UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549








FORM
10-K





x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


(Fee
Required)


For the
Fiscal Year Ended December 31, 2008





o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


(No
Fee Required)


For the
Transition Period from _____________to ______________





Commission
File Number 000-12436








COLONY
BANKCORP, INC.


(Exact
Name of Registrant Specified in its Charter)








Georgia
                  58-1492391(State
      or Other Jurisdiction of Incorporation or Organization)
                  (I.R.S.
      Employer Identification Number)115
      South Grant StreetFitzgerald,
      Georgia
                  31750(Address
      of Principal Executive Offices)
                  (Zip
      Code)





(229)
426-6000


Issuer’s
Telephone Number, Including Area Code





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





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





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








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





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes  o  No  x





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days.   Yes x  No o





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a nonaccelerated filer or a smaller reporting
company.  See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.  (Check one): (Do not check
if a smaller reporting company)


Large
      Accelerated Filer     o
              Accelerated
      Filer      x
              Nonaccelerated
      Filer     o
              Smaller
      Reporting Company     o





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





State the
aggregate market value of the voting stock held by nonaffiliates computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of June 30, 2008:  $61,082,068 based on stock
price of $11.35.





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:  7,231,163 shares of $1.00 par
value common stock as of March 12, 2009.





DOCUMENTS
INCORPORATED BY REFERENCE





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







- 1
-





TABLE OF
CONTENTS





PagePART IForward Looking Statement Disclosure
                    3Item
      1.
                    Business
                    5Item
      1A.
                    Risk Factors
                    20Item
      1B.
                    Unresolved Staff Comments
                    27Item
      2.
                    Properties
                    27Item
      3.
                    Legal Proceedings
                    27Item
      4.
                    Submission of Matters to a Vote of Security
      Holders
                    27PART IIItem
      5.
                    Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                    28Item
      6.
                    Selected Financial Data
                    30Item
      7.
                    Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                    32Item
      7A.
                    Quantitative and Qualitative Disclosures About Market
      Risk
                    62Item
      8.
                    Financial Statements and Supplementary Data
                    62Item
      9.
                    Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                    63Item
      9A.
                    Controls and Procedures
                    64Item
      9B.
                    Other Information
                    66PART IIIItem
      10.
                    Directors and Executive Officers and Corporate
      Governance
                    66Item
      11.
                    Executive Compensation
                    66Item
      12.
                    Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                    67Item
      13.
                    Certain Relationships and Related Transactions and Director
      Independence
                    67Item
      14.
                    Principal Accounting Fees and Services
                    67PART IVItem
      15.
                    Exhibits, Financial Statement Schedules
                    68Signatures
                    71





- 2
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 Table of Contents





Forward-Looking Statements and Factors that Could Affect Future
Results





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





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





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





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





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





·
            Inflation,
      interest rate, market and monetary
fluctuations.





·
            Political
      instability.





·
            Acts
      of war or terrorism.





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





·
            Changes
      in consumer spending, borrowings and savings
  habits.





·
            Technological
      changes.





·
            Acquisitions
      and integration of acquired
businesses.





·
            The
      ability to increase market share and control
  expenses.





- 3
-
 Table of Contents





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





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





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





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





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





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





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





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





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





- 4
-
 Table of Contents





PartI


Item
1


Business





COLONY
BANKCORP, INC.





General





Colony
Bankcorp, Inc. (the “Company” or “Colony”) is a Georgia business corporation
which was incorporated on November 8, 1982.   The Company was
organized for the purpose of operating as a bank holding company under the
Federal Bank Holding Company Act of 1956, as amended, and the bank holding
company laws of Georgia (Georgia Laws 1976, p. 168, et. seq.). On July 22,
1983, the Company, after obtaining the requisite regulatory approvals, acquired
100 percent of the issued and outstanding common stock of Colony Bank (formerly
Colony Bank of Fitzgerald and The Bank of Fitzgerald), Fitzgerald, Georgia,
through the merger of the Bank with a subsidiary of the Company which was
created for the purpose of organizing the Bank into a one-bank holding
company.  Since that time, Colony Bank has operated as a wholly-owned
subsidiary of the Company.  Our business is conducted primarily
through our wholly-owned subsidiary, which provides a broad range of banking
services to its retail and commercial customers.  The company
headquarters are located at 115 South Grant Street, Fitzgerald, Georgia 31750,
its telephone number is 229-426-6000 and its Internet address is http://www.colonybank.com.  We
operate twenty-eight domestic banking offices and one mortgage company office
and at December 31, 2008, we had approximately $1.25 billion in total assets,
$943.84 million in total loans, $1.01 billion in total deposits and $83.2
million in stockholder’s equity.  Deposits are insured, up to
applicable limits, by the Federal Deposit Insurance Corporation.





The
Parent Company





Because
Colony Bankcorp, Inc. is a bank holding company, its principal operations are
conducted through its subsidiary bank, Colony Bank (the “Bank”).  It
has 100 percent ownership of its subsidiary and maintains systems of financial,
operational and administrative controls that permit centralized evaluation of
the operations of the subsidiary bank in selected functional areas including
operations, accounting, marketing, investment management, purchasing, human
resources, computer services, auditing, compliance and credit
review.  As a bank holding company, we perform certain stockholder and
investor relations functions.





Colony
Bank- Banking Services





Our
principal subsidiary is the Bank.  The Bank, headquartered in
Fitzgerald, Georgia, offers traditional banking products and services to
commercial and consumer customers in our markets.  Our product line
includes, among other things, loans to small and medium-sized businesses,
residential and commercial construction and land development loans, commercial
real estate loans, commercial loans, agri-business and production loans,
residential mortgage loans, home equity loans, consumer loans and a variety of
demand, savings and time deposit products.  We also offer internet
banking services, electronic bill payment services, safe deposit box rentals,
telephone banking, credit and debit card services, remote depository products
and access to a network of ATMs to our customers.  Colony Bank
conducts a general full service commercial, consumer and mortgage banking
business through twenty-nine offices located in the middle and south Georgia
cities of Fitzgerald, Warner Robins, Centerville, Ashburn, Leesburg, Cordele,
Albany, Thomaston, Columbus, Sylvester, Tifton, Moultrie, Douglas, Broxton,
Savannah, Eastman, Chester, Soperton, Rochelle, Pitts, Quitman and Valdosta,
Georgia.





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





- 5
-
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





Subordinated
Debentures (Trust Preferred Securities)





During
the second quarter of 2004, the Company formed Colony Bankcorp Statutory Trust
III for the sole purpose of issuing $4,500,000 in Trust Preferred Securities
through a pool sponsored by FTN Financial Capital Market.  The
securities have a maturity of thirty years and are redeemable after five years
with certain exceptions.





During
the second quarter of 2006, the Company formed Colony Bankcorp Capital Trust I
for the sole purpose of issuing $5,000,000 in Trust Preferred Securities through
a pool sponsored by SunTrust Bank Capital Markets.  The securities
have a maturity of thirty years and are redeemable after five years with certain
exceptions.





During
the first quarter of 2007, the Company formed Colony Bankcorp Capital Trust II
for the sole purpose of issuing $9,000,000 in Trust Preferred Securities through
a pool sponsored by Trapeza Capital Management, LLC.  The securities
have a maturity of thirty years and are redeemable after five years with certain
exceptions.  Proceeds from this issuance were used to pay off trust
preferred securities issued on March 26, 2002 through Colony Bankcorp Statutory
Trust I.





During
the third quarter of 2007, the Company formed Colony Bankcorp Capital Trust III
for the sole purpose of issuing $5,000,000 in Trust Preferred Securities through
a pool sponsored by Trapeza Capital Management, LLC.  The securities
have a maturity of thirty years and are redeemable after five years with certain
exceptions.  Proceeds from this issuance were used to pay off trust
preferred securities issued on December 19, 2002 through Colony Bankcorp
Statutory Trust II.





Corporate
Restructuring and Business Combinations





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





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





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





- 6
-
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





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





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





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





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





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





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





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





- 7
-
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





Markets
and Competition





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





In
response to competitive issues, the Company merged all of its operations into
one operating subsidiary, Colony Bank, effective August 1, 2008.  This
consolidation effort, which began in 2006, will enable the Company to align
products, pricing and marketing efforts while re-allocating resources to support
management’s future growth strategies.  Future earnings should benefit
positively beginning in 2009 as we implement operation enhancements – both in
revenue enhancement and cost reduction efforts.





Correspondents





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





Employees





On
December 31, 2008, the Company had a total of 295 full-time and 28 part-time
employees.  We consider our relationship with our employees to be
satisfactory.





The
Company has a noncontributory profit-sharing plan covering all employees subject
to certain minimum age and service requirements.  Contributions were
made for all eligible employees in 2008.  In addition, the Company
maintains a comprehensive employee benefit program providing, among other
benefits, hospitalization, major medical, life insurance and disability
insurance.  Management considers these benefits to be competitive with
those offered by other financial institutions in our market
area.  Colony’s employees are not represented by any collective
bargaining group.





- 8
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 Table of Contents





Part
I (Continued)


Item 1
(Continued)





SUPERVISION
AND REGULATION


BANK
HOLDING COMPANY REGULATION





General





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





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





Activity
Limitations





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





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





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





Similar
requirements are imposed by the Georgia Department.





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





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





- 9
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 Table of Contents





Part
I (Continued)


Item 1
(Continued)





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





Limitations
on Acquisitions of Bank Holding Companies





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





Source
of Financial Strength





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





Recent
Legislation





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





- 10
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 Table of Contents





Part
I (Continued)


Item 1
(Continued)





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





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





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





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





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





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Part
I (Continued)


Item 1
(Continued)





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





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





On
February 25, 2009, the first day the CAP program was initiated, the U.S.
Treasury released the actual terms of the program, stating that the purpose of
the CAP is to restore confidence throughout the financial system that the
nation's largest banking institutions have a sufficient capital cushion against
larger than expected future losses, should they occur due to more a more severe
economic environment, and to support lending to creditworthy borrowers. Under
the CAP terms, eligible U.S. banking institutions with assets in excess of $100
billion on a consolidated basis are required to participate in coordinated
supervisory assessments, which are forward-looking "stress test" assessments to
evaluate the capital needs of the institution under a more challenging economic
environment. Should this assessment indicate the need for the bank to establish
an additional capital buffer to withstand more stressful conditions, these
institutions may access the CAP immediately as a means to establish any
necessary additional buffer or they may delay the CAP funding for six months to
raise the capital privately.  Eligible U.S. banking institutions with
assets below $100 billion may also obtain capital from the CAP. The CAP program
is an additional program from the TARP CCP and is open to eligible institutions
regardless of whether they participated in the TARP CCP. The deadline to apply
to the CAP is May 25, 2009. Recipients of capital under the CAP will be subject
to the same executive compensation requirements as if they had received TARP
CCP.





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Part
I (Continued)


Item 1
(Continued)





The EESA
also increased Federal Deposit Insurance Corporation ("FDIC") deposit insurance
on most accounts from $100,000 to $250,000. This increase is currently in place
until the end of 2009 and is not covered by deposit insurance premiums paid by
the banking industry. The FDIC has recently proposed that Congress extend the
$250,000 limit to 2016. In addition, the FDIC has implemented two temporary
programs under the Temporary Liquidity Guaranty Program ("TLGP") to provide
deposit insurance for the full amount of most noninterest bearing transaction
accounts through the end of 2009 and to guarantee certain unsecured debt of
financial institutions and their holding companies through June 2012. Financial
institutions had until December 5, 2008 to opt out of these two programs. The
Company and the Bank have elected to opt to remain in the unlimited insurance
coverage for non-interest bearing accounts, but opted out of the debt guarantee
portion of the program. The FDIC charges "systemic risk special assessments" to
depository institutions that participate in the TLGP. The FDIC has recently
proposed that Congress give the FDIC expanded authority to charge fees to the
holding companies which benefit directly and indirectly from the FDIC
guarantees.





BANK
REGULATION





General





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





Transactions
with Affiliates and Insiders





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





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Part
I (Continued)


Item 1
(Continued)





Dividends





The
Company is a legal entity separate and distinct from the Bank.  The
principal source of the Company’s cash flow, including cash flow to pay
dividends to its stockholders, is dividends that the Bank pays to
it.  Statutory and regulatory limitations apply to the Bank’s payment
of dividends to the Company as well as to the Company’s payment of dividends to
its stockholders.  The Company is a participant in the U.S. Treasury
Capital Program and certain restrictions on the payment of dividends to
stockholders apply.





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





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





Mortgage
Banking Regulation





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





Enforcement
Policies and Actions





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








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Part
I (Continued)


Item 1
(Continued)





Capital
Regulations





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





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





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





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





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





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





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





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





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





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Part
I (Continued)


Item 1
(Continued)





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





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





At
December 31, 2008, the Company exceeded the minimum Tier 1, risk-based and
leverage ratios and qualified as “well capitalized” under current Federal
Reserve Board criteria.  The following table sets forth certain
capital information for the Company as of December 31, 2008.  Consider
the following brief summary rather than the preceeding and the
table.  As of December 31, 2008, Colony had Tier 1 Capital and Total
Capital of approximately 10.80 percent and 12.06 percent, respectively, of
risk-weighted assets. As of December 31, 2008, Colony had a leverage ratio of
Tier 1 Capital to total average assets of approximately 8.39
percent.





December
      31, 2008Amount
                
                
                PercentLeverage
      RatioActual
                
                $
                103,560
                
                
                
                8.39
                %Well-Capitalized
      Requirement
                
                
                61,725
                
                
                
                5.00Minimum
      Required (1)
                
                
                49,380
                
                
                
                4.00Risk
      Based Capital:Tier
      1 CapitalActual
                
                
                103,560
                
                
                
                10.80Well-Capitalized
      Requirement
                
                
                57,513
                
                
                
                6.00Minimum
      Required (1)
                
                
                38,342
                
                
                
                4.00Total
      CapitalActual
                
                
                115,604
                
                
                
                12.06Well-Capitalized
      Requirement
                
                
                95,855
                
                
                
                10.00Minimum
      Required (1)
                
                
                76,684
                
                
                
                8.00





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





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Part
I (Continued)


Item 1
(Continued)





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





FDIC
Insurance Assessments





The FDIC
is an independent federal agency that insures deposits, up to prescribed
statutory limits, of federally insured banks and savings institutions and
safeguards the safety and soundness of the banking and savings industries. The
FDIC insures our customer deposits through the Deposit Insurance Fund (“DIF”) up
to prescribed limits for each depositor. Pursuant to the EESA, the maximum
deposit insurance amount has been increased from $100,000 to $250,000. The
amount of FDIC assessments paid by each DIF member institution is based on its
relative risk of default as measured by regulatory capital ratios and other
supervisory factors. Pursuant to the Federal Deposit Insurance Reform Act of
2005, the FDIC is authorized to set the reserve ratio for the DIF annually at
between 1.15% and 1.50% of estimated insured deposits. The FDIC may increase or
decrease the assessment rate schedule on a semi-annual basis. In an effort to
restore capitalization levels and to ensure the DIF will adequately cover
projected losses from future bank failures, the FDIC, in October 2008, proposed
a rule to alter the way in which it differentiates for risk in the risk-based
assessment system and to revise deposit insurance assessment rates, including
base assessment rates. First quarter 2009 assessment rates were increased to
between 12 and 50 cents for every $100 of domestic deposits, with most banks
paying between 12 and 14 cents.





On
February 27, 2009, the FDIC approved an interim rule to institute a one-time
special assessment of 20 cents per $100 in domestic deposits to restore the DIF
reserves depleted by recent bank failures. The interim rule additionally
reserves the right of the FDIC to charge an additional up-to-10 basis point
special premium at a later point if the DIF reserves continue to fall. The FDIC
also approved an increase in regular premium rates for the second quarter of
2009. For most banks, this will be between 12 to 16 basis points per $100 in
domestic deposits. Premiums for the rest of 2009 have not yet been
set.





Additionally,
by participating in the TLGP, banks temporarily become subject to "systemic risk
special assessments" of 10 basis points for transaction account balances in
excess of $250,000 assessments up to 100 basis points of the amount of TLGP debt
issued. Further, all FDIC-insured institutions are required to pay assessments
to the FDIC to fund interest payments on bonds issued by the Financing
Corporation ("FICO"), an agency of the Federal government established to
recapitalize the predecessor to the DIF. The FICO assessment rates, which are
determined quarterly, averaged 0.0113% of insured deposits in fiscal 2008. These
assessments will continue until the FICO bonds mature in 2017.





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Part
I (Continued)


Item 1
(Continued)





The FDIC
may terminate a depository institution's deposit insurance upon a finding that
the institution's financial condition is unsafe or unsound or that the
institution has engaged in unsafe or unsound practices that pose a risk to the
DIF or that may prejudice the interest of the bank's depositors. The termination
of deposit insurance for a bank would also result in the revocation of the
bank's charter by the DIF.





Community
Reinvestment Act





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





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





Consumer
Regulations





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





·
            Governing
      disclosures of credit terms to consumer
  borrowers;





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





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





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





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





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





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





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





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 Table of Contents





Part
I (Continued)


Item 1
(Continued)





Fiscal
and Monetary Policy





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





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





Anti-Terrorism
Legislation





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





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





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





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





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





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 Table of Contents





Part
I (Continued)


Item 1
(Continued)





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





·
            The
      development of internal policies, procedures and
  controls;





·
            The
      designation of a compliance
officer;





·
            An
      ongoing employee training program;
and





·
            An
      independent audit function to test the
programs.





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





Item1A


Risk
Factors





The
following are certain risks that management believes are specific to our
business.  An investment in our common stock is subject to risks
inherent to our business.  The material risks and uncertainties that
management believes affect us are described below.  Before making an
investment decision, you should carefully consider the risks and uncertainties
described below together with all of the other information included or
incorporated by reference in this report.  The risks and uncertainties
described below are not the only ones we face.  Additional risks and
uncertainties that management is not aware or that management currently
considers immaterial may also impair our business operations.  This
should not be viewed as an all inclusive list or in any particular
order.





If any of
the following risks actually occur, our financial condition, results of
operations or cash flows could be materially and adversely
affected.





Future
Loan Losses May Exceed Our Allowance for Loan Losses





We are
subject to credit risk, which is the risk of losing principal or interest due to
borrowers’ failure to repay loans in accordance with their terms.  The
continued downturn in the economy or the housing and real estate market downturn
in our market areas or a rapid change in interest rates could have a negative
effect on collateral values and borrowers’ ability to repay.  This
deterioration in economic conditions could result in losses to the Bank in
excess of loan loss allowances.





