SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
DC 20549





FORM
10-Q





QUARTERLY
REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES


EXCHANGE
ACT OF 1934








FOR
      QUARTER ENDED SEPTEMBER 30, 2008
              COMMISSION
      FILE NUMBER 0-12436








COLONY
BANKCORP, INC.


(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)








GEORGIA
                58-1492391(STATE
      OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
                (I.R.S.
      EMPLOYER IDENTIFICATION
NUMBER)








115 SOUTH GRANT STREET,
FITZGERALD, GEORGIA 31750


ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES








229/426-6000


REGISTRANT’S
TELEPHONE NUMBER INCLUDING AREA CODE








INDICATE
BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED REPORTS REQUIRED TO BE FILED
BY SECTIONS 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PRECEDING 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    T                      NO    £





INDICATE
BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, A NONACCELERATED FILER OR A SMALLER REPORTING
COMPANY.   SEE DEFINITIONS OF ACCELERATED FILER, LARGE
ACCELERATED FILER AND SMALLER REPORTING COMPANY IN RULE 12b-2 OF THE EXCHANGE
ACT.  (CHECK ONE)





LARGE
      ACCELERATED FILER    £
              ACCELERATED
      FILER    TNON
      ACCELERATED FILER    £
              SMALLER
      REPORTING COMPANY    £(DO
      NOT CHECK IF A SMALLER REPORTING COMPANY)





INDICATE
BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE
12B-2 OF THE ACT).





YES    £                      NO    T





INDICATE
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON
STOCK, AS OF THE LATEST PRACTICABLE DATE.








CLASS
                OUTSTANDING AT NOVEMBER 7,
    2008COMMON
      STOCK, $1 PAR VALUE
                7,212,613










TABLE OF
CONTENTS


PagePART I – Financial
    InformationForward Looking Statement
      Disclosure
                            3Item 1.
                            Financial Statements
                            4Item 2.
                            Management’s Discussion and Analysis of Financial
      Condition and Results of Operation
                            28Item 3.
                            Quantitative and Qualitative Disclosures About
      Market Risk
                            49Item 4.
                            Controls and Procedures
                            52PART II – Other InformationItem 1.
                            Legal Proceedings
                            53Item 1A.
                            Rick Factors
                            53Item 2.
                            Unregistered Sales of Equity Securities and Use of
      Proceeds
                            53Item 3.
                            Defaults Upon Senior Securities
                            53Item 4.
                            Submission of Matters to a Vote of Security
      Holders
                            53Item 5.
                            Other Information
                            53Item 6.
                            Exhibits
                            53Signatures
                            55


2
 Table of Contents


Forward Looking Statement Disclosure





Statements
in this Quarterly Report regarding future events or performance are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 (the PSLRA) and are made pursuant to the safe
harbors of the PSLRA.  Actual results of Colony Bankcorp, Inc. (the
Company) could be quite different from those expressed or implied by the
forward-looking statements.  Any statements containing the words
“could,” “may,” “will,” “should,” “plan,” “believe,” “anticipates,” “estimates,”
“predicts,” “expects,” “projections,” “potential,” “continue,” or words of
similar import, constitute “forward-looking statements”, as do any other
statements that expressly or implicitly predict future events, results, or
performance.   Factors that could cause results to differ from
results expressed or implied by our forward-looking statements include, among
others, risks discussed in the text of this Quarterly Report as well as the
following specific items:





·
            General
      economic conditions, whether national or regional, that could affect the
      demand for loans or lead to increased loan
  losses;





·
            Competitive
      factors, including increased competition with community, regional, and
      national financial institutions, that may lead to pricing pressures that
      reduce yields the Company achieves on loans and increase rates the Company
      pays on deposits, loss of the Company’s most valued customers, defection
      of key employees or groups of employees, or other
  losses;





·
            Increasing
      or decreasing interest rate environments, including the shape and level of
      the yield curve, that could lead to decreases in net interest margin,
      lower net interest and fee income, including lower gains on sales of
      loans, and changes in the value of the Company’s investment
      securities;





·
            Changing
      business or regulatory conditions, or new legislation, affecting the
      financial services industry that could lead to increased costs, changes in
      the competitive balance among financial institutions, or revisions to our
      strategic focus;





·
            Changes
      or failures in technology or third party vendor relationships in important
      revenue production or service areas, or increases in required investments
      in technology that could reduce our revenue, increase our costs or lead to
      disruptions in our business.





·
            Readers
      are cautioned not to place undue reliance on our forward-looking
      statements, which reflect management’s analysis only as of the date of the
      statements.  The Company does not intend to publicly revise or
      update forward-looking statements to reflect events or circumstances that
      arise after the date of this
report.





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


3
 Table of Contents


PART 1.   FINANCIAL INFORMATION


ITEM 1.





FINANCIAL
STATEMENTS





THE
FOLLOWING FINANCIAL STATEMENTS ARE PROVIDED FOR COLONY BANKCORP, INC. AND ITS
WHOLLY- OWNED SUBSIDIARY BANK, COLONY BANK.





A.
            CONSOLIDATED
      BALANCE SHEETS – SEPTEMBER 30, 2008 AND DECEMBER 31,
  2007.





B.
            CONSOLIDATED
      STATEMENTS OF INCOME – FOR THE THREE MONTHS ENDED  SEPTEMBER 30,
      2008 AND 2007 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
      2007.





C.
            CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME – FOR THE THREE MONTHS ENDED SEPTEMBER
      30, 2008 AND 2007 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
      2007.





D.
            CONSOLIDATED
      STATEMENTS OF CASH FLOWS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
      AND 2007.





THE
CONSOLIDATED FINANCIAL STATEMENTS FURNISHED HAVE NOT BEEN AUDITED BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS, BUT REFLECT, IN THE OPINION OF MANAGEMENT, ALL
ADJUSTMENTS (CONSISTING
SOLELY OF NORMAL RECURRING ADJUSTMENTS) NECESSARY FOR A FAIR PRESENTATION OF THE
RESULTS OF OPERATIONS FOR THE PERIODS PRESENTED.





THE RESULTS OF OPERATIONS FOR THE NINE
MONTH PERIOD ENDED SEPTEMBER 30, 2008 ARE NOT NECESSARILY INDICATIVE OF THE
RESULTS TO BE EXPECTED FOR THE FULL YEAR.


4
 Table of Contents




COLONY
BANKCORP, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


SEPTEMBER
30, 2008 AND DECEMBER 31, 2007


(DOLLARS
IN THOUSANDS)





September 30, 2008
                
                
                December 31, 2007ASSETS
                
                (Unaudited)Cash
      and Cash EquivalentsCash
      and Due from Banks
                
                $
                22,929
                
                
                $
                28,369Federal
      Funds Sold
                
                
                199
                
                
                
                21,73723,128
                
                
                
                50,106Interest-Bearing
      Deposits
                
                
                435
                
                
                
                1,467Investment
      SecuritiesAvailable
      for Sale, at Fair Value
                
                
                171,863
                
                
                
                167,123Held
      to Maturity, at Cost (Fair Value of $67 and $72, as of September 30, 2008
      and December 31, 2007, Respectively)
                
                
                65
                
                
                
                68171,928
                
                
                
                167,191Federal
      Home Loan Bank Stock, at Cost
                
                
                6,317
                
                
                
                5,533Loans
                
                
                970,682
                
                
                
                945,279Allowance
      for Loan Losses
                
                
                (17,952
                )
                
                
                (15,513
                )Unearned
      Interest and Fees
                
                
                (226
                )
                
                
                (301
                )952,504
                
                
                
                929,465Premises
      and Equipment
                
                
                29,399
                
                
                
                27,809Other
      Real Estate
                
                
                4,756
                
                
                
                1,332Goodwill
                
                
                2,412
                
                
                
                2,412Other
      Intangible Assets
                
                
                375
                
                
                
                402Other
      Assets
                
                
                24,076
                
                
                
                23,059Total
      Assets
                
                $
                1,215,330
                
                
                $
                1,208,776LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNoninterest-Bearing
                
                $
                69,038
                
                
                $
                86,112Interest-Bearing
                
                
                908,714
                
                
                
                932,490977,752
                
                
                
                1,018,602Borrowed
      MoneyFederal
      Funds Purchased
                
                
                12,664
                
                
                
                1,346Securities
      Sold Under Agreements to Repurchase
                
                
                20,000
                
                
                
                ---Subordinated
      Debentures
                
                
                24,229
                
                
                
                24,229Other
      Borrowed Money
                
                
                91,000
                
                
                
                73,600147,893
                
                
                
                99,175Other
      Liabilities
                
                
                6,879
                
                
                
                7,256Commitments
      and ContingenciesStockholders'
      EquityCommon
      Stock, Par Value $1 a Share, Authorized 20,000,000 Shares, Issued
      7,213,813 and 7,200,913 Shares as of September 30, 2008 and December 31,
      2007, Respectively
                
                
                7,214
                
                
                
                7,201Paid-In
      Capital
                
                
                24,561
                
                
                
                24,420Retained
      Earnings
                
                
                52,675
                
                
                
                52,087Restricted
      Stock - Unearned Compensation
                
                
                (275
                )
                
                
                (237
                )Accumulated
      Other Comprehensive Loss, Net of Tax
                
                
                (1,369
                )
                
                
                27282,806
                
                
                
                83,743Total
      Liabilities and Stockholders' Equity
                
                $
                1,215,330
                
                
                $
                1,208,776








The
accompanying notes are an integral part of these statements.


5
 Table of Contents




COLONY
BANKCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF INCOME


THREE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


AND
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(UNAUDITED)


(DOLLARS
IN THOUSANDS)








Three
      Months Ended
                
                
                Nine
      Months Ended9/30/2008
                
                
                9/30/2007
                
                
                9/30/2008
                
                
                9/30/2007Interest
      IncomeLoans,
      Including Fees
                
                $
                16,295
                
                
                $
                20,735
                
                
                $
                51,386
                
                
                $
                60,923Federal
      Funds Sold
                
                
                25
                
                
                
                237
                
                
                
                264
                
                
                
                1,204Deposits
      with Other Banks
                
                
                7
                
                
                
                36
                
                
                
                27
                
                
                
                111Investment
      SecuritiesU.S.
      Government Agencies
                
                
                1,809
                
                
                
                1,632
                
                
                
                5,076
                
                
                
                4,749State,
      County and Municipal
                
                
                92
                
                
                
                136
                
                
                
                322
                
                
                
                407Corporate
      Obligations and Asset-Backed Securities
                
                
                113
                
                
                
                79
                
                
                
                292
                
                
                
                205Dividends
      on Other Investments
                
                
                87
                
                
                
                76
                
                
                
                253
                
                
                
                22518,428
                
                
                
                22,931
                
                
                
                57,620
                
                
                
                67,824Interest
      ExpenseDeposits
                
                
                7,599
                
                
                
                10,853
                
                
                
                25,746
                
                
                
                32,133Federal
      Funds Purchased
                
                
                241
                
                
                
                13
                
                
                
                293
                
                
                
                50Borrowed
      Money
                
                
                1,103
                
                
                
                1,272
                
                
                
                3,448
                
                
                
                3,5728,943
                
                
                
                12,138
                
                
                
                29,487
                
                
                
                35,755Net
      Interest Income
                
                
                9,485
                
                
                
                10,793
                
                
                
                28,133
                
                
                
                32,069Provision
      for Loan Losses
                
                
                3,370
                
                
                
                850
                
                
                
                8,512
                
                
                
                2,678Net
      Interest Income After Provision for Loan Losses
                
                
                6,115
                
                
                
                9,943
                
                
                
                19,621
                
                
                
                29,391Noninterest
      IncomeService
      Charges on Deposits
                
                
                1,233
                
                
                
                1,224
                
                
                
                3,571
                
                
                
                3,556Other
      Service Charges, Commissions and Fees
                
                
                240
                
                
                
                218
                
                
                
                735
                
                
                
                703Mortgage
      Fee Income
                
                
                168
                
                
                
                225
                
                
                
                511
                
                
                
                763Securities
      Gains (Losses)
                
                
                11
                
                
                
                (2
                )
                
                
                1,195
                
                
                
                184Other
                
                
                128
                
                
                
                181
                
                
                
                1,173
                
                
                
                8061,780
                
                
                
                1,846
                
                
                
                7,185
                
                
                
                6,012Noninterest
      ExpensesSalaries
      and Employee Benefits
                
                
                4,051
                
                
                
                4,464
                
                
                
                12,483
                
                
                
                13,693Occupancy
      and Equipment
                
                
                1,098
                
                
                
                1,025
                
                
                
                3,166
                
                
                
                3,036Other
                
                
                2,664
                
                
                
                2,267
                
                
                
                7,635
                
                
                
                6,9017,813
                
                
                
                7,756
                
                
                
                23,284
                
                
                
                23,630Income
      Before Income Taxes
                
                
                82
                
                
                
                4,033
                
                
                
                3,522
                
                
                
                11,773Income
      Taxes (Benefits)
                
                
                (112
                )
                
                
                1,414
                
                
                
                823
                
                
                
                3,978Net
      Income
                
                $
                194
                
                
                $
                2,619
                
                
                $
                2,699
                
                
                $
                7,795Net
      Income Per Share of Common StockBasic
                
                $
                0.03
                
                
                $
                0.36
                
                
                $
                0.38
                
                
                $
                1.08Diluted
                
                $
                0.03
                
                
                $
                0.36
                
                
                $
                0.38
                
                
                $
                1.08Cash
      Dividends Declared Per Share of Common Stock
                
                $
                0.10
                
                
                $
                0.09
                
                
                $
                0.29
                
                
                $
                0.27Weighted
      Average Basic Shares Outstanding
                
                
                7,201,580
                
                
                
                7,193,603
                
                
                
                7,197,016
                
                
                
                7,187,586Weighted
      Average Diluted Shares Outstanding
                
                
                7,201,580
                
                
                
                7,202,424
                
                
                
                7,197,016
                
                
                
                7,198,270








The
accompanying notes are an integral part of these statements.


6
 Table of Contents


COLONY
BANKCORP INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


THREE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


AND
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(UNAUDITED)


(DOLLARS
IN THOUSANDS)





Three
      Months Ended
                
                
                Nine
      Months Ended09/30/08
                
                
                09/30/07
                
                
                09/30/08
                
                
                09/30/07Net
      Income
                
                $
                194
                
                
                $
                2,619
                
                
                $
                2,699
                
                
                $
                7,795Other
      Comprehensive Income (Loss), Net of TaxGains
      (Losses) on Securities Arising During the Year
                
                
                (541
                )
                
                
                1,040
                
                
                
                (852
                )
                
                
                633Reclassification
      Adjustment
                
                
                (8
                )
                
                
                2
                
                
                
                (789
                )
                
                
                (121
                )Change
      in Net Unrealized Losses on Securities Available for Sale, Net
      Reclassification Adjustment and Tax Effect
                
                
                (549
                )
                
                
                1,042
                
                
                
                (1,641
                )
                
                
                512Comprehensive
      Income (Loss)
                
                $
                (355
                )
                
                $
                3,661
                
                
                $
                1,058
                
                
                $
                8,307








The
accompanying notes are an integral part of these statements.


7
 Table of Contents


COLONY
BANKCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


NINE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


(UNAUDITED)


(DOLLARS
IN THOUSANDS)





2008
                
                
                2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Income
                
                $
                2,699
                
                
                $
                7,795Adjustments
      to Reconcile Net Income to Net CashProvided
      by Operating Activities:Depreciation
                
                
                1,526
                
                
                
                1,391Provision
      for Loan Losses
                
                
                8,512
                
                
                
                2,678Securities
      Gains
                
                
                (1,195
                )
                
                
                (184
                )Amortization
      and Accretion
                
                
                552
                
                
                
                428Loss
      on Sale of Other Real Estate and Repossessions
                
                
                62
                
                
                
                53Gain
      on Sale of Equipment
                
                
                (11
                )
                
                
                (6
                )Decrease
      (Increase) in Cash Surrender Value of Life Insurance
                
                
                (155
                )
                
                
                20Other
      Prepaids, Deferrals and Accruals, Net
                
                
                (474
                )
                
                
                (692
                )11,516
                
                
                
                11,483CASH
      FLOWS FROM INVESTING ACTIVITIESFederal
      Home Loan Bank Stock
                
                
                (785
                )
                
                
                (446
                )Purchases
      of Investment Securities Available for Sale
                
                
                (116,756
                )
                
                
                (39,256
                )Proceeds
      from Maturities, Calls, and Paydowns ofInvestment
      Securities:Available
      for Sale
                
                
                45,203
                
                
                
                16,786Held
      to Maturity
                
                
                7
                
                
                
                8Proceeds
      from Sale of Investment SecuritiesAvailable
      for Sale
                
                
                65,299
                
                
                
                16,985(Increase)
      Decrease in Interest-Bearing Deposits in Other Banks
                
                
                1,032
                
                
                
                (542
                )Net
      Loans to Customers
                
                
                (37,981
                )
                
                
                (29,526
                )Purchase
      of Premises and Equipment
                
                
                (3,117
                )
                
                
                (1,730
                )Other
      Real Estate and Repossessions
                
                
                2,815
                
                
                
                2,209Proceeds
      from Sale of Premises and Equipment
                
                
                12
                
                
                
                258Investment
      in Statutory Trust
                
                
                ---
                
                
                
                (434
                )Liquidation
      of Statutory Trust
                
                
                ---
                
                
                
                279(44,271
                )
                
                
                (35,409
                )CASH
      FLOWS FROM FINANCING ACTIVITIESNoninterest-Bearing
      Customer Deposits
                
                
                (17,074
                )
                
                
                (3,178
                )Interest-Bearing
      Customer Deposits
                
                
                (23,776
                )
                
                
                (20,513
                )Increase
      (Decrease) in Federal Funds Purchased
                
                
                11,318
                
                
                
                (594
                )Securities
      Sold Under Agreements to Repurchase
                
                
                20,000
                
                
                
                ---Dividends
      Paid
                
                
                (2,091
                )
                
                
                (1,890
                )Proceeds
      from Other Borrowed Money
                
                
                51,500
                
                
                
                41,100Principal
      Payments on Other Borrowed Money
                
                
                (34,100
                )
                
                
                (29,000
                )Proceeds
      from Issuance of Subordinated Debentures
                
                
                ---
                
                
                
                14,434Principal
      Payments on Subordinated Debentures
                
                
                ---
                
                
                
                (9,279
                )5,777
                
                
                
                (8,920
                )Net
      Increase (Decrease) in Cash and Cash Equivalents
                
                
                (26,978
                )
                
                
                (32,846
                )Cash
      and Cash Equivalents at Beginning of Period
                
                
                50,106
                
                
                
                72,380Cash
      and Cash Equivalents at End of Period
                
                $
                23,128
                
                
                $
                39,534








The
accompanying notes are an integral part of these statements.


