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 14, 2014

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, 2013 and 2012 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, 2013.  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 audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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, 2013 and 2012, and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 2013 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, 2013 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.

McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

ASSETS

	2013			2012
Cash and Cash Equivalents
Cash and Due from Banks	$	25,691,605		$	29,243,927
Federal Funds Sold		20,495,060			20,001,906
		46,186,665			49,245,833
Interest-Bearing Deposits		21,960,291			21,795,341
Investment Securities
Available for Sale, at Fair Value		263,257,890			268,300,411
Held to Maturity, at Cost (Fair Value of $37,309 and $41,909 as of December 31, 2013 and 2012, Respectively)		37,062			41,467
		263,294,952			268,341,878
Federal Home Loan Bank Stock, at Cost		3,163,900			3,364,300
Loans		751,218,462			747,050,011
Allowance for Loan Losses		(11,805,986	)		(12,736,921	)
Unearned Interest and Fees		(360,522	)		(233,927	)
		739,051,954			734,079,163
Premises and Equipment		24,876,469			24,916,106
Other Real Estate (Net of Allowance of $3,985,920 and $4,561,099 in 2013 and 2012, Respectively)		15,502,462			15,940,693
Other Intangible Assets		187,761			223,510
Other Assets		34,326,432			21,489,957
Total Assets	$	1,148,550,886		$	1,139,396,781

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

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

LIABILITIES AND STOCKHOLDERS’ EQUITY

	2013			2012
Deposits
Noninterest-Bearing	$	115,260,701		$	123,966,542
Interest-Bearing		872,268,779			855,718,349
		987,529,480			979,684,891
Borrowed Money
Subordinated Debentures		24,229,000			24,229,000
Other Borrowed Money		40,000,000			35,000,000
		64,229,000			59,229,000
Other Liabilities		6,838,167			4,723,723
Commitments and Contingencies
Stockholders’ Equity
Preferred Stock, Stated Value $1,000; Authorized 10,000,000 Shares, Issued 28,000 Shares		28,000,000			27,827,053
Common Stock, Par Value $1; Authorized 20,000,000 Shares, Issued 8,439,258 Shares as of December 31, 2013 and 2012		8,439,258			8,439,258
Paid-In Capital		29,145,094			29,145,094
Retained Earnings		33,444,913			30,497,576
Accumulated Other Comprehensive Loss, Net of Tax		(9,075,026	)		(149,814	)
		89,954,239			95,759,167
Total Liabilities and Stockholders’ Equity	$	1,148,550,886		$	1,139,396,781

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

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

	2013			2012		2011
Interest Income
Loans, Including Fees	$	41,350,195		$	41,963,113	$	44,460,149
Federal Funds Sold and Securities Purchased Under Agreements to Resell		39,199			99,273		114,794
Deposits with Other Banks		26,704			42,903		45,646
Investment Securities
U.S. Government Agencies		3,516,978			4,824,423		6,873,296
State, County and Municipal		123,972			206,483		160,892
Corporate Obligations		47,275			76,029		91,034
Dividends on Other Investments		81,398			77,203		47,001
		45,185,721			47,289,427		51,792,812
Interest Expense
Deposits		5,821,366			8,737,281		12,950,229
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		116			-		337,711
Borrowed Money		1,675,164			2,279,469		3,517,633
		7,496,646			11,016,750		16,805,573
Net Interest Income		37,689,075			36,272,677		34,987,239
Provision for Loan Losses		4,485,000			6,784,767		8,250,000
Net Interest Income After Provision for Loan Losses		33,204,075			29,487,910		26,737,239
Noninterest Income
Service Charges on Deposits		4,690,599			3,572,897		3,244,536
Other Service Charges, Commissions and Fees		1,725,271			1,514,898		1,311,758
Mortgage Fee Income		484,396			400,009		265,636
Securities Gains (Losses)		(363,804	)		2,837,464		2,923,601
Gain on Sale of SBA Loans		635,190			305,924		946,732
Other		1,205,631			1,102,077		1,258,813
		8,377,283			9,733,269		9,951,076
Noninterest Expenses
Salaries and Employee Benefits		16,691,972			15,564,893		14,632,693
Occupancy and Equipment		3,794,524			3,878,268		3,997,667
Directors’ Fees		416,972			465,220		466,075
Legal and Professional Fees		721,322			1,085,881		1,186,884
Foreclosed Property		3,918,128			5,613,316		4,045,245
FDIC Assessment		1,321,981			1,497,974		1,828,799
Advertising		508,292			422,718		508,329
Software		852,475			789,226		660,120
Telephone		778,151			744,930		735,758
ATM/Card Processing		641,228			511,186		348,221
Other		4,972,404			4,805,418		4,641,046
		34,617,449			35,379,030		33,050,837
Income Before Income Taxes		6,963,909			3,842,149		3,637,478
Income Taxes		2,334,864			1,200,851		1,103,883
Net Income		4,629,045			2,641,298		2,533,595
Preferred Stock Dividends		1,508,761			1,435,385		1,400,000
Net Income Available to Common Stockholders	$	3,120,284		$	1,205,913	$	1,133,595
Net Income Per Share of Common Stock, Basic and Diluted	$	0.37		$	0.14	$	0.13
Cash Dividends Declared Per Share of Common Stock	$	0.00		$	0.00	$	0.00
Weighted Average Shares Outstanding, Basic and Diluted		8,439,258			8,439,258		8,439,258

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

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31

	2013			2012			2011
Net Income	$	4,629,045		$	2,641,298		$	2,533,595
Other Comprehensive Income (Loss), Net of Tax
Gains (Losses) on Securities Arising During the Year, Net of Tax Effect of $(4,597,836), $(1,060,984) and $1,292,789, Respectively		(9,165,323	)		(186,830	)		4,439,108
Impairment Loss on Securities, Net of Tax Effect of $(124,652), $(20,253) and $(18,040), Respectively		241,971			39,315			35,018
Realized Gains (Losses) on Sale of AFS Securities, Net of Tax Effect of $959, $984,991 and $1,012,064, Respectively		(1,860	)		(1,912,041	)		(1,964,595	)
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects		(8,925,212	)		(2,059,556	)		2,509,531
Comprehensive Income (Loss)	$	(4,296,167	)	$	581,742		$	5,043,126

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

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

	Preferred Stock		Shares Issued			Common Stock			Paid-In Capital			Retained Earnings			Restricted Stock - Unearned Compensation			Accumulated Other Comprehensive Income (Loss)			Total
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
Forfeiture of Restricted Stock				(3,700	)		(3,700	)		(25,993	)					29,693						-
Amortization of Unearned Compensation																11,101						11,101
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects																			2,509,531			2,509,531
Accretion of Fair Value of Warrant		156,566											(156,566	)								-
Dividends on Preferred Shares													(1,400,000	)								(1,400,000	)
Net Income													2,533,595									2,533,595
Balance, December 31, 2011		27,662,476		8,439,258			8,439,258			29,145,094			29,456,240			-			1,909,742			96,612,810
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects																			(2,059,556	)		(2,059,556	)
Accretion of Fair Value of Warrant		164,577											(164,577	)								-
Dividends on Preferred Shares													(1,435,385	)								(1,435,385	)
Net Income													2,641,298									2,641,298
Balance, December 31, 2012		27,827,053		8,439,258			8,439,258			29,145,094			30,497,576			-			(149,814	)		95,759,167
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects																			(8,925,212	)		(8,925,212	)
Accretion of Fair Value of Warrant		172,947											(172,947	)								-
Dividends on Preferred Shares													(1,508,761	)								(1,508,761	)
Net Income													4,629,045									4,629,045
Balance, December 31, 2013	$	28,000,000		8,439,258		$	8,439,258		$	29,145,094		$	33,444,913		$	-		$	(9,075,026	)	$	89,954,239

