Part II (Continued)
Item 7 (Continued)

Return on Assets and Stockholder’s Equity

The following table presents selected financial ratios for each of the periods indicated.

   
Year Ended December 31
  
   
2010
    
2009
    
2008
  
                   
Return on Average Assets(1)
     (0.07 )%     (1.60 )%     0.17 %
                         
Return on Average Equity(1)
     (0.98 )     (19.45 )     2.40  
                         
Dividend Payout
  
NM(2)
    
NM(2)
       139.29  
                         
Equity to Assets
     7.29       6.83       6.64  
                         
Dividends Declared
   $0.00     $0.146     $0.39  

 
(1)
Computed using net income available to common shareholders.

 
(2)
Not meaningful due to net loss recorded.

Future Outlook

During the past three years, the financial services industry experienced tremendous adversities as a result of the collapse of the real estate markets across the country.  Colony, like most banking companies, has been affected by these economic challenges that started with a rapid stall of real estate sales and development throughout the country.  Focus during 2010 and again in 2011 will be directed toward addressing and bringing resolution to problem assets.

During 2009, Colony made significant strides to reduce our operating leverage by seeking a more efficient structure and more consistent products and services throughout the company.  We successfully completed the consolidation of our seven banking subsidiaries into the single banking company – Colony Bank.  The momentum created by this strategic move will allow Colony to improve future profitability while better positioning the company to take advantage of future growth opportunities.  In response to the elevated risk of residential real estate and land development loans, management has extensively reviewed our loan portfolio with a particular emphasis on our residential and land development real estate exposure.  Senior management with experience in problem loan workouts have been identified and assigned responsibility to oversee the workout and resolution of problem loans.  The Company will continue to closely monitor our real estate dependent loans throughout the company and focus on asset quality during this economic downturn.

 
- 59 -

Part II (Continued)
Item 7 (Continued)

Business
Recent Developments

On October 21, 2010, the Board of Directors of the Company’s subsidiary bank, Colony Bank (the “Bank”), received notification from its primary regulators, the Georgia Department of Banking and Finance (“the Georgia Department”) and the FDIC that the Bank’s latest examination results require a program of corrective action as outlined in a proposed Memorandum of Understanding (“MOU”).  An MOU is characterized by the supervising authorities as an informal action that is neither published nor made publically available by the supervising authorities and is used when circumstances do not warrant formal supervisory action.  An MOU is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act.  The Board of Directors entered into the MOU at its regularly scheduled monthly meeting on November 16, 2010 with the effective date of the MOU being November 23, 2010.

The MOU requires the Bank to develop, implement, and maintain various processes to improve the Bank’s risk management of its loan portfolio, reduce adversely classified assets in accordance with certain timeframes, limit the extension of additional credit to borrowers with adversely classified loans subject to certain exceptions, adopt a written plan to properly monitor and reduce the Bank’s commercial real estate concentration, continue to maintain the Bank’s loan loss provision and review its adequacy at least quarterly, and formulate and implement a written plan to improve and maintain earnings to be forwarded for review by the Georgia Department and FDIC.  The Bank is also required to obtain approval before any cash dividends can be paid.

The Bank has also agreed to have and maintain minimum capital ratios at specified levels higher than those otherwise required by applicable regulations as follows:  Tier 1 capital to total average assets of 8% and total risk-based capital to total risk-weighted assets of 10%.  At December 31, 2010, the Bank’s capital ratios were 8.30% and 14.39%, respectively.

 
- 60 -
 
Part II (Continued)


Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is located in Item 7 under the heading Interest Rate Sensitivity.


Financial Statements and Supplemental Data

The following consolidated financial statements of the Registrant and its subsidiaries are included on exhibit 13 of this Annual Report on Form 10-K:

Consolidated Balance Sheets - December 31, 2010 and 2009

Consolidated Statements of Operations - Years Ended December 31, 2010, 2009 and 2008

Consolidated Statements of Comprehensive Income (Loss) - Years Ended December 31, 2010, 2009 and 2008

Consolidated Statements of Changes in Stockholders’ Equity - Years Ended December 31, 2010, 2009 and 2008

Consolidated Statements of Cash Flows - Years Ended December 31, 2010, 2009 and 2008

Notes to Consolidated Financial Statements

 
- 61 -

Part II (Continued)
Item 8 (Continued)

Quarterly Results of Operations (Unaudited)

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2010 and 2009:

   
Three Months Ended
  
   
December 31
    
September 30
    
June 30
    
March 31
  
2010
  
($ in Thousands, Except Per Share Data)
  
Interest Income
   $ 13,952     $ 14,441     $ 15,123     $ 15,222  
Interest Expense
     5,073       5,379       5,527       5,544  
Net Interest Income
     8,879       9,062       9,596       9,678  
Provision for Loan Losses
     2,500       4,200       3,400       3,250  
Securities Gains
     817       922       97       781  
Noninterest Income
     1,966       1,742       1,922       1,759  
Noninterest Expense
     8,732       9,115       7,696       8,313  
Income (Loss) Before Income Taxes
     430       (1,589 )     519       655  
Provision for Income Taxes
     127       (555 )     (2 )     (29 )
Net Income (Loss)
     303       (1,034 )     521       684  
Preferred Stock Dividends
     350       350       350       350  
Net Income (Loss) Available to Common Stockholders
   $ (47 )   $ (1,384 )   $ 171     $ 334  
                                 
Net Income (Loss) Per Common Share
                                
Basic
   $ (0.01 )   $ (0.16 )   $ 0.02     $ 0.05  
Diluted
   $ (0.01 )   $ (0.16 )   $ 0.02     $ 0.05  
                                 
2009
                                
Interest Income
   $ 16,098     $ 16,650     $ 16,639     $ 16,460  
Interest Expense
     5,835       6,346       6,700       7,400  
Net Interest Income
     10,263       10,304       9,939       9,060  
Provision for Loan Losses
     21,865       4,000       13,355       4,225  
Securities Gains (Losses)
     (521 )     609       221       2,317  
Noninterest Income
     1,731       1,747       1,791       1,649  
Noninterest Expense
     11,040       8,128       8,311       7,365  
Income (Loss) Before Income Taxes
     (21,432 )     532       (9,715 )     1,436  
Provision for Income Taxes
     (7,199 )     164       (3,318 )     358  
Net Income (Loss)
     (14,233 )     368       (6,397 )     1,078  
Preferred Stock Dividends
     350       350       350       315  
Net Income (Loss) Available to Common Stockholders
   $ (14,583 )   $ 18     $ (6,747 )   $ 763  
                                 
Net Income (Loss) Per Common Share
                                
Basic
   $ (2.02 )   $ 0.00     $ (0.94 )   $ 0.11  
Diluted
   $ (2.02 )   $ 0.00     $ (0.94 )   $ 0.11  


Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There was no accounting or disclosure disagreement or reportable event with the current auditors that would have required the filing of a report on Form 8-K.

 
- 62 -

Part II (Continued)

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 are effective.

During the year ended December 31, 2010, there was not any change 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, 2010 based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework, 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, 2010.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.  The Company’s registered public accounting firm was not required to issue an attestation on its internal controls over financial reporting pursuant to the rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

Colony Bankcorp, Inc.
March 15, 2011

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.

See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
- 63 -

Part II (Continued)

Other Information

None.
 
Part III

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 Terry Hester, Colony Bankcorp, Inc., 115 S. Grant Street, Fitzgerald, Georgia 31750.

The remaining information required by this item is incorporated by reference to the Company’s definitive Proxy Statements 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.


Executive Compensation

The information required by this item is incorporated by reference to 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.

 
- 64 -

Part III (Continued)

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

EQUITY COMPENSATION PLAN INFORMATION

Plan Category
  
Number of Securities to be Issued Upon Stock Grant, Exercise of Outstanding Options, Warrants and Rights
(a)
    
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
(b)
    
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
(c)
  
                         
Equity Compensation Plans Approved By Security Holders
                        
                         
2004 Restricted Stock Grant Plan
                     104,342  
                         
Equity Compensation Plans Not Approved by Security Holders
                        
                         
1999 Restricted Stock Grant Plan
                     -  
                         
                      104,342  

The remaining information required by this item is incorporated by reference to 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.


Certain Relationships and Related Transactions and Director Independence

The information required by this item is incorporated by reference to the Company’s definitive Proxy Statements to be filed with Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the fiscal year covered by this Annual Report.


Principal Accounting Fees and Services

The information required by this item is incorporated by reference to the Company’s definitive Proxy Statements to be filed with Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the fiscal year covered by this Annual Report.

 
- 65 -

Part IV

Exhibits, Financial Statement Schedules
 
(a)
The following documents are filed as part of this report:
     
 
(1)
Financial Statements
     
 
(2)
Financial Statements Schedules:
     
     
All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or the related notes.
     
 
(3)
A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this report is shown on the “Exhibit Index” filed herewith.
     
Exhibit Index
     
3.1
Articles of Incorporation
     
   
-filed as Exhibit 3(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.
     
3.2
Bylaws, as Amended
     
   
-filed as Exhibit 3(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.
     
3.3
Articles of Amendment to the Company’s Articles of Incorporation Authorizing Additional Capital Stock in the Form of Ten Million Shares of Preferred Stock
     
   
-filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 000-12436) filed with the Commission on January 13, 2009 and incorporated herein by reference.
     
3.4
Articles of Amendment to the Company’s Articles of Incorporation Establishing the Terms of the Series A Preferred Stock
     
   
-filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436) filed with the Commission on January 13, 2009 and incorporated herein by reference.
     
4.1
Instruments Defining the Rights of Security Holders
     
   
-incorporated herein by reference to page 1 of the Company’s Definitive Proxy Statement for Annual Meeting of Stockholders to be held on April 26, 2005, filed with the Securities and Exchange Commission on March 2, 2005 (File No. 000-12436).
     
4.2
Warrant to Purchase up to 500,000 shares of Common Stock
     
   
-filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on January 13, 2009 and incorporated herein by reference.

 
- 66 -

Part IV (Continued)
Item 15 (Continued)

4.3
Form of Series A Preferred Stock Certificate
     
   
-filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on January 13, 2009 and incorporated herein by reference.
     
10.1
Deferred Compensation Plan and Sample Director Agreement
     
   
-filed as Exhibit 10(a) to the Registrant’s Registration Statement on Form 10 (File No. 0-18486), filed with the Commission on April 25, 1990 and incorporated herein by reference.
     
10.2
Profit-Sharing Plan Dated January 1, 1979
     
   
-filed as Exhibit 10(b) to the Registrant’s Registration Statement on Form 10 (File No. 0-18486), filed with the Commission on April 25, 1990 and incorporated herein by reference.
     
10.3
1999 Restricted Stock Grant Plan and Restricted Stock Grant Agreement
     
   
-filed as Exhibit 10© the Registrant’s Annual Report on Form 10-K (File 000-12436), filed with the Commission on March 30, 2001 and incorporated herein by reference.
   
10.4
2004 Restricted Stock Grant Plan and Restricted Stock Grant Agreement
     
   
-filed as Exhibit C to the Registrant’s Definitive Proxy Statement for Annual Meeting of Stockholders held on April 27, 2004, filed with the Securities and Exchange Commission on March 3, 2004 (File No. 000-12436) and incorporated herein by reference.
   
10.5
Lease Agreement – Mobile Home Tracks, LLC c/o Stafford Properties, Inc. and Colony Bank Worth
     
   
-filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10Q (File No. 000-12436), filed with Securities and Exchange Commission on November 5, 2004 and incorporated herein by reference.
     