8
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





COLONY
BANKCORP, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





(1)
            Summary
      of Significant Accounting Policies





Principles
of Consolidation





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





All
dollars in notes to consolidated financial statements are rounded to the nearest
thousand.





Nature
of Operations





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





Use
of Estimates





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





Reclassifications





In
certain instances, amounts reported in prior years’ consolidated financial
statements have been reclassified to conform to statement presentations selected
for 2008. Such reclassifications had no effect on previously reported
stockholders’ equity or net income.





Concentrations
of Credit Risk





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 our larger MSA markets.  Declining
collateral real estate values that secure land development, construction and
speculative real estate loans in our larger MSA markets has resulted in
increased loan loss provisions in 2008.





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





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


9
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(1)
            Summary
      of Significant Accounting Policies
(Continued)





Accounting
Policies





The
accounting and reporting policies of Colony Bankcorp, Inc. and its subsidiary
are in accordance with accounting principles generally accepted and conform to
general practices within the banking industry. The significant accounting
policies followed by Colony and the methods of applying those policies are
summarized hereafter.





Investment
Securities





Investment
securities are recorded under Statement of Financial Accounting Standards (SFAS)
No. 115, whereby the Company classifies its securities as trading, available for
sale or held to maturity. Securities that are held principally for resale in the
near term are classified as trading. Trading securities are carried at fair
value, with realized and unrealized gains and losses included in noninterest
income. Securities acquired with both the intent and ability to be held to
maturity are classified as held to maturity and reported at amortized cost. All
other securities not classified as trading or held to maturity are considered
available for sale.





Securities
available for sale are reported at estimated fair value. Unrealized gains and
losses on securities available for sale are excluded from earnings and are
reported, net of deferred taxes, in accumulated other comprehensive income, a
component of stockholders’ equity. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
In estimating other-than-temporary impairment losses, management considers (1)
the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer and (3)
the intent and ability of the Company to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses from sales of securities available for sale are computed using
the specific identification method. This caption includes securities, which may
be sold to meet liquidity needs arising from unanticipated deposit and loan
fluctuations, changes in regulatory capital requirements, or unforeseen changes
in market conditions.





Federal
Home Loan Bank Stock





Investment
in stock of a Federal Home Loan Bank (FHLB) isrequired for every
federally insured institution that utilizes its services. FHLB stock is
considered restricted, as defined in SFAS No. 115; accordingly, the provisions
of SFAS No. 115 are not applicable to this investment. The FHLB stock is
reported in the consolidated financial statements at cost. Dividend income is
recognized when earned.





Loans





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





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





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





Allowance
for Loan Losses





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


10
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(1)
            Summary
      of Significant Accounting Policies
(Continued)





Allowance
for Loan Losses (Continued)





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





The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as either doubtful or
substandard. For such loans that are also classified as impaired, an allowance
is established when the discounted cash flows (or collateral value or observable
market price) of the impaired loan is lower than the carrying value of that
loan. The general component covers nonclassified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.





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





Premises
and Equipment





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





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





Description
                            
                            Life in Years
                            
                            MethodBanking
      Premises
                            
                            15-40
                            
                            Straight-Line
      and AcceleratedFurniture
      and Equipment
                            
                            5-10
                            
                            Straight-Line
      and AcceleratedLeasehold
      Improvements
                            
                            5-20
                            
                            Straight-Line





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





Goodwill
and Intangible Assets





Goodwill
represents the excess of the cost over the fair value of the net assets
purchased in a business combination.  Impairment testing of goodwill
is performed annually or more frequently if events or circumstances indicate
possible impairment.  No impairment has been identified as a result of
the testing performed.





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


11
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(1)
            Summary
      of Significant Accounting Policies
(Continued)





Transfers
of Financial Assets





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





Statement
of Cash Flows





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





Advertising
Costs





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





Income
Taxes





The
provision for income taxes is based upon income for financial statement
purposes, adjusted for nontaxable income and nondeductible expenses. Deferred
income taxes have been provided when different accounting methods have been used
in determining income for income tax purposes and for financial reporting
purposes.





Deferred
tax assets and liabilities are recognized based on future tax consequences
attributable to differences arising from the financial statement carrying values
of assets and liabilities and their tax bases. The differences relate primarily
to depreciable assets (use of different depreciation methods for financial
statement and income tax purposes) and allowance for loan losses (use of the
allowance method for financial statement purposes and the direct write-off
method for tax purposes). In the event of changes in the tax laws, deferred tax
assets and liabilities are adjusted in the period of the enactment of those
changes, with effects included in the income tax provision. The Company and its
subsidiary file a consolidated federal income tax return. The subsidiary pays
its proportional share of federal income taxes to the Company based on its
taxable income.





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





Other
Real Estate





Other
real estate generally represents real estate acquired through foreclosure and is
initially recorded at the lower of cost or estimated market value at the date of
acquisition. Losses from the acquisition of property in full or partial
satisfaction of debt are recorded as loan losses. Subsequent declines in value,
routine holding costs and gains or losses upon disposition are included in other
losses.





Comprehensive
Income





Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain changes in assets and liabilities, such as
unrealized gains and losses on securities available for sale, represent equity
changes from economic events of the period other than transactions with owners
and are not reported in the consolidated statements of income but as a separate
component of the equity section of the consolidated balance sheets. Such items
are considered components of other comprehensive income. SFAS No. 130, Reporting Comprehensive Income,requires the presentation in the financial statements of net income and
all items of other comprehensive income as total comprehensive
income.


12
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(1)
            Summary
      of Significant Accounting Policies
(Continued)





Off-Balance
Sheet Credit Related Financial Instruments





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





Changes
in Accounting Principles and Effects of New Accounting
Pronouncements





SFAS No. 141, Business Combinations
(Revised 2007).SFAS No. 141R replaces SFAS No. 141, Business Combinations,and
applies to all transactions and other events in which one entity obtains control
over one or more other businesses.  SFAS No. 141R requires an
acquirer, upon initially obtaining control of another entity, to recognize the
assets, liabilities and any noncontrolling interest in the acquiree at fair
value as of the acquisition date.  Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt.  This fair value approach
replaces the cost-allocation process required under SFAS No. 141 whereby the
cost of an acquisition was allocated to the individual assets acquired and
liabilities assumed based on their estimated fair value.  SFAS No.
141R requires acquirers to expense acquisition-related costs as incurred rather
than allocating such costs to the assets acquired and liabilities assumed, as
was previously the case under SFAS No. 141.  Under SFAS No. 141R, the
requirements of SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities,would have to be met in order to accrue for
a restructuring plan in purchase accounting.  Pre-acquisition
contingencies are to be recognized at fair value, unless it is a noncontractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS No. 5, Accounting for
Contingencies.SFAS No. 141R is expected to have an impact on
the Company’s accounting for business combinations closing on or after January
1, 2009.





In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements.  SFAS No. 157 enhances existing guidance for
measuring assets and liabilities using fair value.  Before the
issuance of SFAS No. 157, guidance for applying fair value was incorporated in
several accounting pronouncements.  SFAS No. 157 provides a single
definition of fair value, together with a framework for measuring it, and
requires additional disclosure about the use of fair value to measure assets and
liabilities.  SFAS No. 157 also emphasizes that fair value is
market-based measurement, not an entity-specific measurement, and sets out a
fair value hierarchy with the highest priority being quoted prices in active
markets.  Under SFAS No. 157, fair value measurements are disclosed by
level within that hierarchy.  While SFAS No. 157 does not add any new
fair value measurements, it does change current practice.  Changes to
practice include: (1) a requirement for an entity to include its own credit
standing in the measurement of its liabilities; (2) a modification of the
transaction price presumption; (3) a prohibition on the use of block discounts
when valuing large blocks of securities for broker-dealers and investment
companies; and (4) a requirement to adjust the value of restricted stock for the
effect of the restriction even if the restriction lapses within one
year.  The adoption of this standard January 1, 2008 did not have a
material effect on the financial position, results of operations or
disclosures.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment to FASB Statement No.
115.  This statement permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value.  The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions.  This statement requires a business entity to report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date.  An entity may
decide whether to elect the fair value option for each eligible item on its
election date, subject to certain requirements described in the
statement.  The adoption of this standard January 1, 2008 did not have
an effect on the Company’s financial position, results of operations or
disclosures.





SFAS No. 160, Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB Statement No.
51.SFAS No. 160 amends Accounting Research Bulletin (ARB) No.
51, Consolidated Financial
Statements,to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS No. 160 clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements.  Among
other requirements, SFAS No. 160 requires consolidated net income to be reported
at amounts that include the amounts attributable to both the parent and the
noncontrolling interest.  It also requires disclosure, on the face of
the consolidated statements of income, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest.  SFAS
No. 160 is effective for the Company on January 1, 2009 and is not expected to
have a significant impact on the Company’s consolidated financial
statements.


13
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(1)
            Summary
      of Significant Accounting Policies
(Continued)





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





Emerging Issues Task Force (EITF)
Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance
Arrangements.EITF No. 06-4 requires the recognition of a
liability and related compensation expense for endorsement split-dollar life
insurance policies that provide a benefit to an employee that extends to
postretirement periods.  Under EITF No. 06-4, life insurance policies
purchased for the purpose of providing such benefits do not effectively settle
an entity’s obligation to the employee.  Accordingly, the entity must
recognize a liability and related compensation expense during the employee’s
active service period based on the future cost of insurance to be incurred
during the employee’s retirement.  If the entity has agreed to provide
the employee with a death benefit, then the liability for the future death
benefit should be recognized by following the guidance in SFAS No. 106, Employer’s Accounting for
Postretirement Benefits Other Than Pensions.The adoption of
this standard January 1, 2008 did not have an effect on the Company’s financial
position, results of operations or disclosures.





SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles.”SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy).  The
hierarchical guidance provided by SFAS 162 did not have a significant impact on
the Corporation’s financial statements.





(2) Cash and Balances Due from
Banks





Components
of cash and balances due from banks are as follows as of September 30, 2008 and
December 31, 2007:





September 30, 2008
                  
                  
                  December 31, 2007Cash
      on Hand and Cash Items
                  
                  $
                  9,506
                  
                  
                  $
                  8,527Noninterest-Bearing
      Deposits with Other Banks
                  
                  
                  13,423
                  
                  
                  
                  19,842$
                  22,929
                  
                  
                  $
                  28,369





As of
September 30, 2008, the Banks had required deposit reserves of approximately
$6,924 with the Federal Reserve that was satisfied
with cash on hand.





(3) Investment
Securities





Investment
securities as of September 30, 2008 are summarized as follows:





Amortized
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      FairCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueSecurities
      Available for Sale:U.S.
      Government AgenciesMortgage-Backed
                      
                      $
                      155,938
                      
                      
                      $
                      387
                      
                      
                      $
                      (1,245
                      )
                      
                      $
                      155,080Other
                      
                      
                      650
                      
                      
                      
                      ---
                      
                      
                      
                      ---
                      
                      
                      
                      650State,
      County & Municipal
                      
                      
                      9,730
                      
                      
                      
                      19
                      
                      
                      
                      (281
                      )
                      
                      
                      9,468Corporate
      Obligations
                      
                      
                      6,619
                      
                      
                      
                      41
                      
                      
                      
                      (651
                      )
                      
                      
                      6,009Asset-Backed
      Securities
                      
                      
                      1,000
                      
                      
                      
                      ---
                      
                      
                      
                      (344
                      )
                      
                      
                      656$
                      173,937
                      
                      
                      $
                      447
                      
                      
                      $
                      (2,521
                      )
                      
                      $
                      171,863Securities
      Held to Maturity:State,
      County and Municipal
                      
                      $
                      65
                      
                      
                      $
                      2
                      
                      
                      $
                      ---
                      
                      
                      $
                      67




The
amortized cost and fair value of investment securities as of September 30, 2008,
by contractual maturity, are shown hereafter.  Expected maturities
will differ from contractual maturities because issuers have the right to call
or prepay obligations with or without call or prepayment
penalties.


14
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(3) Investment Securities
(Continued)





SecuritiesAvailable for Sale
                    
                    
                    Held to MaturityAmortized Cost
                    
                    
                    Fair Value
                    
                    
                    Amortized Cost
                    
                    
                    Fair ValueDue
      in One Year or Less
                    
                    $
                    3,977
                    
                    
                    $
                    3,937Due
      After One Year Through Five Years
                    
                    
                    5,590
                    
                    
                    
                    5,285Due
      After Five Years Through Ten Years
                    
                    
                    4,787
                    
                    
                    
                    4,713
                    
                    
                    $
                    65
                    
                    
                    $
                    67Due
      After Ten Years
                    
                    
                    3,645
                    
                    
                    
                    2,848
                    
                    
                    
                    --
                    
                    
                    
                    --17,999
                    
                    
                    
                    16,783
                    
                    
                    
                    65
                    
                    
                    
                    67Mortgage
      Backed Securities
                    
                    
                    155,938
                    
                    
                    
                    155,080
                    
                    
                    
                    --
                    
                    
                    
                    --$
                    173,937
                    
                    
                    $
                    171,863
                    
                    
                    $
                    65
                    
                    
                    $
                    67








Investment
securities as of December 31, 2007 are summarized as follows:





Amortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    FairCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    ValueSecurities
      Available for Sale:U.S.
      Government AgenciesMortgage
      Backed
                    
                    $
                    109,024
                    
                    
                    $
                    758
                    
                    
                    $
                    (459
                    )
                    
                    $
                    109,323Other
                    
                    
                    36,818
                    
                    
                    
                    314
                    
                    
                    
                    (36
                    )
                    
                    
                    37,096State,
      County & Municipal
                    
                    
                    14,178
                    
                    
                    
                    33
                    
                    
                    
                    (296
                    )
                    
                    
                    13,915Corporate
      Obligations
                    
                    
                    5,689
                    
                    
                    
                    105
                    
                    
                    
                    (7
                    )
                    
                    
                    5,787Asset-Backed
      Securities
                    
                    
                    1,000
                    
                    
                    
                    ---
                    
                    
                    
                    ---
                    
                    
                    
                    1,000Marketable
      Equity Securities
                    
                    
                    2
                    
                    
                    
                    ---
                    
                    
                    
                    ---
                    
                    
                    
                    2$
                    166,711
                    
                    
                    $
                    1,210
                    
                    
                    $
                    (798
                    )
                    
                    $
                    167,123Securities
      Held to Maturity:State,
      County and Municipal
                    
                    $
                    68
                    
                    
                    $
                    4
                    
                    
                    $
                    ---
                    
                    
                    $
                    72





Proceeds
from the sale of investments available for sale during first nine months of 2008
totaled $65,299 compared to $16,985 for the first nine months of
2007.  The sale of investments available for sale during 2008 resulted
in gross realized gains of $1,202 and gross unrealized losses of $7, while the
sale of investments available for sale during 2007 resulted in gross realized
gains of $214 and losses of $30.





Investment
securities having a carry value approximating $94,149 and $89,145 as of
September 30, 2008 and December 31, 2007, respectively, were pledged to secure
public deposits and for other purposes.