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

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

	2013			2012			2011
Cash Flows from Operating Activities
Net Income	$	4,629,045		$	2,641,298		$	2,533,595
Adjustments to Reconcile Net Income to Net Cash Provided from Operating Activities
Depreciation		1,527,392			1,676,820			1,790,041
Amortization and Accretion		2,667,404			4,180,158			3,487,124
Provision for Loan Losses		4,485,000			6,784,767			8,250,000
Deferred Income Taxes		2,178,222			1,204,439			867,006
Securities (Gains) Losses		363,804			(2,837,464	)		(2,923,601	)
(Gain) Loss on Sale of Premises and Equipment		(677	)		1,148			3,668
Loss on Sale of Other Real Estate and Repossessions		1,565,091			1,839,196			1,106,479
Provision for Losses on Other Real Estate		1,321,418			2,702,709			1,411,061
Increase in Cash Surrender Value of Life Insurance		(338,712	)		(185,341	)		(174,289	)
Change In
Interest Receivable		285,033			250,755			739,423
Prepaid Expenses		(168,060	)		1,741,834			1,861,810
Interest Payable		385,285			74,637			(398,903	)
Accrued Expenses and Accounts Payable		213,753			(95,972	)		(405,612	)
Other		(243,543	)		2,827,648			(2,987,906	)
		18,870,455			22,806,632			15,159,896
Cash Flows from Investing Activities
Interest-Bearing Deposits in Other Banks		(164,950	)		7,161,969			21,769,424
Purchase of Investment Securities Available for Sale		(132,419,073	)		(250,445,594	)		(381,284,748	)
Proceeds from Sale of Investment Securities Available for Sale		72,672,795			227,690,806			342,672,937
Proceeds from Maturities, Calls and Paydowns of Investment Securities Available for Sale		48,330,382			54,006,594			41,978,769
Held to Maturity		11,623			14,019			12,565
Proceeds from Sale of Premises and Equipment		2,500			1,500			1,605
Net Loans to Customers		(19,959,948	)		(50,126,252	)		63,267,200
Purchase of Premises and Equipment		(1,489,579	)		(845,338	)		(397,825	)
Proceeds from Sale of Other Real Estate and Repossessions		8,041,638			9,876,136			9,991,792
Proceeds from Sale of Federal Home Loan Bank Stock		200,400			2,033,900			665,300
Purchase of Bank-Owned Life Insurance		(10,000,000	)		-			-
		(34,774,212	)		(632,260	)		98,677,019
Cash Flows from Financing Activities
Interest-Bearing Customer Deposits		16,550,430			(49,998,012	)		(50,448,220	)
Noninterest-Bearing Customer Deposits		(8,705,841	)		29,697,631			(8,690,512	)
Proceeds from Other Borrowed Money		21,500,000			5,000,000			-
Principal Payments on Other Borrowed Money		(16,500,000	)		(41,000,000	)		(4,076,010	)
Dividends Paid on Preferred Stock		-			-			(1,400,000	)
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		-			-			(20,000,000	)
		12,844,589			(56,300,381	)		(84,614,742	)
Net Increase (Decrease) in Cash and Cash Equivalents		(3,059,168	)		(34,126,009	)		29,222,173
Cash and Cash Equivalents, Beginning		49,245,833			83,371,842			54,149,669
Cash and Cash Equivalents, Ending	$	46,186,665		$	49,245,833		$	83,371,842

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

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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 consolidated financial statements include the accounts of Colony Bankcorp, Inc. and its wholly-owned subsidiary, Colony Bank, 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 Company provides a full range of retail and commercial banking services for consumers and small- to medium-size businesses located primarily in central, south and coastal 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 and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.

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 2013.  Such reclassifications had no effect on previously reported stockholders’ equity or net income.

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(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, 2013, approximately 87 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 downturn of the housing and real estate market that began in 2007 resulted in an increase of problem loans secured by real estate, of which most are centered 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 recent years.  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.  Securities available for sale 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.

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(1) Summary of Significant Accounting Policies (Continued)

Investment Securities (Continued)

The Company 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 Company’s intent to sell and whether it is more likely than not that the Company will be required to sell the security before anticipated recovery of the amortized cost basis.  If the Company intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery, the OTTI write-down is recognized in earnings.  If the Company 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.

Loans Modified in a Troubled Debt Restructuring (TDR)

Loans are considered to have been modified in a TDR when, due to a borrower’s financial difficulty, the Company makes certain concessions to the borrower that it would not otherwise consider for new debt with similar risk characteristics.  Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of the collateral.  Generally, a nonaccrual loan that has been modified in a TDR remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan.  However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period.  If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status. Once a loan is modified in a troubled debt restructuring, it is accounted for as an impaired loan, regardless of its accrual status, until the loan is paid in full, sold or charged off.

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(1) Summary of Significant Accounting Policies (Continued)

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.

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 (1) changes in the composition of the loan portfolio, (2) the extent of loan concentrations within the portfolio, (3) the effectiveness of the Company’s lending policies, procedures and internal controls, (4) the experience, ability and effectiveness of the Company’s lending management and staff, and (5) national and local economics and business conditions.

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

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

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(1) Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

A significant portion of the Company’s impaired loans are deemed to be collateral dependent.  Management therefore measures impairment on these loans based on the fair value of the collateral.  Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company or by senior members of the Company’s credit administration staff.  The decision whether or not to obtain an external third-party appraisal usually depends on the type of property being evaluated.  External appraisals are usually obtained on more complex, income producing properties such as hotels, shopping centers and businesses.  Less complex properties such as residential lots, farm land and single family houses may be evaluated internally by senior credit administration staff.  When the Company does obtain appraisals from external third-parties, the values utilized in the impairment calculation are “as is” or current market values.  The appraisals, whether prepared internally or externally, may utilize a single valuation approach or a combination of approaches including the comparable sales, income and cost approach.  Appraised amounts used in the impairment calculation are typically discounted 10 percent to account for selling and marketing costs, if the repayment of the loan is to come from the sale of the collateral.  Although appraisals may not be obtained each year on all impaired loans, the collateral values used in the impairment calculations are evaluated quarterly by management.  Based on management’s knowledge of the collateral and the current real estate market conditions, appraised values may be further discounted to reflect facts and circumstances known to management since the initial appraisal was performed.

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are typically significant and result in a level 3 classification of the inputs for determining fair value.  Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, we consider the fair value of impaired loans to be highly sensitive to changes in market conditions.

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.

Intangible Assets

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.

- 12-

(1) Summary of Significant Accounting Policies (Continued)

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, interest-bearing checking accounts, savings accounts, loans and certificates of deposit are reported net.

Securities Purchased Under Agreement to Resell and Securities Sold Under Agreements to 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.

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.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The Company and its subsidiary file a consolidated federal income tax return.  The subsidiary pays its proportional share of federal income taxes to the Company based on its taxable income.

The Company’s federal and state income tax returns for tax years 2013, 2012, 2011 and 2010 are subject to examination by the Internal Revenue Service (IRS) and the Georgia Department of Revenue, generally for three years after filing.

- 13-

(1) Summary of Significant Accounting Policies (Continued)

Income Taxes (Continued)

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 operations.

Other Real Estate

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

Bank-Owned Life Insurance

The Company has purchased life insurance on the lives of certain key members of management and directors.  The life insurance policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement, if applicable.  Increases in the cash surrender value are recorded as other income in the consolidated statements of income.The cash surrender value of the insurance contracts is recorded in other assets on the consolidated balance sheets in the amount of $13,940,176 and $3,601,464 as of December 31, 2013 and 2012, respectively.

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.  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 (loss).

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 on the balance sheet when they are funded.

- 14-

(1) Summary of Significant Accounting Policies (Continued)

Changes in Accounting Principles and Effects of New Accounting Pronouncements

Adoption of New Accounting Standards

ASU 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Company on January 1, 2013 and did not have a significant impact on the Company’s consolidated financial statements.

ASU 2012-02, Intangibles - Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 became effective for the Company on January 1, 2013 and did not have a significant impact on the Company’s consolidated financial statements.

ASU 2011-11, Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.  ASU 2011-11 amends Topic 210, Balance Sheet, to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the consolidated balance sheet and/or subject to a master netting arrangement or similar agreement.  ASU No. 2013-01, Balance Sheet (Topic 210) - Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, clarifies that ordinary trade receivables are not within the scope of ASU 2011-11.  ASU 2011-11 became effective for the Company on January 1, 2013 and 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:

	2013		2012
Cash on Hand and Cash Items	$	10,531,340	$	9,063,437
Noninterest-Bearing Deposits with Other Banks		15,160,265		20,180,490
	$	25,691,605	$	29,243,927

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 $1,252,000 and $6,065,000 at December 31, 2013 and 2012, respectively.

- 15-

(3) Investment Securities

Investment securities as of December 31, 2013 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	273,029,073	$	118,843	$	(13,799,858	)	$	259,348,058
State, County and Municipal		3,978,857		14,963		(83,988	)		3,909,832
	$	277,007,930	$	133,806	$	(13,883,846	)	$	263,257,890
Securities Held to Maturity
State, County and Municipal	$	37,062	$	247	$	-		$	37,309

The amortized cost and fair value of investment securities as of December 31, 2013, by contractual maturity, are shown hereafter.  Expected maturities may differ from contractual maturities for certain investments because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  This is often the case with mortgage-backed securities, which are disclosed separately in the table below.

	Securities
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in One Year or Less	$	272,219	$	274,166	$	-	$	-
Due After One Year Through Five Years		1,755,607		1,768,121		37,062		37,309
Due After Five Years Through Ten Years		1,298,122		1,265,127		-		-
Due After Ten Years		652,909		602,418		-		-
		3,978,857		3,909,832		37,062		37,309
Mortgage-Backed Securities		273,029,073		259,348,058		-		-
	$	277,007,930	$	263,257,890	$	37,062	$	37,309

Investment securities as of December 31, 2012 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	263,186,852	$	833,920	$	(961,698	)	$	263,059,074
State, County and Municipal		3,973,926		34,670		(4,586	)		4,004,010
Corporate Obligations		1,000,000		104,900		-			1,104,900
Asset-Backed Securities		366,623		-		(234,196	)		132,427
	$	268,527,401	$	973,490	$	(1,200,480	)	$	268,300,411
Securities Held to Maturity
State, County and Municipal	$	41,467	$	442	$	-		$	41,909

- 16-

(3) Investment Securities (Continued)

Proceeds from sales of investments available for sale were $72,672,795 in 2013, $227,690,806 in 2012 and $342,672,937 in 2011.  Gross realized gains totaled $442,124 in 2013, $3,084,666 in 2012 and $2,978,193 in 2011.  Gross realized losses totaled $805,928 in 2013, $247,202 in 2012 and $54,592 in 2011.