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 Table of Contents





Part
I (Continued)


Item 1A
(Continued)





Our loan
customers may not repay their loans according to the terms of these loans, and
the collateral securing the payment of these loans may be insufficient to ensure
repayment.  As a result, we may experience loan losses, which could
have a material adverse effect on our operating results.  Management
makes various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans.  We maintain an allowance for loan losses in an attempt to
cover any loan losses that may occur.  In determining the size of the
allowance, we rely on an analysis of our loan portfolio based on historical loss
experience, volume and types of loans, trends in classification, volume and
trends in delinquencies and nonaccruals, national and local economic conditions
and other pertinent information.  Our determination of the size of the
allowance could be understated due to our lack of familiarity with
market-specific factors.





If our
assumptions are wrong, our current allowance may not be sufficient to cover
future loan losses, and adjustments may be necessary to allow for different
economic conditions or adverse developments in our loan
portfolio.  Material additions to our allowance would materially
decrease our net income.  As a result of a difficult real estate
market, we have increased our allowance from $15.51 million as of December 31,
2007 to $17.02 million as of December 31, 2008.  We expect to continue
to increase our allowance in 2009; however, we can make no assurance that our
allowance will be adequate to cover future loan losses given current and future
market conditions.





In
addition, federal and state regulators periodically review our allowance for
loan losses and may require us to increase our provision for loan losses or
recognize further loan charge-offs, based on judgments different than those of
our management.  Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory agencies could have a negative
effect on our operating results.





Any
increases in the allowance for possible loan losses will result in a decrease in
net income and capital, and may have a material adverse effect on our financial
condition, results of operations and cash flows.  See the section
captioned “Allowance for Possible Loan Losses” in Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations located
elsewhere in this report for further discussion related to our process for
determining the appropriate level of the allowance for loan losses.





Our
Business Has Been and May Continue to be Adversely Affected by Current
Conditions in the Financial Markets and Economic Conditions
Generally





Negative
developments in the latter half of 2007 and 2008 in the banking industry have
resulted in uncertainty in the financial markets in general and a related
general economic downturn, which have continued into 2009.  In
addition, as a consequence of the recession that the United States now finds
itself in, business activity across a broad range of industries faces
significant difficulties due to the lack of consumer spending and liquidity
concerns in the global credit markets.  At the same time we have seen
unemployment increase significantly.





- 21
-
 Table of Contents





Part
I (Continued)


Item 1A
(Continued)





As a
result of the current economic environment, many financial institutions,
including us, have experienced declines in the performance of their loans,
including construction, land development and land loans, commercial loans and
consumer loans.  Consequently, competition among financial
institutions for quality loans and deposits has increased
significantly.  In addition, the values of real estate collateral
supporting many real estate dependent loans have declined and may continue to
decline.  Financial stock prices have been negatively affected, as has
the ability of banks and bank holding companies to raise capital or borrow in
the debt markets has become more difficult compared to recent
years.  As a result, there is potential for new federal or state laws
and regulations regarding lending and funding practices and liquidity standards,
and bank regulatory agencies are expected to be very aggressive in responding to
concerns and trends identified in examinations.  The impact of the
recession extending for a lengthy time may adversely impact our financial
performance and our stock price.





In
addition, further negative market developments may affect consumer confidence
levels and may cause adverse changes in payment patterns, causing increases in
delinquencies and default rates, which may impact our charge-offs and provision
for possible loan losses.  A worsening of these conditions would
likely magnify the adverse effects of these difficult market conditions on us
and many others in the banking industry.





Overall,
during the past year, the general business environment has had an adverse effect
on our business, and there can be no assurance that the environment will improve
anytime soon.  Until conditions improve, we expect our business,
financial condition and results of operations to be negatively
impacted.





Rapidly
Changing Interest Rate Environments Could Reduce Our Net Interest Margin, Net
Interest Income, Fee Income and Net Income





Interest
and fees on loans and securities, net of interest paid on deposits and
borrowings, are a large part of our net income.  Interest rates are
key drivers of our net interest margin and subject to many factors beyond the
control of management.  As interest rates change, net interest income
is affected.  Rapid increases in interest rates in the future could
result in interest expense increasing faster than interest income because of
mismatches in financial instrument maturities.  Further, substantially
higher interest rates generally reduce loan demand and may result in slower loan
growth particularly in construction lending, an important factor in the
Company’s revenue growth over the years.  Decreases or increases in
interest rates could have a negative effect on the spreads between the interest
rates earned on assets and the rates of interest paid on liabilities and,
therefore, decrease net interest income.  In response to the dramatic
deterioration of the subprime, mortgage, credit and liquidity markets, the
Federal Reserve reduced interest rates by a total of 400 basis points since
December 2007, which likely will reduce our net interest income during the first
quarter of 2009 and the foreseeable future.  See “Quantitative and
Qualitative Disclosures about Market Risk” in Part II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations located
elsewhere for further discussion of interest rate market risk.





- 22
-
 Table of Contents





Part
I (Continued)


Item 1A
(Continued)





Our
Business is Subject to the Success of the Local Economies Where We
Operate





Our
success significantly depends upon the growth in population, income levels,
deposits and housing starts in our primary and secondary markets.  If
the communities in which we operate do not grow or if prevailing economic
conditions locally or nationally are unfavorable, our business may not
succeed.  We are currently experiencing adverse economic conditions in
some of our market areas, which affect the ability of our customers to repay
their loans to us and generally negatively affect our financial condition and
results of operations.





The
market value of the real estate securing our loans as collateral has been
adversely affected by the slowing economy and unfavorable change in economic
conditions in our market areas and could be further adversely affected in the
future.  As of December 31, 2008, approximately 84.8 percent of our
loans receivable were secured by real estate.  Any sustained period of
increased payment delinquencies, foreclosures or losses caused by the adverse
market and economic conditions, including the downturn in the real estate market
in the state of Georgia will adversely affect the value of our assets, our
revenues, results of operations and financial condition.  Currently,
we are experiencing such an economic downturn, and if it continues, our
operations could be further adversely affected.





We
Make and Hold in Our Portfolio a Significant Number of Land Acquisition and
Development and Construction Loans, Which in the Current Market Environment Pose
More Credit Risk than Other Types of Loans Typically Made by Financial
Institutions





We offer
land acquisition and development and construction loans for builders and
developers.  As of December 31, 2008, approximately $160 million of
our loan portfolio represents loans for which the related property is neither
presold nor preleased.  These land acquisition and development and
construction loans are considered more risky than other types of residential
mortgage loans.  The primary credit risks associated with land
acquisition and development and construction lending are underwriting, project
risks and market risks.  Project risks include cost overruns, borrower
credit risk, project completion risk, general contractor credit risk and
environmental and other hazard risks.  Market risks are risks
associated with the sale of the completed residential units.  They
include affordability risk, which means the risk of affordability of financing
by borrowers, product design risks, and risks posed by completing
projects.  While we believe we have established adequate reserves on
our financial statements to cover the credit risk of our land acquisition and
development and construction loan portfolio, there can be no assurance that
losses will not exceed our reserves, which could adversely impact our
earnings.





Current
and Anticipated Deterioration in the Housing Market and the Homebuilding
Industry May Lead to Increased Loss Severities and Further Worsening of
Delinquencies and Nonperforming Assets in Our Loan
Portfolios.  Consequently, Our Results of Operations May be Adversely
Impacted





There has
been substantial industry concern and publicity over asset quality among
financial institutions due in large part to issues related to subprime mortgage
lending, declining real estate values and general economic
concerns.  Furthermore, the housing and the residential mortgage
markets recently have experienced a variety of difficulties and changed economic
conditions.  If market conditions continue to deteriorate, they may
lead to additional valuation adjustments on our loan portfolios and real estate
owned as we continue to reassess the market value of our loan portfolio, the
losses associated with the loans in default and the net realizable value of real
estate owned.





- 23
-
 Table of Contents





Part
I (Continued)


Item 1A
(Continued)





The
homebuilding industry has experienced a significant and sustained decline in
demand for new homes and an oversupply of new and existing homes available for
sale in various markets, including some of the markets in which we
lend.  Our customers who are builders and developers face greater
difficulty in selling their homes in markets where these trends are more
pronounced.  Consequently, we are facing increased delinquencies and
nonperforming assets as these builders and developers are forced to default on
their loans with us.  We do not anticipate that the housing market
will improve in the near-term and, accordingly, additional downgrades,
provisions for loan losses and charge-offs related to our loan portfolio may
occur.





Liquidity
Risk Could Impact Our Ability to Fund Operations and Jeopardize Our Financial
Condition





Liquidity
is essential for our business.  An inability to raise funds through
traditional deposits, brokered deposits, borrowings or the sale of securities or
loans could have a significant negative impact on our liquidity.  Our
access to funding sources in amounts adequate to finance our activities or the
terms of which are acceptable to us could be impaired by factors that affect us
specifically or the financial services industry in general.  Factors
that could detrimentally impact our access to liquidity sources include a
decrease in the level of our business activity as a result of a downturn in the
markets in which our loans are concentrated or adverse regulatory action against
us.  Our ability to borrow could also be impaired by factors that are
not specific to us, such as a disruption in the financial markets or negative
views and expectations about the prospects for the banking industry in light of
the recent turmoil faced by banking organizations and the continued
deterioration in credit markets.





We rely
on commercial and retail deposits, brokered deposits, advances from the Federal
Home Loan Bank (“FHLB”) of Atlanta and other borrowings to fund our
operations.  Although we have historically been able to replace
maturing deposits and advances as necessary, we might not be able to replace
such funds in the future if, among other things, our results of operations or
financial condition or the results of operations or financial condition of the
FHLB of Atlanta or market conditions were to change.





Although
we consider these sources of funds adequate for our liquidity needs, there can
be no assurance in this regard and we may be compelled to seek additional
sources of financing in the future.  Likewise, we may seek additional
debt in the future to achieve our business strategies, in connection with future
acquisitions or for other reasons.  There can be no assurance
additional borrowings, if sought, would be available to us or, if available,
would be on favorable terms.  Financial stock prices have been
negatively affected by the recent adverse economic environment, as has the
ability of the financial services industry to raise capital or borrow in the
debt markets compared to recent years.  If additional financing
sources are unavailable or not available on reasonable terms, our financial
condition and results of operations could be materially affected.





We
actively review the depository institutions that hold our federal funds sold and
due from banks cash balances.  We are currently not able to provide
assurances that access to our cash equivalents and federal funds sold will not
be impacted by adverse conditions in the financial markets.  Our
emphasis is primarily on safety of principal and we diversify our due from banks
and federal funds sold among correspondent banks to minimize exposure to any one
of these entities.  The financials of the correspondent banks are
reviewed routinely as part of our asset/liability management
process.  Balances in our accounts with financial institutions in the
U. S. may exceed the FDIC insurance limits.  While we monitor and
adjust the balances in our accounts as appropriate, these balances could be
impacted if the financial institutions fail and could be subject to other
adverse conditions in the financial markets.





- 24
-
 Table of Contents





Part
I (Continued)


Item 1A
(Continued)





Concern
of Customers Over Deposit Insurance May Cause a Decrease in
Deposits





With
recent increased concerns about bank failures, customers increasingly are
concerned about the extent to which their deposits are insured by FDIC.
Customers may withdraw deposits in an effort to ensure that the amount they have
on deposit with their bank is fully insured.  Decreases in deposits
may adversely affect our funding costs and net income.  Colony began
offering CDARS product during 2008 that provides customers the opportunity to
place uninsured deposits into the CDARS network and receive full FDIC insurance
coverage and with the reciprocal agreement a like amount of funds is placed back
in our bank, though these reciprocal deposits are classified as brokered
deposits.





Our Federal Deposit Insurance Premium
Could be Substantially Higher in the Future, Which Could Have a Material Adverse
Effect





The FDIC
insures deposits at FDIC insured financial institutions, including the
Bank.  The FDIC charges the insured financial institutions premiums to
maintain the Deposit Insurance Fund at a certain level.  Current
economic conditions have increased bank failures and expectations for further
failures, in which case the FDIC ensures payments of deposits up to insured
limits from the Deposit Insurance Fund.





On
October 16, 2008, the FDIC published a restoration plan designed to replenish
the Deposit Insurance Fund over a period of five years and to increase the
deposit insurance reserve ratio, which decreased to 1.01 percent of insured
deposits on June 30, 2008, to the statutory minimum of 1.15 percent of insured
deposits by December 31, 2013.  In order to implement the restoration
plan, the FDIC proposes to change both its risk-based assessment system and its
base assessment rates.  For the first quarter of 2009 only, the FDIC
increased all FDIC deposit assessment rates by 7 basis points.  These
new rates range from 12-14 basis points for Risk Category I institutions to 50
basis points for Risk Category IV institutions.  Under the FDIC’s
restoration plan, the FDIC proposes to establish new initial base assessment
rates that will be subject to adjustment as described
below.  Beginning April 1, 2009, the base assessment rates would range
from 10-14 basis points for Risk Category I institutions to 45 basis points for
Risk Category IV institutions. Changes to the risk-based assessment system would
include increasing premiums for institutions that rely on excessive amounts of
brokered deposits, CDARS, increasing premiums for excessive use of secured
liabilities, including Federal Home Loan Bank advances.  Either an
increase in the Risk Category of the Bank or adjustments to the base assessment
rates could have a material adverse effect on our earnings.





There
can be no Assurance That the Recently Enacted Emergency Economic Stabilization
Act of 2008 and the American Recovery and Reinvestment Act Will Help Stabilize
the U.S. Economy and Financial System





On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”)
was enacted.  The U.S. Treasury and banking regulators are
implementing a number of programs under this legislation and otherwise to
address capital and liquidity issues in the banking system, including the TARP
Capital Purchase Program (“CPP”).  The Company participated in the CPP
Program and received $28 million on January 9, 2009 through the issuance of
preferred stock along with warrants. In addition, other regulators have taken
steps to stabilize and add liquidity to the financial markets, such as the FDIC
Temporary Liquidity Guarantee Program (“TLG Program”), which we opted to remain
in the unlimited insurance coverage for non-interest bearing accounts and now
accounts in which the rate of interest paid is 0.50 percent or less but
opted-out of the debt guarantee portion of this program.





- 25
-
 Table of Contents





Part
I (Continued)


Item 1A
(Continued)





In
addition, the U.S. Congress recently enacted the American Recovery and
Reinvestment Act (“ARRA”) in an effort to save and create jobs, stimulate the
U.S. economy and promote long-term growth and stability.  There can
also be no assurance as to the actual impact that the EESA, ARRA and other
programs will have on the financial markets, including the extreme levels of
volatility and limited credit availability currently being
experienced.  The failure of the EESA, ARRA and other programs to
stabilize the financial markets and a continuation or worsening of the current
financial markets conditions could materially and adversely affect our business,
financial condition, results of operations, access to credit or the trading
price of our common stock.





The EESA
and ARRA are is relatively new legislation and, as such, are subject to change
and evolving interpretation.  This is particularly true given the
change in administration that occurred on January 20, 2009.  There can
be no assurance as to the effects that such changes will have on their in
improving the U.S. economy effectiveness or on our business, financial condition
or results of operations.





Treasury
“Stress Tests” and Other Actions may Adversely Affect Bank Operations and Value
of Shares





On
February 10, 2009, the U.S. Treasury Secretary outlined a plan to restore
stability to the financial system.  This announcement included
reference to a plan by the Treasury to conduct “stress tests” of banks which
received funds under the Capital Purchase Program and similar Treasury
programs.  The methods and procedures to be used by the Treasury in
conducting its “stress tests,” how these methods and procedures will be applied,
and the significance or consequence of such tests presently are not
known.  Any of these or their consequences could adversely affect us,
our bank operations and the value of Colony shares, among other
things.





Slower
than Anticipated Growth in New Branches and New Product and Service Offerings
Could Result in Reduced Net Income





We have
placed a strategic emphasis on expanding our branch network and product
offerings. Executing this strategy carries risks of slower than anticipated
growth both in new branches and new products.  New branches and
products require a significant investment of both financial and personnel
resources.  Lower than expected loan and deposit growth in new
investments can decrease anticipated revenues and net income generated by those
investments, and opening new branches and introducing new products could result
in more additional expenses than anticipated and divert resources from current
core operations.





The
Financial Services Industry is Very Competitive





We face
competition in attracting and retaining deposits, making loans, and providing
other financial services throughout our market area.  Our competitors
include other community banks, larger banking institutions, and a wide range of
other financial institutions such as credit unions, government-sponsored
enterprises, mutual fund companies, insurance companies and other nonbanking
businesses.  Many of these competitors have substantially greater
resources than us.  For a more complete discussion of our competitive
environment, see “Business – Markets and Competition” in Item 1 above. If we are
unable to compete effectively, we will lose market share, and income from
deposits, loans and other products may be reduced.





- 26
-
 Table of Contents





Part
I (Continued)


Item 1A
(Continued)





Inability
to Hire or Retain Certain Key Professionals, Management and Staff could
Adversely Affect Our Revenues and Net Income





We rely
on key personnel to manage and operate our business, including major revenue
generating functions such as our loan and deposit portfolios.  The
loss of key staff may adversely affect our ability to maintain and manage these
portfolios effectively, which could negatively affect our
revenues.  In addition, loss of key personnel could result in
increased recruiting and hiring expenses, which could cause a decrease in our
net income.





Item1B


Unresolved
Staff Comments





None.





Item2


Properties





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





Item3


Legal
Proceedings





The
Company and its subsidiary may become parties to various legal proceedings
arising from the normal course of business.  As of December 31, 2008,
there are no material pending legal proceedings to which Colony or
its subsidiary are a party or of which any of its property is the
subject.





Item4


Submission
of Matters to a Vote of Security Holders





A special
meeting of shareholders was held on December 30, 2008 for the purpose of
amending the Articles of Incorporation to approve the issuance of preferred
stock so that the Company could participate in the U.S. Treasury Capital
Purchase Program.  Total shares eligible to vote amounted to
7,212,313.  A total of 5,564,803 (77.15 percent) shares were
represented by shareholders in attendance or by proxy and approved proposal 1 to
amend the Articles of Incorporation as follows:





For
                  
                  Against
                  
                  Abstain5,332,762
                  
                  223,539
                  
                  8,502





Proposal
No. 2 to approve adjournment, postponement or continuation of the meeting had
the following votes cast:





For
                  
                  Against
                  
                  Abstain5,333,844
                  
                  222,959
                  
                  8,000





- 27
-
 Table of Contents





Part II


Item
5


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





Effective
April 2, 1998, Colony Bankcorp, Inc. common stock is quoted on the NASDAQ
National Market under the symbol “CBAN.”  Prior to this date, there
was no public market for the common stock of the registrant.