15
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(3) Investment Securities
(Continued)





Information
pertaining to securities with gross unrealized losses at September 30, 2008 and
December 31, 2007 aggregated by investment category and length of time that
individual securities have been in a continuous loss position,
follows:





Less
      Than 12 Months
                              
                              
                              12
      Months or Greater
                              
                              
                              TotalGross
                              
                              
                              
                              
                              
                              Gross
                              
                              
                              
                              
                              
                              GrossFair
                              
                              
                              Unrealized
                              
                              
                              Fair
                              
                              
                              Unrealized
                              
                              
                              Fair
                              
                              
                              UnrealizedValue
                              
                              
                              Losses
                              
                              
                              Value
                              
                              
                              Losses
                              
                              
                              Value
                              
                              
                              LossesSeptember
      30, 2008U.S.
      Government AgenciesMortgage
      Backed
                              
                              $
                              109,843
                              
                              
                              $
                              (1,224
                              )
                              
                              $
                              850
                              
                              
                              $
                              (21
                              )
                              
                              $
                              110,693
                              
                              
                              $
                              (1,245
                              )State,
      County and Municipal
                              
                              
                              4,593
                              
                              
                              
                              (281
                              )
                              
                              
                              ---
                              
                              
                              
                              ---
                              
                              
                              
                              4,593
                              
                              
                              
                              (281
                              )Corporate
      Obligations
                              
                              
                              4,968
                              
                              
                              
                              (651
                              )
                              
                              
                              ---
                              
                              
                              
                              ---
                              
                              
                              
                              4,968
                              
                              
                              
                              (651
                              )Asset-Backed
      Securities
                              
                              
                              656
                              
                              
                              
                              (344
                              )
                              
                              
                              ---
                              
                              
                              
                              ---
                              
                              
                              
                              656
                              
                              
                              
                              (344
                              )$
                              120,060
                              
                              
                              $
                              (2,500
                              )
                              
                              $
                              850
                              
                              
                              $
                              (21
                              )
                              
                              $
                              120,910
                              
                              
                              $
                              (2,521
                              )December
      31, 2007U.S.
      Government AgenciesMortgage
      Backed
                              
                              $
                              13,721
                              
                              
                              $
                              (56
                              )
                              
                              $
                              30,761
                              
                              
                              $
                              (403
                              )
                              
                              $
                              44,482
                              
                              
                              $
                              (459
                              )Other
                              
                              
                              ---
                              
                              
                              
                              ---
                              
                              
                              
                              14,101
                              
                              
                              
                              (36
                              )
                              
                              
                              14,101
                              
                              
                              
                              (36
                              )State,
      County and Municipal
                              
                              
                              6,918
                              
                              
                              
                              (255
                              )
                              
                              
                              3,115
                              
                              
                              
                              (41
                              )
                              
                              
                              10,033
                              
                              
                              
                              (296
                              )Corporate
      Obligations
                              
                              
                              ---
                              
                              
                              
                              ---
                              
                              
                              
                              995
                              
                              
                              
                              (7
                              )
                              
                              
                              995
                              
                              
                              
                              (7
                              )Marketable
      Equity Securities
                              
                              
                              2
                              
                              
                              
                              ---
                              
                              
                              
                              ---
                              
                              
                              
                              ---
                              
                              
                              
                              2
                              
                              
                              
                              ---$
                              20,641
                              
                              
                              $
                              (311
                              )
                              
                              $
                              48,972
                              
                              
                              $
                              (487
                              )
                              
                              $
                              69,613
                              
                              
                              $
                              (798
                              )





Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer and (3) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.





At
September 30, 2008, the debt securities with unrealized losses have depreciated
2.04 percent from the Company’s amortized cost basis.  These
securities are guaranteed by either U.S. Government or other
governments.  These unrealized losses relate principally to current
interest rates for similar type of securities.  In analyzing an
issuer’s financial condition, management considers whether the securities are
issued by the federal government or its agencies, whether downgrades by bond
rating agencies have occurred and the results of reviews of the issuer’s
financial condition.  As management has the ability to hold debt
securities until maturity, or for the foreseeable future if classified as
available-for-sale, no declines are deemed to be
other-than-temporary.





(4) Loans





The
composition of loans as of  September 30, 2008 and December 31, 2007
was as follows:





September 30, 2008
                    
                    
                    December 31, 2007Commercial,
      Financial and Agricultural
                    
                    $
                    90,105
                    
                    
                    $
                    52,323Real
      Estate – Construction
                    
                    
                    164,092
                    
                    
                    
                    211,484Real
      Estate – Farmland
                    
                    
                    58,254
                    
                    
                    
                    42,439Real
      Estate – Other
                    
                    
                    593,564
                    
                    
                    
                    544,655Installment
      Loans to Individuals
                    
                    
                    44,012
                    
                    
                    
                    72,350All
      Other Loans
                    
                    
                    20,655
                    
                    
                    
                    22,028$
                    970,682
                    
                    
                    $
                    945,279





Nonaccrual
loans are loans for which principal and interest are doubtful of collection in
accordance with original loan terms and for which accruals of interest have been
discontinued due to payment delinquency.  Nonaccrual loans totaled
$29,667 and $14,956 as of September 30, 2008 and December 31, 2007, respectively
and total recorded investment in loans past due 90 days or more and still
accruing interest approximated $20 and $60, respectively.


16
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(5) Allowance for Loan
Losses





Transactions
in the allowance for loan losses are summarized below for nine months ended
September 30, 2008 and September
30, 2007 as follows:




September 30, 2008
                  
                  
                  September 30, 2007Balance,
      Beginning
                  
                  $
                  15,513
                  
                  
                  $
                  11,989Provision
      Charged to Operating Expenses
                  
                  
                  8,512
                  
                  
                  
                  2,678Loans
      Charged Off
                  
                  
                  (6,534
                  )
                  
                  
                  (1,971
                  )Loan
      Recoveries
                  
                  
                  461
                  
                  
                  
                  1,125Balance,
      Ending
                  
                  $
                  17,952
                  
                  
                  $
                  13,821








(6) Premises and
Equipment





Premises
and equipment are comprised of the following as of September 30, 2008 and
December 31, 2007:





September 30, 2008
                  
                  
                  December 31, 2007Land
                  
                  $
                  7,805
                  
                  
                  $
                  7,799Building
                  
                  
                  20,939
                  
                  
                  
                  20,901Furniture,
      Fixtures and Equipment
                  
                  
                  13,303
                  
                  
                  
                  12,641Leasehold
      Improvements
                  
                  
                  994
                  
                  
                  
                  994Construction
      in Progress
                  
                  
                  2,348
                  
                  
                  
                  44845,389
                  
                  
                  
                  42,783Accumulated
      Depreciation
                  
                  
                  (15,990
                  )
                  
                  
                  (14,974
                  )$
                  29,399
                  
                  
                  $
                  27,809





Depreciation
charged to operations totaled $1,526 and $1,391 for September 30, 2008 and
September 30, 2007, respectively.





Certain
Company facilities and equipment are leased under various operating
leases.  Rental expense approximated $282 and $273 for nine months
ended September 30, 2008 and September 30, 2007, respectively.








(7) Goodwill and Intangible
Assets





The
following is an analysis of the goodwill and core deposit intangible asset
activity for the nine months ended September 30, 2008 and September 30,
2007:




Nine
      Months Ended
                      
                      
                      Nine
      Months EndedSeptember
      30, 2008
                      
                      
                      September
      30, 2007GoodwillBalance,
      Beginning
                      
                      $
                      2,412
                      
                      
                      $
                      2,412Goodwill
      Acquired
                      
                      
                      ---
                      
                      
                      
                      ---Balance,
      Ending
                      
                      $
                      2,412
                      
                      
                      $
                      2,412Net
      Core Deposit, IntangibleBalance,
      Beginning
                      
                      $
                      402
                      
                      
                      $
                      439Amortization
      Expense
                      
                      
                      (27
                      )
                      
                      
                      (28
                      )Balance,
      Ending
                      
                      $
                      375
                      
                      
                      $
                      411


17
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(7) Goodwill and Intangible
Assets (Continued)





The
following table reflects the expected amortization for the core deposit
intangible at September 30, 2008:





2008
                  
                  $
                  92009
                  
                  
                  362010
                  
                  
                  362011
                  
                  
                  362012
      and thereafter
                  
                  
                  258$
                  375





(8) Income
Taxes





The
Company records income taxes under SFAS No. 109, Accounting for Income Taxes,
which requires an asset and liability approach to financial accounting and
reporting for income taxes.  Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable
income.  Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.  Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.








(9) Fair Value
Measurements





SFAS No.
157, Fair Value Measurements,defines fair value, establishes a framework for measuring fair value,
establishes a three-level valuation hierarchy for disclosure of fair value
measurement and enhances disclosure requirements for fair value
measurements.  The valuation hierarchy is based upon the transparency
of inputs to the valuation of an asset or liability as of the measurement
date.  The three levels are defined as follows:





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





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





·
            Level
      3
            inputs
      to the valuation methodology are unobservable and significant to the fair
      value measurement.





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





Assets





Securities





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


18
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(9) Fair Value Measurements
(Continued)





Impaired
loans





SFAS No.
157 applies to loans measured for impairment using the practical expedients
permitted by SFAS No. 114, Accounting by Creditors for
Impairment of a Loan,including impaired loans measured at an observable
market price (if available), or at the fair value of the loan’s collateral (if
the loan is collateral dependent).  Fair value of the loan’s
collateral, when the loan is dependent on collateral, is determined by
appraisals or independent valuation which is then adjusted for the cost related
to liquidation of the collateral.





Assets Measured at Fair
Value on a Recurring Basis





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


30, 2008
aggregated by the level in the fair value hierarchy within which those
measurements fall.





Fair Value Measurements at Reporting Date
      UsingSeptember
      30, 2008
                        
                        
                        Quoted
      Prices inActive Markets forIdentical
      Assets(Level 1)
                        
                        
                        Significant
      OtherObservableInputs
      (Level 2)
                        
                        
                        SignificantUnobservableInputs(Level
      3)Securities
      Available for SaleU.S.
      Government AgenciesMortgage-Backed
                        
                        $
                        155,080
                        
                        
                        $
                        ---
                        
                        
                        $
                        155,080
                        
                        
                        $
                        ---Other
                        
                        
                        650
                        
                        
                        
                        ---
                        
                        
                        
                        650
                        
                        
                        
                        ---State,County
      & Municipal
                        
                        
                        9,468
                        
                        
                        
                        ---
                        
                        
                        
                        9,468
                        
                        
                        
                        ---Corporate
      Obligations
                        
                        
                        6,009
                        
                        
                        
                        ---
                        
                        
                        
                        5,310
                        
                        
                        
                        699Asset-Backed
      Securities
                        
                        
                        656
                        
                        
                        
                        ---
                        
                        
                        
                        ---
                        
                        
                        
                        656$
                        171,863
                        
                        
                        $
                        ---
                        
                        
                        $
                        170,508
                        
                        
                        $
                        1,355





Liabilities





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





(10) Deposits





The
aggregate amount of overdrawn deposit accounts reclassified as loan balances
totaled $409 and $574 as of September 30, 2008 and December 31,
2007.





Components
of interest-bearing deposits as of September 30, 2008 and December 31, 2007 are
as follows:





September 30, 2008
                  
                  
                  December 31, 2007Interest-Bearing
      Demand
                  
                  $
                  180,505
                  
                  
                  $
                  190,304Savings
                  
                  
                  33,757
                  
                  
                  
                  31,588Time,
      $100,000 and Over
                  
                  
                  318,467
                  
                  
                  
                  347,219Other
      Time
                  
                  
                  375,985
                  
                  
                  
                  363,379$
                  908,714
                  
                  
                  $
                  932,490





At
September 30, 2008 and December 31, 2007, the Company had brokered deposits of
$115,202 and $54,737 respectively.  Of the $115,202 brokered deposits
at September 30, 2008, $13,379 represented CDARS reciprocal deposits in which
customers placed core deposits into the CDARS program for FDIC insurance
coverage and the Company received reciprocal brokered deposits in a like
amount.  Thus, brokered deposits less the reciprocal deposits totaled
$101,823 at September 30, 2008.  The aggregate amount of short-term
jumbo certificates of deposit, each with a minimum denomination of $100,000 was
approximately $287,529 and $310,971 as of September 30, 2008 and December 31,
2007, respectively.


19
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(10) Deposits
(Continued)





As
of  September 30, 2008 and December 31, 2007,  the scheduled
maturities of certificates of deposits are as follows:





Maturity
                    
                    September 30, 2008
                    
                    
                    December 31, 2007One
      Year and Under
                    
                    $
                    625,698
                    
                    
                    $
                    632,936One
      to Three Years
                    
                    
                    61,141
                    
                    
                    
                    42,977Three
      Years and Over
                    
                    
                    7,613
                    
                    
                    
                    34,685$
                    694,452
                    
                    
                    $
                    710,598





(11) Other Borrowed
Money





Other
borrowed money at September 30, 2008 and December 31, 2007 is summarized as
follows:





September 30, 2008
                  
                  
                  December 31, 2007Federal
      Home Loan Bank Advances
                  
                  $
                  91,000
                  
                  
                  $
                  73,500Silverton
      Note Payable
                  
                  
                  ---
                  
                  
                  
                  100Barclay’s
      Master Repurchase Agreement
                  
                  
                  20,000
                  
                  
                  
                  ---$
                  111,000
                  
                  
                  $
                  73,600





Advances
from the Federal Home Loan Bank (FHLB) have maturities ranging from 2009 to 2019
and interest rates ranging from 2.29 percent to 5.93 percent.  Under
the Blanket Agreement for Advances and Security Agreement with the FHLB,
residential first mortgage loans and cash balances held by the FHLB are pledged
as collateral for the FHLB advances outstanding.  At September 30,
2008, the Company had available line of credit commitments totaling $100,587, of
which $9,587 was available.





Silverton
Bank Note Payable originated on March 5, 2008 as a line of credit with funds
available of $1,000 at a rate of The Wall Street Prime minus 0.75
percent.  Interest payments are due monthly with the entire balance
due March 5, 2009. The debt is secured by all furniture, fixtures, equipment and
software of Colony Management Services.  Colony Bankcorp,
Inc.


guarantees
the debt.  This note was paid off in September 2008.





Barclay’s
Master Repurchase Agreement originated on June 30, 2008.  The
Repurchase Agreement matures on June 30, 2011 and has a one-time call option on
December 30, 2009.  Interest is due quarterly at a fixed rate of 3.34
percent.  The Repurchase Agreement is secured by U.S. Government
mortgage-backed securities.





The
aggregate stated maturities of  other borrowed money at September 30,
2008 are as follows:





Year
                    
                    Amount2008
                    
                    $
                    ---2009
                    
                    
                    19,0002010
                    
                    
                    1,0002011
                    
                    
                    20,0002012
      and Thereafter
                    
                    
                    71,000$
                    111,000





The
Company also has available federal funds lines of credit with various financial
institutions totaling $54,000, of which $12,664 was outstanding at September 30,
2008.  During third quarter 2008, the Company secured another master
repurchase line of credit agreement for $80,000, of which no monies had been
drawn as of September 30, 2008.





(12) Subordinated Debentures
(Trust Preferred Securities)





During
the second quarter of 2004, the Company formed a third subsidiary whose sole
purpose was to issue $4,500 in Trust Preferred Securities through a pool
sponsored by FTN Financial Capital Markets.  The Trust Preferred
Securities have a maturity of 30 years and are redeemable after five years with
certain exceptions.  At September 30, 2008, the floating rate
securities had a 5.50 percent interest rate, which will reset quarterly at the
three-month LIBOR rate plus 2.68 percent.


20
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(12) Subordinated Debentures
(Trust Preferred Securities) (Continued)





During
the second quarter of 2006, the Company formed a fourth subsidiary whose sole
purpose was to issue $5,000 in Trust Preferred Securities through a pool
sponsored by SunTrust Capital Markets.  The Trust Preferred Securities
have a maturity of 30 years and are redeemable after five years with certain
exceptions.  At September 30, 2008 the floating-rate securities had a
5.26  percent interest rate, which will reset quarterly at the
three-month LIBOR rate plus 1.50 percent.





During
the first quarter of 2007, the Company formed a fifth subsidiary whose sole
purpose was to issue $9,000 in Trust Preferred Securities through a pool
sponsored by Trapeza Capital Management, LLC.  The Trust Preferred
Securities have a maturity of 30 years and are redeemable after five years with
certain exceptions.  At September 30, 2008, the floating-rate
securities had a 5.41  percent interest rate, which will reset
quarterly at the three-month LIBOR rate plus 1.65 percent.  Proceeds
from this issuance were used to payoff the trust preferred securities with the
first subsidiary formed in March 2002 as the Company exercised its option to
call.





During
the third quarter of 2007, the company formed a sixth subsidiary whose sole
purpose was to issue $5,000 in Trust Preferred Securities through a pool
sponsored by Trapeza Capital Management, LLC.  The Trust Preferred
Securities have a maturity of 30 years and are redeemable after five years with
certain exceptions.  At September 30, 2008, the floating-rate
securities had a 4.20 percent interest rate, which will reset quarterly at the
three-month LIBOR rate plus 1.40 percent.  Proceeds from this issuance
were used to payoff the trust preferred securities with the second subsidiary
formed in December 2002 as the Company exercised its option to
call.