10.6
Letter Agreement, Dated January 9, 2009, Including Securities Purchase Agreement – Standard Terms Incorporated by Reference Therein, Between the Company and the United States Department of the Treasury
     
   
-filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on January 13, 2009 and incorporated herein by reference.
     
10.7
Form of Waiver, Executed by Each of Messrs AL D. Ross, Terry L. Hester, Henry F. Brown, Jr., Walter P. Patten and Larry E. Stevenson
     
   
-filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436), filed with the Commission on January 13, 2009 and incorporated herein by reference.

 
- 67 -

Part IV (Continued)
Item 15 (Continued)

Consolidated Financial Statements of Colony Bankcorp, Inc. as of December 31, 2010 and 2009
   
Subsidiaries of the Company
     
Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
Certificate of Chief Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
Certificate of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
Certificate of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 30.15 of 31 CFR Part 30

 
- 68 -


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/ Al D. Ross
  
Al D. Ross
President/Director/Chief Executive Officer
  
   
March 15, 2011
  
Date
  
   
   
/s/ Terry L. Hester
  
Terry L. Hester
Executive Vice-President/Chief Financial Officer/Director
  
   
March 15, 2011
  
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:

/s/ L. Morris Downing
  
March 15, 2011
  
L. Morris Downing, Director
  
Date
  
       
       
/s/ Edward J. Harrell
  
March 15, 2011
  
Edward J. Harrell, Director
  
Date
  
       
       
/s/ Mark H. Massee
  
March 15, 2011
  
Mark H. Massee, Director
  
Date
  
       
       
/s/ James D. Minix
  
March 15, 2011
  
James D, Minix, Director
 
Date
  

 
- 69 -
 
/s/ Charles E. Myler
  
March 15, 2011
  
Charles E. Myler, Director
  
Date
  
       
       
/s/ W. B. Roberts, Jr.
  
March 15, 2011
  
W. B. Roberts, Jr., Director
  
Date
  
       
       
/s/ Jonathan W. R. Ross
  
March 15, 2011
  
Jonathan W. R. Ross, Director
  
Date
  
       
       
/s/ B. Gene Waldron
  
March 15, 2011
  
B. Gene Waldron, Director
  
Date
  
 
 
 - 70 -
EX-13 2 ex13.htm EXHIBIT 13 ex13.htm
EXHIBIT NO. 13
McNair, McLemore, Middlebrooks & Co., LLC
CERTIFIED PUBLIC ACCOUNTANTS
389 Mulberry Street • Post Office Box One • Macon, GA 31202
Telephone (478) 746-6277 • Facsimile (478) 743-6858
www.mmmcpa.com


March 15, 2011


REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Stockholders
Colony Bankcorp, Inc.

We have audited the accompanying consolidated balance sheets of Colony Bankcorp, Inc. and Subsidiary as of December 31, 2010 and 2009 and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Colony Bankcorp, Inc. and Subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine management’s assessment of the effectiveness of Colony Bankcorp, Inc.’s internal control over financial reporting as of December 31, 2010 included under Item 9A, Controls and Procedures, in Colony Bankcorp, Inc.’s Annual Report on Form 10-K and, accordingly, we do not express an opinion thereon.

 
signature
 
McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC

 
- 1 -
 

COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
 
ASSETS

   
2010
    
2009
  
             
Cash and Cash Equivalents
            
Cash and Due from Banks
   $ 16,613,187     $ 25,995,486  
Federal Funds Sold
     32,536,482       16,433,256  
Securities Purchased Under Agreements to Resell
     5,000,000       -  
                 
      54,149,669       42,428,742  
                 
Interest-Bearing Deposits
     50,726,734       6,478,801  
                 
Investment Securities
                
Available for Sale, at Fair Value
     303,837,606       267,246,673  
Held to Maturity, at Cost (Fair Value of $52,941 and $56,999 as of December 31, 2010 and 2009, Respectively)
     48,412       53,906  
                 
      303,886,018       267,300,579  
                 
Federal Home Loan Bank Stock, at Cost
     6,063,500       6,345,400  
                 
Loans
     813,250,673       931,391,626  
Allowance for Loan Losses
     (28,280,077 )     (31,400,641 )
Unearned Interest and Fees
     (61,311 )     (139,597 )
                 
      784,909,285       899,851,388  
                 
Premises and Equipment
     27,147,725       28,826,350  
                 
Other Real Estate (Net of Allowance of $1,293,174 and $467,408 in 2010 and 2009, Respectively)
     20,207,806       19,705,044  
                 
Other Intangible Assets
     295,007       330,756  
                 
Other Assets
     28,272,629       35,822,274  
                 
Total Assets
   $ 1,275,658,373     $ 1,307,089,334  

The accompanying notes are an integral part of these balance sheets.

 
- 2 -
 

COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
 
LIABILITIES AND STOCKHOLDERS’ EQUITY

   
2010
    
2009
  
             
Deposits
            
Noninterest-Bearing
   $ 102,959,423     $ 84,238,839  
Interest-Bearing
     956,164,581       973,347,642  
                 
      1,059,124,004       1,057,586,481  
                 
Borrowed Money
                
Securities Sold Under Agreements to Repurchase
     20,000,000       40,000,000  
Subordinated Debentures
     24,229,000       24,229,000  
Other Borrowed Money
     75,076,010       91,000,000  
                 
      119,305,010       155,229,000  
                 
Other Liabilities
     4,270,776       4,999,229  
                 
                 
Commitments and Contingencies
                
                 
                 
Stockholders’ Equity
                
Preferred Stock, No Par Value; Authorized 10,000,000 Shares, Issued 28,000 Shares
     27,505,910       27,356,964  
Common Stock, Par Value $1; Authorized 20,000,000 Shares, Issued 8,442,958 and 7,229,163 Shares as of December 31, 2010 and 2009, Respectively
     8,442,958       7,229,163  
Paid-In Capital
     29,171,087       25,392,913  
Retained Earnings
     28,479,211       29,553,941  
Restricted Stock - Unearned Compensation
     (40,794 )     (158,548 )
Accumulated Other Comprehensive Income, Net of Tax
     (599,789 )     (99,809 )
                 
      92,958,583       89,274,624  
                 
                 
Total Liabilities and Stockholders’ Equity
   $ 1,275,658,373     $ 1,307,089,334  

The accompanying notes are an integral part of these balance sheets.

 
- 3 -
 

COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31

   
2010
    
2009
    
2008
  
Interest Income
                  
Loans, Including Fees
   $ 51,728,665     $ 57,620,911     $ 66,732,488  
Federal Funds Sold and Securities Purchased Under Agreements to Resell
     95,428       24,438       273,476  
Deposits with Other Banks
     38,085       553       27,452  
Investment Securities
                        
U. S. Government Agencies
     6,613,030       7,626,856       7,140,902  
State, County and Municipal
     103,133       258,545       410,298  
Corporate Obligations
     137,831       296,273       414,319  
Dividends on Other Investments
     21,547       19,846       298,264  
                         
      58,737,719       65,847,422       75,297,199  
Interest Expense
                        
Deposits
     17,212,312       21,642,734       32,801,362  
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
     721,044       876,484       513,961  
Borrowed Money
     3,589,847       3,761,924       4,607,347  
                         
      21,523,203       26,281,142       37,922,670  
                         
Net Interest Income
     37,214,516       39,566,280       37,374,529  
                         
Provision for Loan Losses
     13,350,000       43,445,000       12,937,750  
                         
Net Interest Income (Loss) After Provision for Loan Losses
     23,864,516       (3,878,720 )     24,436,779  
                         
Noninterest Income
                        
Service Charges on Deposits
     3,597,416       4,198,019       4,699,616  
Other Service Charges, Commissions and Fees
     1,139,935       986,392       981,124  
Mortgage Fee Income
     313,005       447,989       609,044  
Securities Gains
     2,617,062       2,625,867       1,195,314  
Gain on Sale of SBA Loans
     1,004,585       140,122       11,633  
Other
     1,334,846       1,145,798       1,508,459  
                         
      10,006,849       9,544,187       9,005,190  
Noninterest Expenses
                        
Salaries and Employee Benefits
     14,096,698       14,483,306       16,238,080  
Occupancy and Equipment
     4,422,152       4,287,006       4,190,845  
Directors’ Fees
     495,950       502,575       578,315  
Legal and Professional Fees
     1,369,864       1,362,536       1,379,696  
Foreclosed Property
     4,943,530       2,270,792       382,312  
FDIC Assessment
     1,866,956       2,662,042       603,093  
Goodwill Impairment
     -       2,412,338       -  
Advertising
     743,278       758,458       521,049  
Software
     630,543       498,657       345,995  
Telephone
     703,786       764,373       695,641  
Other
     4,583,606       4,842,139       5,920,889  
                         
      33,856,363       34,844,222       30,855,915  
                         
Income (Loss) Before Income Taxes
     15,002       (29,178,755 )     2,586,054  
                         
Income Taxes (Benefits)
     (459,214 )     (9,994,881 )     557,230  
                         
Net Income (Loss)
     474,216       (19,183,874 )     2,028,824  
Preferred Stock Dividends
     1,400,000       1,365,000       -  
                         
Net Income (Loss) Available to Common Stockholders
   $ (925,784 )   $ (20,548,874 )   $ 2,028,824  
                         
Net Income (Loss) Per Share of Common Stock
                        
Basic
   $ (0.11 )   $ (2.85 )   $ 0.28  
                         
Diluted
   $ (0.11 )   $ (2.85 )   $ 0.28  
                         
Cash Dividends Declared Per Share of Common Stock
   $ 0.00     $ 0.146     $ 0.39  
                         
Weighted Average Shares Outstanding
     8,149,217       7,213,430       7,199,121  

The accompanying notes are an integral part of these statements.

 
- 4 -
 

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

   
2010
    
2009
    
2008
  
                   
Net Income (Loss)
   $ 474,216     $ (19,183,874 )   $ 2,028,824  
                         
Other Comprehensive Income, Net of Tax
                        
Gains on Securities Arising During the Year
     1,227,281       1,257,136       893,158  
Reclassification Adjustment
     (1,727,261 )     (1,733,072 )     (788,907 )
                         
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of  Reclassification Adjustment and Tax Effects
     (499,980 )     (475,936 )     104,251  
                         
Comprehensive Income (Loss)
   $ (25,764 )   $ (19,659,810 )   $ 2,133,075  

The accompanying notes are an integral part of these statements.