Nonaccrual securities are securities for which principal and interest are doubtful of collection in accordance with original terms and for which accruals of interest have been discontinued due to payment delinquency.  Fair value of securities on nonaccrual status totaled $0 and $132,427 as of December 31, 2013 and 2012, respectively.

Investment securities having a carrying value totaling $112,912,815 and $117,450,817 as of December 31, 2013 and 2012, respectively, were pledged to secure public deposits and for other purposes.

Information pertaining to securities with gross unrealized losses at December 31, 2013 and 2012 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, 2013
U.S. Government Agencies Mortgage-Backed	$	190,063,827	$	(9,440,663	)	$	63,193,601	$	(4,359,195	)	$	253,257,428	$	(13,799,858	)
State, County and Municipal		1,647,043		(83,988	)		-		-			1,647,043		(83,988	)
	$	191,710,870	$	(9,524,651	)	$	63,193,601	$	(4,359,195	)	$	254,904,471	$	(13,883,846	)
December 31, 2012
U.S. Government Agencies Mortgage-Backed	$	142,103,991	$	(961,698	)	$	-	$	-		$	142,103,991	$	(961,698	)
State, County and Municipal		1,430,512		(4,586	)		-		-			1,430,512		(4,586	)
Asset-Backed Securities		-		-			132,427		(234,196	)		132,427		(234,196	)
	$	143,534,503	$	(966,284	)	$	132,427	$	(234,196	)	$	143,666,930	$	(1,200,480	)

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.

- 17-

(3) Investment Securities (Continued)

At December 31, 2013, the debt securities with unrealized losses have depreciated 5.17 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.  However, the Company did own one asset-backed security at December 31, 2013 which has been completely written off.  This investment is comprised of one issuance of a trust preferred security and has a book value of $0.  Management evaluates this investment on a quarterly basis utilizing a third-party valuation model.  The results of this model revealed other-than-temporary impairment and as a result, $366,623, $59,568 and $53,058 were written off during the years ended December 31, 2013, 2012 and 2011, respectively.

(4) Loans

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

	2013		2012
Commercial and Agricultural
Commercial	$	48,107,448	$	55,684,492
Agricultural		10,665,938		6,210,953
Real Estate
Commercial Construction		52,738,783		53,808,056
Residential Construction		6,549,260		5,852,238
Commercial		341,783,538		334,386,177
Residential		206,257,927		203,844,522
Farmland		47,034,426		49,056,861
Consumer and Other
Consumer		25,675,560		29,777,776
Other		12,405,582		8,428,936
Total Loans	$	751,218,462	$	747,050,011

- 18-

(4) Loans (Continued)

Commercial and agricultural loans are extended to a diverse group of businesses within the Company’s market area.  These loans are often underwritten based on the borrower’s ability to service the debt from income from the business.  Real estate construction loans often require loan funds to be advanced prior to completion of the project.  Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans.  Consumer loans are originated at the bank level.  These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.

Credit Quality Indicators.  As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (1) the risk grade assigned to commercial and consumer loans, (2) the level of classified commercial loans, (3) net charge-offs, (4) nonperforming loans, and (5) the general economic conditions in the Company’s geographic markets.

The Company uses a risk grading matrix to assign a risk grade to each of its loans.  Loans are graded on a scale of 1 to 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.

· 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.

- 19-

(4) Loans (Continued)

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

2013	Pass		Special Mention		Substandard		Total Loans
Commercial and Agricultural
Commercial	$	41,759,281	$	2,770,284	$	3,577,883	$	48,107,448
Agricultural		10,637,705		16,830		11,403		10,665,938
Real Estate
Commercial Construction		42,668,320		1,512,301		8,558,162		52,738,783
Residential Construction		6,341,530		207,730		-		6,549,260
Commercial		317,567,749		10,759,954		13,455,835		341,783,538
Residential		182,977,361		13,523,478		9,757,088		206,257,927
Farmland		44,776,355		507,122		1,750,949		47,034,426
Consumer and Other
Consumer		24,608,175		320,473		746,912		25,675,560
Other		12,356,116		711		48,755		12,405,582
Total Loans	$	683,692,592	$	29,618,883	$	37,906,987	$	751,218,462
2012
Commercial and Agricultural
Commercial	$	49,947,552	$	1,417,735	$	4,319,205	$	55,684,492
Agricultural		6,155,864		-		55,089		6,210,953
Real Estate
Commercial Construction		37,256,301		1,663,588		14,888,167		53,808,056
Residential Construction		5,748,829		103,409		-		5,852,238
Commercial		298,222,139		9,759,473		26,404,565		334,386,177
Residential		183,222,020		11,412,973		9,209,529		203,844,522
Farmland		45,495,038		913,487		2,648,336		49,056,861
Consumer and Other
Consumer		28,839,058		293,467		645,251		29,777,776
Other		8,350,772		8,907		69,257		8,428,936
Total Loans	$	663,237,573	$	25,573,039	$	58,239,399	$	747,050,011

A loan’s risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral.  Loan risk grades are subject to reassessment at various times throughout the year as part of the Company’s ongoing loan review process.  Loans with an assigned risk grade of 6 or below and an outstanding balance of $250,000 or more are reassessed on a quarterly basis.  During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

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

- 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:

	Accruing Loans
2013	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans
Commercial and Agricultural
Commercial	$	581,281	$	-	$	581,281	$	1,646,418	$	45,879,749	$	48,107,448
Agricultural		81,036		-		81,036		-		10,584,902		10,665,938
Real Estate
Commercial Construction		139,826		-		139,826		8,221,745		44,377,212		52,738,783
Residential Construction		-		-		-		-		6,549,260		6,549,260
Commercial		2,287,341		-		2,287,341		7,366,703		332,129,494		341,783,538
Residential		5,273,586		-		5,273,586		4,933,420		196,050,921		206,257,927
Farmland		350,718		-		350,718		1,629,611		45,054,097		47,034,426
Consumer and Other
Consumer		453,580		3,991		457,571		307,456		24,910,533		25,675,560
Other		198,451		-		198,451		9,146		12,197,985		12,405,582
Total Loans	$	9,365,819	$	3,991	$	9,369,810	$	24,114,499	$	717,734,153	$	751,218,462
2012
Commercial and Agricultural
Commercial	$	797,612	$	-	$	797,612	$	1,033,371	$	53,853,509	$	55,684,492
Agricultural		28,228		-		28,228		39,213		6,143,512		6,210,953
Real Estate
Commercial Construction		1,309,618		-		1,309,618		14,032,580		38,465,858		53,808,056
Residential Construction		-		-		-		-		5,852,238		5,852,238
Commercial		3,771,106		-		3,771,106		6,629,789		323,985,282		334,386,177
Residential		8,223,174		-		8,223,174		5,429,971		190,191,377		203,844,522
Farmland		140,095		-		140,095		2,413,104		46,503,662		49,056,861
Consumer and Other
Consumer		636,888		4,355		641,243		255,216		28,881,317		29,777,776
Other		4,557		-		4,557		17,491		8,406,888		8,428,936
Total Loans	$	14,911,278	$	4,355	$	14,915,633	$	29,850,735	$	702,283,643	$	747,050,011

- 21-

(4) Loans (Continued)

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.  Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $968,700, $1,634,600 and $1,639,800 for the years ended December 31, 2013, 2012 and 2011, respectively.

The following table details impaired loan data as of December 31, 2013:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected
With No Related Allowance Recorded
Commercial	$	305,272	$	305,272	$	-	$	216,057	$	24,494		$	25,193
Agricultural		-		-		-		9,803		-			-
Commercial Construction		7,856,411		4,750,157		-		4,105,370		34,908			41,164
Commercial Real Estate		20,120,403		19,252,946		-		13,198,988		493,940			503,392
Residential Real Estate		7,836,718		6,361,592		-		4,564,666		224,439			209,330
Farmland		302,629		302,629		-		1,858,654		803			869
Consumer		313,194		307,456		-		252,944		18,469			21,109
Other		9,146		9,146		-		2,287		556			575
		36,743,773		31,289,198		-		24,208,769		797,609			801,632
With An Allowance Recorded
Commercial		1,452,798		1,452,798		433,714		1,689,125		14,845			20,748
Agricultural		-		-		-		-		-			-
Commercial Construction		5,922,674		3,471,587		830,546		5,025,176		(159	)		-
Commercial Real Estate		5,874,473		5,874,473		423,685		11,072,314		157,536			148,495
Residential Real Estate		1,949,301		1,849,301		526,005		3,661,706		25,739			24,414
Farmland		1,326,982		1,326,982		85,500		663,903		44,638			46,930
Consumer		-		-		-		-		-			-
Other		-		-		-		-		-			-
		16,526,228		13,975,141		2,299,450		22,112,224		242,599			240,587
Total
Commercial		1,758,070		1,758,070		433,714		1,905,182		39,339			45,941
Agricultural		-		-		-		9,803		-			-
Commercial Construction		13,779,085		8,221,744		830,546		9,130,546		34,749			41,164
Commercial Real Estate		25,994,876		25,127,419		423,685		24,271,302		651,476			651,887
Residential Real Estate		9,786,019		8,210,893		526,005		8,226,372		250,178			233,744
Farmland		1,629,611		1,629,611		85,500		2,522,557		45,441			47,799
Consumer		313,194		307,456		-		252,944		18,469			21,109
Other		9,146		9,146		-		2,287		556			575
	$	53,270,001	$	45,264,339	$	2,299,450	$	46,320,993	$	1,040,208		$	1,042,219