The Trust
Preferred Securities are recorded as subordinated debentures on the consolidated
balance sheets, but subject to certain limitations, qualify as Tier 1 Capital
for regulatory capital purposes.  The proceeds from the offering were
used to fund the cash portion of the Quitman acquisition, payoff holding company
debt, and inject capital into bank subsidiaries.





(13) Restricted Stock – Unearned
Compensation





In 1999,
the board of directors of Colony Bankcorp, Inc. adopted a restricted stock grant
plan which awards certain executive officers common shares of the
Company.  The maximum number of shares (split-adjusted) which may be
subject to restricted stock awards was 64,701.  To date, 77,052
split-adjusted shares have been issued under this plan and since the plan’s
inception, 12,351 shares have been forfeited; thus, remaining shares which may
be subject to restricted stock awards are none at September 30,
2008.  The shares are recorded at fair market value (on the date
granted) as a separate component of stockholders’ equity.  The cost of
these shares is being amortized against earnings using the straight-line method
over three years (the restriction period.)





In April
2004, the stockholders of Colony Bankcorp, Inc. adopted a restricted stock grant
plan which awards certain executive officers common shares of the
Company.  The maximum number of shares which may be subject to
restricted stock awards (split-adjusted) is 143,500.  To date, 34,406
shares have been issued under this plan and since the plan’s inception 7,848
shares have been forfeited, thus remaining shares which may be subject to
restricted stock awards are 116,942 at September 30, 2008.  The shares
are recorded at fair market value (on the date granted) as a separate component
of stockholders’ equity.  The cost of these shares is being amortized
against earnings using the straight-line method over three years (the
restriction period).





(14) Profit Sharing
Plan





The
Company has a profit sharing plan that covers substantially all employees who
meet certain age and service requirements.  It is the Company’s policy
to make contributions to the plan as approved annually by the board of
directors.  The provision for the nine   months ended
September 30, 2008 was $455 compared to $583 for the nine months ended September
30, 2007.  The total provision for contributions to the plan was $584
for 2007, $663 for 2006 and $558 for 2005.





(15) Commitments and
Contingencies





Credit-Related Financial
Instruments.The Company is a party to credit related
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers.  These
financial instruments include commitments to extend credit, standby letters of
credit and commercial letters of credit.  Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.





The
Company’s exposure to credit loss is represented by the contractual amount of
these commitments.  The Company follows the same credit policies in
making commitments as it does for on-balance sheet instruments.


21
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(15) Commitments and
Contingencies (Continued)





At
September 30, 2008 and December 31, 2007 the following financial instruments
were outstanding whose contract amounts represent credit risk:





Contract
      AmountSeptember 30, 2008
                          
                          
                          December 31, 2007Loan
      Commitments
                          
                          $
                          85,091
                          
                          
                          $
                          93,105Standby
      Letters of Credit
                          
                          
                          2,696
                          
                          
                          
                          3,814





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  The commitments for equity lines of credit
may expire without being drawn upon.  Therefore, the total commitment
amounts do not necessarily represent future cash requirements.  The
amount of collateral obtained, if it is deemed necessary by the Company, is
based on management’s credit evaluation of the customer.





Unfunded
commitments under commercial lines of credit, revolving credit lines and
overdraft protection agreements are commitments for possible future extensions
of credit to existing customers.  These lines of credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Company is
committed.





Standby
and performance letters of credit are conditional lending commitments issued by
the Company to guarantee the performance of a customer to a third
party.  Those letters of credit are primarily issued to support public
and private borrowing arrangements.  Essentially all letters of credit
issued have expiration dates within one year.  The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.





Legal
Contingencies.  In the ordinary course of business, there are
various legal proceedings pending against Colony and its
subsidiaries.  The aggregate liabilities, if any, arising from such
proceedings would not, in the opinion of management, have a material adverse
effect on Colony’s consolidated financial position.





(16) Deferred Compensation
Plan





Colony
Bank, wholly-owned subsidiary has deferred compensation plans covering certain
directors choosing to participate through individual deferred compensation
contracts.  In accordance with terms of the contracts, the Bank is
committed to pay the directors deferred compensation over a specified number of
years, beginning at age 65.  In the event of a director’s death before
age 65, payments are made to the director’s named beneficiary over a specified
number of years, beginning on the first day of the month following the death of
the director.





Liabilities
accrued under the plans totaled $1,119 and $1,159 as of September 30, 2008 and
December 31, 2007, respectively.  Benefit payments under the contracts
were $165 and $140 for the nine month period ended September 30, 2008 and
September 30, 2007, respectively.   Provisions charged to
operations totaled $128 and $205 for the nine month period ended September 30,
2008 and September 30, 2007, respectively.





Fee
income recognized with deferred compensation plans totaled $117 and $104 for
nine month period ended September 30, 2008 and September
30, 2007, respectively.





(17) Regulatory Capital
Matters





The
Company is subject to various regulatory capital requirements administered by
federal banking agencies.  Failure to meet minimum capital
requirements can initiate certain mandatory and, possibly, additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s consolidated financial
statements.  Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Company’s assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices.  The Company’s capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.


22
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(17) Regulatory Capital Matter
(Continued)





Quantitative
measures established by regulation to ensure capital adequacy require the
Company to maintain minimum amounts and ratios of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets.  The
amounts and ratios as defined in regulations are presented
hereafter.  Management believes, as of September 30, 2008, the Company
meets all capital adequacy requirements to which it is subject under the
regulatory framework for prompt corrective action.  In the opinion of
management, there are no conditions or events since prior notification of
capital adequacy from the regulators that have changed the institution’s
category.





The
following table summarizes regulatory capital information as of September 30,
2008.





To
      Be Well CapitalizedFor
      Capital
                    
                    
                    Under
      Prompt CorrectiveActual
                    
                    
                    Adequacy Purposes
                    
                    
                    Action ProvisionsAmount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioAs
      of September 30, 2008Total
      Capitalto
      Risk-Weighted AssetsConsolidated
                    
                    $
                    116,997
                    
                    
                    
                    12.15
                    %
                    
                    $
                    77,031
                    
                    
                    
                    8.00
                    %
                    
                    NA
                    
                    
                    NAColony
      Bank
                    
                    
                    116,075
                    
                    
                    
                    12.08
                    
                    
                    
                    76,902
                    
                    
                    
                    8.00
                    
                    
                    $
                    96,128
                    
                    
                    
                    10.00
                    %Tier
      1 Capitalto
      Risk-Weighted AssetsConsolidated
                    
                    $
                    104,888
                    
                    
                    
                    10.89
                    %
                    
                    $
                    38,515
                    
                    
                    
                    4.00
                    %
                    
                    NA
                    
                    
                    NAColony
      Bank
                    
                    
                    103,986
                    
                    
                    
                    10.82
                    
                    
                    
                    38,451
                    
                    
                    
                    4.00
                    
                    
                    
                    57,677
                    
                    
                    
                    6.00
                    %Tier
      1 Capitalto
      Average AssetsConsolidated
                    
                    $
                    104,888
                    
                    
                    
                    8.70
                    %
                    
                    $
                    48,240
                    
                    
                    
                    4.00
                    %
                    
                    NA
                    
                    
                    NAColony
      Bank
                    
                    
                    103,986
                    
                    
                    
                    8.64
                    
                    
                    
                    48,135
                    
                    
                    
                    4.00
                    
                    
                    $
                    60,169
                    
                    
                    
                    5.00
                    %


23
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





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





The
parent company’s balance sheets as of September 30, 2008 and December 31, 2007
and the related statements of income and comprehensive income and cash flows are
as follows:





COLONY
BANKCORP, INC. (PARENT ONLY)


BALANCE
SHEETS


SEPTEMBER
30, 2008 AND DECEMBER 31, 2007





ASSETS
                
                September 30, 2008
                
                
                December 31, 2007(Unaudited)
                
                
                (Audited)Cash
                
                $
                203
                
                
                $
                973Premises
      and Equipment, Net
                
                
                1,328
                
                
                
                1,236Investment
      in Subsidiaries, at Equity
                
                
                105,963
                
                
                
                105,323Other
                
                
                425
                
                
                
                1,491Totals
      Assets
                
                $
                107,919
                
                
                $
                109,023LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDividends
      Payable
                
                $
                703
                
                
                $
                684Other
                
                
                181
                
                
                
                367884
                
                
                
                1,051Subordinated
      Debt
                
                
                24,229
                
                
                
                24,229Stockholders’
      EquityCommon
      Stock, Par Value $1 a Share; Authorized 20,000,000Shares, Issued 7,213,813
      and 7,200,913 Shares as of September 30, 2008 and December 31, 2007,
      Respectively
                
                
                7,214
                
                
                
                7,201Paid-In
      Capital
                
                
                24,561
                
                
                
                24,420Retained
      Earnings
                
                
                52,675
                
                
                
                52,087Restricted
      Stock - Unearned Compensation
                
                
                (275
                )
                
                
                (237
                )Accumulated
      Other Comprehensive Loss, Net of Tax
                
                
                (1,369
                )
                
                
                27282,806
                
                
                
                83,743Total
      Liabilities and Stockholders' Equity
                
                $
                107,919
                
                
                $
                109,023


24
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





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





COLONY
BANKCORP, INC. (PARENT ONLY)


STATEMENT
OF INCOME AND COMPREHENSIVE INCOME


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007


(UNAUDITED)





September 30, 2008
                
                
                September 30, 2007IncomeDividends
      from Subsidiaries
                
                $
                3,779
                
                
                $
                4,544Other
                
                
                71
                
                
                
                1303,850
                
                
                
                4,674ExpensesInterest
                
                
                951
                
                
                
                1,468Salaries
      and Employee Benefits
                
                
                708
                
                
                
                793Other
                
                
                1,036
                
                
                
                7312,695
                
                
                
                2,992Income
      Before Taxes and Equity in Undistributed Earnings of
      Subsidiaries
                
                
                1,155
                
                
                
                1,682Income
      Tax (Benefits)
                
                
                (763
                )
                
                
                (875
                )Income
      Before Taxes and Equity in Undistributed Earnings of
      Subsidiaries
                
                
                1,918
                
                
                
                2,557Equity
      in Undistributed Earnings of Subsidiaries
                
                
                781
                
                
                
                5,238Net
      Income
                
                
                2,699
                
                
                
                7,795Other
      Comprehensive Income, Net of TaxGains
      (Losses) on Securities Arising During Year
                
                
                (852
                )
                
                
                633Reclassification
      Adjustment
                
                
                (789
                )
                
                
                (121
                )Unrealized
      Gains (Losses) in Securities
                
                
                (1,641
                )
                
                
                512Comprehensive
      Income
                
                $
                1,058
                
                
                $
                8,307


25
 Table of Contents




Part
I (Continued)


Item 1
(Continued)





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





COLONY
BANKCORP, INC. (PARENT ONLY)


STATEMENT
OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007


(UNAUDITED)





2008
                
                
                2007Cash
      Flows from Operating ActivitiesNet
      Income
                
                $
                2,699
                
                
                $
                7,795Adjustments
      to Reconcile Net Income to Net Cash Provided from Operating
      ActivitiesDepreciation
      and Amortization
                
                
                215
                
                
                
                252Equity
      in Undistributed Earnings of Subsidiary
                
                
                (781
                )
                
                
                (5,238
                )Other
                
                
                844
                
                
                
                (214
                )2,977
                
                
                
                2,595Cash
      Flows from Investing ActivitiesCapital
      Infusion in Subsidiary
                
                
                (1,500
                )
                
                
                ---Purchases
      of Premises and Equipment
                
                
                (156
                )
                
                
                (45
                )Investment
      in Capital Trust
                
                
                ---
                
                
                
                (434
                )Liquidation
      of Statutory Trust
                
                
                ---
                
                
                
                279(1,656
                )
                
                
                (200
                )Cash
      Flows from Financing ActivitiesDividends
      Paid
                
                
                (2,091
                )
                
                
                (1,890
                )Proceeds
      from Issuance of Subordinated Debentures
                
                
                ---
                
                
                
                14,434Principal
      Payment on Subordinated Debentures
                
                
                ---
                
                
                
                (9,279
                )(2,091
                )
                
                
                3,265Net
      Increase in Cash
                
                
                (770
                )
                
                
                5,660Cash,
      Beginning
                
                
                973
                
                
                
                2,224Cash,
      Ending
                
                $
                203
                
                
                $
                7,884


26
 Table of Contents


Part
I (Continued)


Item 1
(Continued)





(19) Earnings Per
Share





SFAS No.
128 establishes standards for computing and presenting basic and diluted
earnings per share.  Basic earnings per share is calculated and
presented based on income available to common stockholders divided by the
weighted average number of shares outstanding during the reporting
periods.  Diluted earnings per share reflects the potential dilution
of restricted stock.  The following presents earnings per share for
the three months and nine months ended September 30, 2008 and 2007,
respectively, under the requirements of Statement 128:





Three
      Months Ended
                    
                    
                    Three
      Months EndedSeptember
      30, 2008
                    
                    
                    September
      30, 2007Common
                    
                    
                    
                    
                    
                    
                    
                    
                    CommonIncome
                    
                    
                    Shares
                    
                    
                    
                    
                    
                    Income
                    
                    
                    SharesNumerator
                    
                    
                    Denominator
                    
                    
                    EPS
                    
                    
                    Numerator
                    
                    
                    Denominator
                    
                    
                    EPSBasic
      EPSIncome
      Available to Common Stockholders
                    
                    $
                    194
                    
                    
                    
                    7,202
                    
                    
                    $
                    0.03
                    
                    
                    $
                    2,619
                    
                    
                    
                    7,194
                    
                    
                    $
                    0.36Dilutive
      Effect of Potential Common StockRestricted
      Stock
                    
                    
                    
                    
                    
                    
                    0
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8Diluted
      EPSIncome
      Available to Common StockholdersAfter
      Assumed Conversions of Dilutive Securities
                    
                    $
                    194
                    
                    
                    
                    7,202
                    
                    
                    $
                    0.03
                    
                    
                    $
                    2,619
                    
                    
                    
                    7,202
                    
                    
                    $
                    0.36








Nine
      Months Ended
                    
                    
                    Nine
      Months EndedSeptember
      30, 2008
                    
                    
                    September
      30, 2007Common
                    
                    
                    
                    
                    
                    
                    
                    
                    CommonIncome
                    
                    
                    Shares
                    
                    
                    
                    
                    
                    Income
                    
                    
                    SharesNumerator
                    
                    
                    Denominator
                    
                    
                    EPS
                    
                    
                    Numerator
                    
                    
                    Denominator
                    
                    
                    EPSBasic
      EPSIncome
      Available to Common Stockholders
                    
                    $
                    2,699
                    
                    
                    
                    7,197
                    
                    
                    $
                    0.38
                    
                    
                    $
                    7,795
                    
                    
                    
                    7,188
                    
                    
                    $
                    1.08Dilutive
      Effect of Potential Common StockRestricted
      Stock
                    
                    
                    
                    
                    
                    
                    0
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10Diluted
      EPSIncome
      Available to Common StockholdersAfter
      Assumed Conversions of Dilutive Securities
                    
                    $
                    2,699
                    
                    
                    
                    7,197
                    
                    
                    $
                    0.38
                    
                    
                    $
                    7,795
                    
                    
                    
                    7,198
                    
                    
                    $
                    1.08


27
 Table of Contents




Part
I (Continued)


Item 2





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





Forward-Looking
Statements and Factors that Could Affect Future Results





Certain
statements contained in this Quarterly 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), not withstanding
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.





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





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





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





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


28
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





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





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





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





The
Company





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





Application
of Critical Accounting Policies and Accounting Estimates





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





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





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





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





Goodwill and Other Intangibles
– The Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair value 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.


29
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Overview





The
following discussion and analysis presents the more significant factors
affecting the Company’s financial condition as of September 30, 2008 and
December 31, 2007, and results of operations for each of three months and nine
months in the periods ended September 30, 2008 and 2007.  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 $0.19 million,
or $0.03 diluted per common share, in three months ended September 30, 2008
compared to $2.62 million, or $0.36 diluted per common share, in three months
ended September  30, 2007 and net income totaled $2.70 million, or
$0.38 diluted per common share in nine months ended September 30, 2008 compared
to $7.80 million, or $1.08 diluted per common share in nine months ended
September 30, 2007.