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





Year
      Ended December 31, 2008
              
              High
              
              
              Low
              
              
              Close
              
              
              Dividends
      Per ShareFourth
      Quarter
              
              $
              10.95
              
              
              $
              6.06
              
              
              $
              8.02
              
              
              $
              0.098Third
      Quarter
              
              
              11.90
              
              
              
              8.50
              
              
              
              10.40
              
              
              
              0.098Second
      Quarter
              
              
              14.95
              
              
              
              10.12
              
              
              
              11.35
              
              
              
              0.098First
      Quarter
              
              
              15.94
              
              
              
              11.15
              
              
              
              12.70
              
              
              
              0.098Year
      Ended December 31, 2007Fourth
      Quarter
              
              
              19.00
              
              
              
              14.55
              
              
              
              15.20
              
              
              
              0.095Third
      Quarter
              
              
              20.50
              
              
              
              16.47
              
              
              
              17.35
              
              
              
              0.093Second
      Quarter
              
              
              21.85
              
              
              
              18.88
              
              
              
              19.48
              
              
              
              0.090First
      Quarter
              
              
              20.76
              
              
              
              17.55
              
              
              
              20.76
              
              
              
              0.088





The
Registrant paid cash dividends on its common stock of $2,813,633 or $0.39 per
share and $2,629,381 or $0.365 per share in 2008 and 2007,
respectively.





As of
December 31, 2008, the Company had approximately 1,952 stockholders of
record.  There were no sales of unregistered securities of the Company
in 2008.





- 28
-
 Table of Contents





Part
II (Continued)


Item 5
(Continued)


Performance
Graph





The graph
presented below compares the cumulative total stockholder return on Colony
Bankcorp, Inc.’s common stock to the cumulative total return of the NASDAQ
Composite and the SNL Southeast Bank Index for the five fiscal years, which
commenced January 1, 2004 and ended December 31, 2008.  The cumulative
total stockholder return assumes the investment of $100 in Colony Bankcorp,
Inc.’s common stock and in each index on December 31, 2003 and assumes
reinvestment of dividends.  The NASDAQ Composite Index is a publicly
available measure of over 3,000 companies including NASDAQ domestic and
international based common type stocks listed on The NASDAQ Stock
Market.  The SNL Southeast Bank Index is a compilation of the total
stockholder return of all publicly-traded bank holding companies headquartered
in the Southeastern United States.





Comparison
of Five-Year Cumulative Total Stockholder Return










Period
      EndingIndex
                                  
                                  12/31/03
                                  
                                  
                                  12/31/04
                                  
                                  
                                  12/31/05
                                  
                                  
                                  12/31/06
                                  
                                  
                                  12/31/07
                                  
                                  
                                  12/31/08Colony
      Bankcorp, Inc.
                                  
                                  
                                  100.00
                                  
                                  
                                  
                                  170.45
                                  
                                  
                                  
                                  158.19
                                  
                                  
                                  
                                  113.94
                                  
                                  
                                  
                                  99.88
                                  
                                  
                                  
                                  54.69NASDAQ
      Composite
                                  
                                  
                                  100.00
                                  
                                  
                                  
                                  108.59
                                  
                                  
                                  
                                  110.08
                                  
                                  
                                  
                                  120.56
                                  
                                  
                                  
                                  132.39
                                  
                                  
                                  
                                  78.72SNL
      Southeast Bank Index
                                  
                                  
                                  100.00
                                  
                                  
                                  
                                  118.59
                                  
                                  
                                  
                                  121.39
                                  
                                  
                                  
                                  142.34
                                  
                                  
                                  
                                  107.23
                                  
                                  
                                  
                                  43.41





Source:  SNL
Financial LC, Charlottesville, VA





- 29
-
 Table of Contents





Part
II (Continued)


Item 5
(Continued)


Issuer
Purchase of Equity Securities





The
Company purchased no shares of the Company’s common stock during the quarter
ended December 31, 2008.





Item6


Selected
Financial Data





Year
      Ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2005
                              
                              
                              2004(Dollars
      in Thousands, except per share data)Selected
      Balance Sheet DataTotal
      Assets
                              
                              $
                              1,252,782
                              
                              
                              $
                              1,208,777
                              
                              
                              $
                              1,213,504
                              
                              
                              $
                              1,108,338
                              
                              
                              $
                              997,591Total
      Loans, Net of Unearned Interest and Fees
                              
                              
                              960,857
                              
                              
                              
                              944,978
                              
                              
                              
                              941,772
                              
                              
                              
                              858,815
                              
                              
                              
                              778,643Total
      Deposits
                              
                              
                              1,006,991
                              
                              
                              
                              1,018,602
                              
                              
                              
                              1,042,446
                              
                              
                              
                              944,365
                              
                              
                              
                              850,329Investment
      Securities
                              
                              
                              207,704
                              
                              
                              
                              167,191
                              
                              
                              
                              149,307
                              
                              
                              
                              124,326
                              
                              
                              
                              112,593Federal
      Home Loan Bank Stock
                              
                              
                              6,272
                              
                              
                              
                              5,533
                              
                              
                              
                              5,087
                              
                              
                              
                              5,034
                              
                              
                              
                              4,479Stockholders’
      Equity
                              
                              
                              83,215
                              
                              
                              
                              83,743
                              
                              
                              
                              76,611
                              
                              
                              
                              68,128
                              
                              
                              
                              61,763Selected
      Income Statement DataInterest
      Income
                              
                              
                              75,297
                              
                              
                              
                              90,159
                              
                              
                              
                              83,280
                              
                              
                              
                              63,634
                              
                              
                              
                              51,930Interest
      Expense
                              
                              
                              37,922
                              
                              
                              
                              47,701
                              
                              
                              
                              41,392
                              
                              
                              
                              26,480
                              
                              
                              
                              18,383Net
      Interest Income
                              
                              
                              37,375
                              
                              
                              
                              42,458
                              
                              
                              
                              41,888
                              
                              
                              
                              37,154
                              
                              
                              
                              33,547Provision
      for Loan Losses
                              
                              
                              12,938
                              
                              
                              
                              5,931
                              
                              
                              
                              3,987
                              
                              
                              
                              3,444
                              
                              
                              
                              3,469Other
      Income
                              
                              
                              9,005
                              
                              
                              
                              7,817
                              
                              
                              
                              7,350
                              
                              
                              
                              6,152
                              
                              
                              
                              6,424Other
      Expense
                              
                              
                              30,856
                              
                              
                              
                              31,579
                              
                              
                              
                              29,882
                              
                              
                              
                              26,076
                              
                              
                              
                              24,271Income
      Before Tax
                              
                              
                              2,586
                              
                              
                              
                              12,765
                              
                              
                              
                              15,369
                              
                              
                              
                              13,786
                              
                              
                              
                              12,231Income
      Tax Expense
                              
                              
                              557
                              
                              
                              
                              4,218
                              
                              
                              
                              5,217
                              
                              
                              
                              4,809
                              
                              
                              
                              4,162Net
      Income
                              
                              $
                              2,029
                              
                              
                              $
                              8,547
                              
                              
                              $
                              10,152
                              
                              
                              $
                              8,977
                              
                              
                              $
                              8,069Weighted
      Average Shares Outstanding (1)
                              
                              
                              7,199
                              
                              
                              
                              7,189
                              
                              
                              
                              7,177
                              
                              
                              
                              7,168
                              
                              
                              
                              7,131Shares
      Outstanding (1)
                              
                              
                              7,212
                              
                              
                              
                              7,201
                              
                              
                              
                              7,190
                              
                              
                              
                              7,181
                              
                              
                              
                              7,172Intangible
      Assets
                              
                              $
                              2,779
                              
                              
                              $
                              2,815
                              
                              
                              $
                              2,851
                              
                              
                              $
                              2,932
                              
                              
                              $
                              3,047Dividends
      Declared
                              
                              
                              2,814
                              
                              
                              
                              2,629
                              
                              
                              
                              2,337
                              
                              
                              
                              2,058
                              
                              
                              
                              1,808Average
      Assets
                              
                              
                              1,204,846
                              
                              
                              
                              1,204,165
                              
                              
                              
                              1,160,718
                              
                              
                              
                              1,034,777
                              
                              
                              
                              938,283Average
      Stockholders’ Equity
                              
                              
                              84,372
                              
                              
                              
                              80,595
                              
                              
                              
                              71,993
                              
                              
                              
                              65,146
                              
                              
                              
                              59,037Net
      Charge-Offs
                              
                              
                              11,435
                              
                              
                              
                              2,407
                              
                              
                              
                              2,760
                              
                              
                              
                              2,694
                              
                              
                              
                              1,973Reserve
      for Loan Losses
                              
                              
                              17,016
                              
                              
                              
                              15,513
                              
                              
                              
                              11,989
                              
                              
                              
                              10,762
                              
                              
                              
                              10,012OREO
                              
                              
                              12,812
                              
                              
                              
                              1,332
                              
                              
                              
                              970
                              
                              
                              
                              2,170
                              
                              
                              
                              1,127Nonperforming
      Loans
                              
                              
                              35,374
                              
                              
                              
                              15,016
                              
                              
                              
                              8,078
                              
                              
                              
                              8,593
                              
                              
                              
                              8,809Nonperforming
      Assets
                              
                              
                              48,186
                              
                              
                              
                              16,348
                              
                              
                              
                              9,048
                              
                              
                              
                              10,763
                              
                              
                              
                              9,936Average
      Interest-Earning Assets
                              
                              
                              1,144,927
                              
                              
                              
                              1,141,652
                              
                              
                              
                              1,097,716
                              
                              
                              
                              979,966
                              
                              
                              
                              887,331Noninterest-Bearing
      Deposits
                              
                              
                              77,497
                              
                              
                              
                              86,112
                              
                              
                              
                              77,336
                              
                              
                              
                              78,778
                              
                              
                              
                              68,169





- 30
-
 Table of Contents





Part
II (Continued)


Item 6
(Continued)




Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(Dollars
      in Thousands, except per share data)Per
      Share Data: (1)Net
      Income (Diluted)
                  
                  $
                  0.28
                  
                  
                  $
                  1.19
                  
                  
                  $
                  1.41
                  
                  
                  $
                  1.25
                  
                  
                  $
                  1.13Book
      Value
                  
                  
                  11.54
                  
                  
                  
                  11.63
                  
                  
                  
                  10.66
                  
                  
                  
                  9.49
                  
                  
                  
                  8.61Tangible
      Book Value
                  
                  
                  11.15
                  
                  
                  
                  11.24
                  
                  
                  
                  10.26
                  
                  
                  
                  9.08
                  
                  
                  
                  8.19Dividends
                  
                  
                  0.39
                  
                  
                  
                  0.365
                  
                  
                  
                  0.325
                  
                  
                  
                  0.285
                  
                  
                  
                  0.252Profitability
      Ratios:Net
      Income to Average Assets
                  
                  
                  0.17
                  %
                  
                  
                  0.71
                  %
                  
                  
                  0.87
                  %
                  
                  
                  0.87
                  %
                  
                  
                  0.86
                  %Net
      Income to Average Stockholders' Equity
                  
                  
                  2.40
                  
                  
                  
                  10.60
                  
                  
                  
                  14.10
                  
                  
                  
                  13.78
                  
                  
                  
                  13.67Net
      Interest Margin
                  
                  
                  3.30
                  
                  
                  
                  3.75
                  
                  
                  
                  3.84
                  
                  
                  
                  3.81
                  
                  
                  
                  3.81Loan
      Quality Ratios:Net
      Charge-Offs to Total Loans
                  
                  
                  1.19
                  
                  
                  
                  0.25
                  
                  
                  
                  0.29
                  
                  
                  
                  0.31
                  
                  
                  
                  0.25Reserve
      for Loan Losses to Total Loans and OREO
                  
                  
                  1.75
                  
                  
                  
                  1.64
                  
                  
                  
                  1.27
                  
                  
                  
                  1.25
                  
                  
                  
                  1.28Nonperforming
      Assets to Total Loans and OREO
                  
                  
                  4.95
                  
                  
                  
                  1.73
                  
                  
                  
                  0.96
                  
                  
                  
                  1.25
                  
                  
                  
                  1.27Reserve
      for Loan Losses to Nonperforming Loans
                  
                  
                  48.10
                  
                  
                  
                  103.31
                  
                  
                  
                  148.42
                  
                  
                  
                  125.24
                  
                  
                  
                  113.66Reserve
      for Loan Losses to Total Nonperforming Assets
                  
                  
                  35.31
                  
                  
                  
                  94.89
                  
                  
                  
                  132.50
                  
                  
                  
                  99.99
                  
                  
                  
                  100.76Liquidity
      Ratios:Loans
      to Total Deposits
                  
                  
                  95.42
                  
                  
                  
                  92.77
                  
                  
                  
                  90.34
                  
                  
                  
                  90.94
                  
                  
                  
                  91.57Loans
      to Average Earning Assets
                  
                  
                  83.92
                  
                  
                  
                  82.77
                  
                  
                  
                  85.79
                  
                  
                  
                  87.64
                  
                  
                  
                  87.75Noninterest-Bearing
      Deposits to Total Deposits
                  
                  
                  7.70
                  
                  
                  
                  8.45
                  
                  
                  
                  7.42
                  
                  
                  
                  8.34
                  
                  
                  
                  8.02Capital
      Adequacy Ratios:Common
      Stockholders' Equity to Total Assets
                  
                  
                  6.64
                  
                  
                  
                  6.93
                  
                  
                  
                  6.31
                  
                  
                  
                  6.15
                  
                  
                  
                  6.19Total
      Stockholders' Equity to Total Assets
                  
                  
                  6.64
                  
                  
                  
                  6.93
                  
                  
                  
                  6.31
                  
                  
                  
                  6.15
                  
                  
                  
                  6.19Dividend
      Payout Ratio
                  
                  
                  139.29
                  
                  
                  
                  30.67
                  
                  
                  
                  23.05
                  
                  
                  
                  22.80
                  
                  
                  
                  22.30




(1)
            All
      per share data adjusted to reflect 5-for-4 stock split effective May 15,
      2005.





- 31
-
 Table of Contents





PartII (Continued)


Item
7





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





The
Company





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





Application
of Critical Accounting Policies and Accounting Estimates





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





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





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





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





- 32
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Goodwill and Other Intangibles
– The Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair value as
required by SFAS 141.  Goodwill is subject, at a minimum, to annual
tests for impairment.  Other intangible assets are amortized over
their estimated useful lives using straight-line and accelerated methods, and
are subject to impairment if events or circumstances indicate a possible
inability to realize the carrying amount.  The initial goodwill and
other intangibles recorded and subsequent impairment analysis require management
to make subjective judgments concerning estimates of how the acquired asset will
perform in the future.  Events and factors that may significantly
affect the estimates include, among others, customer attrition, changes in
revenue growth trends, specific industry conditions and changes in
competition.





Overview





The
following discussion and analysis presents the more significant factors
affecting the Company’s financial condition as of December 31, 2008 and 2007,
and results of operations for each of the years in the three-year period ended
December 31, 2008. This discussion and analysis should be read in conjunction
with the Company’s consolidated financial statements, notes thereto and other
financial information appearing elsewhere in this report.





Taxable-equivalent
adjustments are the result of increasing income from tax-free loans and
investments by an amount equal to the taxes that would be paid if the income
were fully taxable based on a 34 percent  federal tax rate, thus
making tax-exempt yields comparable to taxable asset yields.





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





Results
of Operations





The
Company’s results of operations are determined by its ability to effectively
manage interest income and expense, to minimize loan and investment losses, to
generate noninterest income and to control noninterest expense.  Since
market forces and economic conditions beyond the control of the Company
determine interest rates, the ability to generate net interest income is
dependent upon the Company’s ability to obtain an adequate spread between the
rate earned on earning assets and the rate paid on interest-bearing liabilities.
Thus, the key performance for net interest income is the interest margin or net
yield, which is taxable-equivalent net interest income divided by average
earning assets.  Net income totaled $2.03 million, or $0.28 diluted
per common share in 2008 compared to $8.55 million, or $1.19 diluted per common
share in 2007 and $10.15 million, or $1.41 diluted per common share in
2006.





- 33
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





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





2008
                
                
                2007
                
                
                2006Taxable–Equivalent
      Net Interest Income
                
                $
                37,740
                
                
                $
                42,817
                
                
                $
                42,158Taxable-Equivalent
      Adjustment
                
                
                365
                
                
                
                359
                
                
                
                270Net
      Interest Income
                
                
                37,375
                
                
                
                42,458
                
                
                
                41,888Provision
      for Possible Loan Losses
                
                
                12,938
                
                
                
                5,931
                
                
                
                3,987Noninterest
      Income
                
                
                9,005
                
                
                
                7,817
                
                
                
                7,350Noninterest
      Expense
                
                
                30,856
                
                
                
                31,579
                
                
                
                29,882Income
      Before Income Taxes
                
                
                2,586
                
                
                
                12,765
                
                
                
                15,369Income
      Taxes
                
                
                557
                
                
                
                4,218
                
                
                
                5,217Net
      Income
                
                $
                2,029
                
                
                $
                8,547
                
                
                $
                10,152Basic
      per Common ShareNet
      Income
                
                $
                0.28
                
                
                $
                1.19
                
                
                $
                1.41Diluted
      per Common ShareNet
      Income
                
                $
                0.28
                
                
                $
                1.19
                
                
                $
                1.41Return
      on Average AssetsNet
      Income
                
                
                0.17
                %
                
                
                0.71
                %
                
                
                0.87
                %Return
      on Average EquityNet
      Income
                
                
                2.40
                %
                
                
                10.60
                %
                
                
                14.10
                %





Net
income for 2008 decreased $6.52 million, or 76.26 percent, compared to
2007.  The decrease was primarily the result of a $7.01 million
increase in provision for loan losses and a decrease of $5.08 million in net
interest income.  The impact of these items was partly offset by a
$1.19 million increase in noninterest income, a decrease of $0.72 million
in noninterest expense and a decrease of $3.66 million in income tax
expense.  Net income for 2007 decreased $1.61 million, or 15.81
percent, compared to 2006.  The decrease was primarily the result of a
$1.95 million increase in provision for loan losses and an increase of $1.70
million in noninterest expense.  The impact of these items was partly
offset by a $0.57 million increase in net interest income, an increase of $0.47
million in noninterest income and a decrease of $1.00 million in income tax
expense.





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





- 34
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Net
Interest Income





Net
interest income is the difference between interest income on earning assets,
such as loans and securities, and interest expense on liabilities, such as
deposits and borrowings, which are used to fund those assets. Net interest
income is the Company’s largest source of revenue, representing 80.58 percent of
total revenue during 2008 and 84.45 percent during 2007.