 
- 5 -
 


COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

   
Preferred Stock
    
Shares Issued
    
Common Stock
    
Paid-In Capital
    
Retained Earnings
    
Restricted Stock - Unearned Compensation
    
Accumulated Other Comprehensive Income (Loss)
    
Total
  
                                                 
Balance, December 31, 2007
   $ -       7,200,913     $ 7,200,913     $ 24,420,497     $ 52,086,834     $ (237,002 )   $ 271,876     $ 83,743,118  
                                                                 
Issuance of Restricted Stock
             15,500       15,500       220,100               (235,600 )             -  
Forfeiture of Restricted Stock
             (4,100 )     (4,100 )     (69,070 )             73,170               -  
Tax Loss on Restricted Stock
                             (35,844 )                             (35,844 )
Amortization of Unearned Compensation
                                             188,439               188,439  
Change in Net Unrealized Gains (Losses) on     Securities Available for Sale, Net of      Reclassification Adjustment and Tax Effects
                                                     104,251       104,251  
Dividends on Common Stock
                                     (2,813,633 )                     (2,813,633 )
Net Income (Loss)
                                     2,028,824                       2,028,824  
                                                                 
Balance, December 31, 2008
     -       7,212,313       7,212,313       24,535,683       51,302,025       (210,993 )     376,127       83,215,155  
                                                                 
Issuance of Preferred Stock
     27,215,218                       784,782                               28,000,000  
Issuance of Restricted Stock
             18,850       18,850       132,421               (151,271 )             -  
Forfeiture of Restricted Stock
             (2,000 )     (2,000 )     (14,050 )             16,050               -  
Tax Loss on Restricted Stock
                             (45,923 )                             (45,923 )
Amortization of Unearned Compensation
                                             187,666               187,666  
Change in Net Unrealized Gains (Losses) on     Securities Available for Sale, Net of      Reclassification Adjustment and Tax Effects
                                                     (475,936 )     (475,936 )
Accretion of Fair Value of Warrant
     141,746                               (141,746 )                     -  
Dividends on Preferred Shares
                                     (1,365,000 )                     (1,365,000 )
Dividends on Common Stock
                                     (1,057,464 )                     (1,057,464 )
Net Income (Loss)
                                     (19,183,874 )                     (19,183,874 )
                                                                 
Balance, December 31, 2009
     27,356,964       7,229,163       7,229,163       25,392,913       29,553,941       (158,548 )     (99,809 )     89,274,624  
                                                                 
Issuance of Common Stock
             1,216,545       1,216,545       3,861,710                               5,078,255  
Forfeiture of Restricted Stock
             (2,750 )     (2,750 )     (27,570 )             30,320               -  
Tax Loss on Restricted Stock
                             (55,966 )                             (55,966 )
Amortization of Unearned Compensation
                                             87,434               87,434  
Change in Net Unrealized Gains (Losses) on     Securities Available for Sale, Net of      Reclassification Adjustment and Tax Effects
                                                     (499,980 )     (499,980 )
Accretion of Fair Value of Warrant
     148,946                               (148,946 )                     -  
Dividends on Preferred Shares
                                     (1,400,000 )                     (1,400,000 )
Net Income (Loss)
                                     474,216                       474,216  
                                                                 
Balance, December 31, 2010
   $ 27,505,910       8,442,958     $ 8,442,958     $ 29,171,087     $ 28,479,211     $ (40,794 )   $ (599,789 )   $ 92,958,583  
 
The accompanying notes are an integral part of these statements.

 
- 6 -
 
 
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31

   
2010
    
2009
    
2008
  
Cash Flows from Operating Activities
                  
Net Income (Loss)
   $ 474,216     $ (19,183,874 )   $ 2,028,824  
Adjustments to Reconcile Net Income (Loss) to Net
                        
Cash Provided from Operating Activities
                        
Depreciation
     2,140,735       2,092,845       2,028,158  
Amortization and Accretion
     4,043,795       3,807,011       777,051  
Goodwill Impairment
     -       2,412,338       -  
Provision for Loan Losses
     13,350,000       43,445,000       12,937,750  
Deferred Income Taxes
     639,607       (5,869,055 )     (250,215 )
Securities Gains
     (2,617,062 )     (2,625,867 )     (1,195,314 )
(Gain) Loss on Sale of Equipment
     28,146       (82,503 )     (857 )
Loss on Sale of Other Real Estate and Repossessions
     1,827,704       163,642       59,623  
Unrealized Loss on Other Real Estate
     1,293,174       467,408       -  
Increase in Cash Surrender Value of Life Insurance
     (56,024 )     (184,905 )     (235,305 )
Change In
                        
Interest Receivable
     1,325,068       699,018       2,875,146  
Prepaid Expenses
     2,006,032       (5,785,826 )     18,698  
Interest Payable
     (452,764 )     (1,256,460 )     (816,819 )
Accrued Expenses and Accounts Payable
     (148,591 )     315,879       (815,214 )
Other
     3,500,575       (3,360,614 )     (121,645 )
                         
      27,354,611       15,054,037       17,289,881  
Cash Flows from Investing Activities
                        
Interest-Bearing Deposits in Other Banks
     (44,247,933 )     (6,331,814 )     1,319,703  
Purchase of Investment Securities Available for Sale
     (380,490,982 )     (488,257,181 )     (157,485,718 )
Proceeds from Sale of Investment Securities Available for Sale
     286,387,727       368,575,701       65,298,695  
Proceeds from Maturities, Calls and Paydowns of Investment Securities Available for Sale
     55,648,274       58,599,391       52,666,161  
Held to Maturity
     14,001       12,688       13,573  
Proceeds from Sale of Premises and Equipment
     -       125,512       29,888  
Net Loans to Customers
     88,105,734       (18,973,081 )     (42,435,526 )
Purchase of Premises and Equipment
     (490,256 )     (1,290,324 )     (3,920,230 )
Proceeds from Sale of Other Real Estate and Repossessions
     9,866,063       12,158,095       3,392,500  
Federal Home Loan Bank Stock
     281,900       (73,000 )     (739,700 )
                         
      15,074,528       (75,454,013 )     (81,860,654 )
Cash Flows from Financing Activities
                        
Interest-Bearing Customer Deposits
     (17,183,061 )     43,853,063       (2,995,624 )
Noninterest-Bearing Customer Deposits
     18,720,584       6,741,949       (8,614,892 )
Proceeds from Other Borrowed Money
     23,076,010       19,000,000       122,400,000  
Principal Payments on Other Borrowed Money
     (39,000,000 )     (19,000,000 )     (65,000,000 )
Dividends Paid on Preferred Stock
     (1,400,000 )     (1,190,000 )     -  
Dividends Paid on Common Stock
     -       (1,760,665 )     (2,794,520 )
Issuance of Common Stock
     5,078,255       -       -  
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
     (20,000,000 )     (2,274,000 )     928,000  
Proceeds Allocated to Issuance of Preferred Stock
     -       27,215,218       -  
Proceeds Allocated to Warrants Issued
     -       784,782       -  
                         
      (30,708,212 )     73,370,347       43,922,964  
                         
Net Increase (Decrease) in Cash and Cash Equivalents
     11,720,927       12,970,371       (20,647,809 )
                         
Cash and Cash Equivalents, Beginning
     42,428,742       29,458,371       50,106,180  
                         
Cash and Cash Equivalents, Ending
   $ 54,149,669     $ 42,428,742     $ 29,458,371  

The accompanying notes are an integral part of these statements.

 
- 7 -
 

COLONY BANKCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  Summary of Significant Accounting Policies

Principles of Consolidation

Colony Bankcorp, Inc. (the Company) is a bank holding company located in Fitzgerald, Georgia. The Company merged all of its operations into one operating subsidiary effective August 1, 2008.  The consolidated financial statements include the accounts of Colony Bankcorp, Inc. and its wholly-owned subsidiary, Colony Bank (which includes its wholly-owned subsidiary, Colony Mortgage Corp.), Fitzgerald, Georgia.  All significant intercompany accounts have been eliminated in consolidation. The accounting and reporting policies of Colony Bankcorp, Inc. conform to generally accepted accounting principles and practices utilized in the commercial banking industry.

Nature of Operations

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

Use of Estimates

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

Accounting Standards Codification

The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009.  At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and nonpublic nongovernmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature.  Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered nonauthoritative.  The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.  Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements and note disclosures have been reclassified to conform to statement presentations selected for 2010.  Such reclassifications had no effect on previously reported stockholders’ equity or net income.

 
- 8 -
 

(1)  Summary of Significant Accounting Policies (Continued)

Concentrations of Credit Risk

Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions.  The Company has a concentration in real estate loans as well as a geographic concentration that could pose an adverse credit risk, particularly with the current economic downturn in the real estate market.  At December 31, 2010, approximately 86 percent of the Company’s loan portfolio was concentrated in loans secured by real estate.  A substantial portion of borrowers’ ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector.  The continued downturn of the housing and real estate market that began in 2007 has resulted in an increase of problem loans secured by real estate.  These loans are centered primarily in the Company’s larger MSA markets.  Declining collateral real estate values that secure land development, construction and speculative real estate loans in the Company’s larger MSA markets have resulted in high loan loss provisions in 2010.  In addition, a large portion of the Company’s foreclosed assets are also located in these same geographic markets, making the recovery of the carrying amount of foreclosed assets susceptible to changes in market conditions.  Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis.

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

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

Investment Securities

The Company classifies its investment securities as trading, available for sale or held to maturity.  Securities that are held principally for resale in the near term are classified as trading.  Trading securities are carried at fair value, with realized and unrealized gains and losses included in noninterest income.  Currently, no securities are classified as trading.  Securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost.  All securities not classified as trading or held to maturity are considered available for sale.  Securities available for sale are reported at estimated fair value.  Unrealized gains and losses on securities available for sale are excluded from earnings and are reported, net of deferred taxes, in accumulated other comprehensive income (loss), a component of stockholders’ equity.  Gains and losses from sales of securities available for sale are computed using the specific identification method.  This caption includes securities, which may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital requirements, or unforeseen changes in market conditions.

 
- 9 -
 
 
(1)  Summary of Significant Accounting Policies (Continued)

Investment Securities (Continued)

The Bank evaluates each held to maturity and available for sale security in a loss position for other-than-temporary impairment (OTTI).  In estimating other-than-temporary impairment losses, management considers such factors as the length of time and the extent to which the market value has been below cost, the financial condition of the issuer and the Bank’s intent to sell and whether it is more likely than not that the Bank will be required to sell the security before anticipated recovery of the amortized cost basis.  If the Bank intends to sell or if it is more likely than not that the Bank will be required to sell the security before recovery, the OTTI write-down is recognized in earnings.  If the Bank does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income (loss).

Federal Home Loan Bank Stock

Investment in stock of a Federal Home Loan Bank (FHLB) is required for every federally insured institution that utilizes its services.  FHLB stock is considered restricted, as defined in the accounting standards.  The FHLB stock is reported in the consolidated financial statements at cost.  Dividend income is recognized when earned.

Loans

Loans that the Company has the ability and intent to hold for the foreseeable future or until maturity are recorded at their principal amount outstanding, net of unearned interest and fees.  Loan origination fees, net of certain direct origination costs, are deferred and amortized over the estimated terms of the loans using the straight-line method.  Interest income on loans is recognized using the effective interest method.

A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date.

When management believes there is sufficient doubt as to the collectibility of principal or interest on any loan or generally when loans are 90 days or more past due, the accrual of applicable interest is discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of collection.  Interest payments received on nonaccrual loans are either applied against principal or reported as income, according to management’s judgment as to the collectibility of principal.  Loans are returned to an accrual status when factors indicating doubtful collectibility on a timely basis no longer exist.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.

 
- 10 -
 

(1)  Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

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 is 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 (i) changes in the composition of the loan portfolio, (ii) the extent of loan concentrations within the portfolio, (iii) the effectiveness of the Company’s lending policies, procedures and internal controls, (iv) the experience, abililty and effectiveness of the Company’s lending management and staff, and (v) national and local economics and business conditions.

Loans identified as losses by management, internal loan review and/or Bank examiners are charged off.

During 2010, the Company continued its methodology regarding the look-back period for charge-off experience to one year.  The current methodology has resulted in significant loan loss provisions for 2010 and 2009.

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.

Premises and Equipment

Premises and equipment are recorded at acquisition cost net of accumulated depreciation.