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





Three
      Months Ended
                                
                                
                                Nine
      Months EndedSeptember
      30
                                
                                
                                September
      302008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007Taxable-equivalent
      net interest income
                                
                                $
                                9,578
                                
                                
                                $
                                10,885
                                
                                
                                $
                                28,396
                                
                                
                                $
                                32,331Taxable-equivalent
      adjustment
                                
                                
                                93
                                
                                
                                
                                92
                                
                                
                                
                                263
                                
                                
                                
                                262Net
      interest income
                                
                                
                                9,485
                                
                                
                                
                                10,793
                                
                                
                                
                                28,133
                                
                                
                                
                                32,069Provision
      for possible loan losses
                                
                                
                                3,370
                                
                                
                                
                                850
                                
                                
                                
                                8,512
                                
                                
                                
                                2,678Noninterest
      income
                                
                                
                                1,780
                                
                                
                                
                                1,846
                                
                                
                                
                                7,185
                                
                                
                                
                                6,012Noninterest
      expense
                                
                                
                                7,813
                                
                                
                                
                                7,756
                                
                                
                                
                                23,284
                                
                                
                                
                                23,630Income
      before income taxes
                                
                                
                                82
                                
                                
                                
                                4,033
                                
                                
                                
                                3,522
                                
                                
                                
                                11,773Income
      Taxes
                                
                                
                                (112
                                )
                                
                                
                                1,414
                                
                                
                                
                                823
                                
                                
                                
                                3,978Net
      income
                                
                                $
                                194
                                
                                
                                $
                                2,619
                                
                                
                                $
                                2,699
                                
                                
                                $
                                7,795Net
      Income per common share:Basic
                                
                                $
                                0.03
                                
                                
                                $
                                0.36
                                
                                
                                $
                                0.38
                                
                                
                                $
                                1.08Diluted
                                
                                $
                                0.03
                                
                                
                                $
                                0.36
                                
                                
                                $
                                0.38
                                
                                
                                $
                                1.08Return
      on average assets
                                
                                
                                0.06
                                %
                                
                                
                                0.87
                                %
                                
                                
                                0.30
                                %
                                
                                
                                0.87
                                %Return
      on average equity
                                
                                
                                0.93
                                %
                                
                                
                                12.87
                                %
                                
                                
                                4.24
                                %
                                
                                
                                13.07
                                %


30
 Table of Contents




Part
I (Continued)


Item 2
(Continued)





Net
income for three months ended September 30, 2008 decreased $2.43 million, or
92.59 percent, compared to the same period in 2007.  The decrease was
primarily the result of a $1.31 million decrease in net interest income, a
decrease of $0.07 million in noninterest income, an increase of $2.52 million in
provision for possible loan losses, a decrease of $1.53 million in income
taxes  and an increase of $0.06 million in noninterest
expense.





Net
income for nine months ended September 30, 2008 decreased $5.10 million, or
65.38 percent compared to the same period in 2007.  The decrease was
primarily the result of a decrease of $3.94 million in net interest income, an
increase of $1.17 million in noninterest income, an increase of $5.83 million in
provision for possible loan losses, a decrease of $3.15 million in income taxes
and a decrease of $0.35 million in noninterest expense.





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





Net
Interest Income





Net
interest income is the difference between interest income on earning assets,
such as loans and securities, and interest expense on liabilities, such as
deposits and borrowings, which are used to fund those assets. Net interest
income is the Company’s largest source of revenue, representing 79.66 percent of
total revenue for nine months ended September 30, 2008 and 84.21 percent for the
same period a year ago.





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 4.00 percent to 8.25 percent during 2001 to
2007.  At year end 2007, the prime rate was 7.25 percent and with the
225 basis point reduction during the first half of 2008 the prime rate ended the
quarter at 5.00 percent.  The federal funds rate moved similar to
prime rate with interest rates ranging from 1.00 percent to 5.25 percent during
2001 to 2007.  At year end 2007, the federal funds rate was 4.25
percent and with the 225 basis point reduction during the first nine months of
2008 the federal funds rate ended the quarter at 2.00 percent.  We
anticipate the Federal Reserve lowering rates during fourth quarter 2008 due to
recessionary fears with a bias toward tightening policy the last half of
2009.





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.


31
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Rate/Volume
Analysis





The
rate/volume analysis presented hereafter illustrates the change from September
30, 2007 to September 30, 2008 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 September 30, 2007 to September 30, 2008 (1)($
      in thousands)
                            
                            Volume
                            
                            
                            Rate
                            
                            
                            TotalInterest
      IncomeLoans,
      Net-taxable
                            
                            $
                            692
                            
                            
                            $
                            (10,212
                            )
                            
                            $
                            (9,520
                            )Investment
      SecuritiesTaxable
                            
                            
                            228
                            
                            
                            
                            132
                            
                            
                            
                            360Tax-exempt
                            
                            
                            (61
                            )
                            
                            
                            13
                            
                            
                            
                            (48
                            )Total
      Investment Securities
                            
                            
                            167
                            
                            
                            
                            145
                            
                            
                            
                            312Interest-Bearing
      Deposits in other Banks
                            
                            
                            (53
                            )
                            
                            
                            (31
                            )
                            
                            
                            (84
                            )Federal
      Funds Sold
                            
                            
                            (714
                            )
                            
                            
                            (226
                            )
                            
                            
                            (940
                            )Other
      Interest - Earning Assets
                            
                            
                            31
                            
                            
                            
                            (3
                            )
                            
                            
                            28Total
      Interest Income
                            
                            
                            123
                            
                            
                            
                            (10,327
                            )
                            
                            
                            (10,204
                            )Interest
      ExpenseInterest-Bearing
      Demand and Savings Deposits
                            
                            
                            126
                            
                            
                            
                            (992
                            )
                            
                            
                            (866
                            )Time
      Deposits
                            
                            
                            (1,760
                            )
                            
                            
                            (3,761
                            )
                            
                            
                            (5,521
                            )Federal
      Funds Purchased
                            
                            
                            435
                            
                            
                            
                            (192
                            )
                            
                            
                            243Subordinated
      Debentures
                            
                            
                            (45
                            )
                            
                            
                            (472
                            )
                            
                            
                            (517
                            )Other
      Borrowed Money
                            
                            
                            632
                            
                            
                            
                            (239
                            )
                            
                            
                            393Total
      Interest Expense
                            
                            
                            (612
                            )
                            
                            
                            (5,656
                            )
                            
                            
                            (6,268
                            )Net
      Interest Income
                            
                            $
                            735
                            
                            
                            $
                            (4,671
                            )
                            
                            $
                            (3,936
                            )





(1)
            Changes
      in net interest income for the periods, based on either changes in average
      balances or changes in average rates for interest-earning assets and
      interest-bearing liabilities, are shown on this table. During each year,
      there are numerous and simultaneous balance and rate changes; therefore,
      it is not possible to precisely allocate the changes between balances and
      rates. For the purpose of this table, changes that are not exclusively due
      to balance changes or rate changes have been attributed to
      rates.





Our
financial performance is impacted by, among other factors, interest rate risk
and credit risk. We do not utilize derivatives to mitigate our interest rate or
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. This 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 of
alternative strategies or changes in balance sheet structure.


32
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Interest
rates play a major part in the net interest income of financial institutions.
The repricing of interest earning 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 0.80 to 1.20.





Our
exposure to interest rate risk is reviewed on at least a semiannual basis 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. We are generally focusing our
investment activities on securities with terms or average lives in the 2-7year
range.





The
Company maintains approximately 38 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 certificate of deposits that mature within one year. This balance
sheet composition has allowed the Company to be relatively constant with its net
interest margin the past several years, though the unprecedented 475basis point decrease by
U.S. Federal Reserve in 2001, 50 basis point decrease in 2002 and 25 basis point
decrease in 2003 resulted in significant net interest margin pressure. During
2004 and 2005, interest rates increased 125 basis points and 200 basis points
respectively, while another 100 basis point increase occurred during 2006,
resulting in stable net interest margins.  The 100 basis point
decrease by the Federal Reserve in 2007 followed by 225 basis point decrease in
first half 2008 resulted in significant pressure on net interest margins
again.  Net interest margin decreased to 3.34 percent for nine months
ended September 30, 2008 compared to 3.79 percent for the same period a year
ago. We anticipate margin compression the balance of 2008 given the Federal
Reserve’s present interest rate forecast of lowering rates the balance of
2008.





Taxable-equivalent
net interest income for nine months ended September 30, 2008 decreased $3.94
million, or 12.17 percent compared to the same period a year ago. The
fluctuation between the comparable periods resulted from the negative impact of
the significant decrease in interest rates.  The average volume of
earning assets during nine months ended September 30, 2008 decreased almost
$3.22 million compared to the same period a year ago while over the same period
the net interest margin decreased by 45 basis points from
3.79  percent to 3.34 percent.  Growth in average earning
assets during 2008 and 2007 was primarily in loans.  The decrease in
the net interest margin in 2008 was primarily the result of the general decrease
in market interest rates and sluggish loan activity.





The
average volume of loans increased $10.7 million in nine months ended September
30, 2008 compared to the same period a year ago.  The average yield on
loans decreased 142 basis points in nine months ended September 30, 2008
compared to the same period a year ago. Funding for this growth was primarily
provided by other borrowed money and reduction in Federal funds
sold.  The average volume of deposits decreased $37.9 million in nine
months ended September 30, 2008 compared to the same period a year ago, with
interest-bearing deposits decreasing $37.1 million in nine months ended
September 30, 2008.  Accordingly, the ratio of average
interest-bearing deposits to total average deposits was 92.4 percent in nine
months ended September 30, 2008 compared to 92.6 percent in the same period a
year ago.    This deposit mix, combined with a general
decrease in market rates, had the effect of (i) decreasing the average cost of
total deposits by 70 basis points in nine months ended September 30, 2008
compared to the same period a year ago and, (ii) mitigating a portion of the
impact of decreasing yields on earning assets.





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 2.98 percent in nine months ended September
30, 2008 compared to 3.38 percent in the same period a year ago. 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 Market Risk included elsewhere in this
report.





Provision
for Loan Losses





The
provision for loan losses is determined by management as the amount to be added
to the allowance for loan losses after net charge-offs have been deducted to
bring the allowance to a level which, in management’s best estimate, is
necessary to absorb probable losses within the existing loan portfolio. The
provision for loan losses totaled $8.51 million in nine months ended
September  30, 2008 compared to $2.68 million in the same period a
year ago.   See the section captioned “Allowance for Loan Losses”
elsewhere in this discussion for further analysis of the provision for loan
losses.


33
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Noninterest
Income





The
components of noninterest income were as follows:





Three
      Months Ended
                        
                        
                        Nine
      Months EndedSeptember
      30
                        
                        
                        September
      302008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Service
      Charges on Deposit Accounts
                        
                        $
                        1,233
                        
                        
                        $
                        1,224
                        
                        
                        $
                        3,571
                        
                        
                        $
                        3,556Other
      Charges, Commissions and Fees
                        
                        
                        240
                        
                        
                        
                        218
                        
                        
                        
                        735
                        
                        
                        
                        703Other
                        
                        
                        128
                        
                        
                        
                        181
                        
                        
                        
                        1,173
                        
                        
                        
                        806Mortgage
      Fee Income
                        
                        
                        168
                        
                        
                        
                        225
                        
                        
                        
                        511
                        
                        
                        
                        763Securities
      Gaines (Losses)
                        
                        
                        11
                        
                        
                        
                        (2
                        )
                        
                        
                        1,195
                        
                        
                        
                        184Total
                        
                        $
                        1,780
                        
                        
                        $
                        1,846
                        
                        
                        $
                        7,185
                        
                        
                        $
                        6,012





Total
noninterest income for three months ended September 30, 2008 decreased $66
thousand, or 3.58 percent compared to the same period a year ago. Total
noninterest income for nine months ended September 30, 2008 increased $1.17
million, or 19.51 percent, compared to the same year ago
period.  Growth in noninterest income was primarily in other income
and securities gains.  Changes in these items and the other components
of noninterest income are discussed in more detail below.





Service Charges on Deposit
Accounts.  Service charges on deposit accounts for three months
ended September 30, 2008 increased $9  thousand, or 0.74 percent,
compared to the same period a year ago.   Service charges on
deposit accounts for the nine months ended September 30, 2008 increased $15
thousand, or 0.42 percent, compared to the same year ago period.





Mortgage Fee
Income.  Mortgage fee income for three months ended September
30, 2008 decreased $57 thousand, or 25.33 percent, compared to the same period
year ago.   Mortgage fee income for nine months ended September
30, 2008 decreased $252 thousand, or 33.03 percent, compared to the same year
ago period.  The company anticipates fee income to continue to show a
decrease over the previous year due to the current mortgage market and slowing
economy.





All Other Noninterest
Income.  Other charges, commissions and fees and other income
for three months ended September 30, 2008 was $368 thousand compared to $399
thousand in the same year ago period, or a decrease of 7.77
percent.  Other charges, commissions and fees, and other income for
nine months ended September 30, 2008 was $1.91 million compared to $1.51 million
in the same year ago period, or an increase of 26.44 percent.  The
significant increase was gains realized of $670 thousand resulting from the
Company’s unwinding of its position in $19 million FHLB advances during second
quarter 2008.





Securities
Gains.  The Company realized gains from the sale of securities
of $11 thousand in three months ended September 30, 2008  compared to
$(2) thousand loss in the same year ago period and realized gains from the sale
of securities of $1.2 million in nine  months ended September 30, 2008
compared to $184 thousand in the same year ago period.  The sale of
securities in 2008 allowed the Company to restructure its balance sheet by
selling short-term securities that were likely to be called or experience higher
paydowns on mortgage-backed securities and reinvest into longer-term securities
at attractive yields.





Noninterest
Expense





The
components of noninterest expense were as follows:





Three
      Months Ended
                    
                    
                    Nine
      Months EndedSeptember 30
                    
                    
                    September 302008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Salaries
      and Employee Benefits
                    
                    $
                    4,051
                    
                    
                    $
                    4,464
                    
                    
                    $
                    12,483
                    
                    
                    $
                    13,693Occupancy
      and Equipment
                    
                    
                    1,098
                    
                    
                    
                    1,025
                    
                    
                    
                    3,166
                    
                    
                    
                    3,036Other
                    
                    
                    2,664
                    
                    
                    
                    2,267
                    
                    
                    
                    7,635
                    
                    
                    
                    6,901Total
                    
                    $
                    7,813
                    
                    
                    $
                    7,756
                    
                    
                    $
                    23,284
                    
                    
                    $
                    23,630


34
 Table of Contents




Part
I (Continued)


Item 2
(Continued)





Total
noninterest expense for three months ended September 30, 2008 increased $57
thousand, or 0.73 percent, compared to the same period a year ago. Total
noninterest expense for nine months ended September 30, 2008 decreased $346
thousand, or 1.46 percent, compared to the same period a year
ago.  These items and the changes in the various components of
noninterest expense are discussed in more detail below.





Salaries and Employee
Benefits.  Salaries and employee benefits expense for three
months ended September 30, 2008 decreased $413  thousand, or 9.25
percent, compared to the same period a year ago.  Salaries and
employee benefits expense for the nine months ended September 30, 2008 decreased
$1.21 million, or 8.84 percent, compared to the same year ago
period.  The  slowing economy and lack of growth resulted in
decreases in headcount as a result of normal attrition in both
periods.  In addition the bonus accrual for 2008 was adjusted as
projected payouts based on company performance are significantly below incentive
plan targeted goals.  These two areas are the primary factors for the
decreased salary and employee benefits for the comparable periods.





Occupancy and
Equipment.  Occupancy and equipment expense has remained
relatively flat in both periods with an increase of
$73   thousand for three months ended September 30, 2008 compared
to the same year ago period and an increase of $130 thousand for nine months
ended September 30, 2008 compared to the same year ago period.





All Other Non-Interest
Expense.  All other noninterest expense for three months ended
September 30, 2008 increased $397 thousand, or 17.51 percent compared to the
same year ago period.  All other noninterest expense for nine months
ended September 30, 2008 increased $734 thousand, or 10.64 percent compared to
the same year ago period.  Significant increases impacting the
comparable periods include the FDIC insurance assessment and consultation
expenses.  For the nine months ended September 30, 2008, FDIC
insurance assessments increased to $421 thousand from $129 thousand in the same
year ago period, or an increase of 226.36 percent and consultation expense
increased to $682 thousand from $253 thousand, or an increase of 169.57
percent.  FDIC insurance premiums for the entire banking industry have
been adjusted up by FDIC to reflect the insurance assessment increase, while the
Company has engaged a consulting company to assist in a total bank performance
assessment that accounts for the increase in consultation
expenses.  This assessment should result in enhanced revenue and
operational cost reduction as the Company moves toward a centralized operational
process.





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 $1.194   billion in nine months ended
September 30, 2008 compared to $1.201 billion in nine months ended September 30,
2007.