- 22-

(4) Loans (Continued)

The following table details impaired loan data as of December 31, 2012:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Collected
With No Related Allowance Recorded
Commercial	$	1,508,236	$	1,041,938	$	-	$	1,052,916	$	27,407	$	28,410
Agricultural		39,213		39,213		-		58,056		-		-
Commercial Construction		10,624,917		6,414,986		-		9,194,360		27,377		51,820
Commercial Real Estate		16,565,971		15,505,907		-		26,482,274		430,339		420,549
Residential Real Estate		4,450,128		4,131,707		-		3,096,151		89,139		123,101
Farmland		2,828,539		2,413,103		-		2,326,180		42,588		55,258
Consumer		297,356		255,216		-		228,181		10,441		12,920
Other		17,491		17,491		-		24,414		1,191		1,291
		36,331,851		29,819,561		-		42,462,532		628,482		693,349
With An Allowance Recorded
Commercial		1,493,432		1,493,432		462,555		942,673		91,888		87,611
Agricultural		-		-		-		-		-		-
Commercial Construction		8,266,649		7,617,594		1,732,534		10,533,468		-		-
Commercial Real Estate		12,758,884		12,745,422		1,236,526		6,398,364		383,356		366,423
Residential Real Estate		5,514,994		4,421,809		840,492		4,288,062		144,661		117,266
Farmland		-		-		-		64,862		-		-
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-
		28,033,959		26,278,257		4,272,107		22,227,429		619,905		571,300
Total
Commercial		3,001,668		2,535,370		462,555		1,995,589		119,295		116,021
Agricultural		39,213		39,213		-		58,056		-		-
Commercial Construction		18,891,566		14,032,580		1,732,534		19,727,828		27,377		51,820
Commercial Real Estate		29,324,855		28,251,329		1,236,526		32,880,638		813,695		786,972
Residential Real Estate		9,965,122		8,553,516		840,492		7,384,213		233,800		240,367
Farmland		2,828,539		2,413,103		-		2,391,042		42,588		55,258
Consumer		297,356		255,216		-		228,181		10,441		12,920
Other		17,491		17,491		-		24,414		1,191		1,291
	$	64,365,810	$	56,097,818	$	4,272,107	$	64,689,961	$	1,248,387	$	1,264,649

- 23-

(4) Loans (Continued)

Troubled Debt Restructurings (TDRs) are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower’s financial condition.  Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time.  Not all loan modifications are TDRs.  Loan modifications are reviewed and approved by the Company’s senior lending staff, who then determine whether the loan meets the criteria for a TDR.  Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:

· Interest rate reductions - Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

· Amortization or maturity date changes - Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

· Principal reductions - These are often the result of commercial real estate loan workouts where two new notes are created.  The primary note is underwritten based upon our normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note.  The terms of the secondary note vary by situation and often involve that note being charged off, or the principal and interest payments being deferred until after the primary note has been repaid.  In situations where a portion of the note is charged off during modification, there is often no specific reserve allocated to those loans.  This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is no additional exposure on those loans.

- 24-

(4) Loans (Continued)

As discussed in Note 1, Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan.  The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of December 31, 2013.  The following tables present the number of loan contracts restructured during the 12 months ended December 31, 2013 and the pre- and post-modification recorded investment as well as the number of contracts and the recorded investment for those TDRs modified during the previous 12 months which subsequently defaulted during the period.  Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due.

Troubled Debt Restructurings

2013	# of Contracts		Pre-Modification		Post-Modification
Commercial		1	$	83,748	$	81,277
Commercial Construction		2		228,633		225,959
Commercial Real Estate		1		225,852		225,852
Residential Real Estate		4		1,885,700		1,764,399
Total Loans		8	$	2,423,933	$	2,297,487
2012
Commercial		1	$	107,749	$	107,749
Commercial Real Estate		1		56,835		56,835
Residential Real Estate		5		1,082,585		1,079,614
Total Loans		7	$	1,247,169	$	1,244,198
2011
Commercial		3	$	3,240,469	$	1,541,882
Commercial Construction		3		1,430,147		1,430,101
Commercial Real Estate		9		20,827,349		15,906,547
Residential Real Estate		8		1,505,356		1,456,878
Total Loans		23	$	27,003,321	$	20,335,408

- 25-

(4) Loans (Continued)

Troubled debt restructurings that subsequently defaulted as of December 31 are as follows:

	2013				2012				2011
	# of Contracts		Recorded Investment		# of Contracts		Recorded Investment		# of Contracts		Recorded Investment
Commercial		1	$	81,277		-	$	-		1	$	1,175,922
Commercial Construction		-		-		-		-		3		4,475,473
Commercial Real Estate		-		-		1		203,291		3		2,322,361
Residential Real Estate		-		-		1		10,000		-		-
Total Loans		1	$	81,277		2	$	213,291		7	$	7,973,756

At December 31, 2013, 2012 and 2011, all restructured loans were performing as agreed.  However, two restructured loans totaling $81,277 and $10,000 at December 31, 2013 and 2012 failed to continue to perform as agreed and, as a result, the loans were charged off in August 2013 and January 2012, respectively.  At December 31, 2011, two restructured loans totaling $999,133 and $51,998 failed to continue to perform as agreed and, as a result, the loans were charged off in March 2011 and December 2011, respectively.

(5) Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31 are as follows:

	2013			2012			2011
Balance, Beginning of Year	$	12,736,921		$	15,649,594		$	28,280,077
Provision for Loan Losses		4,485,000			6,784,767			8,250,000
Loans Charged Off		(6,227,716	)		(10,454,175	)		(22,850,673	)
Recoveries of Loans Previously Charged Off		811,781			756,735			1,970,190
Balance, End of Year	$	11,805,986		$	12,736,921		$	15,649,594

- 26-

(5) Allowance for Loan Losses (Continued)

The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the years ended December 31.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other loan categories and periodically may result in reallocation within the provision categories.

2013	Beginning Balance		Charge-Offs			Recoveries		Provision		Ending Balance
Commercial and Agricultural
Commercial	$	981,021	$	(120,690	)	$	55,829	$	100,913	$	1,017,073
Agricultural		296,175		(34,502	)		6,200		26,013		293,886
Real Estate
Commercial Construction		1,890,200		(2,071,162	)		253,459		1,709,682		1,782,179
Residential Construction		138,092		-			-		-		138,092
Commercial		5,162,839		(2,872,408	)		297,984		1,790,861		4,379,276
Residential		3,405,947		(706,242	)		64,583		513,981		3,278,269
Farmland		290,526		(20,977	)		21,762		20,183		311,494
Consumer and Other
Consumer		227,774		(397,822	)		93,520		319,781		243,253
Other		344,347		(3,913	)		18,444		3,586		362,464
	$	12,736,921	$	(6,227,716	)	$	811,781	$	4,485,000	$	11,805,986
2012
Commercial and Agricultural
Commercial	$	1,070,560	$	(653,389	)	$	139,802	$	424,048	$	981,021
Agricultural		297,168		(3,028	)		-		2,035		296,175
Real Estate
Commercial Construction		3,122,594		(4,106,124	)		209,352		2,664,378		1,890,200
Residential Construction		138,092		-			-		-		138,092
Commercial		6,448,064		(4,325,642	)		232,880		2,807,537		5,162,839
Residential		3,695,357		(960,620	)		47,690		623,520		3,405,947
Farmland		364,663		(224,725	)		4,716		145,872		290,526
Consumer and Other
Consumer		205,154		(169,249	)		81,956		109,913		227,774
Other		307,942		(11,398	)		40,339		7,464		344,347
	$	15,649,594	$	(10,454,175	)	$	756,735	$	6,784,767	$	12,736,921

- 27-

(5) Allowance for Loan Losses (Continued)

2011	Beginning Balance		Charge-Offs			Recoveries		Provision			Ending Balance
Commercial and Agricultural
Commercial	$	4,414,817	$	(841,887	)	$	127,490	$	(2,629,860	)	$	1,070,560
Agricultural		698,637		(455,165	)		454,453		(400,757	)		297,168
Real Estate
Commercial Construction		4,126,043		(6,957,181	)		557,168		5,396,564			3,122,594
Residential Construction		519,766		(481	)		-		(381,193	)		138,092
Commercial		8,029,525		(12,492,097	)		527,996		10,382,640			6,448,064
Residential		5,941,696		(1,704,887	)		149,173		(690,625	)		3,695,357
Farmland		944,323		(60,447	)		411		(519,624	)		364,663
Consumer and Other
Consumer		3,074,220		(222,878	)		145,279		(2,791,467	)		205,154
Other		531,050		(115,650	)		8,220		(115,678	)		307,942
	$	28,280,077	$	(22,850,673	)	$	1,970,190	$	8,250,000		$	15,649,594

During 2012, the Company changed its loss history period used in calculating the ALLL from a one-year average to a rolling eight-quarter average.  Although at December 31, 2012 the loss history period used was based on the annual loss rate from calendar year 2011 and the first three quarters of 2012, whereas the loss history period used at December 31, 2013 was based on the loss rate from the eight quarters ended September 30, 2013.