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





The
Federal Reserve Board influences the general market rates of interest, including
the deposit and loan rates offered by many financial institutions. The Company’s
loan portfolio is significantly affected by changes in the prime interest rate.
The prime interest rate, which is the rate offered on loans to borrowers with
strong credit has ranged from 3.25 percent to 8.25 percent during 2001 to
2008.  At year end 2007, the prime rate was 7.25 percent and with the
400 basis point reduction during 2008 the prime rate ended the year at 3.25
percent.  The federal funds rate moved similar to prime rate with
interest rates ranging from 0.25 percent to 5.25 percent during 2001 to
2008.  At year end 2007, the federal funds rate was 4.25 percent and
with the 400 basis point reduction during 2008 the federal funds rate ended the
year at 0.25 percent.  We anticipate the Federal Reserve tightening
interest rate policy toward the latter part of 2009, which should improve
Colony’s net interest margin.





The
following table presents the changes in taxable-equivalent net interest income
and identifies the changes due to differences in the average volume of earning
assets and interest-bearing liabilities and the changes due to changes in the
average interest rate on those assets and liabilities. The changes in net
interest income due to changes in both average volume and average interest rate
have been allocated to the average volume change or the average interest rate
change in proportion to the absolute amounts of the change in each. The
Company’s consolidated average balance sheets along with an analysis of
taxable-equivalent net interest earnings are presented in the Quantitative and
Qualitative Disclosures About Market Risk included elsewhere in this
report.





- 35
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Rate/Volume
Analysis





The
rate/volume analysis presented hereafter illustrates the change from year to
year for each component of the taxable equivalent net interest income separated
into the amount generated through volume changes and the amount generated by
changes in the yields/rates.





Changes
      From
                                                                                                                                                                                                                                                  2007
      to 2008 (a)
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                Changes
      From
                                                                                                                                                                                                                                                  2006
      to 2007 (a)($
      in thousands)
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                Volume
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                Rate
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                Total
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                Volume
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                Rate
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                TotalInterest
      IncomeLoans,
      Net-Taxable
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                943
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                (15,143
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                (14,200
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                2,855
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                3,028
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                5,883Investment
      SecuritiesTaxable
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                645
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                132
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                777
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                704
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                627
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,331Tax-Exempt
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (121
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                20
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (101
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                278
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (7
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                271Total
      Investment Securities
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                524
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                152
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                676
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                982
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                620
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,602Interest-Bearing
      Deposits inOther
      Banks
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (82
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (34
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (116
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                6
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                4
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                10Federal
      Funds Sold
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (940
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (265
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (1,205
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (613
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                56
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (557
                                                                                                                                                                                                                                                )Other
      Interest-Earning Assets
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                45
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (56
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (11
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                6
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                24
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                30Total
      Interest Income
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                490
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (15,346
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (14,856
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                3,236
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                3,732
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                6,968Interest
      ExpenseInterest-Bearing
      Demand andSavings
      Deposits
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                139
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (1,509
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (1,370
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                72
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                328
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                400Time
      Deposits
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (2,017
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (6,542
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (8,559
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,090
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                4,631
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                5,721Total
      Interest Expense on Deposits
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (1,878
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (8,051
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (9,929
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,162
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                4,959
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                6,121Other
      Interest-Bearing LiabilitiesFederal
      Funds Purchased and Repurchase Agreements
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                891
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (436
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                455
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                29
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                30Subordinated
      Debentures
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (137
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (598
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (735
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                272
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (145
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                127Other
      Debt
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                865
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (434
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                431
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                18
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                13
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                31Total
      Interest Expense
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (259
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (9,519
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                (9,778
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                1,481
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                4,828
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                6,309Net
      Interest Income (Loss)
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                749
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                (5,827
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                (5,078
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                1,755
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                (1,096
                                                                                                                                                                                                                                                )
                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                $
                                                                                                                                                                                                                                                659





(a)
            Changes
      in net interest income for the periods, based on either changes in average
      balances or changes in average rates for interest-earning assets and
      interest-bearing liabilities, are shown on this table. During each year
      there are numerous and simultaneous balance and rate changes; therefore,
      it is not possible to precisely allocate the changes between balances and
      rates. For the purpose of this table, changes that are not exclusively due
      to balance changes or rate changes have been attributed to
      rates.





- 36
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Our
financial performance is impacted by, among other factors, interest rate risk
and credit risk.  We do not utilize derivatives to mitigate our credit
risk, relying instead on an extensive loan review process and our allowance for
loan losses.





Interest
rate risk is the change in value due to changes in interest
rates.  The Company is exposed only to U.S. dollar interest-rate
changes and, accordingly, the Company manages exposure by considering the
possible changes in the net interest margin. The Company does not have any
trading instruments nor does it classify any portion of its investment portfolio
as held for trading. The Company does not engage in any hedging activity or
utilize any derivatives. The Company has no exposure to foreign currency
exchange rate risk, commodity price risk and other market risks. Interest rate
risk is addressed by our Asset & Liability Management Committee (ALCO) which
includes senior management representatives. The ALCO monitors interest rate risk
by analyzing the potential impact to the net portfolio of equity value and net
interest income from potential changes to interest rates and considers the
impact of alternative strategies or changes in balance sheet
structure.





Interest
rates play a major part in the net interest income of financial institutions.
The repricing of interest-earnings assets and interest-bearing liabilities can
influence the changes in net interest income. The timing of repriced assets and
liabilities is Gap management and our Company has established its policy to
maintain a Gap ratio in the one-year time horizon of .80 to 1.20.





Our
exposure to interest rate risk is reviewed at least quarterly by our Board of
Directors and the ALCO. Interest rate risk exposure is measured using interest
rate sensitivity analysis to determine our change in net portfolio value in the
event of assumed changes in interest rates. In order to reduce the exposure to
interest rate fluctuations, we have implemented strategies to more closely match
our balance sheet composition. The Company has engaged FTN Financial to run a
quarterly asset/liability model for interest rate risk analysis.  We
are generally focusing our investment activities on securities with terms or
average lives in the 3-7 year range.





The
Company maintains about 36.5 percent of its loan portfolio in adjustable rate
loans that reprice with prime rate changes, while the bulk of its other loans
mature within 3 years. The liabilities to fund assets are primarily in
short-term certificates of deposit that mature within one year. This balance
sheet composition has allowed the Company to be relatively constant with its net
interest margin until 2008.  During 2006 interest rates increased 100
basis points and during 2007 interest rates decreased 100 basis
points.  The 100 basis point decrease by the Federal Reserve in 2007
followed by 400 basis point decrease in 2008 resulted in significant pressure in
net interest margins.  Net interest margin decreased to 3.30 percent
for 2008 compared to 3.75 percent for 2007 and 3.84 percent for
2006.  Given the Federal Reserve’s aggressive posture during 2008 that
ended the year with a range of 0 – 0.25 percent federal funds target rate, we
anticipate a slightly improved net interest margin in 2009.





- 37
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Taxable-equivalent
net interest income for 2008 decreased $5.08 million, or 11.86 percent, compared
to 2007, while taxable-equivalent net interest income for 2007 increased by
$0.66 million, or 1.56 percent, compared to 2006.  The fluctuation
between the comparable periods resulted from the slight positive impact of
growth in the average volume of earning assets and a negative impact from the
decreasing average interest rates.  The average volume of earning
assets during 2008 increased almost $3.28 million compared to 2007 while over
the same period the net interest margin decreased to 3.30 percent
from  3.75 percent.  Similarly, the average volume of
earning assets during 2007 increased $43.9 million compared to 2006 while over
the same period the net interest margin decreased to 3.75 percent from 3.84
percent.  Growth in average earning assets during 2008 and 2007 was
primarily in loans. The reduction in the net interest margin in 2008 was
primarily the result of the Federal Reserve reducing interest rates 400 basis
points during 2008 along with sluggish loan growth in 2008.





The
average volume of loans increased $11.0 million in 2008 compared to 2007 and
increased $34.6 million in 2007 compared to 2006.  The average yield
on loans decreased 158 basis points in 2008 compared to 2007 and increased 32
basis points in 2007 compared to 2006. Funding for this growth was primarily
provided by other borrowings in 2008 and by deposit growth in
2007.  The average volume of other borrowings increased $35 million in
2008 compared to 2007 while average deposits decreased $35 million in 2008
compared to 2007.  The average volume of deposits increased $30.6
million in 2007 compared to 2006. Interest-bearing deposits made up 91.6 percent
of the decrease in average deposits in 2008 and 89.6 percent of the growth in
average deposits in 2007. Accordingly, the ratio of average interest-bearing
deposits to total average deposits was 92.5 percent in 2008, 92.5 percent in
2007 and 92.6 percent in 2006. This deposit mix, combined with a general
decrease in interest rates, had the effect of (i) decreasing the average cost of
total deposits by 85 basis points in 2008 compared to 2007 and increasing the
average cost of total deposits by 49 basis points in 2007 compared to 2006, and
(ii) mitigating a portion of the impact of decreasing yields on earning assets
on the Company’s net interest income.





The
Company’s net interest spread, which represents the difference between the
average rate earned on earning assets and the average rate paid on
interest-bearing liabilities, was 2.97 percent in 2008 compared to 3.34 percent
in 2007 and 3.50 percent in 2006. The net interest spread, as well as the net
interest margin, will be impacted by future changes in short-term and long-term
interest rate levels, as well as the impact from the competitive environment. A
discussion of the effects of changing interest rates on net interest income is
set forth in Quantitative and Qualitative Disclosures About Interest Rate
Sensitivity included elsewhere in this report.





Provision
for Possible Loan Losses





The
provision for possible loan losses is determined by management as the amount to
be added to the allowance for possible loan losses after net charge-offs have
been deducted to bring the allowance to a level which, in management’s best
estimate, is necessary to absorb probable losses within the existing loan
portfolio. The provision for possible loan losses totaled $12.94 million in 2008
compared to $5.93 million in 2007 and $3.99 million in 2006.  See the
section captioned “Allowance for Possible Loan Losses” elsewhere in this
discussion for further analysis of the provision for possible loan
losses.





- 38
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Noninterest
Income





The
components of noninterest income were as follows:





2008
                
                
                2007
                
                
                2006Service
      Charges on Deposit Accounts
                
                $
                4,700
                
                
                $
                4,771
                
                
                $
                4,580Other
      Charges, Commissions and Fees
                
                
                981
                
                
                
                921
                
                
                
                831Other
                
                
                1,520
                
                
                
                974
                
                
                
                1,171Mortgage
      Fee Income
                
                
                609
                
                
                
                967
                
                
                
                768Securities
      Gains
                
                
                1,195
                
                
                
                184
                
                
                
                -$
                9,005
                
                
                $
                7,817
                
                
                $
                7,350





Total
noninterest income for 2008 increased $1.19 million, or 15.20 percent, compared
to 2007 while total noninterest income for 2007 increased $0.47 million, or 6.35
percent, compared to 2006.  The increase in 2008 noninterest income
compared to 2007 was primarily in securities gains and other income, while the
increase in 2007 noninterest income compared to 2006 was primarily in mortgage
fee income and service charges on deposit accounts.  Changes in these
items and the other components of noninterest income are discussed in more
detail below.





Service Charges on Deposit
Accounts.  Service charges on deposit accounts for 2008
decreased $71 thousand, or 1.49 percent, compared to 2007.  The
decrease was primarily due to a decrease in volume of consumer and business
account overdraft fees.  Service charges on deposit accounts for 2007
increased $191 thousand, or 4.17 percent, compared to 2006.  The
increase was primarily due to an increase in overdraft fees, which were mostly
related to consumer accounts.





Mortgage Fee
Income.Mortgage fee income for 2008 decreased $358 thousand,
or 37.02 percent, compared to 2007.  The decrease was primarily due to
decreased mortgage loan activity with the housing and real estate
downturn.  Mortgage fee income for 2007 increased $199 thousand, or
25.91 percent, compared to 2006 due to a company-wide focus on mortgage loans to
be sold into the secondary market.





All Other Noninterest
Income.  The aggregate of all other noninterest income accounts
increased $1,617   thousand, or 77.78 percent, compared to
2007.  The increase was primarily due to gains realized from the sale
of securities of $1,195 thousand for 2008 compared to $184 thousand for 2007, or
an increase of $1,011 thousand.  In addition other income increased to
$1,520 thousand for 2008 compared to $974 thousand for 2007, or an increase of
$546 thousand.  The significant increase was gains realized of $670
thousand resulting from the company’s unwinding of its position in $19 million
FHLB advances during 2008.  These increases were offset by a reduction
in gains realized from the sale of SBA and FSA governmental loans as gains
realized were $12 thousand for 2008 compared to a $150 thousand for 2007, or a
reduction of $138 thousand.





- 39
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





The
aggregate of all other noninterest income accounts increased $77 thousand, or
3.85 percent compared to 2006.  The increase was primarily due to
gains from the sale of securities of $184 thousand for 2007 compared to no
security gains for 2006, or an increase of $184 thousand.  In addition
ATM fee income increased to $765 thousand for 2007 compared to $652 thousand for
2006, or an increase of $113 thousand and fee income on check orders increased
to $147 thousand for 2007 compared to $78 thousand for 2006, or an increase of
$69 thousand.  These increases were offset by a reduction in gains
realized from the sale of SBA and FSA governmental loans as gains realized were
$150 thousand for 2007 compared to $512 thousand for 2006, or a reduction of
$362 thousand.





Noninterest
Expense





The
components of noninterest expense were as follows:





2008
                
                
                2007
                
                
                2006Salaries
      and Employee Benefits
                
                $
                16,238
                
                
                $
                17,866
                
                
                $
                16,870Occupancy
      and Equipment
                
                
                4,191
                
                
                
                4,039
                
                
                
                4,035Other
                
                
                10,427
                
                
                
                9,674
                
                
                
                8,977$
                30,856
                
                
                $
                31,579
                
                
                $
                29,882





Total
noninterest expense for 2008 decreased $723 thousand, or 2.29 percent compared
to 2007 while total noninterest expense for 2007 increased $1.70 million, or
5.68 percent, compared to 2006.  Reduction in noninterest expense in
2008 was primarily in salaries and employee benefits while the Company had an
increase in occupancy and equipment expense and other noninterest
expense.  Growth in noninterest expense in 2007 was primarily in
salaries and employee benefits and other noninterest expense.





Salaries and Employee
Benefits.  Salaries and employee benefits expense for 2008
decreased $1,628 thousand, or 9.11 percent, compared to 2007.  The
slowing economy and lack of growth resulted in decreases in headcount as a
result of normal attrition and restructuring due to consolidation efforts
initiated in 2008.  In addition bonuses and profit sharing payouts
were down significantly based on Company performance being significantly below
targeted goals.  Bonus and profit sharing payouts were $316 thousand
for 2008 compared to $1,517 thousand for 2007, or a reduction of $1,201
thousand.  Reduction of head count and incentive payouts are the
primary factors for the reduction in salaries and employee benefits compared to
2007.





Salaries
and employee benefits for 2007 increased $996 thousand, or 5.90 percent,
compared to 2006.  The increase is primarily related to increases in
head count, merit increases, payroll taxes and health insurance
expense.  The slight increase in head count was primarily staffing
needs in the back office support area as no new offices were opened in
2007.  Areas of addition included technology, human resources and
administrative support.  These increases were offset by a reduction in
incentive and profit sharing expense as payouts were approximately $442 thousand
less than in 2006 due to the Company’s performance in which targeted goals with
the incentive and profit sharing plan were not met.





- 40
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Occupancy and
Equipment.  Net occupancy expense for 2008 increased $152
thousand compared to 2007, or an increase of 3.76 percent.  The
Company opened one new office during 2008 to incur additional occupancy expense
compared to 2007.  In addition new data processing equipment purchased
in connection with Company-wide consolidation efforts resulted in depreciation
expense increasing $152 thousand for 2008 compared to 2007.





Net
occupancy expense for 2007 remained flat compared to 2006.  The
Company matched up with net occupancy and equipment expense for 2006 primarily
because there were no new offices opened during 2007.





All Other Noninterest
Expense.  All other noninterest expense for 2008 increased $753
thousand, or 7.78 percent.  Significant changes in noninterest expense
were:  FDIC insurance assessment fees increased to $604 thousand for
2008 compared to $190 thousand for 2007, or an increase of $414 thousand; legal
and professional fees increased to $1.38 million for 2008 compared to $1.14
million for 2007, or an increase of $240 thousand and repossession/foreclosure
expense increased to $333 thousand for 2008 compared to $101 thousand for 2007,
or an increase of $232 thousand.





All other
noninterest expense for 2007 increased $697 thousand, or 7.76
percent.  Significant changes in noninterest expense
were:  legal and professional fees increased to $1.14 million for 2007
compared to $1.07 million for 2006, or an increase of $70 thousand; ATM expense
increased to $462 thousand for 2007 compared to $377 thousand for 2006, or an
increase of $85 thousand; software and license fee expense increased to $424
thousand for 2007 compared to $341 thousand for 2006, or an increase of $83
thousand; deferred compensation expense increased to $238 thousand for 2007
compared to $165 thousand for 2006, or an increase of $73 thousand and
amortization expense on trust preferred securities increased to $295 thousand
for 2007 compared to $30 thousand for 2006, or an increase of $265
thousand.  The Company exercised call options on trust preferred
securities to refinance at lower interest rates and expensed the unamortized
fees on the two trust preferred securities.





Sources
and Uses of Funds





The
following table illustrates, during the years presented, the mix of the
Company’s funding sources and the assets in which those funds are invested as a
percentage of the Company’s average total assets for the period indicated.
Average assets totaled $1,205 million in 2008 compared to $1,204 million in 2007
and $1,161 million in 2006.





