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 JUNE 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 AUGUST
      8, 2008COMMON
      STOCK, $1 PAR VALUE
            7,215,463













TABLE OFCONTENTS


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
            29Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            50Item 4.
            Controls and Procedures
            53PART II – Other
      InformationItem 1.
            Legal Proceedings
            54Item 1A.
            Rick Factors
            54Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            54Item 3.
            Defaults Upon Senior Securities
            54Item 4.
            Submission of Matters to a Vote of Security
      Holders
            54Item 5.
            Other Information
            54Item 6.
            Exhibits
            55Signatures
            
            56





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
SUBSIDIARIES: COLONY BANK OF FITZGERALD, COLONY BANK ASHBURN, COLONY BANK
WILCOX, COLONY BANK OF DODGE COUNTY, COLONY BANK WORTH, COLONY BANK SOUTHEAST,
COLONY MANAGEMENT SERVICES, INC., AND COLONY BANK QUITMAN, FSB.





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





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




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




D.
            CONSOLIDATED
      STATEMENTS OF CASH FLOWS – FOR THE SIX MONTHS ENDED JUNE 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 SIX
MONTH PERIOD ENDED JUNE 30, 2008 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS
TO BE EXPECTED FOR THE FULL YEAR.





4
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





COLONY
BANKCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


JUNE
30, 2008 AND DECEMBER 31, 2007


(DOLLARS
IN THOUSANDS)





June 30, 2008
            
            
            December 31, 2007ASSETS
            
            (Unaudited)Cash
      and Cash EquivalentsCash
      and Due from Banks
            
            $
            27,478
            
            
            $
            28,369Federal
      Funds Sold
            
            
            5,579
            
            
            
            21,73733,057
            
            
            
            50,106Interest-Bearing
      Deposits
            
            
            1,783
            
            
            
            1,467Investment
      SecuritiesAvailable
      for Sale, at Fair Value
            
            
            177,054
            
            
            
            167,123Held
      to Maturity, at Cost (Fair Value of $65 and $72, as of June 30, 2008 and
      December 31, 2007, Respectively)
            
            
            63
            
            
            
            68177,117
            
            
            
            167,191Federal
      Home Loan Bank Stock, at Cost
            
            
            6,092
            
            
            
            5,533Loans
            
            
            954,287
            
            
            
            945,279Allowance
      for Loan Losses
            
            
            (17,466
            )
            
            
            (15,513
            )Unearned
      Interest and Fees
            
            
            (213
            )
            
            
            (301
            )936,608
            
            
            
            929,465Premises
      and Equipment
            
            
            28,606
            
            
            
            27,809Other
      Real Estate
            
            
            3,198
            
            
            
            1,332Goodwill
            
            
            2,412
            
            
            
            2,412Other
      Intangible Assets
            
            
            384
            
            
            
            402Other
      Assets
            
            
            21,955
            
            
            
            23,059Total
      Assets
            
            $
            1,211,212
            
            
            $
            1,208,776LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNoninterest-Bearing
            
            $
            75,946
            
            
            $
            86,112Interest-Bearing
            
            
            900,376
            
            
            
            932,490976,322
            
            
            
            1,018,602Borrowed
      MoneyFederal
      Funds Purchased
            
            
            16,465
            
            
            
            1,346Securities
      Sold Under Agreements to Repurchase
            
            
            20,000
            
            
            
            ---Subordinated
      Debentures
            
            
            24,229
            
            
            
            24,229Other
      Borrowed Money
            
            
            84,600
            
            
            
            73,600145,294
            
            
            
            99,175Other
      Liabilities
            
            
            5,773
            
            
            
            7,256Commitments
      and ContingenciesStockholders'
      EquityCommon
      Stock, Par Value $1 a Share, Authorized 20,000,000 Shares, Issued
      7,215,463 and 7,200,913 Shares as of June 30, 2008 and December 31, 2007,
      Respectively
            
            
            7,215
            
            
            
            7,201Paid-In
      Capital
            
            
            24,589
            
            
            
            24,420Retained
      Earnings
            
            
            53,185
            
            
            
            52,087Restricted
      Stock - Unearned Compensation
            
            
            (346
            )
            
            
            (237
            )Accumulated
      Other Comprehensive Loss, Net of Tax
            
            
            (820
            )
            
            
            27283,823
            
            
            
            83,743Total
      Liabilities and Stockholders' Equity
            
            $
            1,211,212
            
            
            $
            1,208,776





The
accompanying notes are an integral part of these statements.