Depreciation is charged to operations over the estimated useful lives of the assets.  The estimated useful lives and methods of depreciation are as follows:

Description
  
Life in Years
  
Method
         
Banking Premises
  
15-40
  
Straight-Line and Accelerated
Furniture and Equipment
  
5-10
  
Straight-Line and Accelerated

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

 
- 11 -
 

(1)  Summary of Significant Accounting Policies (Continued)

Goodwill and Intangible Assets

Goodwill represents the excess of the cost over the fair value of the net assets purchased in a business combination.  The Company did not have any goodwill on its books at December 31, 2010.

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

Transfers of Financial Assets

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

Statement of Cash Flows

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

Securities Purchased and Sold Under Agreements to Resell or Repurchase

The Company purchases certain securities under agreements to resell.  The amounts advanced under these agreements represent short-term loans and are reflected as assets in the consolidated balance sheets.

The Company sells securities under agreements to repurchase.  These repurchase agreements are treated as borrowings.  The obligations to repurchase securities sold are reflected as a liability and the securities underlying the agreements are reflected as assets in the consolidated balance sheets.

Advertising Costs

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

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.

 
- 12 -
 
 
(1)  Summary of Significant Accounting Policies (Continued)

Income Taxes (Continued)

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 bases.  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.  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.

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

Other Real Estate

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

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, represent equity changes from economic events of the period other than transactions with owners and are not reported in the consolidated statements of operations but as a separate component of the equity section of the consolidated balance sheets.  Such items are considered components of other comprehensive income (loss).  Accounting standards codification requires the presentation in the consolidated financial statements of net income and all items of other comprehensive income (loss) as total comprehensive income.

Off-Balance Sheet Credit Related Financial Instruments

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

 
- 13 -
 

(1)  Summary of Significant Accounting Policies (Continued)

Changes in Accounting Principles and Effects of New Accounting Pronouncements

In the first quarter of 2010, a new accounting standard was issued for Fair Value Measurements and Disclosures - Improving Disclosures About Fair Value Measurements.  This standard requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements.  The new standard further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) the Company should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in levels 2 and 3 of the fair value hierarchy.  The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011.  The remaining disclosure requirements and clarifications made by this standard became effective for the Company on January 1, 2010 and did not have a significant impact on the Company’s consolidated financial statements.

In July 2010, a new standard was issued for Receivables - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  This standard requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses.  Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment.  The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, nonaccrual and past due loans and credit quality indicators.  This standard became effective for the Company’s consolidated financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period.  Disclosures that relate to activity during a reporting period will be required for the Corporation’s financial statements that include periods beginning on or after January 1, 2011.  Subsequently, the effective date of the disclosure requirements related to troubled debt restructurings was temporarily deferred to coincide with the effective date of a proposed accounting standards update related to troubled debt restructurings, which is currently expected to be effective for periods ending after June 15, 2011.

 
- 14 -
 

(1)  Summary of Significant Accounting Policies (Continued)

Changes in Accounting Principles and Effects of New Accounting Pronouncements (Continued)

Revised standards on Business Combinations apply to all transactions and other events in which one entity obtains control over one or more other businesses.  An acquirer, upon initially obtaining control of another entity, must recognize the assets, liabilities and any noncontrolling interest in the acquiree at fair value as of the acquisition date.  Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt.  This fair value approach replaces the cost-allocation process whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value.  Acquirers must expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case.  Pre-acquisition contingencies are to be recognized at fair value, unless it is a noncontractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of contingency accounting.  The revised standards are expected to have an impact on the Company’s accounting for business combinations closing on or after January 1, 2009.

Revised standards for Noncontrolling Interest in Consolidated Financial Statements establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  A noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements.  Among other requirements, consolidated net income (loss) must be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.  Also required are disclosures, on the face of the consolidated statements of operations, of the amounts of consolidated net income (loss) attributable to the parent and to the noncontrolling interest.  Requirements were effective for the Company on January 1, 2009 and did not have a significant impact on the Company’s consolidated financial statements.

Revised standards for Recognition and Presentation of Other-Than-Temporary Impairments became effective for the Company in the second quarter of 2009.  These standards amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the consolidated financial statements.  The existing recognition and measurement guidance related to other-than-temporary impairments of equity securities is not amended.  The adoption of these amendments did not have a significant impact on the Company’s consolidated financial statements.

In April 2009, new standards were issued providing additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased.  The standard emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques(s) used, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  Adoption of these standards on June 15, 2009 did not have a significant impact on the Company’s consolidated financial statements.

 
- 15 -
 

(1)  Summary of Significant Accounting Policies (Continued)

Changes in Accounting Principles and Effects of New Accounting Pronouncements (Continued)

New requirements for subsequent events establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  The standards define (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the consolidated financial statements (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its consolidated financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date.  This guidance became effective for the Company’s financial statements for periods ending after June 15, 2009.  Implementation resulted in no significant impact on the Company’s consolidated financial statements.

In June 2009, standards were issued for Transfers and Servicing, which enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets.  The guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets.  The guidance also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset.  The guidance became effective on January 1, 2010 and did not have a material impact on the Company’s consolidated financial statements.

Revised standards for Earnings per Share became effective for the Company on January 1, 2009.  These standards provide that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.  Adoption of the new guidance did not have a significant impact on the Company’s consolidated financial statements.


(2)  Cash and Balances Due from Banks

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

   
2010
    
2009
  
             
Cash on Hand and Cash Items
   $ 8,897,618     $ 8,773,237  
Noninterest-Bearing Deposits with Other Banks
     7,715,569       17,222,249  
                 
    $ 16,613,187     $ 25,995,486  

The Company is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a percentage of deposits.  Reserve balances totaled approximately $916,000 and $555,000 at December 31, 2010 and 2009.

 
- 16 -
 

(3)  Investment Securities

Investment securities as of December 31, 2010 are summarized as follows:

   
Amortized Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Fair Value
  
Securities Available for Sale
                        
U.S. Government Agencies Mortgage-Backed
   $ 299,018,595     $ 1,763,198     $ (2,319,337 )   $ 298,462,456  
State, County and Municipal
     3,248,533       34,391       (26,691 )     3,256,233  
Corporate Obligations
     2,000,000       101,920       (115,430 )     1,986,490  
Asset-Backed Securities
     479,249       -       (346,822 )     132,427  
                                 
    $ 304,746,377     $ 1,899,509     $ (2,808,280 )   $ 303,837,606  
Securities Held to Maturity
                                
State, County and Municipal
   $   48,412     $ 4,529     $   -     $ 52,941  

The amortized cost and fair value of investment securities as of December 31, 2010, by contractual maturity, are shown hereafter.  Expected maturities will differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.

   
Securities
  
   
Available for Sale
    
Held to Maturity
  
   
Amortized Cost
    
Fair Value
    
Amortized Cost
    
Fair Value
  
                         
Due After One Year Through Five Years
   $ 500,087     $ 518,929     $ 48,412     $ 52,941  
Due After Five Years Through Ten Years
     2,740,136       2,844,431       -       -  
Due After Ten Years
     2,487,559       2,011,790       -       -  
                                 
      5,727,782       5,375,150       48,412       52,941  
Mortgage-Backed Securities
     299,018,595       298,462,456       -       -  
                                 
    $ 304,746,377     $ 303,837,606     $ 48,412     $ 52,941  

Investment securities as of December 31, 2009 are summarized as follows:

   
Amortized Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Fair Value
  
Securities Available for Sale
                        
U.S. Government Agencies Mortgage-Backed
   $ 258,432,952     $ 1,535,588     $ (1,059,532 )   $ 258,909,008  
State, County and Municipal
     4,027,322       74,749       (34,843 )     4,067,228  
Corporate Obligations
     4,458,376       64,810       (385,176 )     4,138,010  
Asset-Backed Securities
     479,249       -       (346,822 )     132,427  
                                 
    $ 267,397,899     $ 1,675,147     $ (1,826,373 )   $ 267,246,673  
Securities Held to Maturity
                                
State, County and Municipal
   $ 53,906     $ 3,093     $ -     $ 56,999  

 
- 17 -
 

(3)  Investment Securities (Continued)

Proceeds from sales of investments available for sale were $286,387,727 in 2010, $368,575,701 in 2009 and $65,298,695 in 2008.  Gross realized gains totaled $2,617,062 in 2010, $3,204,669 in 2009 and $1,201,896 in 2008.  Gross realized losses totaled $0 in 2010, $578,802 in 2009 and $6,582 in 2008.

Investment securities having a carrying value approximating $123,789,118 and $157,868,000 as of December 31, 2010 and 2009, respectively, were pledged to secure public deposits and for other purposes.

Information pertaining to securities with gross unrealized losses at December 31, 2010 and 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

   
Less Than 12 Months
    
12 Months or Greater
    
Total
  
   
Fair Value
    
Gross Unrealized Losses
    
Fair Value
    
Gross Unrealized Losses
    
Fair Value
    
Gross Unrealized Losses
  
December 31, 2010
                                    
U.S. Government Agencies Mortgage-Backed
   $ 152,286,738     $ (2,319,337 )   $ -     $ -     $ 152,286,738     $ (2,319,337 )
State, County and Municipal
     1,776,763       (26,691 )     -       -       1,776,763       (26,691 )
Corporate Obligations
     -       -       884,570       (115,430 )     884,570       (115,430 )
Asset-Backed Securities
     -       -       132,427       (346,822 )     132,427       (346,822 )
                                                 
    $ 154,063,501     $ (2,346,028 )   $ 1,016,997     $ (462,252 )   $ 155,080,498     $ (2,808,280 )
                                                 
December 31, 2009
                                                
U.S. Government Agencies Mortgage-Backed
   $ 114,222,812     $ (1,056,502 )   $ 419,159     $ (3,030 )   $ 114,641,971     $ (1,059,532 )
State, County and Municipal
     -       -       1,424,697       (34,843 )     1,424,697       (34,843 )
Corporate Obligations
     -       -       3,073,200       (385,176 )     3,073,200       (385,176 )
Asset-Backed Securities
     -       -       132,427       (346,822 )     132,427       (346,822 )
                                                 
    $ 114,222,812     $ (1,056,502 )   $ 5,049,483     $ (769,871 )   $ 119,272,295     $ (1,826,373 )

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, 2010, the debt securities with unrealized losses have depreciated 1.78 percent from the Company’s amortized cost basis. These securities are guaranteed by either the U.S. Government, other governments or U.S. corporations. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.  The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other than temporary.

 
- 18 -
 

(4)  Loans

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

   
2010
    
2009
  
             
Commercial and Industrial
            
Commercial
   $ 53,220,341     $ 64,485,345  
Industrial
     10,551,791       16,499,065  
                 
Real Estate
                
Commercial Construction
     72,309,231       103,676,394  
Residential Construction
     4,373,011       9,440,662  
Commercial
     362,878,565       395,795,782  
Residential
     207,471,813       231,197,658  
Farmland
     52,778,389       54,965,260  
                 
Consumer and Other
                
Consumer
     33,563,863       38,382,831  
Other
     16,103,669       16,948,629  
                 
Total Loans
   $ 813,250,673     $ 931,391,626  

Commercial and industrial loans are extended to a diverse group of businesses within the Company’s market area.  These loans are often underwritten based on the borrower’s ability to service the debt from income from the business.  Real estate construction loans often require loan funds to be advanced prior to completion of the project.  Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans.  Consumer loans are originated at the bank level.  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 (i) the risk grade assigned to commercial and consumer loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions in the Company’s geographic markets.