- 41
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





2008
                
                
                2007
                
                
                2006Sources
      of FundsDepositsNoninterest-Bearing
                
                $
                73,569
                
                
                
                6.1
                %
                
                $
                76,509
                
                
                
                6.4
                %
                
                $
                73,334
                
                
                
                6.3
                %Interest-Bearing
                
                
                912,932
                
                
                
                75.8
                
                
                
                945,028
                
                
                
                78.5
                
                
                
                917,634
                
                
                
                79.1Federal
      Funds Purchased and Repurchase Agreements
                
                
                18,200
                
                
                
                1.5
                
                
                
                1,130
                
                
                
                -
                
                
                
                563
                
                
                
                -Subordinated
      Debentures and Other Borrowed Money
                
                
                110,141
                
                
                
                9.1
                
                
                
                92,211
                
                
                
                7.7
                
                
                
                88,512
                
                
                
                7.6Other
      Noninterest-Bearing Liabilities
                
                
                5,632
                
                
                
                0.5
                
                
                
                8,692
                
                
                
                0.7
                
                
                
                8,682
                
                
                
                0.8Equity
      Capital
                
                
                84,372
                
                
                
                7.0
                
                
                
                80,595
                
                
                
                6.7
                
                
                
                71,993
                
                
                
                6.2$
                1,204,846
                
                
                
                100.0
                %
                
                $
                1,204,165
                
                
                
                100.0
                %
                
                $
                1,160,718
                
                
                
                100.0
                %Uses
      of FundsLoans
                
                $
                941,794
                
                
                
                78.2
                %
                
                $
                934,495
                
                
                
                77.6
                %
                
                $
                901,162
                
                
                
                77.6
                %Investment
      Securities
                
                
                168,532
                
                
                
                14.0
                
                
                
                157,033
                
                
                
                13.0
                
                
                
                135,538
                
                
                
                11.7Federal
      Funds Sold
                
                
                10,499
                
                
                
                0.9
                
                
                
                28,863
                
                
                
                2.4
                
                
                
                41,307
                
                
                
                3.6Interest-Bearing
      Deposits
                
                
                1,235
                
                
                
                0.1
                
                
                
                2,879
                
                
                
                0.2
                
                
                
                2,753
                
                
                
                0.2Other
      Interest-Earning Assets
                
                
                6,079
                
                
                
                0.5
                
                
                
                5,308
                
                
                
                0.5
                
                
                
                5,192
                
                
                
                0.4Other
      Noninterest-Earning Assets
                
                
                76,707
                
                
                
                6.3
                
                
                
                75,587
                
                
                
                6.3
                
                
                
                74,766
                
                
                
                6.5$
                1,204,846
                
                
                
                100.0
                %
                
                $
                1,204,165
                
                
                
                100.0
                %
                
                $
                1,160,718
                
                
                
                100.0
                %





Deposits
continue to be the Company’s primary source of funding.  Over the
comparable periods, the relative mix of deposits continues to be high in
interest-bearing deposits.  Interest-bearing deposits totaled 92.54
percent of total average deposits in 2008 compared to 92.51 percent in 2007 and
92.60 percent in 2006.





The
Company primarily invests funds in loans and securities.  Loans
continue to be the largest component of the Company’s mix of invested
assets.  Loan demand was sluggish in 2008 as total loans were $961.0
million at December 31, 2008, up 1.66 percent, compared to loans of $945.3
million at December 31, 2007, while total loans at December 31, 2007 were up
0.32 percent compared to loans of $942.3 million at December 31,
2006.  See additional discussion regarding the Company’s loan
portfolio in the section captioned “Loans” included below.  The
majority of funds provided by deposit growth have been invested in
loans.





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Part
II (Continued)


Item 7
(Continued)





Loans





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





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Commercial,
      Financial and Agricultural
                
                $
                86,379
                
                
                $
                52,323
                
                
                $
                61,887
                
                
                $
                48,849
                
                
                $
                44,284Real
      EstateConstruction
                
                
                160,374
                
                
                
                211,484
                
                
                
                193,952
                
                
                
                152,944
                
                
                
                100,774Mortgage,
      Farmland
                
                
                54,159
                
                
                
                42,439
                
                
                
                40,936
                
                
                
                37,152
                
                
                
                38,245Mortgage,
      Other
                
                
                600,653
                
                
                
                544,655
                
                
                
                549,601
                
                
                
                529,599
                
                
                
                500,869Consumer
                
                
                44,163
                
                
                
                72,350
                
                
                
                76,930
                
                
                
                73,473
                
                
                
                73,685Other
                
                
                15,308
                
                
                
                22,028
                
                
                
                18,967
                
                
                
                17,100
                
                
                
                20,823961,036
                
                
                
                945,279
                
                
                
                942,273
                
                
                
                859,117
                
                
                
                778,680Unearned
      Interest and Fees
                
                
                (179
                )
                
                
                (301
                )
                
                
                (501
                )
                
                
                (302
                )
                
                
                (37
                )Allowance
      for Loan Losses
                
                
                (17,016
                )
                
                
                (15,513
                )
                
                
                (11,989
                )
                
                
                (10,762
                )
                
                
                (10,012
                )Loans
                
                $
                943,841
                
                
                $
                929,465
                
                
                $
                929,783
                
                
                $
                848,053
                
                
                $
                768,631





The
following table presents total loans as of December 31, 2008 according to
maturity distribution and/or repricing opportunity on adjustable rate
loans.





Maturity
      and Repricing Opportunity
                  
                  ($
      in thousands)One
      Year or Less
                  
                  $
                  595,545After
      One Year through Three Years
                  
                  
                  297,803After
      Three Years through Five Years
                  
                  
                  57,051Over
      Five Years
                  
                  
                  10,637$
                  961,036





Overview. Loans totaled
$961.0 million at December 31, 2008, up 1.66 percent from December 31, 2007
loans of $945.3 million.  The majority of the Company’s loan portfolio
is comprised of the real estate loans-other, real estate construction and
commercial financial and agricultural loans.  Real estate-other, which
is primarily 1-4 family residential properties and nonfarm nonresidential
properties and includes both commercial and consumer balances, made up 62.50
percent and 57.62 percent of total loans, real estate construction made up 16.69
percent and 22.37 percent while commercial financial and agricultural loans made
up 8.99 percent and 5.54 percent of total loans at December 31, 2008 and
December 31, 2007, respectively.





Loan Origination/Risk
Management.In accordance with the Company’s decentralized
banking model, loan decisions are made at the local office
level.  The Company utilizes an Executive Loan Committee to assist
lenders with the decision making and underwriting process of larger loan
requests.  Due to the diverse economic markets served by the Company,
evaluation and underwriting criterion may vary slightly by
office.  Overall, loans are extended after a review of the borrower’s
repayment ability, collateral adequacy, and overall credit
worthiness.





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Part
II (Continued)


Item 7
(Continued)





Commercial
purpose, commercial real estate, and industrial loans are underwritten similar
to other loans throughout the company.  The properties securing the
Company’s commercial real estate portfolio are diverse in terms of type and
geographic location.  This diversity helps reduce the Company’s
exposure to adverse economic events that affect any single market or
industry.  Management monitors and evaluates commercial real estate
loans based on collateral, geography, and risk grade criteria.  The
Company also utilizes information provided by third-party agencies to provide
additional insight and guidance about economic conditions and trends affecting
the markets it serves.





The
Company extends loans to builders and developers that are secured by non-owner
occupied properties. In such cases, the Company reviews the overall economic
conditions and trends for each market to determine the desirability of loans to
be extended for residential construction and development.  Sources of
repayment for these types of loans may be pre-committed permanent loans from
approved long-term lenders, sales of developed property or an interim mini-perm
loan commitment from the Company until permanent financing is
obtained.  In some cases, loans are extended for residential loan
construction for speculative purposes and are based on the perceived present and
future demand for housing in a particular market served by the
Company.  These loans are monitored by on-site inspections and are
considered to have higher risks than other real estate loans due to their
ultimate repayment being sensitive to interest rate changes, general economic
conditions and trends, the demand for the properties, and the availability of
long-term financing.





The
Company originates consumer loans at the office level.  Due to the
diverse economic markets served by the Company, underwriting criterion may vary
slightly by office.  The Company is committed to serving the borrowing
needs of all markets served and, in some cases, adjusts certain evaluation
methods to meet the overall credit demographics of each
market.  Consumer loans represent relatively small loan amounts that
are spread across many individual borrowers to help minimize
risk.  Additionally, consumer trends and outlook reports are reviewed
by management on a regular basis.





The
Company maintains an internal loan review department that reviews and validates
the credit risk program on a periodic basis. Results of these reviews are
presented to management. The loan review process complements and reinforces the
risk identification and assessment decisions made by lenders and credit
personnel, as well as the Company’s policies and procedures.





Commercial, Financial and
Agricultural.Commercial, financial and agricultural loans at
December 31, 2008 increased 65.20 percent from December 31, 2007 to $86.4
million. The Company’s commercial and industrial loans are a diverse group of
loans to small, medium and large businesses. The purpose of these loans varies
from supporting seasonal working capital needs to term financing of equipment.
While some short-term loans may be made on an unsecured basis, most are secured
by the assets being financed with collateral margins that are consistent with
the Company’s loan policy guidelines.





Industry Concentrations. As
of December 31, 2008 and December 31, 2007, there were no concentrations of
loans within any single industry in excess of 10 percent of total loans, as
segregated by Standard Industrial Classification code (“SIC code”). The SIC code
is a federally designed standard industrial numbering system used by the Company
to categorize loans by the borrower’s type of business.





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Part
II (Continued)


Item 7
(Continued)





Collateral
Concentrations.  Lending is concentrated in commercial and real
estate primarily to local borrowers. The Company has a high concentration of
real estate loans that could pose an adverse credit risk particularly with the
current economic downturn in the real estate market.  In management’s
opinion, the balance of the loan portfolio is sufficiently diversified to avoid
significant concentration of credit risk.  Although the Company has a
diversified loan portfolio, a substantial portion of borrowers’ ability to honor
their contracts is dependent upon the viability of the real estate economic
sector.  The continued downturn of the housing and real estate market
that began in 2007 has resulted in an increase of real estate dependent problem
loans.  These loans are centered primarily in the Company’s larger MSA
markets.  Declining collateral real estate values that secure land
development, construction and speculative real estate loans in the Company’s
larger MSA markets have resulted in increased loan loss provisions in
2008.





Large Credit Relationships.
Colony is currently in eighteen counties in south and central Georgia and
include metropolitan markets in Dougherty, Lowndes, Houston, Chatham and
Muscogee counties.  As a result, the Company originates and maintains
large credit relationships with several commercial customers in the ordinary
course of business.  The Company considers large credit relationships
to be those with commitments equal to or in excess of $5.0 million prior to any
portion being sold.  Large relationships also include loan
participations purchased if the credit relationship with the agent is equal to
or in excess of $5.0 million.  In addition to the Company’s normal
policies and procedures related to the origination of large credits, the
Company’s Central Credit Committee must approve all new and renewed credit
facilities which are part of large credit relationships.  The
following table provides additional information on the Company’s large credit
relationships outstanding at December 31, 2008 and December 31,
2007.





December
      31, 2008
                
                
                December
      31, 2007Number
      of
                
                
                Period
      End Balances
                
                
                Number
      of
                
                
                Period
      End BalancesRelationships
                
                
                Committed
                
                
                Outstanding
                
                
                Relationships
                
                
                Committed
                
                
                OutstandingLarge
      Credit Relationships$10
      Million and Greater
                
                
                2
                
                
                $
                27,605
                
                
                $
                21,345
                
                
                
                3
                
                
                $
                38,957
                
                
                $
                23,441$5
      Million to $9.9 Million
                
                
                12
                
                
                
                74,679
                
                
                
                71,215
                
                
                
                15
                
                
                
                92,595
                
                
                
                89,677





Maturities and Sensitivities of
Loans to Changes in Interest Rates.  The following table
presents the maturity distribution of the Company’s loans at December 31, 2008.
The table also presents the portion of loans that have fixed interest rates or
variable interest rates that fluctuate over the life of the loans in accordance
with changes in an interest rate index such as the prime rate.





Due
      in One
                Year
      or Less
              
              
              After
      One,
                but
      Within
                Three
      Years
              
              
              After
      Three,
                but
      Within
                Five
      Years
              
              
              After
                Five
                Years
              
              
              TotalLoans
      with Fixed Interest Rates
              
              $
              250,413
              
              
              $
              293,447
              
              
              $
              57,031
              
              
              $
              10,302
              
              
              $
              611,193Loans
      with Floating Interest Rates
              
              
              345,132
              
              
              
              4,356
              
              
              
              20
              
              
              
              335
              
              
              
              349,843$
              595,545
              
              
              $
              297,803
              
              
              $
              57,051
              
              
              $
              10,637
              
              
              $
              961,036





The
Company may renew loans at maturity when requested by a customer whose financial
strength appears to support such renewal or when such renewal appears to be in
the Company’s best interest. In such instances, the Company generally requires
payment of accrued interest and may adjust the rate of interest, require a
principal reduction or modify other terms of the loan at the time of
renewal.





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Part
II (Continued)


Item 7
(Continued)





Nonperforming
Assets and Potential Problem Loans





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





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Loans
      Accounted for on Nonaccrual
                
                $
                35,124
                
                
                $
                14,956
                
                
                $
                8,069
                
                
                $
                8,579
                
                
                $
                7,856Loans
      Past Due 90 Days or More
                
                
                250
                
                
                
                60
                
                
                
                9
                
                
                
                14
                
                
                
                953Other
      Real Estate Foreclosed
                
                
                12,812
                
                
                
                1,332
                
                
                
                970
                
                
                
                2,170
                
                
                
                1,127Total
      Nonperforming Assets
                
                $
                48,186
                
                
                $
                16,348
                
                
                $
                9,048
                
                
                $
                10,763
                
                
                $
                9,936Nonperforming
      Assets as a Percentage ofTotal
      Loans and Foreclosed Assets
                
                
                4.95
                %
                
                
                1.73
                %
                
                
                0.96
                %
                
                
                1.25
                %
                
                
                1.27
                %Total
      Assets
                
                
                3.85
                %
                
                
                1.35
                %
                
                
                0.75
                %
                
                
                0.97
                %
                
                
                1.00
                %Accruing
      Past Due Loans30–89
      Days Past Due
                
                $
                18,675
                
                
                $
                15,681
                
                
                $
                10,593
                
                
                $
                6,829
                
                
                $
                8,30290
      or More Days Past Due
                
                
                250
                
                
                
                60
                
                
                
                9
                
                
                
                14
                
                
                
                953Total
      Accruing Past Due Loans
                
                $
                18,925
                
                
                $
                15,741
                
                
                $
                10,602
                
                
                $
                6,843
                
                
                $
                9,255





Nonperforming
assets include nonaccrual loans, loans past due 90 days or more, restructured
loans and foreclosed real estate.  Nonperforming assets at December
31, 2008 increased 194.75 percent from December 31, 2007.  The
increase in nonperforming assets was primarily attributable to the under
performance of residential real estate and land development loans given the
downturn in the real estate market that began during the latter part of
2007.





Generally,
loans are placed on nonaccrual status if principal or interest payments become
90 days past due and/or management deems the collectibility of the principal
and/or interest to be in question, as well as when required by regulatory
requirements. Loans to a customer whose financial condition has deteriorated are
considered for nonaccrual status whether or not the loan is 90 days or more past
due. For consumer loans, collectibility and loss are generally determined before
the loan reaches 90 days past due. Accordingly, losses on consumer loans are
recorded at the time they are determined. Consumer loans that are 90 days or
more past due are generally either in liquidation/payment status or bankruptcy
awaiting confirmation of a plan. Once interest accruals are discontinued,
accrued but uncollected interest is charged to current year operations.
Subsequent receipts on non-accrual loans are recorded as a reduction of
principal, and interest income is recorded only after principal recovery is
reasonably assured. Classification of a loan as non-accrual does not preclude
the ultimate collection of loan principal or interest.





Renegotiated
loans are loans on which, due to deterioration in the borrower’s financial
condition, the original terms have been modified in favor of the borrower or
either principal or interest has been forgiven.





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Part
II (Continued)


Item 7
(Continued)





Foreclosed
assets represent property acquired as the result of borrower defaults on loans.
Foreclosed assets are recorded at estimated fair value, less estimated selling
costs, at the time of foreclosure. Write-downs occurring at foreclosure are
charged against the allowance for possible loan losses. On an ongoing basis,
properties are appraised as required by market indications and applicable
regulations. Write-downs are provided for subsequent declines in value and are
included in other non-interest expense along with other expenses related to
maintaining the properties.





Allowance
for Possible Loan Losses





The
allowance for possible loan losses is a reserve established through a provision
for possible loan losses charged to expense, which represents management’s best
estimate of probable losses that have been incurred within the existing
portfolio of loans. The allowance, in the judgment of management, is necessary
to reserve for estimated loan losses and risks inherent in the loan portfolio.
The allowance for possible loan losses includes allowance allocations calculated
in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, and allowance
allocations determined in accordance with SFAS No. 5, Accounting for
Contingencies.The level of the allowance reflects
management’s continuing evaluation of industry concentrations, specific credit
risks, loan loss experience, current loan portfolio quality, present economic,
political and regulatory conditions and unidentified losses inherent in the
current loan portfolio. Portions of the allowance may be allocated for specific
credits; however, the entire allowance is available for any credit that, in
management’s judgment, should be charged off. While management utilizes its best
judgment and information available, the ultimate adequacy of the allowance is
dependent upon a variety of factors beyond the Company’s control, including the
performance of the Company’s loan portfolio, the economy, changes in interest
rates and the view of the regulatory authorities toward loan classifications.





The
Company’s allowance for possible loan losses consists of specific valuation
allowances established for probable losses on impaired loans and historical
valuation allowances for other loans with similar risk
characteristics.





The
allowances established for probable losses on impaired loans are based on a
regular analysis and evaluation of classified loans.  Loans are
classified based on an internal credit risk grading process that evaluates,
among other things: (i) the obligor’s ability to repay; (ii) the underlying
collateral, if any; and (iii) the economic environment and industry in which the
borrower operates.  This analysis is performed at the branch level and
is reviewed at the parent company level.  Once a loan is classified,
it is reviewed to determine whether the loan is impaired and, if impaired, a
portion of the allowance for possible loan losses is specifically allocated to
the loan.  Specific valuation allowances are determined after
considering the borrower’s financial condition, collateral deficiencies, and
economic conditions affecting the borrower’s industry, among other
things.





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Part
II (Continued)


Item 7
(Continued)





The
methodology used to assign an allowance to a nonimpaired loan is more
subjective.  Generally, the allowance assigned to nonimpaired loans is
determined by applying historical loss rates to existing loans with similar risk
characteristics, adjusted for qualitative factors including the volume and
severity of identified classified loans, changes in economic conditions, changes
in credit policies or underwriting standards, and changes in the level of credit
risk associated with specific industries and markets.  Because the
economic and business climate in any given industry or market, and its impact on
any given borrower, can change rapidly, the risk profile of the loan portfolio
is continually assessed and adjusted when
appropriate.  Notwithstanding these procedures, there still exists the
possibility that our assessment could prove to be significantly incorrect and
that an immediate adjustment to the allowance for loan losses would be
required.





Management
evaluates the adequacy of the allowance for each of these components on a
quarterly basis.  Peer comparisons, industry comparisons, and
regulatory guidelines are also used in the determination of the general
valuation allowance.