5
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





COLONY
BANKCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


THREE
MONTHS ENDED JUNE 30, 2008 AND 2007


AND
SIX MONTHS ENDED JUNE 30, 2008 AND 2007


(UNAUDITED)


(DOLLARS
IN THOUSANDS)





Three
      Months Ended
            
            
            Six
      Months Ended6/30/2008
            
            
            6/30/2007
            
            
            6/30/2008
            
            
            6/30/2007Interest
      IncomeLoans,
      Including Fees
            
            $
            16,742
            
            
            $
            20,420
            
            
            
            35,091
            
            
            
            40,188Federal
      Funds Sold
            
            
            84
            
            
            
            336
            
            
            
            239
            
            
            
            967Deposits
      with Other Banks
            
            
            9
            
            
            
            34
            
            
            
            20
            
            
            
            75Investment
      SecuritiesU.S.
      Government Agencies
            
            
            1,586
            
            
            
            1,573
            
            
            
            3,267
            
            
            
            3,117State,
      County and Municipal
            
            
            92
            
            
            
            137
            
            
            
            230
            
            
            
            271Corporate
      Obligations and Asset-Backed Securities
            
            
            85
            
            
            
            63
            
            
            
            179
            
            
            
            126Dividends
      on Other Investments
            
            
            82
            
            
            
            73
            
            
            
            166
            
            
            
            14918,680
            
            
            
            22,636
            
            
            
            39,192
            
            
            
            44,893Interest
      ExpenseDeposits
            
            
            8,475
            
            
            
            10,673
            
            
            
            18,147
            
            
            
            21,280Federal
      Funds Purchased
            
            
            24
            
            
            
            31
            
            
            
            52
            
            
            
            37Borrowed
      Money
            
            
            1,138
            
            
            
            1,107
            
            
            
            2,345
            
            
            
            2,3009,637
            
            
            
            11,811
            
            
            
            20,544
            
            
            
            23,617Net
      Interest Income
            
            
            9,043
            
            
            
            10,825
            
            
            
            18,648
            
            
            
            21,276Provision
      for Loan Losses
            
            
            4,071
            
            
            
            914
            
            
            
            5,142
            
            
            
            1,828Net
      Interest Income After Provision for Loan Losses
            
            
            4,972
            
            
            
            9,911
            
            
            
            13,506
            
            
            
            19,448Noninterest
      IncomeService
      Charges on Deposits
            
            
            1,173
            
            
            
            1,214
            
            
            
            2,338
            
            
            
            2,332Other
      Service Charges, Commissions and Fees
            
            
            241
            
            
            
            239
            
            
            
            495
            
            
            
            485Mortgage
      Fee Income
            
            
            174
            
            
            
            286
            
            
            
            343
            
            
            
            538Securities
      Gains
            
            
            614
            
            
            
            2
            
            
            
            1,184
            
            
            
            186Other
            
            
            832
            
            
            
            315
            
            
            
            1,045
            
            
            
            6252,034
            
            
            
            2,056
            
            
            
            5,405
            
            
            
            4,166Noninterest
      ExpensesSalaries
      and Employee Benefits
            
            
            4,029
            
            
            
            4,687
            
            
            
            8,432
            
            
            
            9,229Occupancy
      and Equipment
            
            
            1,061
            
            
            
            1,010
            
            
            
            2,068
            
            
            
            2,011Other
            
            
            2,624
            
            
            
            2,268
            
            
            
            4,971
            
            
            
            4,6347,714
            
            
            
            7,965
            
            
            
            15,479
            
            
            
            15,874Income
      Before Income Taxes
            
            
            292
            
            
            
            4,002
            
            
            
            3,440
            
            
            
            7,740Income
      Taxes
            
            
            0
            
            
            
            1,300
            
            
            
            935
            
            
            
            2,564Net
      Income
            
            $
            292
            
            
            $
            2,702
            
            
            $
            2,505
            
            
            $
            5,176Net
      Income Per Share of Common StockBasic
            
            $
            0.04
            
            
            $
            0.38
            
            
            $
            0.35
            
            
            $
            0.72Diluted
            
            $
            0.04
            
            
            $
            0.38
            
            
            $
            0.35
            
            
            $
            0.72Cash
      Dividends Declared Per Share of Common Stock
            
            $
            0.10
            
            
            $
            0.09
            
            
            $
            0.20
            
            
            $
            0.18Weighted
      Average Basic Shares Outstanding
            
            
            7,197,607
            
            
            
            7,187,587
            
            
            
            7,194,734
            
            
            
            7,184,576Weighted
      Average Diluted Shares Outstanding
            
            
            7,197,607
            
            
            
            7,197,645
            
            
            
            7,194,734
            
            
            
            7,196,193





The
accompanying notes are an integral part of these statements.