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

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

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

 
- 19 -
 

(4)  Loans (Continued)

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

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

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

The following table presents the loan portfolio by credit quality indicator (risk grade) as of December 31, 2010. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

   
Pass
    
Special Mention
    
Substandard
    
Total Loans
  
                         
Commercial and Industrial
                        
Commercial
   $ 48,731,982     $ 2,498,305     $ 1,990,054     $ 53,220,341  
Industrial
     10,059,081       169,381       323,329       10,551,791  
                                 
Real Estate
                                
Commercial Construction
     33,522,709       10,064,271       28,722,251       72,309,231  
Residential Construction
     3,974,130       204,000       194,881       4,373,011  
Commercial
     294,186,347       11,847,051       56,845,167       362,878,565  
Residential
     183,518,173       9,195,410       14,758,230       207,471,813  
Farmland
     49,499,619       1,838,814       1,439,956       52,778,389  
                                 
Consumer and Other
                                
Consumer
     32,046,108       726,933       790,822       33,563,863  
Other
     14,553,167       1,185,260       365,242       16,103,669  
                                 
Total Loans
   $ 670,091,316     $ 37,729,425     $ 105,429,932     $ 813,250,673  

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 $50,000 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.

 
- 20 -
 

(4)  Loans (Continued)

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

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of December 31, 2010:

   
Accruing Loans
                    
   
30-89 Days Past Due
    
90 Days or More Past Due
    
Total Accruing Loans Past Due
    
Nonaccrual Loans
    
Current Loans
    
Total Loans
  
                                     
Commercial and Industrial
                                    
Commercial
   $ 382,728     $ -     $ 382,728     $ 393,823     $ 52,443,790     $ 53,220,341  
Industrial
     100,810       -       100,810       175,062       10,275,919       10,551,791  
                                                 
Real Estate
                                                
Commercial Construction
     1,514,127       -       1,514,127       10,181,795       60,613,309       72,309,231  
Residential Construction
     194,881       -       194,881       -       4,178,130       4,373,011  
Commercial
     11,790,383       -       11,790,383       13,567,530       337,520,652       362,878,565  
Residential
     4,268,098       15,876       4,283,974       3,057,049       200,130,790       207,471,813  
Farmland
     566,868       -       566,868       1,157,528       51,053,993       52,778,389  
                                                 
Consumer and Other
                                                
Consumer
     702,795       3,312       706,107       290,115       32,567,641       33,563,863  
Other
     218,887       -       218,887       79,072       15,805,710       16,103,669  
                                                 
Total Loans
   $ 19,739,577     $ 19,188     $ 19,758,765     $ 28,901,974     $ 764,589,934     $ 813,250,673  

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1,621,700, $2,318,100 and $1,328,600 for the years ended December 31, 2010, 2009 and 2008, respectively.

 
- 21 -
 

(4)  Loans (Continued)

Nonaccrual loans are loans for which principal and interest are doubtful of collection in accordance with original loan terms and for which accruals of interest have been discontinued due to payment delinquency.  Nonaccrual loans totaled $28,901,974 and $33,535,160 as of December 31, 2010 and 2009, respectively, and total recorded investment in loans past due 90 days or more and still accruing interest approximated $19,188 and $31,200, respectively.  During its review of impaired loans, the Company determined the majority of its exposures on these loans were known losses.  As a result, the exposures were charged off, reducing the specific allowances on impaired loans.

The following table details impaired loan data as of December 31, 2010:

   
Impaired Balance
    
Related Allowance
    
Average Recorded Investment
    
Interest Income Recognized
    
Interest Income Collected
  
                               
With No Related Allowance Recorded
                              
Commercial
   $ 258,676     $ -     $ 308,508     $ (987 )   $ 5,465  
Agricultural
     175,062       -       220,716       689       689  
Commercial Construction
     10,181,795       -       11,760,840       7,320       31,963  
Residential Construction
     -       -       8,248       -       -  
Commercial Real Estate
     4,270,905       -       9,041,753       80,585       85,448  
Residential Real Estate
     3,057,049       -       3,931,449       41,420       53,813  
Farmland
     1,157,528       -       645,619       (6,571 )     10,969  
Consumer
     290,115       -       296,301       17,166       19,342  
Other
     79,072       -       129,249       4,550       7,760  
                                         
      19,470,202       -     $ 26,342,683       144,172       215,449  
                                         
With An Allowance Recorded
                                        
Commercial
     135,146       116,159       33,787       (1,125 )     3,316  
Commercial Real Estate
     9,296,626       539,671       2,324,156       341,937       475,999  
                                         
      9,431,772       655,830       2,357,943       340,812       479,315  
                                         
Total
                                        
Commercial
     393,822       116,159       342,295       (2,112 )     8,781  
Agricultural
     175,062       -       220,716       689       689  
Commercial Construction
     10,181,795       -       11,760,840       7,320       31,963  
Residential Construction
     -       -       8,248       -       -  
Commercial Real Estate
     13,567,531       539,671       11,365,909       422,522       561,447  
Residential Real Estate
     3,057,049       -       3,931,449       41,420       53,813  
Farmland
     1,157,528       -       645,619       (6,571 )     10,969  
Consumer
     290,115       -       296,301       17,166       19,342  
Other
     79,072       -       129,249       4,551       7,760  
                                         
    $ 28,901,974     $ 655,830     $ 28,700,626     $ 484,985     $ 694,764  

 
- 22 -
 

(4)  Loans (Continued)

The following table details impaired loan data for 2009:

Total Investment in Impaired Loans
   $ 33,535,160  
         
Less Allowance for Impaired Loan Losses
     (17,000 )
         
Net Investment, December 31
   $ 33,518,160  
         
Average Investment During the Year
   $ 36,394,731  
         
Income Recognized During the Year
   $ 684,940  
         
Income Collected During the Year
   $ 913,255  


(5)  Allowance for Loan Losses

The following table details activity in the allowance for loan losses, segregated by class of loan, for the year ended December 31, 2010.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other loan categories.
 
 
  
Beginning Balance
    
Charge-Offs
    
Recoveries
    
Provision
    
Ending Balance
  
                               
Commercial and Industrial
                              
Commercial
   $ 3,930,760     $ (469,214 )   $ 80,181     $ 873,090     $ 4,414,817  
Industrial
     779,337       (255,627 )     1,377       173,550       698,637  
                                         
Real Estate
                                        
Commercial Construction
     7,402,484       (4,648,124 )     184,868       1,186,815       4,126,043  
Residential Construction
     447,676       -       -       72,090       519,766  
Commercial
     8,790,443       (7,459,619 )     141,931       6,556,770       8,029,525  
Residential
     5,025,839       (2,929,668 )     439,940       3,405,585       5,941,696  
Farmland
     942,019       (271,750 )     7,639       266,415       944,323  
                                         
Consumer and Other
                                        
Consumer
     2,826,058       (548,834 )     245,641       551,355       3,074,220  
Other
     1,256,025       (1,039,618 )     50,313       264,330       531,050  
                                         
    $ 31,400,641     $ (17,622,454 )   $ 1,151,890     $ 13,350,000     $ 28,280,077  

 
- 23 -
 

(5)  Allowance for Loan Losses (Continued)

   
Ending Balance
  
   
Individually Evaluated for Impairment
    
Collectively Evaluated for Impairment
    
Total
  
                   
Commercial and Industrial
                  
Commercial
   $ 336,011     $ 4,078,806     $  4,414,817  
Industrial
     -       698,637       698,637  
                         
Real Estate
                        
Commercial Construction
     3,501,117       624,926       4,126,043  
Residential Construction
     -       519,766       519,766  
Commercial
     7,539,533       489,992       8,029,525  
Residential
     1,561,952       4,379,744       5,941,696  
Farmland
     -       944,323       944,323  
                         
Consumer and Other
                        
Consumer
     3,033       3,071,187       3,074,220  
Other
     -       531,050       531,050  
                         
Total End of Period Allowance Balance
   $ 12,941,646     $ 15,338,431     $ 28,280,077  
                         
Total End of Period Loan Balance
   $ 104,807,855     $ 708,442,818     $ 813,250,673  

The Company determines its individual reserves during its quarterly review of substandard loans.  Although not all loans in the substandard category are considered impaired, this quarterly reassessment often results in the identification of individual reserves which are placed against certain loans as part of management’s allowance for loan loss calculation.

Transactions in the allowance for loan losses for years 2009 and 2008 are summarized below:

   
2009
    
2008
  
             
Balance, Beginning
   $ 17,015,883     $ 15,512,940  
                 
Provision Charged to Operating Expenses
     43,445,000       12,937,750  
Loans Charged Off
     (29,493,324 )     (11,966,439 )
Loan Recoveries
     433,082       531,632  
                 
Balance, Ending
   $ 31,400,641     $ 17,015,883  

 
- 24 -
 

(6)  Premises and Equipment

Premises and equipment are comprised of the following as of December 31:

   
2010
    
2009
  
             
Land
   $ 7,787,667     $ 7,805,167  
Building
     23,790,525       23,642,043  
Furniture, Fixtures and Equipment
     13,737,177       14,365,687  
Leasehold Improvements
     993,086       993,086  
Construction in Progress
     -       6,775  
                 
      46,308,455       46,812,758  
Accumulated Depreciation
     (19,160,730 )     (17,986,408 )
                 
    $ 27,147,725     $ 28,826,350  

Depreciation charged to operations totaled $2,140,735 in 2010, 2,092,845 in 2009 and $2,028,158 in 2008.

Certain Company facilities and equipment are leased under various operating leases.  Rental expense approximated $377,000 for 2010, $365,000 for 2009 and $374,000 for 2008.

Future minimum rental payments as of December 31, 2010 are as follows:

Year Ending December 31
  
Amount
  
       
2011
   $ 129,138  
2012
     122,813  
2013
     88,658  
2014
     10,139  
         
    $ 350,748  

 
- 25 -
 

(7)  Goodwill and Intangible Assets

The following is an analysis of the goodwill and core deposit intangible activity for the years ended December 31:
   
2010
    
2009
  
             
Goodwill
            
Balance, Beginning
   $ -     $ 2,412,338  
Goodwill Impairment Expense
     -       (2,412,338 )
                 
Balance, Ending
   $ -     $ -  

   
Core Deposit Intangible
    
Accumulated Amortization
    
Net Core Deposit Intangible
  
                   
Core Deposit Intangible
                  
Balance, December 31, 2009
   $ 1,056,693     $ (725,937 )   $ 330,756  
                         
Amortization Expense
     -       (35,749 )     (35,749 )
                         
Balance, December 31, 2010
   $ 1,056,693     $ (761,686 )   $ 295,007  

Amortization expense related to the core deposit intangible was $35,749, $35,749 and $35,748 for the years ended December 31, 2010, 2009 and 2008, respectively.