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





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





2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004Reserve
                            
                            
                            %*
                            
                            
                            Reserve
                            
                            
                            %*
                            
                            
                            Reserve
                            
                            
                            %*
                            
                            
                            Reserve
                            
                            
                            %*
                            
                            
                            Reserve
                            
                            
                            %*Commercial,
      Financial and Agricultural
                            
                            $
                            4,254
                            
                            
                            
                            9
                            %
                            
                            $
                            3,645
                            
                            
                            
                            6
                            %
                            
                            $
                            3,597
                            
                            
                            
                            7
                            %
                            
                            $
                            3,229
                            
                            
                            
                            6
                            %
                            
                            $
                            3,004
                            
                            
                            
                            6
                            %Real
      Estate – Construction
                            
                            
                            2,808
                            
                            
                            
                            17
                            
                            
                            
                            2,560
                            
                            
                            
                            22
                            
                            
                            
                            719
                            
                            
                            
                            21
                            
                            
                            
                            646
                            
                            
                            
                            18
                            
                            
                            
                            501
                            
                            
                            
                            13Real
      Estate – Farmland
                            
                            
                            681
                            
                            
                            
                            6
                            
                            
                            
                            621
                            
                            
                            
                            4
                            
                            
                            
                            599
                            
                            
                            
                            4
                            
                            
                            
                            538
                            
                            
                            
                            4
                            
                            
                            
                            501
                            
                            
                            
                            5Real
      Estate – Other
                            
                            
                            5,955
                            
                            
                            
                            62
                            
                            
                            
                            5,430
                            
                            
                            
                            58
                            
                            
                            
                            3,896
                            
                            
                            
                            58
                            
                            
                            
                            3,498
                            
                            
                            
                            62
                            
                            
                            
                            3,304
                            
                            
                            
                            64Loans
      to Individuals
                            
                            
                            2,467
                            
                            
                            
                            4
                            
                            
                            
                            2,404
                            
                            
                            
                            8
                            
                            
                            
                            2,398
                            
                            
                            
                            8
                            
                            
                            
                            2,152
                            
                            
                            
                            8
                            
                            
                            
                            2,002
                            
                            
                            
                            9All
      Other Loans
                            
                            
                            851
                            
                            
                            
                            2
                            
                            
                            
                            853
                            
                            
                            
                            2
                            
                            
                            
                            780
                            
                            
                            
                            2
                            
                            
                            
                            699
                            
                            
                            
                            2
                            
                            
                            
                            700
                            
                            
                            
                            3$
                            17,016
                            
                            
                            
                            100
                            %
                            
                            $
                            15,513
                            
                            
                            
                            100
                            %
                            
                            $
                            11,989
                            
                            
                            
                            100
                            %
                            
                            $
                            10,762
                            
                            
                            
                            100
                            %
                            
                            $
                            10,012
                            
                            
                            
                            100
                            %





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





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





- 48
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





The
following table presents an analysis of the Company’s loan loss experience for
the periods indicated.





($
      in thousands)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Allowance
      for Loan Losses at Beginning of Year
                  
                  $
                  15,513
                  
                  
                  $
                  11,989
                  
                  
                  $
                  10,762
                  
                  
                  $
                  10,012
                  
                  
                  $
                  8,516Charge-OffsCommercial,
      Financial and Agricultural
                  
                  
                  1,680
                  
                  
                  
                  957
                  
                  
                  
                  1,351
                  
                  
                  
                  767
                  
                  
                  
                  463Real
      Estate
                  
                  
                  9,190
                  
                  
                  
                  1,862
                  
                  
                  
                  854
                  
                  
                  
                  698
                  
                  
                  
                  692Consumer
                  
                  
                  994
                  
                  
                  
                  793
                  
                  
                  
                  697
                  
                  
                  
                  1,369
                  
                  
                  
                  618All
      Other
                  
                  
                  103
                  
                  
                  
                  296
                  
                  
                  
                  471
                  
                  
                  
                  232
                  
                  
                  
                  36311,967
                  
                  
                  
                  3,908
                  
                  
                  
                  3,373
                  
                  
                  
                  3,046
                  
                  
                  
                  2,136RecoveriesCommercial,
      Financial and Agricultural
                  
                  
                  73
                  
                  
                  
                  109
                  
                  
                  
                  420
                  
                  
                  
                  176
                  
                  
                  
                  9Real
      Estate
                  
                  
                  285
                  
                  
                  
                  992
                  
                  
                  
                  20
                  
                  
                  
                  18
                  
                  
                  
                  36Consumer
                  
                  
                  155
                  
                  
                  
                  312
                  
                  
                  
                  156
                  
                  
                  
                  83
                  
                  
                  
                  90All
      Other
                  
                  
                  19
                  
                  
                  
                  88
                  
                  
                  
                  17
                  
                  
                  
                  75
                  
                  
                  
                  28532
                  
                  
                  
                  1,501
                  
                  
                  
                  613
                  
                  
                  
                  352
                  
                  
                  
                  163Net
      Charge-Offs
                  
                  
                  11,435
                  
                  
                  
                  2,407
                  
                  
                  
                  2,760
                  
                  
                  
                  2,694
                  
                  
                  
                  1,973Provision
      for Loans Losses
                  
                  
                  12,938
                  
                  
                  
                  5,931
                  
                  
                  
                  3,987
                  
                  
                  
                  3,444
                  
                  
                  
                  3,469Allowance
      for Loan Losses at End of Year
                  
                  $
                  17,016
                  
                  
                  $
                  15,513
                  
                  
                  $
                  11,989
                  
                  
                  $
                  10,762
                  
                  
                  $
                  10,012Ratio
      of Net Charge-Offs to Average Loans
                  
                  
                  1.19
                  %
                  
                  
                  0.25
                  %
                  
                  
                  0.30
                  %
                  
                  
                  0.33
                  %
                  
                  
                  0.27
                  %





The
allowance for possible loan losses is maintained at a level considered
appropriate by management, based on estimated probable losses within the
existing loan portfolio. The allowance, in the judgment of management, is
necessary to reserve for estimated loan losses and risks inherent in the loan
portfolio. The provision for loan losses reflects loan quality trends, including
the level of net charge-offs or recoveries, among other factors. The provision
for loan losses increased $7.01 million from $5.93 million in 2007 to $12.94
million in 2008. Provisions were higher in 2008 compared to 2007 primarily due
to the elevated risk of residential real estate and land development loans given
the downturn in the real estate market that began in the last half of
2007.  Nonperforming assets as a percentage of total loans and
foreclosed assets increased to 4.95 percent at December 31, 2008 compared to
1.73 percent a year ago.  During 2007, provision for loan losses
increased $1.94 million from the $3.99 million recorded in 2006.





Net
charge-offs in 2008 increased $9,028 thousand compared to 2007 while net
charge-offs in 2007 decreased $353 thousand compared to 2006.  Net
charge-offs were fairly consistent during 2007, 2006 and 2005; however, the net
charge-offs increased significantly in 2008 primarily from the write-down of
non-performing credits to current appraised values.  We anticipate an
elevated amount of charge-offs in 2009 as problem credits run through the
collection process to resolution.





- 49
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Management
believes the level of the allowance for loan losses was adequate as of December
31, 2008. Should any of the factors considered by management in evaluating the
adequacy of the allowance for loan losses change, the Company’s estimate of
probable loan losses could also change, which could affect the level of future
provisions for possible loan losses.





Investment
Portfolio





The
following table presents carrying values of investment securities held by the
Company as of December 31, 2008, 2007 and 2006.





($
      in thousands)
                
                2008
                
                
                2007
                
                
                2006U.S.
      Treasuries and Government Agencies
                
                $
                -
                
                
                $
                37,095
                
                
                $
                54,366Obligations
      of States and Political Subdivisions
                
                
                9,110
                
                
                
                13,984
                
                
                
                11,811Corporate
      Obligations
                
                
                6,176
                
                
                
                5,787
                
                
                
                3,745Asset
      Backed Securities
                
                
                668
                
                
                
                1,000
                
                
                
                -Marketable
      Equity Securities
                
                
                -
                
                
                
                2
                
                
                
                349Investment
      Securities
                
                
                15,954
                
                
                
                57,868
                
                
                
                70,271Mortgage
      Backed Securities
                
                
                191,750
                
                
                
                109,323
                
                
                
                79,036Total
      Investment Securities andMortgage
      Backed Securities
                
                $
                207,704
                
                
                $
                167,191
                
                
                $
                149,307





The
following table represents expected maturities and weighted-average yields of
investment securities held by the Company as of December 31,
2008.  (Mortgage backed securities are based on the average life at
the projected speed, while Agencies, State and Political Subdivisions and
Corporate Obligations reflect anticipated calls being exercised.)





Within
      1 Year
              
              
              After
      1 Year But
                Within
      5 Years
              
              
              After
      5 Years But Within 10 Years
              
              
              After
      10 YearsAmount
              
              
              Yield
              
              
              Amount
              
              
              Yield
              
              
              Amount
              
              
              Yield
              
              
              Amount
              
              
              YieldMortgage
      Backed Securities
              
              $
              44,148
              
              
              
              4.99
              %
              
              $
              146,914
              
              
              
              4.72
              %
              
              $
              -
              
              
              
              -
              %
              
              $
              688
              
              
              
              5.52
              %Obligations
      of State and Political Subdivisions
              
              
              515
              
              
              
              4.76
              
              
              
              2,810
              
              
              
              5.78
              
              
              
              4,264
              
              
              
              5.77
              
              
              
              1,521
              
              
              
              5.04Corporate
      Obligations
              
              
              2,188
              
              
              
              7.83
              
              
              
              2,074
              
              
              
              5.41
              
              
              
              1,155
              
              
              
              5.67
              
              
              
              759
              
              
              
              6.05Asset
      Backed Securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              668
              
              
              
              6.33Total
      Investment Portfolio
              
              $
              46,851
              
              
              
              5.12
              %
              
              $
              151,798
              
              
              
              4.75
              %
              
              $
              5,419
              
              
              
              5.75
              %
              
              $
              3,636
              
              
              
              5.58
              %





- 50
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Securities
are classified as held to maturity and carried at amortized cost when management
has the positive intent and ability to hold them to maturity. Securities are
classified as available for sale when they might be sold before maturity.
Securities available for sale are carried at fair value, with unrealized holding
gains and losses reported in other comprehensive income. The Company has 99.9
percent of its portfolio classified as available for sale.





At
December 31, 2008, there were no holdings of any one issuer, other than the U.S.
government and its agencies, in an amount greater than 10 percent of the
Company’s shareholders’ equity.





The
average yield of the securities portfolio was 4.84 percent in 2008 compared to
4.77 percent in 2007 and 4.34 percent in 2006. The increase in the average yield
from 2007 to 2008 primarily resulted from the investment of new funds at higher
rates.  The overall growth in the securities portfolio over the
comparable periods was primarily funded by other borrowings growth.





Deposits





The
following table presents the average amount outstanding and the average rate
paid on deposits by the Company for the years 2008, 2007 and 2006.





2008
                
                
                2007
                
                
                2006Average
                
                
                Average
                
                
                Average
                
                
                Average
                
                
                Average
                
                
                Average($
      in thousands)
                
                Amount
                
                
                Rate
                
                
                Amount
                
                
                Rate
                
                
                Amount
                
                
                RateNoninterest-Bearing
      Demand Deposits
                
                $
                73,569
                
                
                
                
                
                $
                76,509
                
                
                
                
                
                $
                73,334Interest-Bearing
      Demand and Savings
                
                
                220,655
                
                
                
                1.44
                %
                
                
                214,111
                
                
                
                2.13
                %
                
                
                210,461
                
                
                
                1.97
                %Time
      Deposits
                
                
                692,277
                
                
                
                4.28
                
                
                
                730,917
                
                
                
                5.22
                
                
                
                707,173
                
                
                
                4.59Total
      Deposits
                
                $
                986,501
                
                
                
                3.33
                %
                
                $
                1,021,537
                
                
                
                4.18
                %
                
                $
                990,968
                
                
                
                3.69
                %





The
following table presents the maturities of the Company's other time deposits as
of December 31, 2008.





Other
      Time Deposits
                
                
                Other
      Time Deposits($
      in thousands)
                
                $100,000
      or Greater
                
                
                Less
      Than $100,000
                
                
                TotalMonths
      to Maturity3
      or Less
                
                $
                126,264
                
                
                $
                122,804
                
                
                $
                249,068Over
      3 through 12
                
                
                174,886
                
                
                
                208,608
                
                
                
                383,494Over
      12 Months
                
                
                32,348
                
                
                
                37,024
                
                
                
                69,372$
                333,498
                
                
                $
                368,436
                
                
                $
                701,934





- 51
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Average
deposits decreased $35.0 million in 2008 compared to 2007 and increased $30.6
million in 2007 compared to 2006.  The decrease in 2008 included $2.9
million or 8.3 percent, related to noninterest-bearing deposits while the
increase in 2007 included $3.2 million, or 10.4 percent related to
noninterest-bearing deposits.  Accordingly the ratio of average
noninterest-bearing deposits to total average deposits was 7.5 percent in 2008
and 7.5 percent in 2007 and 7.4 percent in 2006.  The general decrease
in market rates in 2008 had the effect of (i) decreasing the average cost of
interest-bearing deposits by 93 basis points in 2008 compared to 2007 and (ii)
mitigating a portion of the impact of decreasing yields on earning assets on the
Company’s net interest income in 2008.  The general increase in market
rates in 2007 had the effect of (i) increasing the average cost of
interest-bearing deposits by 53 basis points in 2007 compared to 2006 and (ii)
mitigating a portion of the impact of increasing yields on earning assets on the
Company’s net interest income in 2008.





Total
average interest-bearing deposits decreased $32.10 million, or 3.40 percent in
2008 compared to 2007 and increased $27.4 million, or 2.99 percent, in 2007
compared to 2006.  The decrease in average deposits in 2008 compared
to 2007 was primarily in other time deposit accounts.  With the
current interest rate environment, it appears that many customers continue to
maintain time deposit accounts, with the prevalent investment period continuing
to be for one year time deposits.





The
Company supplements deposit sources with brokered deposits.  As of
December 31, 2008, the Company had $131.96 million, or 13.10 percent of total
deposits, in brokered certificates of deposit attracted by external third
parties.





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





The
following table summarizes the Company’s contractual obligations and other
commitments to make future payments as of December 31, 2008. Payments for
borrowings do not include interest. Payments related to leases are based on
actual payments specified in the underlying contracts. Loan commitments and
standby letters of credit are presented at contractual amounts; however, since
many of these commitments are expected to expire unused or only partially used,
the total amounts of these commitments do not necessarily reflect future cash
requirements.





- 52
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Payments
      Due by PeriodMore
      than 1
                      
                      
                      3
      Years or
                      
                      
                      5
      Years1
      Year or
                      
                      
                      Year
      but Less
                      
                      
                      More
      but Less
                      
                      
                      orLess
                      
                      
                      Than
      3 Years
                      
                      
                      Than
      5 Years
                      
                      
                      More
                      
                      
                      TotalContractual
      ObligationsSubordinated
      Debentures
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      24,229
                      
                      
                      $
                      24,229Federal
      Funds Purchased
                      
                      
                      2,274
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      2,274Securities
      Sold Under Agreements to Repurchase
                      
                      
                      20,000
                      
                      
                      
                      20,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      40,000Federal
      Home Loan Bank Advances
                      
                      
                      19,000
                      
                      
                      
                      1,000
                      
                      
                      
                      41,000
                      
                      
                      
                      30,000
                      
                      
                      
                      91,000Operating
      Leases
                      
                      
                      135
                      
                      
                      
                      252
                      
                      
                      
                      211
                      
                      
                      
                      10
                      
                      
                      
                      608Deposits
      with Stated Maturity Dates
                      
                      
                      632,562
                      
                      
                      
                      62,928
                      
                      
                      
                      6,393
                      
                      
                      
                      51
                      
                      
                      
                      701,934673,971
                      
                      
                      
                      84,180
                      
                      
                      
                      47,604
                      
                      
                      
                      54,290
                      
                      
                      
                      860,045Other
      CommitmentsLoan
      Commitments
                      
                      
                      73,610
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      73,610Standby
      Letters of Credit
                      
                      
                      2,710
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,71076,320
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      76,320Total
      Contractual Obligations
      andOther
      Commitments
                      
                      $
                      750,291
                      
                      
                      $
                      84,180
                      
                      
                      $
                      47,604
                      
                      
                      $
                      54,290
                      
                      
                      $
                      936,365





In the
ordinary course of business, the Bank has entered into off-balance sheet
financial instruments which are not reflected in the consolidated financial
statements.  These instruments include commitments to extend credit,
standby letters of credit, performance letters of credit, guarantees and
liability for assets held in trust.  Such financial instruments are
recorded in the financial statements when funds are disbursed or the instruments
become payable.  The Company uses the same credit policies for these
off-balance sheet financial instruments as they do for instruments that are
recorded in the consolidated financial statements.





Loan Commitments. The Company
enters into contractual commitments to extend credit, normally with fixed
expiration dates or termination clauses, at specified rates and for specific
purposes. Substantially all of the Company’s commitments to extend credit are
contingent upon customers maintaining specific credit standards at the time of
loan funding. The Company minimizes its exposure to loss under these commitments
by subjecting them to credit approval and monitoring procedures. Management
assesses the credit risk associated with certain commitments to extend credit in
determining the level of the allowance for possible loan losses.





Loan
commitments outstanding at December 31, 2008 are included in the preceding
table.





- 53
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Standby Letters of
Credit.  Letters of credit are written conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. In the event the customer does not perform in accordance with the terms
of the agreement with the third party, the Company would be required to fund the
commitment. The maximum potential amount of future payments the Company could be
required to make is represented by the contractual amount of the commitment. If
the commitment is funded, the Company would be entitled to seek recovery from
the customer. The Company’s policies generally require that standby letters of
credit arrangements contain security and debt covenants similar to those
contained in loan agreements. Standby letters of credit outstanding at December
31, 2008 are included in the preceding table.





Capital
and Liquidity





At
December 31, 2008, shareholders’ equity totaled $83.2 million compared to $83.7
million at December 31, 2007. In addition to net income of $2.03 million, other
significant changes in shareholders’ equity during 2008 included $2.81 million
of dividends declared and an increase of $188 thousand resulting from the stock
grant plan. The accumulated other comprehensive income component of
shareholders’ equity totaled $376 thousand at December 31, 2008 compared to $272
thousand at December 31, 2007. This fluctuation was mostly related to the
after-tax effect of changes in the fair value of securities available for sale.
Under regulatory requirements, the unrealized gain or loss on securities
available for sale does not increase or reduce regulatory capital and is not
included in the calculation of risk-based capital and leverage ratios.
Regulatory agencies for banks and bank holding companies utilize capital
guidelines designed to measure Tier 1 and total capital and take into
consideration the risk inherent in both on-balance sheet and off-balance sheet
items. Tier 1 capital consists of common stock and qualifying preferred
stockholders’ equity less goodwill.  Tier 2 capital consists of
certain convertible, subordinated and other qualifying debt and the allowance
for loan losses up to 1.25 percent of risk-weighted assets.  The
Company has no Tier 2 capital other than the allowance for loan
losses.





Using the
capital requirements presently in effect, the Tier 1 ratio as of December 31,
2008 was 10.80 percent and total Tier 1 and 2 risk-based capital was 12.06
percent.  Both of these measures compare favorably with the regulatory
minimum of 4 percent for Tier 1 and 8 percent for total risk-based
capital.  The Company’s Tier 1 leverage ratio as of December 31, 2008
was 8.39 percent, which exceeds the required ratio standard of 4
percent.