6
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





COLONY
BANKCORP INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


THREE
MONTHS ENDED JUNE 30, 2008 AND 2007


AND
SIX MONTHS ENDED JUNE 30, 2008 AND 2007


(UNAUDITED)


(DOLLARS
IN THOUSANDS)





Three
      Months Ended
            
            
            Six
      Months Ended06/30/08
            
            
            06/30/07
            
            
            06/30/08
            
            
            06/30/07Net
      Income
            
            $
            292
            
            
            $
            2,702
            
            
            $
            2,505
            
            
            $
            5,176Other
      Comprehensive Income (Loss), Net of TaxGains
      (Losses) on Securities Arising During the Year
            
            
            (1,426
            )
            
            
            (813
            )
            
            
            (311
            )
            
            
            (407
            )Reclassification
      Adjustment
            
            
            (405
            )
            
            
            (2
            )
            
            
            (781
            )
            
            
            (123
            )Change
      in Net Unrealized Losses on Securities Available for Sale, Net of
      Reclassification Adjustment and Tax Effect
            
            
            (1,831
            )
            
            
            (815
            )
            
            
            (1,092
            )
            
            
            (530
            )Comprehensive
      Income (Loss)
            
            $
            (1,539
            )
            
            $
            1,887
            
            
            $
            1,413
            
            
            $
            4,646





The
accompanying notes are an integral part of these statements.





7
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





COLONY
BANKCORP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


SIX
MONTHS ENDED JUNE 30, 2008 AND 2007


(UNAUDITED)


(DOLLARS
IN THOUSANDS)





2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Income
            
            $
            2,505
            
            
            $
            5,176Adjustments
      to Reconcile Net Income to Net CashProvided
      by Operating Activities:Depreciation
            
            
            992
            
            
            
            932Provision
      for Loan Losses
            
            
            5,142
            
            
            
            1,828Securities
      Gains
            
            
            (1,184
            )
            
            
            (186
            )Amortization
      and Accretion
            
            
            320
            
            
            
            285Loss
      on Sale of Other Real Estate and Repossessions
            
            
            42
            
            
            
            71Gain
      on Sale of Equipment
            
            
            (10
            )
            
            
            (7
            )Decrease
      (Increase) in Cash Surrender Value of Life Insurance
            
            
            (142
            )
            
            
            33Change
      in Loans Held for Sale
            
            
            ---
            
            
            
            (380
            )Other
      Prepaids, Deferrals and Accruals, Net
            
            
            208
            
            
            
            (902
            )7,873
            
            
            
            6,850CASH
      FLOWS FROM INVESTING ACTIVITIESFederal
      Home Loan Bank Stock
            
            
            (560
            )
            
            
            (378
            )Purchases
      of Investment Securities Available for Sale
            
            
            (108,327
            )
            
            
            (23,939
            )Proceeds
      from Maturities, Calls, and Paydowns ofInvestment
      Securities:Available
      for Sale
            
            
            34,724
            
            
            
            9,524Held
      to Maturity
            
            
            7
            
            
            
            8Proceeds
      from Sale of Investment SecuritiesAvailable
      for Sale
            
            
            63,111
            
            
            
            7,673(Increase)
      Decrease in Interest-Bearing Deposits in Other Banks
            
            
            (317
            )
            
            
            877Net
      Loans to Customers
            
            
            (16,098
            )
            
            
            (14,055
            )Purchase
      of Premises and Equipment
            
            
            (1,789
            )
            
            
            (1,086
            )Other
      Real Estate and Repossessions
            
            
            1,865
            
            
            
            1,087Proceeds
      from Sale of Premises and Equipment
            
            
            10
            
            
            
            7Investment
      in Statutory Trust
            
            
            ---
            
            
            
            (279
            )Liquidation
      of Statutory Trust
            
            
            ---
            
            
            
            279(27,374
            )
            
            
            (20,282
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNoninterest-Bearing
      Customer Deposits
            