Nine
      Months EndedSeptember
      30,Sources
      of Funds:
                            
                            2008
                            
                            
                            2007Deposits:Noninterest-Bearing
                            
                            $
                            74,749
                            
                            
                            
                            6.26
                            %
                            
                            $
                            75,553
                            
                            
                            
                            6.29
                            %Interest-Bearing
                            
                            
                            909,744
                            
                            
                            
                            76.18
                            
                            
                            
                            946,877
                            
                            
                            
                            78.86Federal
      Funds Purchased and Repo Agreements
                            
                            
                            12,207
                            
                            
                            
                            1.02
                            
                            
                            
                            1,258
                            
                            
                            
                            0.11Long-term
      Debt and Other Borrowings
                            
                            
                            107,091
                            
                            
                            
                            8.97
                            
                            
                            
                            88,693
                            
                            
                            
                            7.39Other
      Noninterest-Bearing Liabilities
                            
                            
                            5,494
                            
                            
                            
                            0.46
                            
                            
                            
                            8,818
                            
                            
                            
                            0.73Equity
      Capital
                            
                            
                            84,967
                            
                            
                            
                            7.11
                            
                            
                            
                            79,518
                            
                            
                            
                            6.62Total
                            
                            $
                            1,194,252
                            
                            
                            
                            100.00
                            %
                            
                            $
                            1,200,717
                            
                            
                            
                            100.00
                            %Uses
      of Funds:Loans
                            
                            $
                            936,483
                            
                            
                            
                            78.41
                            %
                            
                            $
                            930,538
                            
                            
                            
                            77.50
                            %Securities
                            
                            
                            160,671
                            
                            
                            
                            13.45
                            
                            
                            
                            155,658
                            
                            
                            
                            12.96Federal
      Funds Sold
                            
                            
                            12,518
                            
                            
                            
                            1.05
                            
                            
                            
                            30,762
                            
                            
                            
                            2.56Interest-Bearing
      Deposits in Other Banks
                            
                            
                            1,529
                            
                            
                            
                            0.13
                            
                            
                            
                            2,943
                            
                            
                            
                            0.25Other
      Interest-Earning Assets
                            
                            
                            5,951
                            
                            
                            
                            0.50
                            
                            
                            
                            5,233
                            
                            
                            
                            0.44Other
      Noninterest-Earning Assets
                            
                            
                            77,100
                            
                            
                            
                            6.46
                            
                            
                            
                            75,583
                            
                            
                            
                            6.29Total
                            
                            $
                            1,194,252
                            
                            
                            
                            100.00
                            %
                            
                            $
                            1,200,717
                            
                            
                            
                            100.00
                            %





35
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





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 92.41
percent of total average deposits in nine  months ended September 30,
2008 compared to 92.61 percent in the same period a year ago.





The
Company primarily invests funds in loans and securities.  Loans
continue to be the largest component of the Company’s mix of invested
assets.  Total loans were $970.7 million at September 30, 2008, up
2.69 percent, compared to loans of $945.3 million at December 31,
2007.  See additional discussion regarding the Company’s loan
portfolio in the section captioned “Loans” included elsewhere in this
discussion.  The majority of funds provided by deposit growth have
been invested in loans.





Loans





The
following table presents the composition of the Company’s loan portfolio as of
September 30, 2008 and December 31, 2007:





September 30, 2008
                  
                  
                  December 31, 2007Commercial,
      Financial and Agricultural
                  
                  $
                  90,105
                  
                  
                  $
                  52,323Real
      EstateConstruction
                  
                  
                  164,092
                  
                  
                  
                  211,484Mortgage,
      Farmland
                  
                  
                  58,254
                  
                  
                  
                  42,439Mortgage,
      Other
                  
                  
                  593,564
                  
                  
                  
                  544,655Consumer
                  
                  
                  44,012
                  
                  
                  
                  72,350Other
                  
                  
                  20,655
                  
                  
                  
                  22,028970,682
                  
                  
                  
                  945,279Unearned
      Interest and Fees
                  
                  
                  (226
                  )
                  
                  
                  (301
                  )Allowance
      for Loan Losses
                  
                  
                  (17,952
                  )
                  
                  
                  (15,513
                  )Loans
                  
                  $
                  952,504
                  
                  
                  $
                  929,465





The
following table presents total loans as of September 30, 2008 according to
maturity distribution and/or repricing opportunity on adjustable rate
loans:





Maturity and Repricing
      Opportunity
                    
                    ($ in Thousands)One
      Year or Less
                    
                    $
                    611,916After
      One Year through Three Years
                    
                    
                    289,034After
      Three Years through Five Years
                    
                    
                    58,189Over
      Five Years
                    
                    
                    11,543$
                    970,682





Overview. Loans totaled
$970.7 million at September 30, 2008, up 2.69 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.  Real estate-other, which is
primarily 1-4 family residential properties and nonfarm nonresidential
properties, made up 61.15 percent and 57.62 percent of total loans, real estate
construction made up 16.90 percent and 22.37 percent, while commercial,
financial and agricultural made up 9.28 percent and 5.54 percent of total loans
at September 30, 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 bank
level.  The Company utilizes a Senior Credit 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
bank.  Overall, loans are extended after a review of the borrower’s
repayment ability, collateral adequacy, and overall credit
worthiness.





Commercial
purpose, commercial real estate, and 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.


36
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





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





The
Company originates consumer loans at the bank level.  Due to the
diverse economic markets served by the Company, underwriting criterion may vary
slightly by bank.  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 that helps minimize
risk.  Additionally, consumer trends and outlook reports are reviewed
by management on a regular basis.





The
Company maintains an independent 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
September 30, 2008 increased 72.21  percent from December 31,
2007 to $90 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.





Collateral
Concentrations.  Lending is concentrated in commercial and real
estate loans 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 addition, 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 borrower’s ability to honor their contracts is dependent
upon the viability of the real estate economic sector.  Problem loans
are centered primarily in land development in our larger MSA
markets.  Charge-offs in 2008 are primarily the result of declining
collateral real estate values that secure land development, construction and
speculative real estate loans in our larger MSA markets.





Large Credit Relationships.
  Colony is currently in eighteen counties in middle and south Georgia
which include metropolitan markets in Doughtery, 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 Senior 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 period end.




September
      30, 2008
                    
                    
                    December
      31, 2007Period
      End Balances
                    
                    
                    
                    
                    
                    Period
      End BalancesNumber
      of
                    
                    
                    
                    
                    
                    
                    
                    
                    Number
      ofRelationships
                    
                    
                    Committed
                    
                    
                    Outstanding
                    
                    
                    Relationships
                    
                    
                    Committed
                    
                    
                    OutstandingLarge
      Credit Relationships:$10
      million and greater
                    
                    2
                    
                    
                    $
                    30,156
                    
                    
                    $
                    21,034
                    
                    
                    3
                    
                    
                    $
                    38,957
                    
                    
                    $
                    23,441$5
      million to $9.9 million
                    
                    10
                    
                    
                    $
                    62,879
                    
                    
                    $
                    61,320
                    
                    
                    15
                    
                    
                    $
                    92,595
                    
                    
                    $
                    89,677


37
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Maturities and Sensitivities of
Loans to Changes in Interest Rates.  The following table
presents the maturity distribution of the Company’s loans at September 30, 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
                  
                  $
                  249,644
                  
                  
                  $
                  284,818
                  
                  
                  $
                  58,176
                  
                  
                  $
                  11,209
                  
                  
                  $
                  603,847Loans
      with floating interest rates
                  
                  
                  362,272
                  
                  
                  
                  4,216
                  
                  
                  
                  13
                  
                  
                  
                  334
                  
                  
                  
                  366,835Total
                  
                  $
                  611,916
                  
                  
                  $
                  289,034
                  
                  
                  $
                  58,189
                  
                  
                  $
                  11,543
                  
                  
                  $
                  970,682





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.





Non-Performing
Assets and Potential Problem Loans





Non-performing
assets and accruing past due loans as of September 30, 2008 and December 31,
2007 were as follows:





September
      30, 2008
                
                
                December
      31, 2007Loans
      accounted for on nonaccrual
                
                $
                29,667
                
                
                $
                14,956Loans
      past due 90 days or more
                
                
                20
                
                
                
                60Other
      real estate foreclosed
                
                
                4,756
                
                
                
                1,332Total
      non-performing assets
                
                $
                34,443
                
                
                $
                16,348Non-performing
      assets as a percentage of:Total
      loans and foreclosed assets
                
                
                3.53
                %
                
                
                1.73
                %Total
      assets
                
                
                2.83
                %
                
                
                1.35
                %Accruing
      past due loans:30-89
      days past due
                
                $
                18,480
                
                
                $
                15,68190
      or more days past due
                
                
                20
                
                
                
                60Total
      accruing past due loans
                
                $
                18,500
                
                
                $
                15,741





Non-performing
assets include non-accrual loans, loans past due 90 days or more, restructured
loans and foreclosed real estate.  Non-performing assets at September
30, 2008 increased 110.69 percent from December 31, 2007.





Generally,
loans are placed on non-accrual 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 non-accrual 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.





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





Foreclosed
assets represent property acquired as the result of borrower defaults on loans.
Foreclosed assets are recorded at the lower of cost or 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.


38
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Allowance
for Loan Losses





The
allowance for loan losses is a reserve established through a provision for loan
losses charged to expense, which represents management’s best estimate of
probable losses that have been incurred within the existing portfolio of loans.
The allowance, in the judgment of management, is necessary to reserve for
estimated loan losses and risks inherent in the loan portfolio.





The
allowance for loan losses includes allowance allocations calculated in
accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS 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 loan losses
consists of specific valuation allowances established for probable losses on
specific loans and historical valuation allowances for other loans with similar
risk characteristics.





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





Historical
valuation allowances are calculated from loss factors applied to loans with
similar risk characteristics.  The loss factors are based on loss
ratios for groups of loans with similar risk characteristics.  The
loss ratios are derived from the proportional relationship between actual loan
losses and the total population of loans in the risk category.  The
historical loss ratios are periodically updated based on actual charge-off
experience.  The Company’s groups of similar loans include similarly
risk-graded groups of loans not reviewed for individual impairment.





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.





September
      30, 2008
                
                
                December
      31, 2007Reserve
                
                
                
                %
                *
                
                Reserve
                
                
                
                %
                *Commercial,
      Financial and Agricultural
                
                $
                5,116
                
                
                
                9
                %
                
                $
                3,645
                
                
                
                6
                %Real
      Estate – Construction
                
                
                2,962
                
                
                
                17
                %
                
                
                2,560
                
                
                
                22
                %Real
      Estate – Farmland
                
                
                718
                
                
                
                6
                %
                
                
                621
                
                
                
                4
                %Real
      Estate – Other
                
                
                6,283
                
                
                
                61
                %
                
                
                5,430
                
                
                
                58
                %Loans
      to Individuals
                
                
                1,885
                
                
                
                5
                %
                
                
                2,404
                
                
                
                8
                %All
      other Loans
                
                
                988
                
                
                
                2
                %
                
                
                853
                
                
                
                2
                %Total
                
                $
                17,952
                
                
                
                100
                %
                
                $
                15,513
                
                
                
                100
                %





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


39
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





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.





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





Three
      Months Ended
                      
                      
                      Three
      Months Ended($ in thousands)
                      
                      September 30, 2008
                      
                      
                      September 30, 2007Allowance
      for Loan Losses at Beginning of Quarter
                      
                      $
                      17,466
                      
                      
                      $
                      12,647Charge-OffCommercial,
      Financial and Agricultural
                      
                      
                      682
                      
                      
                      
                      139Real
      Estate
                      
                      
                      1,906
                      
                      
                      
                      188Consumer
                      
                      
                      455
                      
                      
                      
                      118All
      Other
                      
                      
                      33
                      
                      
                      
                      413,076
                      
                      
                      
                      486RecoveriesCommercial,
      Financial and Agricultural
                      
                      
                      7
                      
                      
                      
                      74Real
      Estate
                      
                      
                      148
                      
                      
                      
                      710Consumer
                      
                      
                      37
                      
                      
                      
                      18All
      Other
                      
                      
                      --
                      
                      
                      
                      8192
                      
                      
                      
                      810Net
      Charge-Offs (recoveries)
                      
                      
                      2,884
                      
                      
                      
                      (324
                      )Provision
      for Loan Losses
                      
                      
                      3,370
                      
                      
                      
                      850Allowance
      for Loan Losses at End of Quarter
                      
                      $
                      17,952
                      
                      
                      $
                      13,821Ratio
      of Net Charge-Offs (recoveries) to Average Loans
                      
                      
                      0.30
                      %
                      
                      
                      (0.03
                      )%





The
allowance for loan losses is maintained at a level considered appropriate by
management, based on estimated probable losses within the existing loan
portfolio. The allowance, in the judgment of management, is necessary to reserve
for estimated loan losses and risks inherent in the loan portfolio. The
provision for loan losses reflects loan quality trends, including the level of
net charge-offs or recoveries, among other factors. The provision for loan
losses increased $2.52 million from $850 thousand in three months ended
September 30, 2007.  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
2007.  Nonperforming assets as a percentage of total loans and
foreclosed assets increased to 3.53 percent at September 30, 2008 compared to
0.76 percent at September 30, 2007 and 1.73 percent at December 31,
2007.





Net
charge-offs in three months ended September 30, 2008 increased $3.21 million
compared to the same period a year ago.  Net charge-offs of 0.30
percent for third quarter 2008 annualizes to 1.20 percent for the
year.  Net charge-offs the past three years have averaged 0.30
percent; however, we will exceed that level in 2008 as many problem credits are
now being brought to resolution in this challenging credit
environment.





Management
believes the level of the allowance for loan losses was appropriate as of
September 30, 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 loan losses.


40
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





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





Nine
      Months Ended
                      
                      
                      Nine
      Months Ended($ in thousands)
                      
                      September 30, 2008
                      
                      
                      September 30, 2007Allowance
      for Loan Losses at Beginning of Period
                      
                      $
                      15,513
                      
                      
                      $
                      11,989Charge-OffCommercial,
      Financial and Agricultural
                      
                      
                      1,344
                      
                      
                      
                      664Real
      Estate
                      
                      
                      4,420
                      
                      
                      
                      846Consumer
                      
                      
                      685
                      
                      
                      
                      314All
      Other
                      
                      
                      85
                      
                      
                      
                      1476,534
                      
                      
                      
                      1,971RecoveriesCommercial,
      Financial and Agricultural
                      
                      
                      66
                      
                      
                      
                      96Real
      Estate
                      
                      
                      271
                      
                      
                      
                      915Consumer
                      
                      
                      105
                      
                      
                      
                      89All
      Other
                      
                      
                      19
                      
                      
                      
                      25461
                      
                      
                      
                      1,125Net
      Charge-Offs
                      
                      
                      6,073
                      
                      
                      
                      846Provision
      for Loan Losses
                      
                      
                      8,512
                      
                      
                      
                      2,678Allowance
      for Loan Losses at End of Period
                      
                      $
                      17,952
                      
                      
                      $
                      13,821Ratio
      of Net Charge-Offs to Average Loans
                      
                      
                      0.64
                      %
                      
                      
                      0.09
                      %





The
allowance for loan losses is maintained at a level considered appropriate by
management, based on estimated probable losses within the existing loan
portfolio. The allowance, in the judgment of management, is necessary to reserve
for estimated loan losses and risks inherent in the loan portfolio. The
provision for loan losses reflects loan quality trends, including the level of
net charge-offs or recoveries, among other factors. The provision for loan
losses increased $5.83 million from $2.68 million in nine months ended September
30, 2007 to $8.51 million in nine months ended September 30,
2008.  Provisions increased during 2008 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 2007.





Net
charge-offs in nine months ended September 30, 2008 increased $5.23 million
compared to the same period a year ago.  Net charge-offs of 0.64
percent year to date 2008 that annualizes to 0.85 percent is above our net
charge-off ratio for the past several years. We anticipate annual net
charge-offs to be in the 0.85 to 1.00 percent range for 2008.


41
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Investment
Portfolio





The
following table presents carrying values of investment securities held by the
Company as of September 30, 2008 and December 31, 2007.





($ in thousands)
                  
                  September 30, 2008
                  
                  
                  December 31, 2007U.S.
      Government Agencies
                  
                  $
                  650
                  
                  
                  $
                  37,096State,
      County and Municipal
                  
                  
                  9,533
                  
                  
                  
                  13,983Corporate
      Obligations
                  
                  
                  6,009
                  
                  
                  
                  5,787Asset-Backed
      Securities
                  
                  
                  656
                  
                  
                  
                  1,00016,848
                  
                  
                  
                  57,866Marketable
      Equity Securities
                  
                  
                  --
                  
                  
                  
                  2Mortgage
      Backed Securities
                  
                  
                  155,080
                  
                  
                  
                  109,323Total
      Investment Securities andMortgage
      Backed Securities
                  
                  $
                  171,928
                  
                  
                  $
                  167,191





The
following table represents maturities and weighted-average yields of investment
securities held by the Company as of September  30,
2008.  (Mortgage backed securities are based on the average life at
the projected speed, while Agencies, State and Political
subdivisions  and Corporates 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
                    
                    
                    YieldU.
      S. Government Agencies
                    
                    $
                    650
                    
                    
                    
                    3.75
                    %
                    
                    $
                    ---
                    
                    
                    
                    ---
                    %
                    
                    $
                    ---
                    
                    
                    
                    ---
                    %
                    
                    $
                    ---
                    
                    
                    
                    ---
                    %Mortgage
      Backed Securities
                    
                    
                    9,845
                    
                    
                    
                    4.34
                    
                    
                    
                    139,486
                    
                    
                    
                    4.86
                    
                    
                    
                    5,749
                    
                    
                    
                    5.17
                    
                    
                    
                    ---
                    
                    
                    
                    ---State,
      County and Municipal
                    
                    
                    1,155
                    
                    
                    
                    4.83
                    
                    
                    
                    3,148
                    
                    
                    
                    5.86
                    
                    
                    
                    3,737
                    
                    
                    
                    5.65
                    
                    
                    
                    1,493
                    
                    
                    
                    5.29Corporate
      Obligations
                    
                    
                    2,132
                    
                    
                    
                    8.36
                    %
                    
                    
                    2,137
                    
                    
                    
                    5.41
                    
                    
                    
                    1,041
                    
                    
                    
                    5.67
                    
                    
                    
                    699
                    
                    
                    
                    5.95Asset-Backed
      Securities
                    
                    
                    ---
                    
                    
                    
                    ---
                    
                    
                    
                    ---
                    
                    
                    
                    ---
                    
                    
                    
                    ---
                    
                    
                    
                    ---
                    
                    
                    
                    656
                    
                    
                    
                    6.33Total
      Investment Portfolio
                    
                    $
                    13,782
                    
                    
                    
                    4.98
                    %
                    
                    $
                    144,771
                    
                    
                    
                    4.89
                    %
                    
                    $
                    10,527
                    
                    
                    
                    5.39
                    %
                    
                    $
                    2,848
                    
                    
                    
                    5.69
                    %





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
September 30, 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 4.85 percent in nine months ended
September 30, 2008 compared to 4.74 percent in the same period a year ago. The
increase in the average yield over the comparable periods primarily resulted
from reinvestment of proceeds from maturities and paydowns on mortgage-backed
securities into higher yielding securities.