The following table reflects the expected amortization schedule for the core deposit intangible at December 31, 2010:

2011
   $ 35,749  
2012
     35,749  
2013
     35,749  
2014
     35,749  
2015 and Thereafter
     152,011  
         
    $ 295,007  

 
- 26 -
 

(8)  Income Taxes

The components of income tax expense for the years ended December 31 are as follows:

   
2010
    
2009
    
2008
  
                   
Current Federal (Benefit) Expense
   $ (1,037,717 )   $ (4,075,442 )   $ 861,723  
Deferred Federal (Benefit) Expense
     639,607       (5,869,055 )     (250,215 )
                         
Federal Income Tax (Benefit) Expense
     (398,110 )     (9,944,497 )     611,508  
Current State Income Tax (Benefit) Expense
     (61,104 )     (50,384 )     (54,278 )
                         
    $ (459,214 )   $ (9,994,881 )   $ 557,230  

The federal income tax (benefit) expense of $(398,110) in 2010, $(9,944,497) in 2009 and $611,508 in 2008 is less than the income taxes computed by applying the federal statutory rates to income before income taxes.  The reasons for the differences are as follows:

   
2010
    
2009
    
2008
  
                   
Statutory Federal Income Taxes
   $ 5,101     $ (9,920,776 )   $ 879,258  
Tax-Exempt Interest
     (117,586 )     (185,775 )     (239,097 )
Interest Expense Disallowance
     8,400       16,729       35,869  
Premiums on Officers’ Life Insurance
     (134,106 )     (58,906 )     (54,464 )
Meal and Entertainment Disallowance
     24,972       32,068       13,810  
State Income Taxes
     -       -       -  
Goodwill
     -       58,507       -  
Other
     (184,891 )     113,656       (23,868 )
                         
Actual Federal Income Taxes
   $ (398,110 )   $ (9,944,497 )   $ 611,508  

 
- 27 -
 

(8)  Income Taxes (Continued)

Deferred taxes in the accompanying consolidated balance sheets as of December 31 include the following:

   
2010
    
2009
  
Deferred Tax Assets
            
Allowance for Loan Losses
   $ 9,615,226     $ 10,676,218  
Other Real Estate
     511,839       158,919  
Deferred Compensation
     423,233       441,514  
Restricted Stock
     504,772       475,045  
Goodwill
     439,100       486,077  
Other
     470,435       447,472  
                 
      11,964,605       12,685,245  
Deferred Tax Liabilities
                
Premises and Equipment
     (1,184,064 )     (1,340,773 )
Vested Restricted Stock
     (412,715 )     (337,039 )
Other
     (4,185 )     (4,185 )
                 
      (1,600,964 )     (1,681,997 )
Deferred Tax Assets (Liabilities) on Unrealized Securities Gains (Losses)
     308,982       51,417  
                 
Net Deferred Tax Assets
   $ 10,672,623     $ 11,054,665  

As discussed in Note 1, certain positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities.  An analysis of activity related to unrecognized taxes follows as of December 31, 2010.

Balance, Beginning
   $ 221,584  
         
Positions Taken During the Current Year
     17,259  
Reductions Resulting from Lapse of Statutes of Limitation
     (160,722 )
         
Balance, Ending
   $ 78,121  

The net reduction of $143,463 is included in income tax benefits for the year ended December 31, 2010.

 
- 28 -
 
 
(9)  Fair Value Measurements

Generally accepted accounting principles related to Fair Value Measurements defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances 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.

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

Impaired loans - Fair value accounting principles also apply to loans measured for impairment, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent).  Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

Other Real Estate - Certain foreclosed assets, upon initial recognition, are remeasured and reported at fair value less cost to sale through a charge-off to the allowance for loan losses based on the fair value of the foreclosed asset.  The fair value of a foreclosed asset is estimated using level 2 inputs based on observable market price or appraised value.  When appraised value is not available and management determines the fair value, the fair value of the foreclosed assets is considered level 3.

 
- 29 -
 

(9)  Fair Value Measurements (Continued)

Assets (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring 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, 2010 and 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

         
Fair Value Measurements at Reporting Date Using
  
2010
  
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
   $ 298,462,456     $ -     $ 298,462,456     $ -  
State, County and Municipal
     3,256,233       -       3,256,233       -  
Corporate Obligations
     1,986,490       -       1,101,920       884,570  
Asset-Backed Securities
     132,427       -       -       132,427  
                                 
    $ 303,837,606     $ -     $ 302,820,609     $ 1,016,997  
Nonrecurring
                                
Impaired Loans
   $ 28,246,144     $ -     $   -     $ 28,246,144  
                                 
Other Real Estate
   $ 20,207,806     $ -     $ 20,207,806     $ -  
                                 
2009
                                
                                 
Recurring
                                
Securities Available for Sale
                                
U.S. Government Agencies Mortgage-Backed
   $ 258,909,008     $ -     $ 258,909,008     $ -  
State, County and Municipal
     4,067,228       -       4,067,228       -  
Corporate Obligations
     4,138,010       -       3,288,010       850,000  
Asset-Backed Securities
     132,427       -       -       132,427  
                                 
    $ 267,246,673     $ -     $ 266,264,246     $ 982,427  
Nonrecurring
                                
Impaired Loans
   $ 33,518,160     $ -     $ -     $ 33,518,160  
                                 
Other Real Estate
   $ 19,705,044     $ -     $ 19,705,044     $ -  
 
The Company did not identify any liabilities that are required to be presented at fair value.

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 years ended December 31, 2010 and 2009.

 
- 30 -
 

(9)  Fair Value Measurements (Continued)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   
Available for Sale Securities
  
   
2010
    
2009
  
             
Balance, Beginning
   $ 982,427     $ 1,426,220  
                 
Total Realized/Unrealized Gains (Losses) Included In Loss on OTTI Impairment
     -       (520,751 )
Other Comprehensive Income
     34,570       76,958  
Purchases, Sales, Issuances and Settlements, Net
     -       -  
Transfers In and (Out) of Level 3
     -       -  
                 
Balance, Ending
   $ 1,016,997     $ 982,427  


(10) Deposits

The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $250,200 and $231,993 as of December 31, 2010 and 2009, respectively.

Components of interest-bearing deposits as of December 31 are as follows:

   
2010
    
2009
  
             
Interest-Bearing Demand
   $ 235,855,037     $ 220,168,255  
Savings
     36,629,698       34,850,882  
Time, $100,000 and Over
     298,009,596       364,064,083  
Other Time
     385,670,250       354,264,422  
                 
    $ 956,164,581     $ 973,347,642  

At December 31, 2010 and 2009, the Company had brokered deposits of $36,328,659 and $136,453,418, respectively.  Of the $36,328,659 brokered deposits at December 31, 2010, $31,128,659 represented Certificate of Deposits Account Registry Service (CDARS) reciprocal deposits in which customers placed core deposits into the CDARS program for FDIC insurance coverage and the Company received reciprocal brokered deposits in a like amount.  Thus, brokered deposits less the reciprocal deposits totaled $5,200,000 at December 31, 2010.  The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $216,656,200 and $316,896,500 as of December 31, 2010 and 2009, respectively.

As of December 31, 2010, the scheduled maturities of certificates of deposit are as follows:

Year
  
Amount
  
       
2011
   $ 480,445,908  
2012
     101,801,446  
2013
     88,077,653  
2014
     8,314,804  
2015 and Thereafter
     5,040,035  
         
    $ 683,679,846  

 
- 31 -
 

(11) Securities Sold Under Repurchase Agreements

The Company has securities sold under repurchase agreements in the amount of $20,000,000 at December 31, 2010.  Barclay’s Master Repurchase Agreement originated on June 26, 2008 with the initial draw of $20,000,000 on June 30, 2008.  The Repurchase Agreement matures on June 30, 2011.  Interest payments are due quarterly at a fixed rate of 3.34 percent.  The Repurchase Agreement is secured by U.S. Government mortgage-backed securities.

South Street Securities Master Repurchase Agreement originated on October 27, 2008 with the initial draw of $20,000,000 on October 31, 2008.  The Repurchase Agreement is overnight borrowing at a floating interest rate due monthly.  At December 31, 2010, the Company had an available line totaling $50,000,000, of which the entire $50,000,000 was available.  The Repurchase Agreement is secured by U.S. Government mortgage-backed securities.


(12) Other Borrowed Money

Other borrowed money at December 31 is summarized as follows:

   
2010
    
2009
  
             
Federal Home Loan Bank Advances
   $ 71,000,000     $ 91,000,000  
Other Secured Borrowing
     4,076,010       -  
                 
    $ 75,076,010     $ 91,000,000  

Advances from the Federal Home Loan Bank (FHLB) have maturities ranging from 2011 to 2019 and interest rates ranging from 3.17 percent to 4.75 percent.  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.  In addition, the Company has pledged certain available-for-sale investment securities with carrying values at December 31, 2010 of approximately $47,424,000 as additional collateral, as well as cash balances held on deposit with the FHLB.  At December 31, 2010, the Company had available line of credit commitments totaling $184,320,000, of which $113,260,000 was available.

Other secured borrowing represents SBA loans sold in the secondary market that must be accounted for as a secured borrowing.  These sales agreements contain recourse provisions (generally 90 days) that initially require the Company to account for the transfer of a portion of these financial assets as a secured borrowing, until such time that the recourse provision expires.  Once the recourse provision expires, transfers of a portion of these financial assets are re-evaluated to determine if they meet the participating interest definition and subsequently accounted for as a sale.

The aggregate stated maturities of other borrowed money at December 31, 2010 are as follows:

Year
  
Amount
  
       
2011
   $ 4,076,010  
2012
     41,000,000  
2013
     -  
2014
     -  
2015 and Thereafter
     30,000,000  
         
    $ 75,076,010  

 
- 32 -
 

(12) Other Borrowed Money (Continued)

The Company also has available federal funds lines of credit with various financial institutions totaling $47,000,000, of which there were none outstanding at December 31, 2010.

In addition, 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 needs caused by internal or external disruptions.  At December 31, 2010, the Company had approximately $7.8 million of borrowing capacity available under this arrangement, with no outstanding balances.  Certain available-for-sale investment securities totaling approximately $8.0 million were pledged as collateral under this agreement.


(13) Subordinated Debentures (Trust Preferred Securities)

During the second quarter of 2004, the Company formed a third subsidiary whose sole purpose was to issue $4,500,000 in Trust Preferred Securities through a pool sponsored by FTN Financial Capital Markets.  The Trust Preferred Securities have a maturity of 30 years and are redeemable after 5 years with certain exceptions.  At December 31, 2010, the floating rate securities had a 2.98 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 2.68 percent.

During the second quarter of 2006, the Company formed a fourth subsidiary whose sole purpose was to issue $5,000,000 in Trust Preferred Securities in a private placement by SunTrust Bank Capital Markets.  The Trust Preferred Securities have a maturity of 30 years and are redeemable after 5 years with certain exceptions.  At December 31, 2010, the floating rate securities had a 1.80 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 1.50 percent.

During the first quarter of 2007, the Company formed a fifth subsidiary whose sole purpose was to issue $9,000,000 in Trust Preferred Securities through a pool sponsored by Trapeza Capital Management, LLC.  The Trust Preferred Securities have a maturity of 30 years and are redeemable after 5 years with certain exceptions.  At December 31, 2010, the floating rate securities had a 1.95 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 1.65 percent.  Proceeds from this issuance were used to pay off the Trust Preferred Securities with the first subsidiary formed in March 2002 as the Company exercised its option to call.

During the third quarter of 2007, the Company formed a sixth subsidiary whose sole purpose was to issue $5,000,000 in Trust Preferred Securities through a pool sponsored by Trapeza Capital Management, LLC.  The Trust Preferred Securities have a maturity of 30 years and are redeemable after 5 years with certain exceptions.  At December 31, 2010, the floating rate securities had a 1.69 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 1.40 percent.  Proceeds from this issuance were used to pay off the Trust Preferred Securities with the second subsidiary formed in December 2002 as the Company exercised its option to call.

The Trust Preferred Securities are recorded as a liability on the consolidated balance sheets, but, subject to certain limitations, qualify as Tier 1 capital for regulatory capital purposes.  The proceeds from the offerings were used to fund the cash portion of the Quitman acquisition, pay off holding Company debt, and inject capital into the bank subsidiary.

The total aggregate principal amount of trust preferred certificates outstanding at December 31, 2010 was $23,500,000.  The total aggregate principal amount of subordinated debentures outstanding at December 31, 2010 was $24,229,000.