            
            (10,166
            )
            
            
            (2,267
            )Interest-Bearing
      Customer Deposits
            
            
            (32,113
            )
            
            
            (18,436
            )Increase
      (Decrease) in Federal Funds Purchased
            
            
            15,119
            
            
            
            (170
            )Securities
      Sold Under Agreements to Repurchase
            
            
            20,000
            
            
            
            ---Dividends
      Paid
            
            
            (1,388
            )
            
            
            (1,242
            )Proceeds
      from Other Borrowed Money
            
            
            43,000
            
            
            
            36,000Principal
      Payments on Other Borrowed Money
            
            
            (32,000
            )
            
            
            (28,000
            )Proceeds
      from Issuance of Subordinated Debentures
            
            
            ---
            
            
            
            9,279Principal
      Payments on Subordinated Debentures
            
            
            ---
            
            
            
            (9,279
            )2,452
            
            
            
            (14,115
            )Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            
            (17,049
            )
            
            
            (27,547
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            50,106
            
            
            
            72,380Cash
      and Cash Equivalents at End of Period
            
            $
            33,057
            
            
            $
            44,833





The
accompanying notes are an integral part of these statements.





8
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





COLONY
BANKCORP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








(1) Summary
of Significant Accounting Policies





Principles
of Consolidation





Colony
Bankcorp, Inc. (the Company) is a multi-bank holding company located in
Fitzgerald, Georgia. The consolidated financial statements include the accounts
of Colony Bankcorp, Inc. and its wholly-owned subsidiaries, Colony Bank of
Fitzgerald, Fitzgerald, Georgia; Colony Bank Ashburn (which includes its
wholly-owned subsidiary, Georgia First Mortgage Company), Ashburn, Georgia;
Colony Bank Worth, Sylvester, Georgia; Colony Bank of Dodge County, Eastman,
Georgia; Colony Bank Wilcox, Rochelle, Georgia; Colony Bank Southeast, Broxton,
Georgia; Colony Bank Quitman, FSB, Quitman, Georgia (the Banks); and Colony
Management Services, Inc., 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 Banks
provide a full range of retail and commercial banking services for consumers and
small to medium size businesses located primarily in middle and south Georgia.
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
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 subsidiaries
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
            
            Method.Banking
      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
subsidiaries file a consolidated federal income tax return. Each 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 June 30, 2008 and
December 31, 2007:





June 30, 2008
            
            
            December 31, 2007Cash
      on Hand and Cash Items
            
            $
            8,242
            
            
            $
            8,527Noninterest-Bearing
      Deposits with Other Banks
            
            
            19,236
            
            
            
            19,842$
            27,478
            
            
            $
            28,369





As of
June 30, 2008, the Banks had required deposit reserves of approximately $4,492
with the Federal Reserve that was satisfied
with cash on hand.





(3) Investment
Securities





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





Amortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            ValueSecurities
      Available for Sale:U.S.
      Government AgenciesMortgage-Backed
            
            $
            158,843
            
            
            $
            384
            
            
            $
            (1,428
            )
            
            $
            157,799Other
            
            
            3,400
            
            
            
            5
            
            
            
            ---
            
            
            
            3,405State,
      County & Municipal
            
            
            10,161
            
            
            
            33
            
            
            
            (114
            )
            
            
            10,080Corporate
      Obligations
            
            
            4,891
            
            
            
            31
            
            
            
            (154
            )
            
            
            4,768Asset-Backed
      Securities
            
            
            1,000
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,000Marketable
      Equity Securities
            
            
            2
            
            
            
            ---
            
            
            
            ---
            
            
            
            2$
            178,297
            
            
            $
            453
            
            
            $
            (1,696
            )
            
            $
            177,054Securities
      Held to Maturity:State,
      County and Municipal
            
            $
            63
            
            
            $
            2
            
            
            $
            ---
            
            
            $
            65





14
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





The
amortized cost and fair value of investment securities as of June 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.