For 2008,
average capital was $84.4 million, representing 7.00 percent of average assets
for the year.  This compares to 6.69 percent for 2007.





The
Company paid a quarterly dividend of $0.0975, $0.0975, $0.0975 and $0.0975 per
common share during the first, second, third and fourth quarters of 2008,
respectively, and quarterly dividends of $0.0875, $0.09, $0.0925 and $0.095 per
common share during the first, second, third and fourth quarters of 2007,
respectively. This equates to a dividend payout ratio of 139.29 percent in 2008
and 30.67 percent in 2007.





- 54
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





The
Company, primarily through the actions of its subsidiary bank, engages in
liquidity management to ensure adequate cash flow for deposit withdrawals,
credit commitments and repayments of borrowed funds. Needs are met through loan
repayments, net interest and fee income and the sale or maturity of existing
assets.  In addition, liquidity is continuously provided through the
acquisition of new deposits, the renewal of maturing deposits and external
borrowings.





Management
monitors deposit flow and evaluates alternate pricing structures to retain and
grow deposits.  To the extent needed to fund loan demand, traditional
local deposit funding sources are supplemented by the use of FHLB borrowings,
brokered deposits and other wholesale deposit sources outside the immediate
market area.  Internal policies have been updated to monitor the use
of various core and non-core funding sources, and to balance ready access with
risk and cost.  Through various asset/liability management strategies,
a balance is maintained among goals of liquidity, safety and earnings
potential.  Internal policies that are consistent with regulatory
liquidity guidelines are monitored and enforced by the Bank.





The
investment portfolio provides a ready means to raise cash if liquidity needs
arise.  As of December 31, 2008, the Company held $207.6 million in
bonds (excluding FHLB stock), at current market value in the available for sale
portfolio.  At December 31, 2007, the available for sale bond
portfolio totaled $167.1 million.  Only marketable investment grade
bonds are purchased.  Although most of the Bank’s bond portfolios are
encumbered as pledges to secure various public funds deposits, repurchase
agreements, and for other purposes, management can restructure and free up
investment securities for a sale if required to meet liquidity
needs.





Management
continually monitors the relationship of loans to deposits as it primarily
determines the Company’s liquidity posture.  Colony had ratios of
loans to deposits of 95.4 percent as of December 31, 2008 and 92.8 percent at
December 31, 2007.  Management employs alternative funding sources
when deposit balances will not meet loan demands.  The ratios of loans
to all funding sources (excluding Subordinated Debentures) at December 31, 2008
and December 31, 2007 were 84.3 percent and 86.4 percent,
respectively.  Management continues to emphasize programs to generate
local core deposits as our Company’s primary funding sources.  The
stability of the Bank’s core deposit base is an important factor in Colony’s
liquidity position.  A heavy percentage of the deposit base is
comprised of accounts of individuals and small businesses with comprehensive
banking relationships and limited volatility.  At December 31, 2008
and December 31, 2007, the Bank had $333.5 million and $347.2 million,
respectively, in certificates of deposit of $100,000 or more.  These
larger deposits represented 33.1 percent and 34.09 percent of respective total
deposits.  Management seeks to monitor and control the use of these
larger certificates, which tend to be more volatile in nature, to ensure an
adequate supply of funds as needed.  Relative interest costs to
attract local core relationships are compared to market rates of interest on
various external deposit sources to help minimize the Company’s overall cost of
funds.





Local
market deposit sources proved insufficient to fund the strong loan growth trends
at Colony over the past several years.  The Company supplemented
deposit sources with brokered deposits.  As of December 31, 2008, the
Company had $131.96 million, or 13.10 percent of total deposits, in brokered
certificates of deposit attracted by external third
parties.  Additionally, the Bank uses external wholesale or Internet
services to obtain out-of-market certificates of deposit at competitive interest
rates when funding is needed.





- 55
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





To plan
for contingent sources of funding not satisfied by both local and out-of-market
deposit balances, Colony and its subsidiary have established multiple borrowing
sources to augment their funds management. The Company has borrowing capacity
through membership of the Federal Home Loan Bank program.  The Bank
has also established overnight borrowing for Federal Funds Purchased through
various correspondent banks.  Management believes the various funding
sources discussed above are adequate to meet the Company’s liquidity needs in
the future without any material adverse impact on operating
results.





Liquidity
measures the ability to meet current and future cash flow needs as they become
due. The liquidity of a financial institution reflects its ability to meet loan
requests, to accommodate possible outflows in deposits and to take advantage of
interest rate market opportunities. The ability of a financial institution to
meet its current financial obligations is a function of balance sheet structure,
the ability to liquidate assets, and the availability of alternative sources of
funds. The Company seeks to ensure its funding needs are met by maintaining a
level of liquid funds through asset/liability management.





Asset
liquidity is provided by liquid assets which are readily marketable or
pledgeable or which will mature in the near future. Liquid assets include cash,
interest-bearing deposits in banks, securities available for sale, maturities
and cash flow from securities held to maturity, and federal funds sold and
securities purchased under resale agreements.





Liability
liquidity is provided by access to funding sources which include core
deposits.  Should the need arise, the Company also maintains
relationships with the Federal Home Loan Bank and several correspondent banks
that can provide funds on short notice.





Since
Colony is a bank holding company and does not conduct operations, its primary
sources of liquidity are dividends up streamed from its subsidiary bank and
borrowings from outside sources.





The
liquidity position of the Company is continuously monitored and adjustments are
made to the balance between sources and uses of funds as deemed appropriate.
Management is not aware of any events that are reasonably likely to have a
material adverse effect on the Company’s liquidity, capital resources or
operations. In addition, management is not aware of any regulatory
recommendations regarding liquidity, which if implemented, would have a material
adverse effect on the Company.





- 56
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Impact
of Inflation and Changing Prices





The
Company’s financial statements included herein have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP). GAAP
presently requires the Company to measure financial position and operating
results primarily in terms of historic dollars. Changes in the relative value of
money due to inflation or recession are generally not considered. The primary
effect of inflation on the operations of the Company is reflected in increased
operating costs. In management’s opinion, changes in interest rates affect the
financial condition of a financial institution to a far greater degree than
changes in the inflation rate. While interest rates are greatly influenced by
changes in the inflation rate, they do not necessarily change at the same rate
or in the same magnitude as the inflation rate. Interest rates are highly
sensitive to many factors that are beyond the control of the Company, including
changes in the expected rate of inflation, the influence of general and local
economic conditions and the monetary and fiscal policies of the United States
government, its agencies and various other governmental regulatory authorities,
among other things, as further discussed in the next section.





Regulatory
and Economic Policies





The
Company’s business and earnings are affected by general and local economic
conditions and by the monetary and fiscal policies of the United States
government, its agencies and various other governmental regulatory authorities,
among other things. The Federal Reserve Board regulates the supply of money in
order to influence general economic conditions. Among the instruments of
monetary policy available to the Federal Reserve Board are (i) conducting open
market operations in United States government obligations, (ii) changing the
discount rate on financial institution borrowings, (iii) imposing or changing
reserve requirements against financial institution deposits, and (iv)
restricting certain borrowings and imposing or changing reserve requirements
against certain borrowing by financial institutions and their affiliates. These
methods are used in varying degrees and combinations to affect directly the
availability of bank loans and deposits, as well as the interest rates charged
on loans and paid on deposits. For that reason alone, the policies of the
Federal Reserve Board have a material effect on the earnings of the
Company.





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





Recently
Issued Accounting Pronouncements





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





- 57
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 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Quantitative
and Qualitative Disclosures About Market Risk


AVERAGE
BALANCE SHEETS





2008
                
                
                2007
                
                
                2006Average
                
                
                Income/
                
                
                Yields/
                
                
                Average
                
                
                Income/
                
                
                Yields/
                
                
                Average
                
                
                Income/
                
                
                Yields/($
      in thousands)
                
                Balances
                
                
                Expense
                
                
                Rates
                
                
                Balances
                
                
                Expense
                
                
                Rates
                
                
                Balances
                
                
                Expense
                
                
                RatesAssetsInterest-Earning
      AssetsLoans,
      Net of Unearned Income (1)
                
                $
                958,582
                
                
                $
                66,900
                
                
                
                6.98
                %
                
                $
                947,569
                
                
                $
                81,100
                
                
                
                8.56
                %
                
                $
                912,926
                
                
                $
                75,217
                
                
                
                8.24
                %Investment
      SecuritiesTaxable
                
                
                158,287
                
                
                
                7,582
                
                
                
                4.79
                
                
                
                144,591
                
                
                
                6,805
                
                
                
                4.71
                
                
                
                128,109
                
                
                
                5,474
                
                
                
                4.27Tax-Exempt
      (2)
                
                
                10,245
                
                
                
                582
                
                
                
                5.68
                
                
                
                12,442
                
                
                
                683
                
                
                
                5.49
                
                
                
                7,429
                
                
                
                412
                
                
                
                5.55Total
      Investment Securities
                
                
                168,532
                
                
                
                8,164
                
                
                
                4.84
                
                
                
                157,033
                
                
                
                7,488
                
                
                
                4.77
                
                
                
                135,538
                
                
                
                5,886
                
                
                
                4.34Interest-Bearing
      Deposits
                
                
                1,235
                
                
                
                27
                
                
                
                2.19
                
                
                
                2,879
                
                
                
                143
                
                
                
                4.97
                
                
                
                2,753
                
                
                
                133
                
                
                
                4.83Federal
      Funds Sold
                
                
                10,499
                
                
                
                273
                
                
                
                2.60
                
                
                
                28,863
                
                
                
                1,478
                
                
                
                5.12
                
                
                
                41,307
                
                
                
                2,035
                
                
                
                4.93Other
      Interest-Earning Assets
                
                
                6,079
                
                
                
                298
                
                
                
                4.90
                
                
                
                5,308
                
                
                
                309
                
                
                
                5.82
                
                
                
                5,192
                
                
                
                279
                
                
                
                5.37Total
      Interest-Earning Assets
                
                
                1,144,927
                
                
                
                75,662
                
                
                
                6.61
                
                
                
                1,141,652
                
                
                
                90,518
                
                
                
                7.93
                
                
                
                1,097,716
                
                
                
                83,550
                
                
                
                7.61Noninterest-Earning
      AssetsCash
                
                
                20,232
                
                
                
                
                
                
                
                
                
                
                
                21,575
                
                
                
                
                
                
                
                
                
                
                
                22,372Allowance
      for Loan Losses
                
                
                (16,788
                )
                
                
                
                
                
                
                
                
                
                
                (13,074
                )
                
                
                
                
                
                
                
                
                
                
                (11,764
                )Other
      Assets
                
                
                56,475
                
                
                
                
                
                
                
                
                
                
                
                54,012
                
                
                
                
                
                
                
                
                
                
                
                52,394Total
      Noninterest-Earning Assets
                
                
                59,919
                
                
                
                
                
                
                
                
                
                
                
                62,513
                
                
                
                
                
                
                
                
                
                
                
                63,002Total
      Assets
                
                $
                1,204,846
                
                
                
                
                
                
                
                
                
                
                $
                1,204,165
                
                
                
                
                
                
                
                
                
                
                $
                1,160,718Liabilities
      and Stockholders' EquityInterest-Bearing
      LiabilitiesInterest-Bearing
      Demand and Savings
                
                $
                220,655
                
                
                $
                3,185
                
                
                
                1.44
                %
                
                $
                214,111
                
                
                $
                4,555
                
                
                
                2.13
                %
                
                $
                210,461
                
                
                $
                4,155
                
                
                
                1.97
                %Other
      Time
                
                
                692,277
                
                
                
                29,617
                
                
                
                4.28
                
                
                
                730,917
                
                
                
                38,176
                
                
                
                5.22
                
                
                
                707,173
                
                
                
                32,455
                
                
                
                4.59Total
      Interest-Bearing Deposits
                
                
                912,932
                
                
                
                32,802
                
                
                
                3.59
                
                
                
                945,028
                
                
                
                42,731
                
                
                
                4.52
                
                
                
                917,634
                
                
                
                36,610
                
                
                
                3.99Other
      Interest-Bearing LiabilitiesOther
      Borrowed Money
                
                
                85,912
                
                
                
                3,336
                
                
                
                3.88
                
                
                
                66,200
                
                
                
                2,905
                
                
                
                4.39
                
                
                
                65,794
                
                
                
                2,874
                
                
                
                4.37Subordinated
      Debentures
                
                
                24,229
                
                
                
                1,271
                
                
                
                5.25
                
                
                
                26,011
                
                
                
                2,006
                
                
                
                7.71
                
                
                
                22,718
                
                
                
                1,879
                
                
                
                8.27Federal
      Funds Purchased andRepurchase
      Agreements
                
                
                18,200
                
                
                
                514
                
                
                
                2.82
                
                
                
                1,130
                
                
                
                59
                
                
                
                5.22
                
                
                
                563
                
                
                
                29
                
                
                
                5.15Total
      Other Interest-Bearing Liabilities
                
                
                128,341
                
                
                
                5,121
                
                
                
                3.99
                
                
                
                93,341
                
                
                
                4,970
                
                
                
                5.32
                
                
                
                89,075
                
                
                
                4,782
                
                
                
                5.37Total
      Interest-Bearing Liabilities
                
                
                1,041,273
                
                
                
                37,923
                
                
                
                3.64
                
                
                
                1,038,369
                
                
                
                47,701
                
                
                
                4.59
                
                
                
                1,006,709
                
                
                
                41,392
                
                
                
                4.11Noninterest-Bearing
      Liabilities andStockholders'
      EquityDemand
      Deposits
                
                
                73,569
                
                
                
                
                
                
                
                
                
                
                
                76,509
                
                
                
                
                
                
                
                
                
                
                
                73,334Other
      Liabilities
                
                
                5,632
                
                
                
                
                
                
                
                
                
                
                
                8,692
                
                
                
                
                
                
                
                
                
                
                
                8,682Stockholders'
      Equity
                
                
                84,372
                
                
                
                
                
                
                
                
                
                
                
                80,595
                
                
                
                
                
                
                
                
                
                
                
                71,993Total
      Noninterest-BearingLiabilities
      and Stockholders' Equity
                
                
                163,573
                
                
                
                
                
                
                
                
                
                
                
                165,796
                
                
                
                
                
                
                
                
                
                
                
                154,009Total
      Liabilities and Stockholders' Equity
                
                $
                1,204,846
                
                
                
                
                
                
                
                
                
                
                $
                1,204,165
                
                
                
                
                
                
                
                
                
                
                $
                1,160,718Interest
      Rate Spread
                
                
                
                
                
                
                
                
                
                
                2.97
                %
                
                
                
                
                
                
                
                
                
                
                3.34
                %
                
                
                
                
                
                
                
                
                
                
                3.50
                %Net
      Interest Income
                
                
                
                
                
                $
                37,739
                
                
                
                
                
                
                
                
                
                
                $
                42,817
                
                
                
                
                
                
                
                
                
                
                $
                42,158Net
      Interest Margin
                
                
                
                
                
                
                
                
                
                
                3.30
                %
                
                
                
                
                
                
                
                
                
                
                3.75
                %
                
                
                
                
                
                
                
                
                
                
                3.84
                %





(1)
            The
      average balance of loans includes the average balance of nonaccrual
      loans.  Income on such loans is recognized and recorded on the
      cash basis.  Taxable equivalent adjustments totaling $168, $127
      and $130 for 2008, 2007 and 2006, respectively, are included in interest
      on loans.  The adjustments are based on a federal tax rate of 34
      percent.





(2)
            Taxable-equivalent
      adjustments totaling $198, $232 and $140 for 2008, 2007, and 2006,
      respectively, are included in tax-exempt interest on investment
      securities. The adjustments are based on a federal tax rate of 34 percent
      with appropriate reductions for the effect of disallowed interest expense
      incurred in carrying tax-exempt
obligations.





- 58
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Colony
Bankcorp, Inc. and Subsidiary


Interest
Rate Sensitivity





The
following table is an analysis of the Company’s interest rate-sensitivity
position at December 31, 2008. The interest-bearing rate-sensitivity gap, which
is the difference between interest-earning assets and interest-bearing
liabilities by repricing period, is based upon maturity or first repricing
opportunity, along with a cumulative interest rate-sensitivity
gap.  It is important to note that the table indicates a position at a
specific point in time and may not be reflective of positions at other times
during the year or in subsequent periods. Major changes in the gap position can
be, and are, made promptly as market outlooks change.