42
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Deposits





The
following table presents the average amount outstanding and the average rate
paid on deposits by the Company for the nine  month periods ended
September 30, 2008 and September 30, 2007.





September
      30, 2008
                          
                          
                          September
      30, 2007Average
                          
                          
                          Average
                          
                          
                          Average
                          
                          
                          Average($
      in thousands)
                          
                          Amount
                          
                          
                          Rate
                          
                          
                          Amount
                          
                          
                          RateNoninterest-Bearing
      Demand Deposits
                          
                          $
                          74,749
                          
                          
                          
                          
                          
                          $
                          75,553Interest-Bearing
      Demand and Savings Deposits
                          
                          
                          221,395
                          
                          
                          
                          1.56
                          %
                          
                          
                          213,562
                          
                          
                          
                          2.15
                          %Time
      Deposits
                          
                          
                          688,349
                          
                          
                          
                          4.49
                          %
                          
                          
                          733,315
                          
                          
                          
                          5.22
                          %Total
      Deposits
                          
                          $
                          984,493
                          
                          
                          
                          3.49
                          %
                          
                          $
                          1,022,430
                          
                          
                          
                          4.19
                          %





The
following table presents the maturities of the Company's time deposits as of
September 30, 2008.





Time
                    
                    
                    TimeDeposits
                    
                    
                    Deposits$100,000
                    
                    
                    Less
      Than($
      in thousands)
                    
                    or
      Greater
                    
                    
                    $100,000
                    
                    
                    TotalMonths
      to Maturity3
      or Less
                    
                    $
                    79,240
                    
                    
                    $
                    122,295
                    
                    
                    $
                    201,535Over
      3 through 12 Months
                    
                    
                    208,289
                    
                    
                    
                    215,874
                    
                    
                    
                    424,163Over
      12 Months through 36 Months
                    
                    
                    27,968
                    
                    
                    
                    33,173
                    
                    
                    
                    61,141Over
      36 Months
                    
                    
                    2,970
                    
                    
                    
                    4,643
                    
                    
                    
                    7,613$
                    318,467
                    
                    
                    $
                    375,985
                    
                    
                    $
                    694,452





Average
deposits decreased $37.9 million to $984 million at September 30, 2008 from
$1,022 million at September 30, 2007.  The decrease included $0.80
million, or 1.06 percent, related to noninterest-bearing
deposits.  Accordingly the ratio of average noninterest-bearing
deposits to total average deposits was 7.59 percent for nine months ended
September 30, 2008 compared to 7.39 percent for nine months ended September 30,
2007.  The general increase in market rates, had the effect of (i)
decreasing the average cost of total deposits by 70 basis points in nine months
ended September 30, 2008 compared to the same period a year ago; and (ii)
mitigating a portion of the impact of decreasing yields on earning
assets.





Total
average interest-bearing deposits decreased $37.1 million, or 3.92 percent in
nine months ended September 30, 2008 compared to the same period a year
ago.  The decline in average deposits at September 30, 2008 compared
to September 30, 2007 was primarily in time accounts.





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


September
30, 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.


43
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Payments
      Due by PeriodMore
      than 1
                    
                    
                    3
      Years orYear
      but Less
                    
                    
                    More
      but Less
                    
                    
                    5
      Years or1
      Year or Less
                    
                    
                    Than
      3 Years
                    
                    
                    Than
      5 Years
                    
                    
                    More
                    
                    
                    TotalContractual
      obligations:Subordinated
      debentures
                    
                    $
                    ----
                    
                    
                    $
                    ----
                    
                    
                    $
                    ----
                    
                    
                    $
                    24,229
                    
                    
                    $
                    24,229Federal
      Funds purchased and repurchase agreements
                    
                    
                    12,664
                    
                    
                    
                    20,000
                    
                    
                    
                    ----
                    
                    
                    
                    ----
                    
                    
                    
                    32,664Federal
      Home Loan Bank advances
                    
                    
                    19,000
                    
                    
                    
                    1,000
                    
                    
                    
                    41,000
                    
                    
                    
                    30,000
                    
                    
                    
                    91,000Operating
      leases
                    
                    
                    121
                    
                    
                    
                    184
                    
                    
                    
                    153
                    
                    
                    
                    19
                    
                    
                    
                    477Deposits
      with stated maturity dates
                    
                    
                    625,698
                    
                    
                    
                    61,141
                    
                    
                    
                    7,486
                    
                    
                    
                    127
                    
                    
                    
                    694,452657,483
                    
                    
                    
                    82,325
                    
                    
                    
                    48,639
                    
                    
                    
                    54,375
                    
                    
                    
                    842,822Other
      commitments:Loan
      commitments
                    
                    
                    85,091
                    
                    
                    
                    ----
                    
                    
                    
                    ----
                    
                    
                    
                    ----
                    
                    
                    
                    85,091Standby
      letters of credit
                    
                    
                    2,696
                    
                    
                    
                    ----
                    
                    
                    
                    ----
                    
                    
                    
                    ----
                    
                    
                    
                    2,69687,787
                    
                    
                    
                    ----
                    
                    
                    
                    ----
                    
                    
                    
                    ----
                    
                    
                    
                    87,787Total
      contractual obligations andOther
      commitments
                    
                    $
                    745,270
                    
                    
                    $
                    82,325
                    
                    
                    $
                    48,639
                    
                    
                    $
                    54,375
                    
                    
                    $
                    930,609





In the
ordinary course of business, the Company enters 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 September 30, 2008 are included in the table
above.





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 September
30, 2008 are included in the table above.





Capital
and Liquidity





At
September 30, 2008, stockholders’ equity totaled $82.81 million compared to
$83.74 million at December 31, 2007. In addition to net income of $2.70
million, other significant changes in stockholders’ equity during nine months
ended September 30, 2008 included $2.11 million of dividends declared and an
increase of $0.15 million resulting from the amortization of the stock grant
plan. The accumulated other comprehensive income (loss) component of
stockholders’ equity totaled $(1,369) thousand at September 30, 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 and gain
on marketable equity securities.


44
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Using the
capital requirements presently in effect, the Tier 1 ratio as of September 30,
2008 was 10.89 percent and total Tier 1 and 2 risk-based capital was 12.15
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 September 30, 2008
was 8.70 percent, which exceeds the required ratio standard of 4
percent.





For nine
months ended September 30, 2008, average capital was $85 million, representing
7.11 percent of average assets for the year.   This compares to
6.62 percent for nine months ended September 30, 2007 and 6.69 percent for
calendar year 2007.





The
Company declared cash dividends of $0.29 per common share during the first three
quarters of 2008, and a cash dividend of $0.27  per common share
during the first three quarters of 2007, respectively.  This equates
to a dividend payout ratio of 76.32 percent for the first three quarters of 2008
compared to 24.90 percent for the same period a year ago.





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
banks.





The
investment portfolio provides a ready means to raise cash if liquidity needs
arise.  As of September 30 2008, the Company held $171.9 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 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 99.3 percent as of September 30, 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 September 30, 2008
and December 31, 2007 were 88.11 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 business with comprehensive
banking relationships and limited volatility.  At September 30, 2008
and December 31, 2007, the bank had $318.5 million and $347.2 million in
certificates of deposit of $100,000 or more.  These larger deposits
represented 32.57 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 September 30, 2008, the
Company had $115.2 million, or 11.78 percent of total deposits, in brokered
certificates of deposit attracted by external third parties.  Of the
$115.2 million in brokered deposits at September 30, 2008, $13.4 million
represented CDARS reciprocal deposits in which customers placed core deposits
into the CDARS program for FDIC insurance coverage and the Company received
reciprocal brokered deposits in a like amount.  Excluding reciprocal
deposits the Company had brokered deposits of $101.8 million or 10.41 percent of
total deposits.  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.





To plan
for contingent sources of funding not satisfied by both local and out-of-market
deposit balances, Colony and its subsidiaries have established multiple
borrowing sources to augment their funds management.  The Company has
borrowing capacity through membership of the Federal Home Loan Bank
program.  The bank has also established overnight borrowing for
Federal Funds Purchased through various correspondent banks and has secured a
master repurchase agreement line of credit.  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.


45
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





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





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





Impact
of Inflation and Changing Prices





The
Company’s financial statements included herein have been prepared in accordance
with accounting principles generally accepted in the United States (“GAAP”).
GAAP presently requires the Company to measure financial position and operating
results primarily in terms of historic dollars. Changes in the relative value of
money due to inflation or recession are generally not considered. The primary
effect of inflation on the operations of the Company is reflected in increased
operating costs. 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.


46
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





Return
on Assets and Stockholders’ Equity





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





Three
      Months Ended
                  
                  
                  Nine
      Months EndedSeptember
      30
                  
                  
                  September
      302008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Return
      on Assets
                  
                  
                  0.06
                  %
                  
                  
                  0.87
                  %
                  
                  
                  0.30
                  %
                  
                  
                  0.87
                  %Return
      on Equity
                  
                  
                  0.93
                  %
                  
                  
                  12.87
                  %
                  
                  
                  4.24
                  %
                  
                  
                  13.07
                  %Dividend
      Payout
                  
                  
                  333.33
                  %
                  
                  
                  25.45
                  %
                  
                  
                  76.32
                  %
                  
                  
                  24.90
                  %Avg.
      Equity to Avg. Assets
                  
                  
                  6.94
                  %
                  
                  
                  6.76
                  %
                  
                  
                  7.11
                  %
                  
                  
                  6.62
                  %Dividends
      Declared
                  
                  $
                  0.10
                  
                  
                  $
                  0.09
                  
                  
                  $
                  0.29
                  
                  
                  $
                  0.27





Future
Outlook





Colony is
an emerging company in an industry filled with nonregulated competitors and a
rapid pace of consolidation.  The year brings with it new
opportunities for growth in our existing markets, as well as opportunities to
expand into new markets through acquisitions and denovo
branching.  Entry into the MSA markets – Savannah, Albany, Columbus,
Warner Robins, and Valdosta – will require multi-branch offices and the Company
is presently looking for available real estate to purchase in those
markets.  Construction on the second office in Savannah is complete
and it opened for business on October 6, 2008.  Likewise, Colony has
secured real estate in the Albany market for another office though no
established date for construction has been set.  Colony consummated
the merger of its subsidiaries into the surviving charter, Colony Bank on August
1, 2008.  The single bank charter will allow for standardization and
consistency in the products we offer and the services that we
deliver.  We believe it will enhance our ability to manage risk within
the company.





BUSINESS


General





The
Company was organized in 1983 as a bank holding company through the merger of
Colony Bank of Fitzgerald with a subsidiary of the Company.  Since
that time, Colony Bank of Fitzgerald, which was formed by principals of Colony
Bankcorp, Inc. in 1976, has operated as a wholly-owned subsidiary of the
Company.  In April 1984, Colony Bankcorp, Inc. acquired Colony Bank
Wilcox, and in November 1984, Colony Bank Ashburn became a wholly-owned
subsidiary of Colony Bankcorp, Inc.  Colony Bankcorp, Inc. continued
its growth with the acquisition of Colony Bank of Dodge County in September
1985.  In August 1991, Colony Bankcorp, Inc. acquired Colony Bank
Worth.  In November 1996, Colony Bankcorp, Inc. acquired Colony Bank
Southeast and in November 1996 formed a non-bank subsidiary Colony Management
Services, Inc.  In March 2002, Colony Bankcorp, Inc. acquired Colony
Bank Quitman, FSB and also formed Colony Bankcorp Statutory Trust
I.  In December 2002, Colony formed its second trust, Colony Bankcorp
Statutory Trust II.  In September 2004, Colony formed its third Trust,
Colony Bankcorp Statutory Trust III.  In April 2006, Colony formed its
fourth Trust, Colony Bankcorp Capital Trust I.  In March 2007, Colony
formed its fifth Trust, Colony Bankcorp Capital Trust II, while it liquidated
its first Trust, Colony Bankcorp Statutory Trust I by exercising its call
option.  In September 2007, Colony formed its sixth Trust, Colony
Bankcorp Capital Trust III and liquidated its second Trust, Colony Bankcorp
Statutory Trust II by exercising its call option in December 2007.  In
August 2008 all of the subsidiaries were merged into the surviving bank charter
– Colony Bank.  Colony Bank of Fitzgerald is the remaining charter and
effective with the merger the bank name was changed to Colony Bank.





Through
its subsidiary bank, Colony Bankcorp, Inc. operates a full-service banking
business and offers a broad range of retail and commercial banking services
including checking, savings, NOW accounts, money market and time deposits of
various types; loans for business, agriculture, real estate, personal uses, home
improvement and automobiles; credit card; letters of credit; investment and
discount brokerage services; IRA’s; safe deposit box rentals, bank money orders;
electronic funds transfer services, including wire transfers and automated
teller machines and internet accounts.  Colony Bank is a member of
Federal Deposit Insurance Corporation  whose customer deposits are
insured up to applicable limits by the Federal Deposit Insurance
Corporation.


47
 Table of Contents


Part
I (Continued)


Item 2
(Continued)





On April
2, 1998, the Company was listed on Nasdaq National Market.  The
Company’s common stock trades on the Nasdaq Stock Market under the symbol
“CBAN”.  The Company presently has approximately 2,089 shareholders as
of September 30, 2008  “The Nasdaq Stock Market” or “Nasdaq” is a
highly-regulated electronic securities market comprised of competing Market
Makers whose trading
is supported by a communications network linking them to quotation
dissemination, trade reporting and order execution systems.  This
market also provides specialized automation services for screen-based
negotiations of transactions, on-line comparison of transactions, and a range of
informational services tailored to the needs of the securities industry,
investors and issuers.  The Nasdaq Stock Market is operated by The
Nasdaq Stock Market, Inc., a wholly-owned subsidiary of the National Association
of Securities Dealers,  Inc.