SecuritiesAvailable for Sale
            
            
            Held to MaturityAmortized Cost
            
            
            Fair Value
            
            
            Amortized Cost
            
            
            Fair ValueDue
      in One Year or Less
            
            $
            5,263
            
            
            $
            5,270Due
      After One Year Through Five Years
            
            
            5,752
            
            
            
            5,610Due
      After Five Years Through Ten Years
            
            
            4,582
            
            
            
            4,555
            
            
            $
            63
            
            
            $
            65Due
      After Ten Years
            
            
            3,855
            
            
            
            3,818
            
            
            
            --
            
            
            
            --19,452
            
            
            
            19,253
            
            
            
            63
            
            
            
            65Mortgage
      Backed Securities
            
            
            158,843
            
            
            
            157,799Marketable
      Equity Securities
            
            
            2
            
            
            
            2
            
            
            
            --
            
            
            
            --$
            178,297
            
            
            $
            177,054
            
            
            $
            63
            
            
            $
            65





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 six months of 2008
totaled $63,111 compared to $7,673 for the first six months of
2007.  The sale of investments available for sale during 2008 resulted
in gross realized gains of $1,187 and gross realized losses of $3 and the sale
of investments available for sale during 2007 resulted in gross realized gain of
$212 and losses of $26.





Investment
securities having a carry value approximating $91,651 and $89,145 as of June 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)





Information
pertaining to securities with gross unrealized losses at June 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
            
            
            TotalFair
      Value
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      Value
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      Value
            
            
            Gross
      Unrealized LossesJune
      30, 2008U.S.
      Government AgenciesMortgage
      Backed
            
            $
            100,997
            
            
            $
            (1,348
            )
            
            $
            4,211
            
            
            $
            (80
            )
            
            $
            105,208
            
            
            $
            (1,428
            )Other
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---State,
      County and Municipal
            
            
            4,765
            
            
            
            (114
            )
            
            
            420
            
            
            
            ---
            
            
            
            5,185
            
            
            
            (114
            )Corporate
      Obligations
            
            
            2,288
            
            
            
            (153
            )
            
            
            449
            
            
            
            (1
            )
            
            
            2,737
            
            
            
            (154
            )Marketable
      Equity Securities
            
            
            2
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            2
            
            
            
            ---$
            108,052
            
            
            $
            (1,615
            )
            
            $
            5,080
            
            
            $
            (81
            )
            
            $
            113,132
            
            
            $
            (1,696
            )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 June
30, 2008, the debt securities with unrealized losses have depreciated 1.48
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  June 30, 2008 and December 31, 2007 was as
follows:





June 30, 2008
            
            
            December 31, 2007Commercial,
      Financial and Agricultural
            
            $
            88,641
            
            
            $
            52,323Real
      Estate – Construction
            
            
            183,168
            
            
            
            211,484Real
      Estate – Farmland
            
            
            53,537
            
            
            
            42,439Real
      Estate – Other
            
            
            568,316
            
            
            
            544,655Installment
      Loans to Individuals
            
            
            45,230
            
            
            
            72,350All
      Other Loans
            
            
            15,395
            
            
            
            22,028$
            954,287
            
            
            $
            945,279





16
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





Nonaccrual
loans are loans for which principal and interest are doubtful of collection in
accordance with original loan terms and for which accruals of interest have been
discontinued due to payment delinquency.  Nonaccrual loans totaled
$17,953 and $14,956 as of June 30, 2008 and December 31, 2007, respectively and
total recorded investment in loans past due 90 days or more and still accruing
interest approximated $0 and $60, respectively.





(5) Allowance for Loan
Losses





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





June 30, 2008
            
            
            June 30, 2007Balance,
      Beginning
            
            $
            15,513
            
            
            $
            11,989Provision
      Charged to Operating Expenses
            
            
            5,142
            
            
            
            1,828Loans
      Charged Off
            
            
            (3,458
            )
            
            
            (1,485
            )Loan
      Recoveries
            
            
            269
            
            
            
            315Balance,
      Ending
            
            $
            17,466
            
            
            $
            12,647








(6) Premises and
Equipment





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





June 30, 2008
            
            
            December 31, 2007Land
            
            $
            7,799
            
            
            $
            7,799Building
            
            
            20,937
            
            
            
            20,901Furniture,
      Fixtures and Equipment
            
            
            13,440
            
            
            
            12,641Leasehold
      Improvements
            
            
            994
            
            
            
            994Construction
      in Progress
            
            
            1,318
            
            
            
            44844,488
            
            
            
            42,783Accumulated
      Depreciation
            
            
            (15,882
            )
            
            
            (14,974
            )$
            28,606
            
            
            $
            27,809








Depreciation
charged to operations totaled $992 and $932 for June 30, 2008 and June 30, 2007,
respectively.