During the third quarter, management implemented a change to its methodology for calculating the allowance for loan losses.  This change was intended to better reflect the current position of the loan portfolio.  Prior to the third quarter, the allowance for loan loss calculation incorporated a qualitative factor related to improvements in credit administration.  These improvements, which began in 2008, included organizational changes to credit administration, specifically related to managing past due loans, grading of loans, recognition of losses and underwriting of new loans.  Primary among the organizational changes was the appointment of experienced lending officers to oversee the lending function, as well as the appointment of a chief credit officer.  Management feels these organizational changes are now fully implemented, as evidenced by a lower charge-off rate, and therefore, the qualitative factor is no longer relevant.  The removal of this qualitative factor did not result in a significant adjustment to the recorded allowance for loan loss balance.

The Company determines its individual reserves during its quarterly review of substandard loans.  This process involves reviewing all loans with a risk grade of 6 or greater and an outstanding balance of $250,000 or more, regardless of the loans impairment classification.  Effective March 31, 2013, management increased the dollar threshold of this review process from $50,000 to $250,000.  The threshold change resulted in loans totaling $4.1 million at December 31, 2013 being removed from the individual impairment review process and being placed in the collective review process.  These loans are now subject to general reserves.

- 28-

(5) Allowance for Loan Losses (Continued)

Since not all loans in the substandard category are considered impaired, this quarterly review process may result in the identification of specific reserves on nonimpaired loans.  Management considers those loans graded substandard, but not classified as impaired, to be higher risk loans and, therefore, makes specific allocations to the allowance for those loans if warranted.  The total of such loans is $6.7 million and $10.8 million as of December 31, 2013 and 2012, respectively.  Specific allowance allocations were made for these loans totaling $261 thousand and $899 thousand as of December 31, 2013 and 2012, respectively.  Since these loans are not considered impaired, both the loan balance and related specific allocation are included in the “Collectively Evaluated for Impairment” column of the following tables.

At December 31, 2013, impaired loans totaling $2.82 million were below the $250 thousand review threshold and were not individually reviewed for impairment.  Those loans were subject to the bank’s general loan loss reserve methodology and are included in the “Collectively Evaluated for Impairment” column of the following tables.  Likewise, at December 31, 2012 and 2011, impaired loans totaling $1.03 million and $995 thousand, respectively, were below the $50 thousand review threshold and were subject to the bank’s general loan loss reserve methodology and are included in the “Collectively Evaluated for Impairment” column of the following tables.

	Ending Allowance Balance						Ending Loan Balance
2013	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and Agricultural
Commercial	$	433,714	$	583,359	$	1,017,073	$	1,542,058	$	46,565,390	$	48,107,448
Agricultural		-		293,886		293,886		-		10,665,938		10,665,938
Real Estate
Commercial Construction		830,546		951,633		1,782,179		7,971,298		44,767,485		52,738,783
Residential Construction		-		138,092		138,092		-		6,549,260		6,549,260
Commercial		423,685		3,955,591		4,379,276		24,757,942		317,025,596		341,783,538
Residential		526,005		2,752,264		3,278,269		6,545,490		199,712,437		206,257,927
Farmland		85,500		225,994		311,494		1,617,206		45,417,220		47,034,426
Consumer and Other
Consumer		-		243,253		243,253		-		25,675,560		25,675,560
Other		-		362,464		362,464		9,146		12,396,436		12,405,582
Total End of Year Balance	$	2,299,450	$	9,506,536	$	11,805,986	$	42,443,140	$	708,775,322	$	751,218,462

- 29-

(5) Allowance for Loan Losses (Continued)

	Ending Allowance Balance						Ending Loan Balance
2012	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and Agricultural
Commercial	$	462,555	$	518,466	$	981,021	$	2,512,133	$	53,172,359	$	55,684,492
Agricultural		-		296,175		296,175		-		6,210,953		6,210,953
Real Estate
Commercial Construction		1,732,534		157,666		1,890,200		13,892,135		39,915,921		53,808,056
Residential Construction		-		138,092		138,092		-		5,852,238		5,852,238
Commercial		1,236,526		3,926,313		5,162,839		28,205,405		306,180,772		334,386,177
Residential		840,492		2,565,455		3,405,947		8,022,249		195,822,273		203,844,522
Farmland		-		290,526		290,526		2,393,775		46,663,086		49,056,861
Consumer and Other
Consumer		-		227,774		227,774		28,007		29,749,769		29,777,776
Other		-		344,347		344,347		17,491		8,411,445		8,428,936
Total End of Year Balance	$	4,272,107	$	8,464,814	$	12,736,921	$	55,071,195	$	691,978,816	$	747,050,011

	Ending Allowance Balance						Ending Loan Balance
2011	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and Agricultural
Commercial	$	308,211	$	762,349	$	1,070,560	$	2,237,878	$	46,748,224	$	48,986,102
Agricultural		-		297,168		297,168		-		8,421,884		8,421,884
Real Estate
Commercial Construction		2,693,571		429,023		3,122,594		24,212,519		34,333,301		58,545,820
Residential Construction		-		138,092		138,092		-		3,530,502		3,530,502
Commercial		2,060,815		4,387,249		6,448,064		35,715,026		279,565,722		315,280,748
Residential		674,998		3,020,359		3,695,357		5,614,744		188,023,073		193,637,817
Farmland		11,878		352,785		364,663		486,683		47,738,723		48,225,406
Consumer and Other
Consumer		1,632		203,522		205,154		9,596		30,439,707		30,449,303
Other		-		307,942		307,942		-		9,243,739		9,243,739
Total End of Year Balance	$	5,751,105	$	9,898,489	$	15,649,594	$	68,276,446	$	648,044,875	$	716,321,321

- 30-

(6) Premises and Equipment

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

	2013			2012
Land	$	7,790,167		$	7,780,167
Building		23,832,454			23,758,761
Furniture, Fixtures and Equipment		13,846,579			12,923,699
Leasehold Improvements		970,346			948,260
Construction in Progress		236,591			-
		46,676,137			45,410,887
Accumulated Depreciation		(21,799,668	)		(20,494,781	)
	$	24,876,469		$	24,916,106

Depreciation charged to operations totaled $1,527,392 in 2013, $1,676,820 in 2012 and $1,790,041 in 2011.

Certain Company facilities and equipment are leased under various operating leases.  Rental expense approximated $490,000 for 2013, $447,000 for 2012 and $376,000 for 2011.

Future minimum rental payments as of December 31, 2013 are as follows:

Year Ending December 31	Amount
2014	$	53,458
2015		42,000
2016		42,000
2017		38,500
	$	175,958

(7) Other Real Estate Owned

The aggregate carrying amount of Other Real Estate Owned (OREO) at December 31, 2013, 2012 and 2011 was $15,502,462, $15,940,693 and $20,445,805, respectively.  All of the Company’s other real estate owned represents properties acquired through foreclosure or deed in lieu of foreclosure.  The following table details the change in OREO during 2013, 2012 and 2011 as of December 31:

	2013			2012			2011
Balance, Beginning of Year	$	15,940,693		$	20,445,085		$	20,207,806
Additions		10,251,006			9,729,174			12,555,622
Sales of OREO		(7,804,080	)		(9,711,890	)		(9,804,669	)
Loss on Sale		(1,563,739	)		(1,818,967	)		(1,102,613	)
Provision for Losses		(1,321,418	)		(2,702,709	)		(1,411,061	)
Balance, End of Year	$	15,502,462		$	15,940,693		$	20,445,085

- 31-

(8) Intangible Assets

The following is an analysis of the core deposit intangible activity for the years ended December 31:

	Core Deposit Intangible		Accumulated Amortization			Net Core Deposit Intangible
Core Deposit Intangible
Balance, December 31, 2011	$	1,056,693	$	(797,435	)	$	259,258
Amortization Expense		-		(35,748	)		(35,748	)
Balance, December 31, 2012		1,056,693		(833,183	)		223,510
Amortization Expense		-		(35,749	)		(35,749	)
Balance, December 31, 2013	$	1,056,693	$	(868,932	)	$	187,761

Amortization expense related to the core deposit intangible was $35,749, $35,748 and $35,749 for the years ended December 31, 2013, 2012 and 2011.  Amortizations expense will continue at an annual rate of approximately $35,749 through the first quarter of 2019, at which point the core deposit will be fully amortized.