Assets
      and Liabilities Repricing Within3
      Months
                
                
                4
      to 12
                
                
                
                
                
                1
      to 5
                
                
                Over
      5or
      Less
                
                
                Months
                
                
                1
      Year
                
                
                Years
                
                
                Years
                
                
                Total($
      in Thousands)Earning
      AssetsInterest-Bearing
      Deposits
                
                $
                147
                
                
                $
                -
                
                
                $
                147
                
                
                $
                -
                
                
                $
                -
                
                
                $
                147Federal
      Funds Sold
                
                
                31
                
                
                
                -
                
                
                
                31
                
                
                
                -
                
                
                
                -
                
                
                
                31Investment
      Securities
                
                
                5,374
                
                
                
                41,477
                
                
                
                46,851
                
                
                
                105,401
                
                
                
                55,452
                
                
                
                207,704Loans,
      Net of Unearned Income
                
                
                436,619
                
                
                
                158,836
                
                
                
                595,455
                
                
                
                354,765
                
                
                
                10,637
                
                
                
                960,857Other
      Interest-Bearing Assets
                
                
                6,272
                
                
                
                -
                
                
                
                6,272
                
                
                
                -
                
                
                
                -
                
                
                
                6,272Total
      Interest-Earning Assets
                
                
                448,443
                
                
                
                200,313
                
                
                
                648,756
                
                
                
                460,166
                
                
                
                66,089
                
                
                
                1,175,011Interest-Bearing
      LiabilitiesInterest-Bearing
      Demand Deposits (1)
                
                
                194,211
                
                
                
                -
                
                
                
                194,211
                
                
                
                -
                
                
                
                -
                
                
                
                194,211Savings
      (1)
                
                
                33,349
                
                
                
                -
                
                
                
                33,349
                
                
                
                -
                
                
                
                -
                
                
                
                33,349Time
      Deposits
                
                
                249,068
                
                
                
                383,494
                
                
                
                632,562
                
                
                
                69,321
                
                
                
                51
                
                
                
                701,934Other
      Borrowings (2)
                
                
                22,000
                
                
                
                -
                
                
                
                22,000
                
                
                
                42,000
                
                
                
                27,000
                
                
                
                91,000Subordinated
      Debentures
                
                
                24,229
                
                
                
                -
                
                
                
                24,229
                
                
                
                -
                
                
                
                -
                
                
                
                24,229Federal
      Funds Purchased
                
                
                2,274
                
                
                
                -
                
                
                
                2,274
                
                
                
                -
                
                
                
                -
                
                
                
                2,274Securities
      Sold Under Agreement to Repurchase
                
                
                20,000
                
                
                
                -
                
                
                
                20,000
                
                
                
                20,000
                
                
                
                -
                
                
                
                40,000Total
      Interest-Bearing Liabilities
                
                
                545,131
                
                
                
                383,494
                
                
                
                928,625
                
                
                
                131,321
                
                
                
                27,051
                
                
                
                1,086,997Interest
      Rate-Sensitivity Gap
                
                
                (96,688
                )
                
                
                (183,181
                )
                
                
                (279,869
                )
                
                
                328,845
                
                
                
                39,038
                
                
                $
                88,014Cumulative
      Interest-Sensitivity Gap
                
                $
                (96,688
                )
                
                $
                (279,869
                )
                
                $
                (279,869
                )
                
                $
                48,976
                
                
                $
                88,014Interest
      Rate-Sensitivity Gap as a Percentage of Interest-Earning
      Assets
                
                
                (8.23
                )%
                
                
                (15.59
                )%
                
                
                (23.82
                )%
                
                
                27.99
                %
                
                
                3.32
                %Cumulative
      Interest Rate-Sensitivity as a Percentage of Interest-Earning
      Assets
                
                
                (8.23
                )%
                
                
                (23.82
                )%
                
                
                (23.82
                )%
                
                
                4.17
                %
                
                
                7.49
                %





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





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





- 59
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





The
foregoing table indicates that we had a one year negative gap of ($280) million,
or (23.82) percent of total assets at December 31, 2008.  In theory,
this would indicate that at December 31, 2008, $280 million more in liabilities
than assets would reprice if there were a change in interest rates over the next
365 days.  Thus, if interest rates were to decline, the gap would
indicate a resulting increase in net interest margin.  However,
changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity.  In addition, the interest rate spread between an asset
and our supporting liability can vary significantly while the timing of
repricing of both the assets and our supporting liability can remain the same,
thus impacting net interest income.  This characteristic is referred
to as a basis risk and, generally, relates to the repricing characteristics of
short-term funding sources such as certificates of deposits.





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





The
Company is now utilizing FTN Financial Asset/Liability Management Analysis for a
more dynamic analysis of balance sheet structure.  The Company has
established earnings at risk for net interest income in a +/- 200 basis point
rate shock to be no more than a fifteen percent percentage
change.  The most recent analysis as of December 31, 2008 indicates
that net interest income would deteriorate 14.11 percent with a 200 basis point
decrease and would improve 7.82 percent with a 200 basis point
increase.  The Company has established equity at risk in a +/- 200
basis point rate shock to be no more than a twenty percent percentage
change.  The most recent analysis as of December 31, 2008 indicates
that net economic value of equity percentage change would increase 6.31 percent
with a 200 basis point increase and would decrease 7.09 percent with a 200 basis
point decrease.  The Company has established its one year gap to be
0.80 percent to 1.20 percent.  The most recent analysis as of December
31, 2008 indicates a one year gap of 0.91 percent.  The analysis
reflects net interest margin compression in a declining interest rate
environment. Given that interest rates have basically “bottomed-out” with the
recent Federal Reserve action, the Company is anticipating interest rates to
increase in the future though we believe that interest rates will remain flat
most of 2009.  The Company is focusing on areas to minimize margin
compression in the future by minimizing longer term fixed rate loans, shortening
on the yield curve with investments, securing longer term FHLB advances,
securing brokered certificates of deposit for longer terms and focusing on
reduction of nonperforming assets.





- 60
-
 Table of Contents





Part
II (Continued)


Item 7
(Continued)





Return
on Assets and Stockholder’s Equity





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





Year
      Ended December 312008
              
              
              2007
              
              
              2006Return
      on Assets
              
              
              0.17
              %
              
              
              0.71
              %
              
              
              0.87
              %Return
      on Equity
              
              
              2.40
              %
              
              
              10.60
              %
              
              
              14.10
              %Dividend
      Payout
              
              
              139.29
              %
              
              
              30.67
              %
              
              
              23.05
              %Equity
      to Assets
              
              
              6.64
              %
              
              
              6.93
              %
              
              
              6.31
              %Dividends
      Declared
              
              $
              0.39
              
              
              $
              0.365
              
              
              $
              0.325





Future
Outlook





During
2008, the financial services industry experienced tremendous adversities as a
result of the collapse of the real estate markets across the
country.  Colony, like most banking companies, has been affected by
these economic challenges that started with a rapid stall of real estate sales
and development throughout the country.





Also
during 2008, Colony made significant strides to reduce our operating leverage by
seeking a more efficient structure and more consistent products and services
throughout the company.  We successfully completed the consolidation
of our seven banking subsidiaries into the single banking company – Colony
Bank.  The momentum created by this strategic move will allow Colony
to improve future profitability while better positioning the company to take
advantage of future growth opportunities.  In response to the elevated
risk of residential real estate and land development loans, management has
extensively reviewed our loan portfolio with a particular emphasis on our
residential and land development real estate exposure.  Senior
management with experience in problem loan workouts have been identified and
assigned responsibility to oversee the workout and resolution of problem
loans.  The Company will continue to closely monitor our real estate
dependent loans throughout the company and focus on asset quality during this
economic downturn.





- 61
-
 Table of Contents





Part
II (Continued)


Item
7A


Quantitative
and Qualitative Disclosures about Market Risk





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





Item 8


Financial
Statements and Supplemental Data





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





Consolidated
Balance Sheets – December 31, 2008 and 2007





Consolidated
Statements of Income – Years Ended December 31, 2008, 2007 and 2006





Consolidated
Statements of Comprehensive Income – Years Ended December 31, 2008, 2007 and
2006





Consolidated
Statements of Stockholders’ Equity – Years Ended December 31, 2008, 2007 and
2006





Consolidated
Statements of Cash Flows – Years Ended December 31, 2008, 2007 and
2006





Notes to
Consolidated Financial Statements




- 62
-
 Table of Contents





Part
II (Continued)


Item 8
(Continued)


Quarterly
Results of Operations (Unaudited)





The
following is a summary of the unaudited quarterly results of operations for the
years ended December 31, 2008 and 2007:





Three
      Months EndedDecember
      31
                
                
                September
      30
                
                
                June
      30
                
                
                March
      312008
                
                ($
      in Thousands, Except Per Share Data)Interest
      Income
                
                $
                17,677
                
                
                $
                18,428
                
                
                $
                18,680
                
                
                $
                20,512Interest
      Expense
                
                
                8,435
                
                
                
                8,943
                
                
                
                9,637
                
                
                
                10,907Net
      Interest Income
                
                
                9,242
                
                
                
                9,485
                
                
                
                9,043
                
                
                
                9,605Provision
      for Loan Losses
                
                
                4,426
                
                
                
                3,370
                
                
                
                4,071
                
                
                
                1,071Securities
      Gains (Losses)
                
                
                -
                
                
                
                11
                
                
                
                614
                
                
                
                570Noninterest
      Income
                
                
                1,820
                
                
                
                1,769
                
                
                
                2,420
                
                
                
                1,801Noninterest
      Expense
                
                
                7,572
                
                
                
                7,813
                
                
                
                7,714
                
                
                
                7,757Income
      Before Income Taxes
                
                
                (936
                )
                
                
                82
                
                
                
                292
                
                
                
                3,148Provision
      for Income Taxes
                
                
                (266
                )
                
                
                (112
                )
                
                
                -
                
                
                
                935Net
      Income
                
                $
                (670
                )
                
                $
                194
                
                
                $
                292
                
                
                $
                2,213Net
      Income Per Common ShareBasic
                
                $
                (0.09
                )
                
                $
                0.03
                
                
                $
                0.04
                
                
                $
                0.31Diluted
                
                
                (0.09
                )
                
                
                0.03
                
                
                
                0.04
                
                
                
                0.312007Interest
      Income
                
                $
                22,336
                
                
                $
                22,931
                
                
                $
                22,636
                
                
                $
                22,257Interest
      Expense
                
                
                11,946
                
                
                
                12,138
                
                
                
                11,811
                
                
                
                11,806Net
      Interest Income
                
                
                10,390
                
                
                
                10,793
                
                
                
                10,825
                
                
                
                10,451Provision
      for Loan Losses
                
                
                3,253
                
                
                
                850
                
                
                
                914
                
                
                
                914Securities
      Gains (Losses)
                
                
                -
                
                
                
                (2
                )
                
                
                2
                
                
                
                184Noninterest
      Income
                
                
                1,805
                
                
                
                1,848
                
                
                
                2,054
                
                
                
                1,926Noninterest
      Expense
                
                
                7,950
                
                
                
                7,756
                
                
                
                7,965
                
                
                
                7,909Income
      Before Income Taxes
                
                
                992
                
                
                
                4,033
                
                
                
                4,002
                
                
                
                3,738Provision
      for Income Taxes
                
                
                240
                
                
                
                1,414
                
                
                
                1,300
                
                
                
                1,264Net
      Income
                
                $
                752
                
                
                $
                2,619
                
                
                $
                2,702
                
                
                $
                2,474Net
      Income Per Common ShareBasic
                
                $
                0.11
                
                
                $
                0.36
                
                
                $
                0.38
                
                
                $
                0.34Diluted
                
                
                0.11
                
                
                
                0.36
                
                
                
                0.38
                
                
                
                0.34





Item9


Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure





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





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PartII (Continued)





Item
9A


Controls
and Procedures





As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Chief Executive Officer
and the Principal Financial and Accounting Officer, of the design and operation
of the disclosure controls and procedures.  Based on this evaluation,
the Chief Executive Officer and Principal Financial and Accounting Officer
concluded that the disclosure controls and procedures are
effective.





Management’s
Report on Internal Control Over Financial Reporting





Colony’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Colony’s internal control over
financial reporting is a process designed under the supervision of the Chief
Executive Officer and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of Colony’s
financial statements for external purposes in accordance with generally accepted
accounting principles.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.





Colony’s
management assessed the effectiveness of Colony’s internal control over
financial reporting as of December 31, 2008 based on the criteria for effective
internal control over financial reporting established in Internal Control-Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on the assessment, management determined
that Colony maintained effective internal control over financial reporting as of
December 31, 2008.





McNair,
McLemore, Middlebrooks & Co., LLP, the independent registered public
accounting firm that audited the consolidated financial statements of Colony
included in this Annual Report on Form 10-K, has issued an attestation report on
the effectiveness of Colony’s internal control over financial reporting as of
December 31, 2008. The report, which expresses an unqualified opinion on the
effectiveness of Colony’s internal control over financial reporting as of
December 31, 2008, appears on page 65 of this Report under the heading “Report
of Independent Registered Public Accounting Firm.”





Colony
Bankcorp, Inc.


March 13,
2009





Changes
in Internal Controls





There
were no changes made in our internal controls during the period covered by this
report or, to our knowledge, in other factors that have materially affected, or
are reasonably likely to materially affect these controls.





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





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Part
II (Continued)


Item 9A
(Continued)





McNair,
McLemore, Middlebrooks & Co., LLP


CERTIFIED
PUBLIC ACCOUNTANTS


389
Mulberry Street • Post Office Box One • Macon, GA 31202


Telephone
(478) 746-6277 • Facsimile (478) 743-6858


www.mmmcpa.com


RALPH
      S. McLEMORE, SR., CPA (1902-1981)SIDNEY
      B. McNAIR, CPA (1913-1992)RICHARD
      A. WHITTEN, JR., CPASIDNEY
      E. MIDDLEBROOKS, CPA, PC
                
                ELIZABETH
      WARE HARDIN, CPARAY
      C. PEARSON, CPA
                
                CAROLINE
      E. GRIFFIN, CPAJ.
      RANDOLPH NICHOLS, CPA
                
                RONNIE
      K. GILBERT, CPAWILLIAM
      H. EPPS, JR., CPA
                
                RON
      C. DOUTHIT, CPARAYMOND
      A. PIPPIN, JR., CPA
                
                CHARLES
      A. FLETCHER, CPAJERRY
      A. WOLFE, CPA
                
                MARJORIE
      HUCKABEE CARTER, CPAW.
      E. BARFIELD, JR., CPA
                
                BRYAN
      A. ISGETT, CPAHOWARD
      S. HOLLEMAN, CPA
                
                DAVID
      PASCHAL MUSE, JR., CPAF.
      GAY McMICHAEL, CPA
                
                KATHY
      W. FLETCHER, CPA





March 13,
2009





REPORT
OF INDEPENDENT


REGISTERED PUBLIC ACCOUNTING
FIRM





The Board
of Directors and Stockholders


Colony
Bankcorp, Inc.





We have
audited Colony Bankcorp, Inc.’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).  Colony Bankcorp, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk.  Our audit also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, Colony Bankcorp, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008 based on
criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Colony
Bankcorp, Inc. and Subsidiary as of December 31, 2008 and 2007, and the related
consolidated statements of income, comprehensive income, changes in
stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2008 and our report dated March 13, 2009, expressed an
unqualified opinion.








McNAIR,
McLEMORE, MIDDLEBROOKS & CO., LLP





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PartII (Continued)


Item
9B


Other Information





None.





PartIII


Item
10


Directors
and Executive Officers and Corporate Governance





Code
of Ethics





Colony
Bankcorp, Inc. has adopted a Code of Ethics that applies to the Company’s
principal executive officer and principal accounting and financial
officer.  A copy of the Code of Ethics will be provided to any person
without charge, upon written request mailed to Terry Hester, Colony Bankcorp,
Inc., 115 S. Grant Street, Fitzgerald, Georgia 31750.





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





Item11


Executive
Compensation





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





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PartIII (Continued)


Item
12


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





EQUITY
COMPENSATION PLAN INFORMATION





Plan
      Category
                
                Number
      of Securities to be Issued Upon Stock Grant, Exercise of Outstanding
      Options, Warrants and Rights
                  (a)
                
                
                Weighted-Average
      Exercise Price of Outstanding Options, Warrants and Rights
                  (b)
                
                
                Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securities Reflected in Column
      (a))
                  (c)Equity
      Compensation Plans  Approved By Security Holders2004
      Restricted Stock Grant Plan
                
                
                
                
                
                
                
                
                
                
                117,242Equity
      Compensation Plans Not Approved by Security Holders1999
      Restricted Stock Grant Plan
                
                
                
                
                
                
                
                
                
                
                -117,242





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





Item13


Certain
Relationships and Related Transactions and Director Independence





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





Item14


Principal
Accounting Fees and Services





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





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PartIV


Item
15


Exhibits,
Financial Statement Schedules


(a)
              The
      following documents are filed as part of this report:(1)
              Financial
      Statements(2)
              Financial
      Statements Schedules:All
      schedules are omitted as the required information is inapplicable or the
      information is presented in the financial statements or the related
      notes.(3)
              A
      list of the exhibits required by Item 601 of Regulation S-K to be filed as
      a part of this report is shown on the “Exhibit Index” filed
      herewith.Exhibit
      Index3.1
              Articles
      of Incorporation-filed
      as Exhibit 3(a) to the Registrant's Registration Statement on Form 10
      (File No. 0-18486), filed with the Commission on April 25, 1990 and
      incorporated herein by reference.3.2
              Bylaws,
      as Amended-filed
      as Exhibit 3(b) to the Registrant's Registration Statement on Form 10
      (File No. 0-18486), filed with the Commission on April 25, 1990 and
      incorporated herein by reference.3.3
              Articles
      of Amendment to the Company’s Articles of Incorporation Authorizing
      Additional Capital Stock in the Form of Ten Million Shares of Preferred
      Stock-filed as Exhibit 3.1 to
      the Registrant’s Current Report on Form 8-K (File No. 000-12436) filed
      with the Commission on January 13, 2009 and incorporated herein by
      reference.3.4
              Articles
      of Amendment to the Company’s Articles of Incorporation Establishing the
      Terms of the Series A Preferred Stock-filed as Exhibit 3.2 to
      the Registrant’s Current Report on Form 8-K (File No. 000-12436) filed
      with the Commission on January 13, 2009 and incorporated herein by
      reference.4.1
              Instruments
      Defining the Rights of Security Holders-incorporated
      herein by reference to page 1 of the Company's Definitive Proxy Statement
      for Annual Meeting of Stockholders to be held on April 26, 2005, filed
      with the Securities and Exchange Commission on March 2, 2005 (File No.
      000-12436).4.2
              Warrant
      to Purchase up to 500,000 shares of Common Stock-filed
      as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No.
      000-12436), filed with the Commission on January 13, 2009 and incorporated
      herein by reference.





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Part
IV (Continued)


Item 15
(Continued)





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





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Part
IV (Continued)


Item 15
(Continued)





11
                Statement
      of Computation of Per Share Earnings13
                Consolidated
      Financial Statements of Colony Bankcorp, Inc. as of December 31, 2007 and
      200621
                Subsidiaries
      of the Company31.1
                Certificate
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
                Certificate
      of Chief Financial and Accounting Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232
                Certificate
      of the Chief Executive Officer and Chief Financial Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002





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SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, Colony Bankcorp, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized:





COLONY
BANKCORP, INC.





/s/
      Al D. RossAl
      D. Ross
                President/Director/Chief
      Executive OfficerMarch
      13, 2009Date/s/
      Terry L. HesterTerry
      L. Hester
                Executive
      Vice-President/Chief Financial Officer/DirectorMarch
      13, 2009Date





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:





/s/
      Terry Coleman
                                  
                                  March
      13, 2009Terry
      Coleman, Director
                                  
                                  Date/s/
      L. Morris Downing
                                  
                                  March
      13, 2009L.
      Morris Downing, Director
                                  
                                  Date/s/
      Edward J. Harrell
                                  
                                  March
      13, 2009Edward
      J. Harrell, Director
                                  
                                  Date/s/
      Mark H. Massee
                                  
                                  March
      13, 2009Mark
      H. Massee, Director
                                  
                                  Date/s/
      James D. Minix
                                  
                                  March
      13, 2009James
      D, Minix, Director
                                  
                                  Date





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/s/
      Charles E. Myler
                            
                            March
      13, 2009Charles
      E. Myler, Director
                            
                            Date/s/
      W. B. Roberts, Jr.
                            
                            March
      13, 2009W.
      B. Roberts, Jr., Director
                            
                            Date/s/
      Jonathan W. R. Ross
                            
                            March
      13, 2009Jonathan
      W. R. Ross, Director
                            
                            Date/s/
      B. Gene Waldron
                            
                            March
      13, 2009B.
      Gene Waldron, Director
                            
                            Date






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