Certain
Company facilities and equipment are leased under various operating
leases.  Rental expense approximated $188 and $184 for six months
ended June 30, 2008 and June 30, 2007, respectively.





17
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





(7) Goodwill and Intangible
Assets





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





Six Months Ended
            
            
            Six Months EndedJune30,
      2008
            
            
            June30,
      2007GoodwillBalance,
      Beginning
            
            $
            2,412
            
            
            $
            2,412Goodwill
      Acquired
            
            
            --
            
            
            
            --Balance,
      Ending
            
            $
            2,412
            
            
            $
            2,412Net
      Core Deposit, IntangibleBalance,
      Beginning
            
            $
            402
            
            
            $
            439Amortization
      Expense
            
            
            (18
            )
            
            
            (19
            )Balance,
      Ending
            
            $
            384
            
            
            $
            420








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





2008
            
            $
            182009
            
            
            362010
            
            
            362011
            
            
            362012
      and thereafter
            
            
            258$
            384





(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.





18
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





(9) Fair Value Measurements
(Continued)





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.  The
company’s current portfolio does not have level 3 securities as of June 30,
2008.  When measuring fair value, the valuation techniques available
under the market approach, income approach and/or cost approach are
used.  The Company’s evaluations are based on market data and the
Company employs combinations of these approaches for its valuation methods
depending on the asset class.





Impaired
loans





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





Fair Value Measurements at Reporting Date
      UsingJune 30, 2008
            
            
            Quoted Prices in Active Markets for Identical
      Assets
              (Level 1)
            
            
            Significant Other Observable
      Inputs
              (Level 2)
            
            
            Significant Unobservable
Inputs
              (Level 3)Securities
      Available for SaleU.S.
      Government AgenciesMortgage-Backed
            
            $
            157,799
            
            
            $
            ---
            
            
            $
            157,799
            
            
            $
            ---Other
            
            
            3,405
            
            
            
            ---
            
            
            
            3,405
            
            
            
            ---State,
      County & Municipal
            
            
            10,080
            
            
            
            ---
            
            
            
            10,080
            
            
            
            ---Corporate
      Obligations
            
            
            4,768
            
            
            
            ---
            
            
            
            4,768
            
            
            
            ---Asset-Backed
      Securities
            
            
            1,000
            
            
            
            ---
            
            
            
            1,000
            
            
            
            ---Marketable
      Equity Securities
            
            
            2
            
            
            
            ---
            
            
            
            2
            
            
            
            ---$
            177,054
            
            
            $
            ---
            
            
            $
            177,054
            
            
            $
            ---











Liabilities





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





19
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





(10) Deposits





The
aggregate amount of overdrawn deposit accounts reclassified as loan balances
totaled $533 and $574 as of June 30, 2008 and December 31, 2007.





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





June 30, 2008
            
            
            December 31, 2007Interest-Bearing
      Demand
            
            $
            196,261
            
            
            $
            190,304Savings
            
            
            35,293
            
            
            
            31,588Time,
      $100,000 and Over
            
            
            338,772
            
            
            
            347,219Other
      Time
            
            
            330,050
            
            
            
            363,379$
            900,376
            
            
            $
            932,490





At June
30, 2008 and December 31, 2007, the Company had brokered deposits of $63,316 and
$54,737 respectively.  The aggregate amount of short-term jumbo
certificates of deposit, each with a minimum denomination of $100,000 was
approximately $307,084 and $310,971 as of  June 30, 2008 and December
31, 2007, respectively.





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





Maturity
            
            June 30, 2008
            
            
            December 31, 2007One
      Year and Under
            
            $
            600,129
            
            
            $
            632,936One
      to Three Years
            
            
            59,345
            
            
            
            42,977Three
      Years and Over
            
            
            9,348
            
            
            
            34,685$
            668,822
            
            
            $
            710,598





(11) Other Borrowed
Money





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





June 30, 2008
            
            
            December 31, 2007Federal
      Home Loan Bank Advances
            
            $
            84,000
            
            
            $
            73,500Silverton
      Note Payable
            
            
            600
            
            
            
            100Barclay’s
      Master Repurchase Agreement
            
            
            20,000
            
            
            
            ---$
            104,600
            
            
            $
            73,600





Advances
from the Federal Home Loan Bank (FHLB) have maturities ranging from 2008 to 2019
and interest rates ranging from 2.41 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 June 30, 2008,
the Company had available line of credit commitments totaling $94,304, of which
$10,304 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.  As of June 30, 2008, $400 was available to be
drawn on the line of credit.