(9) Income Taxes

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

	2013		2012			2011
Current Federal (Benefit) Expense	$	156,642	$	(6,114	)	$	311,174
Deferred Federal (Benefit) Expense		2,178,222		1,204,439			867,006
Federal Income Tax (Benefit) Expense		2,334,864		1,198,325			1,178,180
Current State Income Tax (Benefit) Expense		-		2,526			(74,297	)
	$	2,334,864	$	1,200,851		$	1,103,883

The federal income tax (benefit) expense of $2,334,864 in 2013, $1,198,325 in 2012 and $1,178,180 in 2011 is different than the income taxes computed by applying the federal statutory rates to income before income taxes.  The reasons for the differences are as follows:

	2013			2012			2011
Statutory Federal Income Taxes	$	2,367,729		$	1,306,331		$	1,228,538
Tax-Exempt Interest		(110,752	)		(94,891	)		(126,468	)
Interest Expense Disallowance		6,445			4,908			8,751
Premiums on Officers’ Life Insurance		(111,749	)		(59,603	)		(52,431	)
Meal and Entertainment Disallowance		26,549			25,567			20,693
Other		156,642			16,013			99,097
Actual Federal Income Taxes	$	2,334,864		$	1,198,325		$	1,178,180

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(9) Income Taxes (Continued)

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

	2013			2012
Deferred Tax Assets
Allowance for Loan Losses	$	4,014,035		$	4,330,553
Other Real Estate		1,404,812			1,668,653
Deferred Compensation		303,380			342,547
Investments		340,000			-
Goodwill		301,238			345,762
Net Operating Loss Carryforward		730,484			2,310,708
Other		343,919			529,706
		7,437,868			9,527,929
Deferred Tax Liabilities
Premises and Equipment		(1,322,377	)		(1,232,905	)
Other		(2,874	)		(4,185	)
		(1,325,251	)		(1,237,090	)
Deferred Tax Assets (Liabilities) on Unrealized Securities Gains (Losses)		4,550,362			77,177
Net Deferred Tax Assets	$	10,662,979		$	8,368,016

The deferred tax assets are included in Other Assets in the consolidated balance sheets.  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 as of December 31 follows.

	2013			2012			2011
Balance, Beginning	$	38,676		$	33,368		$	78,121
Positions Taken During the Current Year		7,247			11,794			14,275
Reductions Resulting from Lapse of Statutes of Limitation		(3,596	)		(6,486	)		(59,028	)
Balance, Ending	$	42,327		$	38,676		$	33,368

The net increase of $3,651 and $5,308 is included in income tax expense for the years ended December 31, 2013 and 2012, respectively.

The Company has cumulative federal net operating loss carryforwards of $2,148,335 at December 31, 2013 that expire beginning in 2022.

- 33-

(10) Deposits

The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $400,552 and $389,331 as of December 31, 2013 and 2012, respectively.

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

	2013		2012
Interest-Bearing Demand	$	357,290,975	$	314,030,843
Savings		54,094,617		48,777,743
Time, $100,000 and Over		220,672,794		211,244,750
Other Time		240,210,393		281,665,013
	$	872,268,779	$	855,718,349

At December 31, 2013 and 2012, the Company had brokered deposits of $26,579,934 and $28,229,608, respectively.  Of the brokered deposits at December 31, 2013 and 2012, $26,579,934 and $28,229,608 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 $0 at December 31, 2013 and 2012.  The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $143,388,694 and $161,530,500 as of December 31, 2013 and 2012, respectively.

As of December 31, 2013, the scheduled maturities of certificates of deposit are as follows:

Year	Amount
2014	$	322,971,106
2015		69,000,752
2016		37,944,799
2017		12,974,997
2018 and Thereafter		17,991,533
	$	460,883,187

(11) Other Borrowed Money

Other borrowed money at December 31 is summarized as follows:

	2013		2012
Federal Home Loan Bank Advances	$	40,000,000	$	35,000,000

Advances from the Federal Home Loan Bank (FHLB) have maturities ranging from 2017 to 2020 and interest rates ranging from 0.49 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.  At December 31, 2013, the book value of those loans pledged approximated $90,000,000.  At December 31, 2013, the Company had remaining credit availability from the FHLB of approximately $126,490,000.  The Company may be required to pledge additional qualifying collateral in order to utilize the full amount of the remaining credit line.

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(11) Other Borrowed Money (Continued)

Other borrowed money of $9,000,000 matures in 2017, with the remainder of $31,000,000 maturing in 2018 and thereafter.  At December 31, 2013, $30,000,000 of FHLB advances are subject to fixed rates of interest, while the remaining $10,000,000 are subject to floating interest rates which will convert to fixed rates of interests after two years.

The Company also has available federal funds lines of credit with various financial institutions totaling $43,000,000, of which there were none outstanding at December 31, 2013.

The Company has the ability to borrow funds from the Federal Reserve Bank (FRB) of Atlanta utilizing the discount window.  The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the FRB on a short-term basis to meet temporary liquidity shortages caused by internal or external disruptions.  At December 31, 2013, the Company had borrowing capacity available under this arrangement, with no outstanding balances.  The Company would be required to pledge certain available-for-sale investment securities as collateral under this agreement.

In addition, at December 31, 2013, the Company had an available repurchase agreement line of credit with a third party totaling $50,000,000.  Use of this credit facility is subject to the underwriting and risk management policies of the third party in effect at the time of the request.  Such policies may take into consideration current market conditions, the current financial condition of the Company and the ability of the Company to provide adequate securities as collateral for the transaction, among other factors.

(12) Subordinated Debentures (Trust Preferred Securities)

Total

3-Month

Added

Interest

5-Year

Description

Date

Amount

Libor Rate

Points

Rate

Maturity

Call Option

(In Thousands)

Colony Bankcorp Statutory Trust III

6/17/2004

$

4,640

0.24385

2.68

2.92385

6/14/2034

6/17/2009

Colony Bankcorp Capital Trust I

4/13/2006

5,155

0.24660

1.50

1.74660

4/13/2036

4/13/2011

Colony Bankcorp Capital Trust II

3/12/2007

9,279

0.24685

1.65

1.89685

3/12/2037

3/12/2012

Colony Bankcorp Capital Trust III

9/14/2007

5,155

0.23585

1.40

1.63585

9/14/2037

9/14/2012

The Trust Preferred Securities are recorded as subordinated debentures on the consolidated balance sheets, but subject to certain limitations, qualify as Tier 1 Capital for regulatory capital purposes.  The proceeds from these offerings were used to fund certain acquisitions, pay off holding Company debt and inject capital into the bank subsidiary.

On February 13, 2012, the Company announced the suspension of the quarterly interest payments on the Trust Preferred Securities.  Under the terms of the trust documents, the Company may defer payments of interest for up to 20 consecutive quarterly periods without default or penalty.  The regularly scheduled interest payments will continue to be accrued for payment in the future and reported as an expense in the current period.  At December 31, 2013, accrued but unpaid interest expense totaled $1,069,769.

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(13) Preferred Stock

On January 9, 2009 the Company received $28.0 million of equity capital by issuing to the United States Department of the Treasury (Treasury) 28,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock) and a warrant (the Warrant) to purchase up to 500,000 shares of the Company’s common stock. The Preferred stock qualifies as Tier 1 capital and is nonvoting, other than class voting rights on certain matters that could adversely affect the Preferred Stock.  The Preferred Stock may be redeemed by the Company at the liquidation preference of $1,000 per share, plus any accrued and unpaid dividends.  The Warrant may be exercised on or before January 9, 2019 at an exercise price of $8.40 per share.  No voting rights may be exercised with respect to the shares of the Warrant until the Warrant has been exercised.

On January 29, 2013, the Company’s 28,000 shares of Preferred Stock was sold by the Treasury to the public through an auction.  On June 5, 2013, the Company’s Warrant for 500,000 shares of common stock was also sold by the Treasury to the public through an auction.  Neither the sale of the Preferred Stock nor the sale of the Warrant to new investors resulted in any accounting entries and neither transaction had an impact on the Company’s capital position.

The Preferred Stock requires a cumulative cash dividend be paid quarterly at a rate of 5 percent per annum for the first five years and at 9 percent per annum thereafter.  On February 13, 2012, the Company announced the suspension of dividends on Preferred Stock.  Unpaid dividends on the Preferred Stock must be declared and set aside for the benefit of the holders of the Preferred Stock before any dividend may be declared on common stock.  At December 31, 2013 there were accumulated dividends in arrears of $3.12 million, approximately $111 per share, including accrued interest.  Beginning January 9, 2014, cumulated dividends on the Preferred Shares will continue to accrue at a rate of 9 percent per annum.

(14) Restricted Stock - Unearned Compensation

In April 2004, the stockholders 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 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 17,798 shares have been forfeited; thus, the remaining shares which may be issued are 108,042 at December 31, 2013.  During 2013, there were no shares of restricted stock issued or forfeited. The shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity.  The cost of the shares, when issued, is amortized against earnings using the straight-line method over the restriction period, typically three years.

(15) Employee Benefit Plan

The Company offers a defined contribution 401(k) Profit Sharing Plan (the Plan) which covers substantially all employees who meet certain age and service requirements.  The Plan allows employees to make voluntary pre-tax salary deferrals to the Plan.  The Company, at its discretion, may elect to make an annual contribution to the Plan equal to a percentage of each participating employee’s salary.  Such discretionary contributions must be approved by the Company’s board of directors.  Employees are fully vested in the Company contributions after six years of service.  The Company made no discretionary contributions in 2013, 2012 or 2011.

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(16) 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, 2013 and 2012, the following financial instruments were outstanding whose contract amounts represent credit risk:

	Contract Amount
	2013		2012
Commitments to Extend Credit	$	65,688,000	$	64,147,000
Standby Letters of Credit		1,411,000		1,141,000

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.