48
 Table of Contents


Part
I (Continued)


Item 3





Item
3 - Quantitative and Qualitative Disclosures About Market Risk




AVERAGE
      BALANCE SHEETS
                                                                            
                                                                            Nine
      Months Ended
                                                                            
                                                                            
                                                                            Nine
      Months EndedSeptember
      30, 2008
                                                                            
                                                                            
                                                                            September
      30, 2007($
      in thousands)
                                                                            
                                                                            Average
                                                                              Balances
                                                                            
                                                                            
                                                                            Income/
                                                                              Expense
                                                                            
                                                                            
                                                                            Yields/
                                                                              Rates
                                                                            
                                                                            
                                                                            Average
                                                                              Balances
                                                                            
                                                                            
                                                                            Income/
                                                                              Expense
                                                                            
                                                                            
                                                                            Yields/
                                                                              RatesAssetsInterest-Earning
      AssetsLoans,
      Net of Unearned Interest and feesTaxable
      (1)
                                                                            
                                                                            $
                                                                            954,045
                                                                            
                                                                            
                                                                            $
                                                                            51,494
                                                                            
                                                                            
                                                                            
                                                                            7.20
                                                                            %
                                                                            
                                                                            $
                                                                            943,342
                                                                            
                                                                            
                                                                            $
                                                                            61,014
                                                                            
                                                                            
                                                                            
                                                                            8.62
                                                                            %Investment
      SecuritiesTaxable
                                                                            
                                                                            
                                                                            150,017
                                                                            
                                                                            
                                                                            
                                                                            5,391
                                                                            
                                                                            
                                                                            
                                                                            4.79
                                                                            %
                                                                            
                                                                            
                                                                            143,514
                                                                            
                                                                            
                                                                            
                                                                            5,031
                                                                            
                                                                            
                                                                            
                                                                            4.67
                                                                            %Tax-Exempt
      (2)
                                                                            
                                                                            
                                                                            10,654
                                                                            
                                                                            
                                                                            
                                                                            453
                                                                            
                                                                            
                                                                            
                                                                            5.67
                                                                            %
                                                                            
                                                                            
                                                                            12,144
                                                                            
                                                                            
                                                                            
                                                                            501
                                                                            
                                                                            
                                                                            
                                                                            5.50
                                                                            %Total
      Investment Securities
                                                                            
                                                                            
                                                                            160,671
                                                                            
                                                                            
                                                                            
                                                                            5,844
                                                                            
                                                                            
                                                                            
                                                                            4.85
                                                                            %
                                                                            
                                                                            
                                                                            155,658
                                                                            
                                                                            
                                                                            
                                                                            5,532
                                                                            
                                                                            
                                                                            
                                                                            4.74
                                                                            %Interest-Bearing
      Deposits
                                                                            
                                                                            
                                                                            1,529
                                                                            
                                                                            
                                                                            
                                                                            27
                                                                            
                                                                            
                                                                            
                                                                            2.35
                                                                            %
                                                                            
                                                                            
                                                                            2,943
                                                                            
                                                                            
                                                                            
                                                                            111
                                                                            
                                                                            
                                                                            
                                                                            5.03
                                                                            %Federal
      Funds Sold
                                                                            
                                                                            
                                                                            12,518
                                                                            
                                                                            
                                                                            
                                                                            264
                                                                            
                                                                            
                                                                            
                                                                            2.81
                                                                            %
                                                                            
                                                                            
                                                                            30,762
                                                                            
                                                                            
                                                                            
                                                                            1,204
                                                                            
                                                                            
                                                                            
                                                                            5.22
                                                                            %Interest-Bearing
      Other Assets
                                                                            
                                                                            
                                                                            5,951
                                                                            
                                                                            
                                                                            
                                                                            253
                                                                            
                                                                            
                                                                            
                                                                            5.67
                                                                            %
                                                                            
                                                                            
                                                                            5,233
                                                                            
                                                                            
                                                                            
                                                                            225
                                                                            
                                                                            
                                                                            
                                                                            5.73
                                                                            %Total
      Interest-Earning Assets
                                                                            
                                                                            
                                                                            1,134,714
                                                                            
                                                                            
                                                                            $
                                                                            57,882
                                                                            
                                                                            
                                                                            
                                                                            6.80
                                                                            %
                                                                            
                                                                            
                                                                            1,137,938
                                                                            
                                                                            
                                                                            $
                                                                            68,086
                                                                            
                                                                            
                                                                            
                                                                            7.98
                                                                            %Non-interest-Earning
      AssetsCash
      and Cash Equivalents
                                                                            
                                                                            
                                                                            20,496
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            21,474Allowance
      for Loan Losses
                                                                            
                                                                            
                                                                            (16,256
                                                                            )
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            (12,804
                                                                            )Other
      Assets
                                                                            
                                                                            
                                                                            55,298
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            54,109Total
      Noninterest-Earning Assets
                                                                            
                                                                            
                                                                            59,538
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            62,779Total
      Assets
                                                                            
                                                                            $
                                                                            1,194,252
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            1,200,717Liabilities
      and Stockholders' EquityInterest-Bearing
      LiabilitiesInterest-Bearing
      DepositsInterest-Bearing
      Demand and Savings
                                                                            
                                                                            $
                                                                            221,395
                                                                            
                                                                            
                                                                            $
                                                                            2,585
                                                                            
                                                                            
                                                                            
                                                                            1.56
                                                                            %
                                                                            
                                                                            $
                                                                            213,562
                                                                            
                                                                            
                                                                            $
                                                                            2,451
                                                                            
                                                                            
                                                                            
                                                                            2.15
                                                                            %Other
      Time
                                                                            
                                                                            
                                                                            688,349
                                                                            
                                                                            
                                                                            
                                                                            23,161
                                                                            
                                                                            
                                                                            
                                                                            4.49
                                                                            %
                                                                            
                                                                            
                                                                            733,315
                                                                            
                                                                            
                                                                            
                                                                            28,682
                                                                            
                                                                            
                                                                            
                                                                            5.22
                                                                            %Total
      Interest-Bearing Deposits
                                                                            
                                                                            
                                                                            909,744
                                                                            
                                                                            
                                                                            
                                                                            25,746
                                                                            
                                                                            
                                                                            
                                                                            3.77
                                                                            %
                                                                            
                                                                            
                                                                            946,877
                                                                            
                                                                            
                                                                            
                                                                            32,133
                                                                            
                                                                            
                                                                            
                                                                            4.52
                                                                            %Other
      Interest-Bearing LiabilitiesOther
      Borrowed Money
                                                                            
                                                                            
                                                                            82,862
                                                                            
                                                                            
                                                                            
                                                                            2,497
                                                                            
                                                                            
                                                                            
                                                                            4.02
                                                                            %
                                                                            
                                                                            
                                                                            63,705
                                                                            
                                                                            
                                                                            
                                                                            2,104
                                                                            
                                                                            
                                                                            
                                                                            4.40
                                                                            %Subordinated
      Debentures
                                                                            
                                                                            
                                                                            24,229
                                                                            
                                                                            
                                                                            
                                                                            951
                                                                            
                                                                            
                                                                            
                                                                            5.23
                                                                            %
                                                                            
                                                                            
                                                                            24,988
                                                                            
                                                                            
                                                                            
                                                                            1,468
                                                                            
                                                                            
                                                                            
                                                                            7.83
                                                                            %Federal
      Funds Purchased and Repurchase Agreements
                                                                            
                                                                            
                                                                            12,207
                                                                            
                                                                            
                                                                            
                                                                            293
                                                                            
                                                                            
                                                                            
                                                                            3.20
                                                                            %
                                                                            
                                                                            
                                                                            1,258
                                                                            
                                                                            
                                                                            
                                                                            50
                                                                            
                                                                            
                                                                            
                                                                            5.30
                                                                            %Total
      Other Interest-Bearing Liabilities
                                                                            
                                                                            
                                                                            119,298
                                                                            
                                                                            
                                                                            
                                                                            3,741
                                                                            
                                                                            
                                                                            
                                                                            4.18
                                                                            %
                                                                            
                                                                            
                                                                            89,951
                                                                            
                                                                            
                                                                            
                                                                            3,622
                                                                            
                                                                            
                                                                            
                                                                            5.37
                                                                            %Total
      Interest-Bearing Liabilities
                                                                            
                                                                            
                                                                            1,029,042
                                                                            
                                                                            
                                                                            $
                                                                            29,487
                                                                            
                                                                            
                                                                            
                                                                            3.82
                                                                            %
                                                                            
                                                                            
                                                                            1,036,828
                                                                            
                                                                            
                                                                            $
                                                                            35,755
                                                                            
                                                                            
                                                                            
                                                                            4.60
                                                                            %Noninterest-Bearing
      Liabilities andStockholders'
      EquityDemand
      Deposits
                                                                            
                                                                            
                                                                            74,749
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            75,553Other
      Liabilities
                                                                            
                                                                            
                                                                            5,494
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            8,818Stockholders'
      Equity
                                                                            
                                                                            
                                                                            84,967
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            79,518Total
      Noninterest-Bearing Liabilities and Stockholders' Equity
                                                                            
                                                                            
                                                                            165,210
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            163,889Total
      Liabilities and Stockholders' Equity
                                                                            
                                                                            $
                                                                            1,194,252
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            1,200,717Interest
      Rate Spread
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            2.98
                                                                            %
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            3.38
                                                                            %Net
      Interest Income
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            28,395
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            $
                                                                            32,331Net
      Interest Margin
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            3.34
                                                                            %
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            3.79
                                                                            %








(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 $108 and
      $92 for nine month periods ended September 30, 2008 and 2007,
      respectively, are included in tax-exempt interest on
  loans.


(2)
            Taxable-equivalent
      adjustments totaling $154 and $170 for nine month periods ended September
      30, 2008 and 2007, 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.


49
 Table of Contents


Part
I (Continued)


Item 3
(Continued)





Colony
Bankcorp, Inc. and Subsidiary


Interest
Rate Sensitivity





The
following table is an analysis of the Company’s interest rate-sensitivity
position at September 30, 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
      ASSETS:Interest-Bearing
      Deposits
                                                                
                                                                $
                                                                435
                                                                
                                                                
                                                                $
                                                                ---
                                                                
                                                                
                                                                $
                                                                435
                                                                
                                                                
                                                                $
                                                                ---
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                $
                                                                435Federal
      Funds Sold
                                                                
                                                                
                                                                199
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                199
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                199Investment
      Securities
                                                                
                                                                
                                                                6,426
                                                                
                                                                
                                                                
                                                                11,674
                                                                
                                                                
                                                                
                                                                18,100
                                                                
                                                                
                                                                
                                                                102,058
                                                                
                                                                
                                                                
                                                                51,770
                                                                
                                                                
                                                                
                                                                171,928Loans,
      Net of Unearned Income
                                                                
                                                                
                                                                450,867
                                                                
                                                                
                                                                
                                                                160,936
                                                                
                                                                
                                                                
                                                                611,803
                                                                
                                                                
                                                                
                                                                347,110
                                                                
                                                                
                                                                
                                                                11,543
                                                                
                                                                
                                                                
                                                                970,456Other
      Interest-Bearing Assets
                                                                
                                                                
                                                                6,317
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                6,317
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                6,317Total
      Interest-Earning Assets
                                                                
                                                                
                                                                464,244
                                                                
                                                                
                                                                
                                                                172,610
                                                                
                                                                
                                                                
                                                                636,854
                                                                
                                                                
                                                                
                                                                449,168
                                                                
                                                                
                                                                
                                                                63,313
                                                                
                                                                
                                                                
                                                                1,149,335INTEREST-BEARING
      LIABILITIES:Interest-Bearing
      Demand Deposits (1)
                                                                
                                                                
                                                                180,505
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                180,505
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                180,505Savings
      (1)
                                                                
                                                                
                                                                33,757
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                33,757
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                33,757Time
      Deposits
                                                                
                                                                
                                                                201,535
                                                                
                                                                
                                                                
                                                                424,163
                                                                
                                                                
                                                                
                                                                625,698
                                                                
                                                                
                                                                
                                                                61,141
                                                                
                                                                
                                                                
                                                                7,613
                                                                
                                                                
                                                                
                                                                694,452Other
      Borrowings (2)
                                                                
                                                                
                                                                22,000
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                22,000
                                                                
                                                                
                                                                
                                                                42,000
                                                                
                                                                
                                                                
                                                                27,000
                                                                
                                                                
                                                                
                                                                91,000Subordinated
      Debentures
                                                                
                                                                
                                                                24,229
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                24,229
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                24,229Federal
      Funds Purchased
                                                                
                                                                
                                                                12,664
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                12,664
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                12,664Repurchase
      Agreements
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                20,000
                                                                
                                                                
                                                                
                                                                ---
                                                                
                                                                
                                                                
                                                                20,000Total
      Interest-Bearing Liabilities
                                                                
                                                                
                                                                474,690
                                                                
                                                                
                                                                
                                                                424,163
                                                                
                                                                
                                                                
                                                                898,853
                                                                
                                                                
                                                                
                                                                123,141
                                                                
                                                                
                                                                
                                                                34,613
                                                                
                                                                
                                                                
                                                                1,056,607Interest
      Rate-Sensitivity Gap
                                                                
                                                                
                                                                (10,446
                                                                )
                                                                
                                                                
                                                                (251,553
                                                                )
                                                                
                                                                
                                                                (261,999
                                                                )
                                                                
                                                                
                                                                326,027
                                                                
                                                                
                                                                
                                                                28,700
                                                                
                                                                
                                                                
                                                                92,728Cumulative
      Interest-Sensitivity Gap
                                                                
                                                                
                                                                (10,446
                                                                )
                                                                
                                                                
                                                                (261,999
                                                                )
                                                                
                                                                
                                                                (261,999
                                                                )
                                                                
                                                                
                                                                64,028
                                                                
                                                                
                                                                
                                                                92,728Interest
      Rate-Sensivitiy Gap as a Percentage of Interest-Earning
    Assets
                                                                
                                                                
                                                                (0.91
                                                                %)
                                                                
                                                                
                                                                (21.89
                                                                %)
                                                                
                                                                
                                                                (22.80
                                                                %)
                                                                
                                                                
                                                                28.37
                                                                %
                                                                
                                                                
                                                                2.50
                                                                %Cumulative
      Interest Rate-Sensitivity as as a Percentage of Interest-Earning
      Assets
                                                                
                                                                
                                                                (0.91
                                                                %)
                                                                
                                                                
                                                                (22.80
                                                                %)
                                                                
                                                                
                                                                (22.80
                                                                %)
                                                                
                                                                
                                                                5.57
                                                                %
                                                                
                                                                
                                                                8.07
                                                                %





(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.


50
 Table of Contents


Part
I (Continued)


Item 3
(Continued)





The
foregoing table indicates that we had a one year negative gap of ($262) million,
or (22.80) percent of total assets at September 30, 2008.  In theory,
this would indicate that at September 30, 2008, $262 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 increase, the gap would
indicate a resulting decrease in net interest margin.  However,
changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity.  In addition, the interest rate spread between an asset
and our supporting liability can vary significantly while the timing of
repricing of both the assets and our supporting liability can remain the same,
thus impacting net interest income.  This characteristic is referred
to as a basis risk and, generally, relates to the repricing characteristics of
short-term funding sources such as certificates of deposits.





Gap
analysis has certain limitations.  Measuring the volume of repricing
or maturing assets and liabilities does not always measure the full impact on
the portfolio value of equity or net interest income.  Gap analysis
does not account for rate caps on products; dynamic changes such as increasing
prepay speeds as interest rates decrease, basis risk, or the benefit of non-rate
funding sources.  The majority of our loan portfolio reprices quickly
and completely following changes in market rates, while non-term deposit rates
in general move slowly and usually incorporate only a fraction of the change in
rates.  Products categorized as non-rate sensitive, such as our
noninterest-bearing demand deposits, in the gap analysis behave like long term
fixed rate funding sources.  Both of these factors tend to make our
actual behavior more asset sensitive than is indicated in the gap
analysis.  In fact, we experience higher net interest income when
rates rise, opposite what is indicated by the gap analysis.  In fact,
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 utilizes 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 decline.  The most
recent analysis as of August 31, 2008 indicates that net interest income would
deteriorate 11.83 percent with a 200 basis point decrease and would improve 6.70
percent with a 200 basis point increase.  The Company has established
equity at risk in a +/- 200 basis points rate shock to be no more than a twenty
percent decline.  The most recent analysis as of August 31, 2008
indicates that net economic value of equity percentage change would decrease
5.16 percent with a 200 basis point increase and would decrease 7.53 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 August 31, 2008 indicates a one year gap of 0.84 percent.  The
analysis suggests net interest margin compression  in a declining
interest rate environment.  Given that interest rates are at or near
its bottom, the Company is focusing on areas to minimize margin compression in
the future.  These include extending on the liability side of the
balance with FHLB advances and longer-term time deposits.  With the
anticipation of rates going up the last half of 2009, we will look at security
investments in the shorter term (2-4 years) and look to book loans with an
adjustable rate.


51
 Table of Contents


Part
I (Continued)


Item 4





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 our Chief Executive Officer
and the Principal Financial and Accounting Officer of the design and operation
of our disclosure controls and procedures.   Based on this
evaluation, our Chief Executive Officer and Principal Financial and Accounting
Officer concluded that the disclosure controls and procedures are
effective.


52
 Table of Contents


PART II – OTHER INFORMATION





ITEM 1 – LEGAL PROCEEDINGS





None





ITEM 1A – RISK FACTORS





During
the period covered by this report, there have been no material changes from risk
factors as previously disclosed in the registrant’s Form 10-K filed on March 14,
2008 in response to Item 1A to Part I of Form 10-K.





ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





None





ITEM 3 – DEFAULTS UPON SENIOR SECURITIES





None





ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (ANNUAL
MEETING)





None





ITEM 5 – OTHER INFORMATION





None





ITEM 6 – EXHIBITS





3.1  Articles
of Incorporation





-filed as
Exhibit 3(a) to the Registrant’s Registration Statement on Form 10 (File No.
0-18486), filed with the Commission on April 25, 1990 and incorporated herein by
reference





3.2  Bylaws,
as Amended





-filed as
Exhibit 3(b) to the Registrant’s Registration Statement on Form 10 (File No.
0-18486), filed with the Commission on April 25, 1990 and incorporated herein by
reference








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 27, 2004, filed with the
Securities and Exchange Commission on March 3, 2004 (File No.
000-12436)





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


53
 Table of Contents


10.3  1999
Restricted Stock Grant Plan and Restricted Stock Grant Agreement





-filed as
Exhibit 10(c) the Registrant’s Annual Report  on Form 10-K (File No.
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 Shareholders 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 Tracts, 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





11.1  Statement of Computation of Earnings Per
Share





31.1  Certificate of Chief Executive Officer
Pursuant to Section 302 of Sarbanes-Oxley  Act of 2002





31.2  Certificate of Chief Financial Officer
Pursuant to Section 302 of Sarbanes – Oxley  Act of 2002





32.1  Certification of Chief Executive Officer
and Chief Financial Officer Pursuant to  Section 906 of the
Sarbanes-Oxley Act of 2002


54
 Table of Contents


SIGNATURES





Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.








/s/
      Al D. RossDate:
                  November
      7, 2008
                  Al
      D. Ross,President
      and Chief Executive Officer/s/
      Terry L. HesterDate:
                  November
      7, 2008
                  Terry
      L. Hester, Executive Vice President andChief
      Financial Officer






55