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.





20
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





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





Year
            
            Amount2008
            
            $
            3,0002009
            
            
            27,6002010
            
            
            1,0002011
            
            
            20,0002012
      and Thereafter
            
            
            53,000$
            104,600








The
Company also has available federal funds lines of credit with various financial
institutions totaling $64,300, of which $16,465  was outstanding at
June 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 June 30, 2008, the floating rate securities
had a 5.49 percent interest rate, which will reset quarterly at the three-month
LIBOR rate plus 2.68 percent





During
the second quarter of 2006, the Company formed a fourth subsidiary whose sole
purpose was to issue $5,000 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 June 30, 2008 the floating-rate securities had a 4.30
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 June 30, 2008, the floating-rate securities
had a 4.45 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 June 30, 2008, the floating-rate securities
had a 4.31 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 June 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 6,198
shares have been forfeited, thus remaining shares which may be subject to
restricted stock awards are 115,292 at June 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).





21
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





(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 six  months ended June 30,
2008 was $312 compared to $429 for the six months ended June 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.





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





Contract
      AmountJune 30, 2008
            
            
            December 31, 2007Loan
      Commitments
            
            $
            87,385
            
            
            $
            93,105Standby
      Letters of Credit
            
            
            2,651
            
            
            
            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.





Purchase
Commitments.As of June 30, 2008, the Company had an
outstanding commitment of approximately $1,967 to construct and furnish an
office in Savannah.  As of June 30, 2008, the Company has paid $1,269
toward construction in process.





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





Two of
the Bank subsidiaries have deferred compensation plans covering directors
choosing to participate through individual deferred compensation
contracts.  In accordance with terms of the contracts, the Banks are
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.





22
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





(16) Deferred Compensation Plan
(Continued)





Liabilities
accrued under the plans totaled $1,118 and $1,159 as of June 30, 2008 and
December 31, 2007, respectively.  Benefit payments under the contracts
were $115 and $95 for the six month period ended June 30, 2008 and June 30,
2007, respectively.   Provisions charged to operations totaled
$75 and $172 for the six month period ended June 30, 2008 and June 30, 2007,
respectively.





Fee
income recognized with deferred compensation plans totaled $104 and $91 for six
month period ended June 30, 2008 and


June 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.





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 June 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 June 30, 2008
and December 31, 2007 on a consolidated basis and for each significant
subsidiary, as defined.





To
      Be Well CapitalizedFor
      Capital
            
            
            Under
      Prompt CorrectiveActual
            
            
            Adequacy Purposes
            
            
            Action ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of June 30, 2008Total
      Capitalto
      Risk-Weighted AssetsConsolidated
            
            $
            117,235
            
            
            
            12.40
            %
            
            $
            75,637
            
            
            
            8.00
            %
            
            NA
            
            
            NAFitzgerald
            
            
            20,258
            
            
            
            13.42
            
            
            
            12,077
            
            
            
            8.00
            
            
            $
            15,097
            
            
            
            10.00
            %Ashburn
            
            
            29,353
            
            
            
            11.38
            
            
            
            20,642
            
            
            
            8.00
            
            
            
            25,803
            
            
            
            10.00Worth
            
            
            16,315
            
            
            
            11.52
            
            
            
            11,325
            
            
            
            8.00
            
            
            
            14,157
            
            
            
            10.00Southeast
            
            
            24,085
            
            
            
            13.25
            
            
            
            14,542
            
            
            
            8.00
            
            
            
            18,177
            
            
            
            10.00Quitman
            
            
            13,192
            
            
            
            12.13
            
            
            
            8,699
            
            
            
            8.00
            
            
            
            10,873
            
            
            
            10.00Tier
      1 Capitalto
      Risk-Weighted AssetsConsolidated
            
            $
            105,347
            
            
            
            11.14
            %
            
            $
            37,818
            
            
            
            4.00
            %
            
            NA
            
            
            NAFitzgerald
            
            
            18,357
            
            
            
            12.16
            
            
            
            6,039
            
            
            
            4.00
            
            
            $
            9,058
            
            
            
            6.00
            %Ashburn
            
            
            26,092
            
            
            
            10.11
            
            
            
            10,321
            
            
            
            4.00
            
            
            
            15,482
            
            
            
            6.00Worth
            
            
            14,538
            
            
            
            10.27
            
            
            