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.

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(17) 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 $892,294 and $1,007,490 as of December 31, 2013 and 2012, respectively.  Benefit payments under the contracts were $188,240 in 2013 and $203,904 in 2012.  Provisions charged to operations totaled $75,777 in 2013, $82,250 in 2012 and $98,901 in 2011.

Fee income recognized with deferred compensation plans totaled $164,073 in 2013, $175,302 in 2012 and $154,210 in 2011.

(18) Supplemental Cash Flow Information

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

	2013		2012		2011
Interest Expense	$	7,111,361	$	10,942,113	$	17,204,476
Income Taxes	$	-	$	-	$	390,152

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

	2013		2012		2011
Acquisitions of Real Estate Through Loan Foreclosures	$	10,251,006	$	9,729,174	$	12,555,622
Unrealized (Gain) Loss on Investment Securities	$	13,523,049	$	3,120,540	$	(3,802,320	)

(19) Related Party Transactions

The following table reflects the activity and aggregate balance of direct and indirect loans to directors, executive officers or principal holders of equity securities of the Company. All such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than a normal risk of collectibility.  A summary of activity of related party loans is shown below:

	2013			2012
Balance, Beginning	$	4,776,492		$	5,504,230
New Loans		7,610,259			8,075,835
Repayments		(8,322,163	)		(10,510,517	)
Transactions Due to Changes in Directors		-			1,706,944
Balance, Ending	$	4,064,588		$	4,776,492

- 38-

(20) Fair Value of Financial Instruments and Fair Value Measurements

Generally accepted accounting standards in the U.S. require disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value.  The assumptions used in the estimation of the fair value of Colony 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 and is classified level 1.

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.  If a comparable is not available, the investment securities are classified as level 3.

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

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.

Bank-Owned Life Insurance - The carrying value of bank-owned life insurance policies approximates 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 and is classified as level 1.  The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities and is classified as level 2.

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

Other Borrowed Money - The fair value of other borrowed money is calculated by discounting contractual cash flows using an estimated interest rate based on current rates available to the Company for debt of similar remaining maturities and collateral terms. Other borrowed money is classified as level 2 due to their expected maturities.

- 39-

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

The carrying amount and estimated fair values of the Company’s financial instruments as of December 31 are as follows:

	Carrying		Estimated		Level
2013	Amount		Fair Value			1		2		3
	(in Thousands)
Assets
Cash and Short-Term Investments	$	68,147	$	68,147	$	68,147	$	-	$	-
Investment Securities Available for Sale		263,258		263,258		-		262,317		941
Investment Securities Held to Maturity		37		37		-		37		-
Federal Home Loan Bank Stock		3,164		3,164		3,164		-		-
Loans, Net		739,052		741,112		-		729,436		11,676
Bank-Owned Life Insurance		10,165		10,165		10,165		-		-
Liabilities
Deposits		987,529		989,101		526,646		462,455		-
Subordinated Debentures		24,229		24,229		24,229		-		-
Other Borrowed Money		40,000		42,074		-		42,074		-
2012
Assets
Cash and Short-Term Investments	$	71,041	$	71,041	$	71,041	$	-	$	-
Investment Securities Available for Sale		268,300		268,300		-		267,162		1,138
Investment Securities Held to Maturity		41		42		-		42		-
Federal Home Loan Bank Stock		3,364		3,364		3,364		-		-
Loans, Net		734,079		735,115		-		713,109		22,006
Liabilities
Deposits		979,685		982,215		486,775		495,440		-
Subordinated Debentures		24,229		24,229		24,229		-		-
Other Borrowed Money		35,000		38,424		-		38,424		-

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.

- 40-

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements

Generally accepted accounting principles related to Fair Value Measurements define fair value, establish a framework for measuring fair value, establish a three-level valuation hierarchy for disclosure of fair value measurement and enhance disclosure requirements for fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:

· Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

· Level 3 inputs to the valuation methodology are unobservable and represent the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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

Assets

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

- 41-

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements

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

Other Real Estate - Other real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned.  Typically, an external, third-party appraisal is performed on the collateral upon transfer into the other real estate owned account to determine the asset’s fair value.  Subsequent adjustments to the collateral’s value may be based upon either updated third-party appraisals or management’s knowledge of the collateral and the current real estate market conditions.   Appraised amounts used in determining the asset’s fair value, whether internally or externally prepared, are discounted 10 percent to account for selling and marketing costs.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are typically significant and result in a level 3 classification of the inputs for determining fair value.  Because of the high degree of judgment required in estimating the fair value of other real estate owned assets and because of the relationship between fair value and general economic conditions, we consider the fair value of other real estate owned assets to be highly sensitive to changes in market conditions.

- 42-

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements (Continued)

Assets (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis -The following table presents the recorded amount of the Company’s assets measured at fair value on a recurring and nonrecurring basis as of December 31, 2013 and 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.  The table below includes only impaired loans with a specific reserve and only other real estate properties with a valuation allowance at December 31, 2013.  Those impaired loans and other real estate properties are shown net of the related specific reserves and valuation allowances.

			Fair Value Measurements at Reporting Date Using
2013	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	$	259,348,058	$	-	$	259,348,058	$	-
State, County and Municipal		3,909,832		-		2,968,567		941,265
	$	263,257,890	$	-	$	262,316,625		941,265
Nonrecurring
Impaired Loans	$	11,675,691	$	-	$	-	$	11,675,691
Other Real Estate	$	7,019,799	$	-	$	-	$	7,019,799
2012
Recurring
Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	263,059,074	$	-	$	263,059,074	$	-
State, County and Municipal		4,004,010		-		2,998,199		1,005,811
Corporate Obligations		1,104,900		-		1,104,900		-
Asset-Backed Securities		132,427		-		-		132,427
	$	268,300,411	$	-	$	267,162,173	$	1,138,238
Nonrecurring
Impaired Loans	$	22,006,150	$	-	$	-	$	22,006,150
Other Real Estate	$	8,817,204	$	-	$	-	$	8,817,204

Liabilities

The Company did not identify any liabilities that are required to be presented at fair value.

- 43-

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements (Continued)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

The following tables present quantitative information about the significant unobservable inputs used in the fair value measurements for assets in level 3 of the fair value hierarchy measured on a nonrecurring basis at December 31, 2013 and 2012.  These tables are comprised primarily of collateral dependent impaired loans and other real estate owned:

	December 31, 2013		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired Loans
Commercial	$	1,019,084	Sales Comparison	Adjustment for Differences Between the Comparable Sales		0.00%-15.00% (7.50%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		10.00%-50.00% (30.00%)
Real Estate
Commercial Construction		2,641,041	Sales Comparison	Adjustment for Differences Between the Comparable Sales		(16.00)%-28.00% (6.00%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		0.00%-10.00% (5.00%)
			Income Approach	Capitalization Rate		8.50%
Residential Real Estate		1,323,296	Sales Comparison	Adjustment for Differences Between the Comparable Sales		0.00%-46.00% (23.00%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		0.00%-25.00% (12.50%)
Commercial Real Estate		5,450,788	Sales Comparison	Adjustment for Differences Between the Comparable Sales		(27.20%)-216.80% (94.80%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		25.00%-90.00% (57.50%)
			Income Approach	Capitalization Rate		11.00%
Farmland		1,241,482	Sales Comparison	Adjustment for Differences Between the Comparable Sales		(55.00%)-388.00% (166.50)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		10.00%-35.00% (22.50%)
Other Real Estate Owned		7,019,799	Sales Comparison	Adjustment for Differences Between the Comparable Sales		(10.00%)-319.10% (154.55%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		0.36%-87.81% (29.99%)
			Income Approach	Discount Rate		10.00%

- 44-

(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements (Continued)

	December 31, 2012		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired Loans
Commercial	$	1,030,877	Sales Comparison	Adjustment for Differences Between the Comparable Sales		(45.00%)-80.00% (17.50%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		0.00%-80.00% (40.00%)
			Income Approach	Capitalization Rate		8.50%
Real Estate
Commercial Construction		5,885,060	Sales Comparison	Adjustment for Differences Between the Comparable Sales		0.00%-45.00% (22.50%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		0.00%-40.00% (20.00%)
			Income Approach	Discount Rate		7.94%
Residential Real Estate		3,581,317	Sales Comparison	Adjustment for Differences Between the Comparable Sales		0.00%-24.00% (12.00%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		0.00%-40.00% (20.00%)
			Income Approach	Capitalization Rate		8.90%
Commercial Real Estate		11,508,896	Sales Comparison	Adjustment for Differences Between the Comparable Sales		(7.40%)-73.70% (32.95%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		0.00%-40.00% (20.00%)
			Income Approach	Capitalization Rate		9.50%
				Discount Rate		5.13%
Other Real Estate Owned		8,817,204	Sales Comparison	Adjustment for Differences Between the Comparable Sales		(35.00%)-129.50% (47.25%)
				Management Adjustments for Age of Appraisals and/or Current Market Conditions		3.10%-61.32% (32.33%)
			Income Approach	Discount Rate		3.00%

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(20) Fair Value of Financial Instruments and Fair Value Measurements (Continued)

Fair Value Measurements (Continued)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (Continued)

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, 2013, 2012 and 2011.