 
- 33 -
 

(14) Preferred Stock

On January 9, 2009, the Company issued to the United States Department of the Treasury (Treasury), in exchange for aggregate consideration of $28.0 million, (i) 28,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, (the Preferred Stock), and (ii) a warrant (the Warrant) to purchase up to 500,000 shares (the Warrant Common Stock) of the Company’s common stock.

The Preferred Stock qualifies as Tier 1 capital and pays cumulative cash dividends quarterly at a rate of 5 percent per annum for the first five years, and 9 percent per annum thereafter. The Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Preferred Stock. The Preferred Stock may be redeemed by the Company on or after February 15, 2012 at the liquidation preference of $1,000 per share plus any accrued and unpaid dividends.  Prior to this date, the Preferred Stock may not be redeemed unless the Company has received aggregate gross proceeds from one or more qualified equity offerings of any Tier 1 perpetual preferred or common stock of the Company equal to $7.0 million. Subject to certain limited exceptions, until January 9, 2012, or such earlier time as all Preferred Stock has been redeemed, the Company will not, without the Treasury’s consent, be able to increase its dividend rate per share of common stock or repurchase its common stock.

The Warrant may be exercised on or before January 9, 2019 at an exercise price of $8.40 per share.  The Treasury may not exercise voting power with respect to any shares of Warrant Common Stock until the Warrant has been exercised.

Upon receipt of the aggregate consideration from the Treasury on January 9, 2009, the Company allocated the $28,000,000 proceeds on a pro rata basis to the Preferred Stock and the Warrant based on relative fair values.  As a result, the Company allocated $27,220,000 of the aggregate proceeds to the Preferred Stock, and $780,000 was allocated to the Warrant.  The discount recorded on the Preferred Stock that resulted from allocating a portion of the proceeds to the Warrant is being accreted directly to retained earnings over a 5-year period applying a level yield.


(15) Restricted Stock - Unearned Compensation

In 1999, the board of directors of Colony Bankcorp, Inc. adopted a restricted stock grant plan which awards certain executive officers common shares of the Company.  The maximum number of shares (split-adjusted) which may be subject to restricted stock awards is 64,701.  To date, 77,052 shares have been issued under this plan and 12,351 shares have been forfeited; thus, there are no remaining shares which may be issued at December 31, 2010.  The shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity.  The cost of these shares is being amortized against earnings using the straight-line method over three years (the restriction period).

In April 2004, the stockholders of Colony Bankcorp, Inc. adopted a second restricted stock grant plan which awards certain executive officers common shares of the Company.  The maximum number of shares which may be subject to restricted stock awards (split-adjusted) is 143,500.  To date, 53,256 shares have been issued under this plan and 14,098 shares have been forfeited; thus, remaining shares which may be issued are 104,342 at December 31, 2010.   The shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight-line method over three years (the restriction period).

 
- 34 -
 

(16) Profit Sharing Plan

The Company has a profit sharing plan that covers substantially all employees who meet certain age and service requirements.  It is the Company’s policy to make contributions to the plan as approved annually by the board of directors.  The total provision for contributions to the plan was $0 for 2010, $(19,411) for 2009 and $206,179 for 2008.


(17) 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.

At December 31, 2010 and 2009, the following financial instruments were outstanding whose contract amounts represent credit risk:

   
Contract Amount
  
   
2010
    
2009
  
             
Commitments to Extend Credit
   $ 39,457,000     $ 56,100,000  
Standby Letters of Credit
     1,540,000       1,475,000  

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.

 
- 35 -
 

(17) Commitments and Contingencies (Continued)

Legal Contingencies.  In the ordinary course of business, there are various legal proceedings pending against Colony and its Subsidiary.  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.

IRS Exam.  Colony Bankcorp, Inc. and subsidiary are currently under examination by the Internal Revenue Service (IRS) for the year ended December 31, 2009.  The IRS is examining areas of nonaccrual interest, other real estate and bad debts, and may propose income adjustments, most of which, in the opinion of management, will reverse in 2010.  As a result, management anticipates a net adjustment which would have no material impact on the consolidated financial statements.  In addition to 2009, tax returns for calendar years 2008 and 2007 remain subject to examination by the IRS.


(18) Deferred Compensation Plan

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 $1,244,803 and $1,298,572 as of December 31, 2010 and 2009, respectively.  Benefit payments under the contracts were $206,955 in 2010 and $187,655 in 2009.  Provisions charged to operations totaled $154,553 in 2010, $361,171 in 2009 and $178,542 in 2008.

Fee income recognized with deferred compensation plans totaled $182,685 in 2010, $173,253 in 2009 and $160,187 in 2008.


(19) Interest Income and Expense

Interest income of $109,240, $267,553 and $426,779 from state, county and municipal bonds was exempt from regular income taxes in 2010, 2009 and 2008, respectively.

Interest on deposits includes interest expense on time certificates of $100,000 or more totaling $7,050,415, $9,598,455 and $14,596,774 for the years ended December 31, 2010, 2009 and 2008, respectively.


(20) Supplemental Cash Flow Information

Cash payments for the following were made during the years ended December 31:

   
2010
    
2009
    
2008
  
                   
Interest Expense
   $ 21,975,968     $ 27,537,602     $ 38,739,489  
                         
Income Taxes
   $ 275,000     $   -     $ 1,875,000  

 
- 36 -
 

(20) Supplemental Cash Flow Information (Continued)

Noncash financing and investing activities for the years ended December 31 are as follows:

   
2010
    
2009
    
2008
  
Acquisitions of Real Estate Through Loan Foreclosures
   $ 13,159,402     $ 19,258,910     $ 14,748,105  
                         
Unrealized (Gain) Loss on Investment Securities
   $ 757,545     $ 721,116     $ (157,957 )


(21) Related Party Transactions

The aggregate balance of direct and indirect loans to directors, executive officers or principal holders of equity securities of the Company was $9,797,492 as of December 31, 2010 and $6,473,238 as of December 31, 2009. 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 collectibility.  A summary of activity of related party loans is shown below:

   
2010
    
2009
  
             
Balance, Beginning
   $ 6,473,238     $ 7,641,037  
New Loans
     12,533,229       4,829,291  
Repayments
     (9,208,975 )     (5,997,090 )
Transactions Due to Changes in Directors
     -       -  
                 
Balance, Ending
   $ 9,797,492     $ 6,473,238  


(22) Fair Value of Financial Instruments

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.  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.

Investment Securities - Fair values for investment securities are based on quoted market prices where available.  If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments.

Federal Home Loan Bank Stock - The fair value of Federal Home Loan Bank stock approximates carrying value.

 
- 37 -
 

(22) Fair Value of Financial Instruments (Continued)

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.

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.  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.

Federal Funds Purchased - The carrying value of federal funds purchased approximates fair value.

Subordinated Debentures - Fair value approximates carrying value due to the variable interest rates of the subordinated debentures.

Securities Sold Under Agreements to Repurchase and 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.

Unrecognized Financial Instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The fees associated with these instruments are not material.

The carrying amount and estimated fair values of the Company’s financial instruments as of December 31 are as follows:
 
   
2010
    
2009
  
   
Carrying
    
Estimated
    
Carrying
    
Estimated
  
   
Amount
    
Fair Value
    
Amount
    
Fair Value
  
   
(in Thousands)
  
Assets
                        
Cash and Short-Term Investments
   $ 104,876     $ 104,876     $ 48,908     $ 48,908  
Investment Securities Available for Sale
     303,838       303,838       267,247       267,247  
Investment Securities Held to Maturity
     48       53       54       57  
Federal Home Loan Bank Stock
     6,064       6,064       6,345       6,345  
Loans, Net
     784,909       788,455       899,851       908,638  
                                 
Liabilities
                                
Deposits
     1,059,124       1,064,695       1,057,586       1,059,037  
Subordinated Debentures
     24,229       24,229       24,229       24,229  
Securities Sold Under Agreements to Repurchase
     20,000       20,308       40,000       40,671  
Other Borrowed Money
     75,076       77,119       91,000       91,703  

 
- 38 -
 

(22) Fair Value of Financial Instruments (Continued)

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.


(23) Regulatory Capital Matters

The amount of dividends payable to the parent company from the subsidiary bank is limited by various banking regulatory agencies.  Upon approval by regulatory authorities, the Bank may pay cash dividends to the parent company in excess of regulatory limitations.  Additionally, the Company suspended the payment of dividends to its stockholders in the third quarter of 2009.  At December 31, 2010, the Company is subject to certain regulatory restrictions that preclude the declaration of or payment of any dividends to its common stockholders, without prior approval from the Federal Reserve Bank.

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.  The amounts and ratios as defined in regulations are presented hereafter.  Management believes, as of December 31, 2010, 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 Company is also subject to certain other regulatory requirements as discussed in Part 1 Item 1 of its December 31, 2010 Form 10-K filed with the Securities and Exchange Commission on March 15, 2011.  Failure to comply with the abovementioned requirements could have an adverse impact on the Company’s financial condition.

 
- 39 -
 

(23) Regulatory Capital Matters (Continued)

The following table summarizes regulatory capital information as of December 31, 2010 and 2009 on a consolidated basis and for its wholly-owned subsidiary, as defined.

    Actual     For Capital Adequacy Purposes    
To Be Well Capitalized Under Prompt Corrective Action Provisions
  
    Amount    
Ratio
     Amount     Ratio     Amount     Ratio  
As of December 31, 2010
   (In Thousands)  
                                     
Total Capital to Risk-Weighted Assets
                                    
Consolidated
   $ 116,914       14.85 %   $ 62,981       8.00 %     N/A       N/A  
Colony Bank
     113,119       14.39       62,905       8.00     $ 78,631       10.00 %
                                                 
                                                 
Tier I Capital to Risk-Weighted Assets
                                                
Consolidated
     106,845       13.57       31,491       4.00       N/A       N/A  
Colony Bank
     103,062       13.11       31,452       4.00       47,179       6.00  
                                                 
                                                 
Tier I Capital to Average Assets
                                                
Consolidated
     106,845       8.59       49,748       4.00       N/A       N/A  
Colony Bank
     103,062       8.30       49,697       4.00       62,122       5.00  
                                                 
As of December 31, 2009
                                                
                                                 
                                                 
Total Capital to Risk-Weighted Assets
                                                
Consolidated
     118,848       13.07       72,768       8.00       N/A       N/A  
Colony Bank
     117,756       12.97       72,622       8.00     $ 90,777       10.00 %
                                                 
                                                 
Tier I Capital to Risk-Weighted Assets
                                                
Consolidated
     107,231       11.79       36,384       4.00       N/A       N/A  
Colony Bank
     106,161       11.69       36,311       4.00       54,466       6.00  
                                                 
                                                 
Tier I Capital to Average Assets
                                                
Consolidated
     107,231       8.30       51,708       4.00       N/A       N/A  
Colony Bank
     106,161       8.22       51,641       4.00       64,551       5.00  

 
- 40 -
 

(24) Financial Information of Colony Bankcorp, Inc. (Parent Only)

The parent company’s balance sheets as of December 31, 2010 and 2009 and the related statements of income and comprehensive income and cash flows for each of the years in the three-year period then ended are as follows:

COLONY BANKCORP, INC. (PARENT ONLY)
BALANCE SHEETS
DECEMBER 31

ASSETS
  
             
   
2010
    
2009
  
             
Cash
   $ 3,173,061     $ 556,209  
Premises and Equipment, Net
     1,478,045       1,553,652  
Investment in Subsidiary, at Equity
     112,389,013       111,450,651  
Other
     484,008       257,252  
                 
Total Assets
   $ 117,524,127     $ 113,817,764  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
  
                 
Liabilities
                
Dividends Payable
   $ 175,000     $ 175,000  
Other
     161,544       139,140  
                 
      336,544       314,140  
                 
Subordinated Debt
     24,229,000       24,229,000  
                 
Stockholders’ Equity
                
Preferred Stock, No Par Value; Authorized 10,000,000 Shares, Issued 28,000 Shares
     27,505,910       27,356,964  
Common Stock, Par Value $1; Authorized 20,000,000 Shares, Issued 8,442,958 and 7,229,163Shares as of December 31, 2010 and 2009, Respectively
     8,442,958       7,229,163  
Paid-In Capital
     29,171,087       25,392,913  
Retained Earnings
     28,479,211       29,553,940  
Restricted Stock - Unearned Compensation
     (40,794 )     (158,547 )
Accumulated Other Comprehensive Income, Net of Tax
     (599,789 )     (99,809 )
                 
      92,958,583       89,274,624  
                 
Total Liabilities and Stockholders’ Equity
   $ 117,524,127     $ 113,817,764  

 
- 41 -
 

(24) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued)

COLONY BANKCORP, INC. (PARENT ONLY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31

   
2010
    
2009
    
2008
  
                   
Income
                  
Dividends from Subsidiary
   $ 15,536     $ 2,170,827     $ 5,038,854  
Management Fees
     455,241       227,620       -  
Other
     119,776       100,157       92,111  
                         
      590,553       2,498,604       5,130,965  
                         
Expenses
                        
Interest
     516,170       659,456       1,270,942  
Amortization
     2,250       2,250       2,250  
Salaries and Employee Benefits
     761,873       848,076       876,166  
Goodwill Impairment
     -       172,029       -  
Other
     807,209       799,924       1,240,339  
                         
      2,087,502       2,481,735       3,389,697  
                         
Income (Loss) Before Taxes and Equity in Undistributed Earnings of Subsidiary
     (1,496,949 )     16,869       1,741,268  
                         
    Income Tax Benefits
     532,823       608,062       979,911  
                         
Income (Loss) Before Equity in Undistributed Earnings of Subsidiary
     (964,126 )     624,931       2,721,179  
                         
Equity in Undistributed Earnings (Losses) of Subsidiary
     1,438,342       (19,808,805 )     (692,355 )
                         
Net Income (Loss)
     474,216       (19,183,874 )     2,028,824  
Preferred Stock Dividends
     1,400,000       1,365,000       -  
                         
Net Income (Loss) Available to Common Stockholders
   $ (925,784 )   $ (20,548,874 )   $ 2,028,824  

 
- 42 -
 

(24) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued)

COLONY BANKCORP, INC. (PARENT ONLY)
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31

   
2010
    
2009
    
2008
  
                   
Net Income (Loss)
   $ 474,216     $ (19,183,874 )   $ 2,028,824  
                         
Other Comprehensive Income, Net of Tax
                        
Gains on Securities Arising During the Year
     1,227,281       1,257,136       893,158  
Reclassification Adjustment
     (1,727,261 )     (1,733,072 )     (788,907 )
                         
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of     Reclassification Adjustment and Tax Effects
     (499,980 )     (475,936 )     104,251  
                         
Comprehensive Income (Loss)
   $ (25,764 )   $ (19,659,810 )   $ 2,133,075  

 
- 43 -
 

(24) Financial Information of Colony Bankcorp, Inc. (Parent Only) (Continued)

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

   
2010
    
2009
    
2008
  
                   
Cash Flows from Operating Activities
                  
Net Income (Loss)
   $  474,216     $ (19,183,874 )   $ 2,028,824  
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities
                        
Depreciation and Amortization
     194,918       295,209       275,299  
Goodwill Impairment
     -       172,029       -  
Equity in Undistributed (Earnings) Losses of Subsidiary
     (1,438,342 )     19,808,805       692,355  
Other
     (260,318 )     31,634       720,701  
                         
      (1,029,526 )     1,123,803       3,717,179  
                         
Cash Flows from Investing Activities
                        
Capital Infusion in Subsidiary
     -       (25,500,000 )     (1,500,000 )
Purchases of Premises and Equipment
     (31,877 )     (119,156 )     (393,392 )
                         
      (31,877 )     (25,619,156 )     (1,893,392 )
                         
Cash Flows from Financing Activities
                        
Dividends Paid on Preferred Stock
     (1,400,000 )     (1,190,000 )     -  
Dividends Paid on Common Stock
     -       (1,760,665 )     (2,794,520 )
Principal Payments on Notes and Debentures
     -       -       -  
Proceeds from Issuance of Common Stock
     5,078,225       -       -  
Proceeds Allocated to Issuance of Preferred Stock
     -       27,215,218       -  
Proceeds Allocated to Warrants Issued
     -       784,782       -  
                         
      3,678,255       25,049,335       (2,794,520 )
                         
Increase (Decrease) in Cash
     2,616,852       553,982       (970,733 )
                         
Cash, Beginning
     556,209       2,227       972,960  
                         
Cash, Ending
   $ 3,173,061     $ 556,209     $ 2,227  

 
- 44 -
 

(25) Earnings Per Share

Basic and diluted earnings per share are computed and presented hereafter.  Basic earnings per share is calculated and presented based on income available to common stockholders divided by the weighted average number of shares outstanding during the reporting periods.  Diluted earnings per share reflects the potential dilution of restricted stock and common stock warrants.  The following presents earnings per share for the years ended December 31, 2010, 2009 and 2008:

December 31, 2010
  
Income Numerator
    
Common Shares Denominator
    
EPS
  
                   
Basic EPS
                  
Income (Loss) Available to Common Stockholders
   $ (925,784 )   $ 8,149,217     $ (0.11 )
                         
Dilutive Effect of Potential Common Stock
                        
Restricted Stock
             -          
Stock Warrants
             -          
 
                        
Diluted EPS
                        
Income (Loss) Available to Common Stockholders After Assumed Conversions of Dilutive Securities
   $ (925,784 )   $ 8,149,217     $ (0.11 )
                         
December 31, 2009
                        
                         
Basic EPS
                        
Income (Loss) Available to Common Stockholders
   $ (20,548,874 )     7,213,430     $ (2.85 )
                         
Dilutive Effect of Potential Common Stock
                        
Restricted Stock
             -          
Stock Warrants
             -          
 
                        
Diluted EPS
                        
Income (Loss) Available to Common Stockholders After Assumed Conversions of Dilutive Securities
   $ (20,548,874 )     7,213,430     $ (2.85 )
                         
December 31, 2008
                        
                         
Basic EPS
                        
Income Available to Common Stockholders
   $ 2,028,824       7,199,121     $ 0.28  
                         
Dilutive Effect of Potential Common Stock
                        
Restricted Stock
             -          
 
                        
Diluted EPS
                        
Income Available to Common Stockholders After Assumed Conversions of Dilutive Securities
   $ 2,028,824       7,199,121     $ 0.28  

For the years ended December 31, 2010 and 2009, 505,283 and 504,774 shares of common stock equivalents, respectively, were excluded from the calculation of diluted earnings per share because they would have an anti-dilutive effect.

 - 45 -
 EX-21 3 ex21.htm EXHIBIT 21 ex21.htm
EXHIBIT NO. 21


SUBSIDIARIES OF THE COMPANY


Name of Subsidiary
  
State of Incorporation
     
Colony Bank
  
Georgia
Colony Bankcorp Statutory Trust III
  
Delaware
Colony Bankcorp Capital Trust I
  
Delaware
Colony Bankcorp Capital Trust II
  
Delaware
Colony Bankcorp Capital Trust III
  
Delaware
 
 
EX-31.1 4 ex31_1.htm EXHIBIT 31.1 ex31_1.htm
EXHIBIT NO. 31.1

CERTIFICATIONS PURSUANT TO RULE 13a-14(a)/15d-14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Al D. Ross, certify that:

1.     I have reviewed this Form 10-K of Colony Bankcorp, Inc.

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.

4.
The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
d)
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.
The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial; and

 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

March 15, 2011
/s/ Al D. Ross
 
AL D. ROSS
 
President and Chief Executive Officer
 
 
EX-31.2 5 ex31_2.htm EXHIBIT 31.2 ex31_2.htm
EXHIBIT NO. 31.2

CERTIFICATIONS PURSUANT TO RULE 13a-14(a)/15d-14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Terry L. Hester, certify that:

1.     I have reviewed this Form 10-K of Colony Bankcorp, Inc.

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.

4.
The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
d)
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.
The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

 
a)
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial; and

 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

March 15, 2011
/s/ Terry L. Hester
 
TERRY L. HESTER
 
Executive Vice President and Chief Financial Officer
 
 
EX-32 6 ex32.htm EXHIBIT 32 ex32.htm
EXHIBIT NO. 32

CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. §1350
AS ADOPTED PURSUANT TO
§906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Form 10-K of Colony Bankcorp, Inc. (the Company) for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Al D. Ross, President and Chief Executive Officer of the Company, and Terry L. Hester, Chief Financial and Accounting Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of our knowledge and belief that:

 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Al D. Ross
  
Al D. Ross
  
President and Chief Executive Officer
  
March 15, 2011
  


/s/ Terry L. Hester
  
Terry L. Hester
  
Chief Financial and Accounting Officer
  
March 15, 2011
  

This certification accompanies this Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.
 
 
EX-99.1 7 ex99_1.htm EXHIBIT 99.1 ex99_1.htm
EXHIBIT NO. 99.1

COLONY BANKCORP, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 30.15 OF 31 CFR PART 30


The undersigned, Al D. Ross and Terry L. Hester, Chief Executive Officer and Chief Financial Officer of Colony Bankcorp, Inc. (the “Company”) respectively, do hereby certify, based on our knowledge, that:

 
i.
The Compensation Committee of the Company has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to the Company;

 
ii.
The Compensation Committee of the Company has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of the Company and has identified any features of the employee compensation plans that pose risks to the Company and has limited those features to ensure that the Company is not unnecessarily exposed to risks;

 
iii.
The Compensation Committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee, and has limited any such features;

 
iv.
The Compensation Committee of the Company will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

 
v.
The Compensation Committee of the Company will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in:

 
a.
SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of the Company;

 
b.
Employee compensation plans that unnecessarily expose the Company to risks; and

 
c.
Employee compensation plans that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee;

 
vi.
The Company has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under Section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

 
vii.
The Company has prohibited any golden parachute payment, as defined in the regulations and guidance established under Section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

 
viii.
The Company has limited bonus payments to its applicable employees in accordance with Section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

 
 
 


 
ix.
The Company and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under Section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;

 
x.
The Company will permit a non-binding shareholder resolution in compliance with any applicable federal securities rules and regulations on the disclosures provided under the federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period;

 
xi.
The Company will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under Section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

 
xii.
The Company will disclose whether the Company, the board of directors of the Company, or the Compensation Committee of the Company has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

 
xiii.
The Company has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under Section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

 
xiv.
The Company has substantially complied with all other requirements related to employee compensation that are provided in the agreement between the Company and Treasury, including any amendments;

 
xv.
The Company has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and

 
xvi.
I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. (See, for example, 18 USC 1001).

  COLONY BANKCORP, INC.
   
March 15, 2011
/s/ Al D. Ross
 
AL D. ROSS
 
President and Chief Executive Officer


March 15, 2011
/s/ Terry L. Hester
 
TERRY L. HESTER
 
Chief Financial Officer

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