	Available for Sale Securities
	2013			2012			2011
Balance, Beginning	$	1,138,238		$	1,122,427		$	1,016,997
Transfers into Level 3		-			788,933			-
Transfers out of Level 3		(41,908	)		-			-
Securities Purchased During the Year		-			-			-
Securities Called During the Year		-			(1,000,000	)		-
Loss on OTTI Impairment Included in Noninterest Income		(366,623	)		(59,568	)		(53,058	)
Unrealized Gains Included in Other Comprehensive Income		211,558			78,201			158,488
Balance, Ending	$	941,265		$	1,138,238		$	1,122,427

The Company’s policy is to recognize transfers in and transfers out of levels 1, 2 and 3 as of the end of a reporting period.  During the year ended December 31, 2013, the Company had transfers out of level 3 and into level 2.  The transfers out of level 3 were the result of increased market activity for these types of securities, as well as more current credit ratings on these securities.  During the year ended December 31, 2012, the Company transferred certain state, county and municipal securities out of level 2 and into     level 3.  The transfers into level 3 were the result of decreased market activity for these types of securities, as well as a lack of current credit ratings on these securities.  There were no gains or losses recognized as a result of the transfers.  There were no transfers of securities between level 1 and level 2 for the years ended December 31, 2013, 2012 or 2011.

The following table presents quantitative information about recurring level 3 fair value measurements as of December 31, 2013.

	Fair Value			Valuation Techniques	Unobservable Inputs		Range (Weighted Avg)
State, County and Municipal		$	941,265	Discounted Cash Flow		Discount Rate or Yield		N/A*

*  The Company relies on a third-party pricing service to value its municipal securities.  The details of the unobservable inputs and other adjustments used by the third-party pricing service were not readily available to the Company.

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(21) 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, 2013, 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, 2013, 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.

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(21) Regulatory Capital Matters (Continued)

The following table summarizes regulatory capital information as of December 31, 2013 and 2012 on a consolidated basis and for its wholly-owned subsidiary, as defined.

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2013	(In Thousands)
Total Capital to Risk-Weighted Assets
Consolidated	$	129,569		17.06	%	$	60,791		8.00	%		N/A		N/A
Colony Bank		131,024		17.29			60,638		8.00		$	75,797		10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated		120,048		15.81			30,396		4.00			N/A		N/A
Colony Bank		121,521		16.03			30,319		4.00			45,478		6.00
Tier I Capital to Average Assets
Consolidated		120,048		10.57			45,419		4.00			N/A		N/A
Colony Bank		121,521		10.72			45,333		4.00			56,666		5.00
As of December 31, 2012
Total Capital to Risk-Weighted Assets
Consolidated	$	122,630		16.47	%	$	59,548		8.00	%		N/A		N/A
Colony Bank		123,463		16.61			59,474		8.00		$	74,342		10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated		113,283		15.22			29,774		4.00			N/A		N/A
Colony Bank		114,128		15.35			29,737		4.00			44,605		6.00
Tier I Capital to Average Assets
Consolidated		113,283		10.22			44,343		4.00			N/A		N/A
Colony Bank		114,128		10.31			44,282		4.00			55,352		5.00

Effective October 1, 2013, the Memorandum of Understanding (MOU) the Bank had been operating under was lifted; however, the Bank remains subject to a Board Resolution (BR) which requires, among other things, that the Bank 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 percent and total risk-based capital to total risk-weighted assets of 10 percent during the life of the BR.  The BR also requires that, prior to declaring or paying any cash dividend to the Company, the Bank must obtain written consent of its regulators.  Additional requirements of the BR are discussed in Part 1, Item 1 of the Company’s December 31, 2013 Form 10-K filed with the Securities Exchange Commission on March 14, 2014.  Failure to comply with the terms of the BR could have an adverse impact on the Company’s consolidated financial condition.

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

The parent company’s balance sheets as of December 31, 2013 and 2012 and the related statements of operations and comprehensive income (loss) 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

	2013			2012
Cash	$	1,422,289		$	494,432
Premises and Equipment, Net		1,272,965			1,284,968
Investment in Subsidiary, at Equity		114,559,866			119,646,209
Other		1,221,285			821,145
Total Assets	$	118,476,405		$	122,246,754
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Dividends Payable	$	3,119,146		$	1,610,385
Other		1,174,020			648,202
		4,293,166			2,258,587
Subordinated Debt		24,229,000			24,229,000
Stockholders’ Equity
Preferred Stock, Stated Value $1,000; Authorized 10,000,000 Shares, Issued 28,000 Shares		28,000,000			27,827,053
Common Stock, Par Value $1; Authorized 20,000,000 Shares, Issued 8,439,258 Shares as of December 31, 2013 and 2012		8,439,258			8,439,258
Paid-In Capital		29,145,094			29,145,094
Retained Earnings		33,444,913			30,497,576
Accumulated Other Comprehensive Loss, Net of Tax		(9,075,026	)		(149,814	)
		89,954,239			95,759,167
Total Liabilities and Stockholders’ Equity	$	118,476,405		$	122,246,754

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

COLONY BANKCORP, INC. (PARENT ONLY)

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

	2013		2012			2011
Income
Dividends from Subsidiary	$	1,515,549	$	17,372		$	15,265
Management Fees		581,334		590,422			505,414
Other		96,953		101,397			98,180
		2,193,836		709,191			618,859
Expenses
Interest		516,641		554,004			508,081
Amortization		2,250		2,250			2,250
Salaries and Employee Benefits		748,149		735,919			734,104
Other		543,139		558,151			656,914
		1,810,179		1,850,324			1,901,349
Income (Loss) Before Taxes and Equity in Undistributed Earnings of Subsidiary		383,657		(1,141,133	)		(1,282,490	)
Income Tax Benefits		406,518		365,691			425,605
Income (Loss) Before Equity in Undistributed Earnings of Subsidiary		790,175		(775,442	)		(856,885	)
Equity in Undistributed Earnings of Subsidiary		3,838,870		3,416,740			3,390,480
Net Income		4,629,045		2,641,298			2,533,595
Preferred Stock Dividends		1,508,761		1,435,385			1,400,000
Net Income Available to Common Stockholders	$	3,120,284	$	1,205,913		$	1,133,595

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(22) 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

	2013			2012			2011
Net Income	$	4,629,045		$	2,641,298		$	2,533,595
Other Comprehensive Income (Loss), Net of Tax
Gains (Losses) on Securities Arising During the Year, Net of Tax Effect of $(4,597,836), $(1,060,984) and $1,292,789, Respectively		(9,165,323	)		(186,830	)		4,439,108
Impairment Loss on Securities, Net of Tax Effect of $(124,652), $(20,253) and $(18,040), Respectively		241,971			39,315			35,018
Realized Gains (Losses) on Sale of AFS Securities, Net of Tax Effect of $959, $984,991 and $1,012,064, Respectively		(1,860	)		(1,912,041	)		(1,964,595	)
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effects		(8,925,212	)		(2,059,556	)		2,509,531
Comprehensive Income (Loss)	$	(4,296,167	)	$	581,742		$	5,043,126

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

COLONY BANKCORP, INC. (PARENT ONLY)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

	2013			2012			2011
Cash Flows from Operating Activities
Net Income	$	4,629,045		$	2,641,298		$	2,533,595
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities
Depreciation and Amortization		80,711			93,427			112,651
Equity in Undistributed Earnings of Subsidiary		(3,838,870	)		(3,416,740	)		(3,390,480	)
Other		125,679			124,543			24,977
		996,565			(557,472	)		(719,257	)
Cash Flows from Investing Activities
Purchases of Premises and Equipment		(68,708	)		-			(1,900	)
Cash Flows from Financing Activities
Dividends Paid on Preferred Stock		-			-			(1,400,000	)
Increase (Decrease) in Cash		927,857			(557,472	)		(2,121,157	)
Cash, Beginning		494,432			1,051,904			3,173,061
Cash, Ending	$	1,422,289		$	494,432		$	1,051,904

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(23) Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during each period.  Diluted earnings per share reflects the potential dilution of restricted stock and common stock warrants.  Net income available to common stockholders represents net income (loss) after preferred stock dividends.  The following table presents earnings per share for the years ended December 31, 2013, 2012 and 2011:

	2013		2012		2011
Numerator
Net Income (Loss) Available to Common Stockholders	$	3,120,284	$	1,205,913	$	1,133,595
Denominator
Weighted Average Number of Common Shares Outstanding for Basic Earnings Per Common Share		8,439,258		8,439,258		8,439,258
Dilutive Effect of Potential Common Stock
Restricted Stock		-		-		-
Stock Warrants		-		-		-
Weighted-Average Number of Shares Outstanding for Diluted Earnings Per Common Share		8,439,258		8,439,258		8,439,258
Earnings (Loss) Per Share - Basic	$	0.37	$	0.14	$	0.13
Earnings (Loss) Per Share - Diluted	$	0.37	$	0.14	$	0.13

For the years ended December 31, 2013, 2012 and 2011, respectively, the Company has excluded 500,000, 500,000 and 501,855 common stock equivalents with strike prices that would cause them to be antidilutive.

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