            5,663
            
            
            
            4.00
            
            
            
            8,494
            
            
            
            6.00Southeast
            
            
            21,800
            
            
            
            11.99
            
            
            
            7,271
            
            
            
            4.00
            
            
            
            10,906
            
            
            
            6.00Quitman
            
            
            11,833
            
            
            
            10.88
            
            
            
            4,349
            
            
            
            4.00
            
            
            
            6,524
            
            
            
            6.00Tier
      1 Capitalto
      Average AssetsConsolidated
            
            $
            105,347
            
            
            
            8.90
            %
            
            $
            47,326
            
            
            
            4.00
            %
            
            NA
            
            
            NAFitzgerald
            
            
            18,357
            
            
            
            9.59
            
            
            
            7,656
            
            
            
            4.00
            
            
            $
            9,569
            
            
            
            5.00
            %Ashburn
            
            
            26,092
            
            
            
            8.12
            
            
            
            12,847
            
            
            
            4.00
            
            
            
            16,059
            
            
            
            5.00Worth
            
            
            14,538
            
            
            
            8.16
            
            
            
            7,130
            
            
            
            4.00
            
            
            
            8,912
            
            
            
            5.00Southeast
            
            
            21,800
            
            
            
            10.55
            
            
            
            8,268
            
            
            
            4.00
            
            
            
            10,335
            
            
            
            5.00Quitman
            
            
            11,833
            
            
            
            7.83
            
            
            
            6,045
            
            
            
            4.00
            
            
            
            7,556
            
            
            
            5.00





23
 Table of Contents





Part
I (Continued)


Item 1
(Continued)





(17) Regulatory Capital Matters
(Continued)





To
      Be Well CapitalizedFor
      Capital
            
            
            Under
      Prompt CorrectiveActual
            
            
            Adequacy Purposes
            
            
            Action ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of December 31, 2007Total
      Capitalto
      Risk-Weighted AssetsConsolidated
            
            $
            116,222
            
            
            
            12.08
            %
            
            $
            76,944
            
            
            
            8.00
            %
            
            NA
            
            
            NAFitzgerald
            
            
            19,771
            
            
            
            12.65
            
            
            
            12,508
            
            
            
            8.00
            
            
            $
            15,635
            
            
            
            10.00
            %Ashburn
            
            
            29,873
            
            
            
            11.38
            
            
            
            21,000
            
            
            
            8.00
            
            
            
            26,251
            
            
            
            10.00Worth
            
            
            15,808
            
            
            
            11.23
            
            
            
            11,264
            
            
            
            8.00
            
            
            
            14,079
            
            
            
            10.00Southeast
            
            
            22,702
            
            
            
            12.19
            
            
            
            14,895
            
            
            
            8.00
            
            
            
            18,619
            
            
            
            10.00Quitman
            
            
            12,979
            
            
            
            11.70
            
            
            
            8,872
            
            
            
            8.00
            
            
            
            11,091
            
            
            
            10.00Tier
      1 Capitalto
      Risk-Weighted AssetsConsolidated
            
            $
            104,157
            
            
            
            10.83
            %
            
            $
            38,472
            
            
            
            4.00
            %
            
            NA
            
            
            NAFitzgerald
            
            
            17,809
            
            
            
            11.39
            
            
            
            6,254
            
            
            
            4.00
            
            
            $
            9,381
            
            
            
            6.00
            %Ashburn
            
            
            26,571
            
            
            
            10.12
            
            
            
            10,500
            
            
            
            4.00
            
            
            
            15,750
            
            
            
            6.00Worth
            
            
            14,043
            
            
            
            9.97
            
            
            
            5,632
            
            
            
            4.00
            
            
            
            8,448
            
            
            
            6.00Southeast
            
            
            20,364
            
            
            
            10.94
            
            
            
            7,447
            
            
            
            4.00
            
            
            
            11,171
            
            
            
            6.00Quitman
            
            
            11,592
            
            
            
            10.45
            
            
            
            4,436
            
            
            
            4.00
            
            
            
            6,654
            
            
            
            6.00Tier
      1 Capitalto
      Average AssetsConsolidated
            
            $
            104,157
            
            
            
            8.60
            %
            
            $
            48,467
            
            
            
            4.00
            %
            
            NA
            
            
            NAFitzgerald
            
            
            17,809
            
            
            
            9.13
            
            
            
            7,800
            
            
            
            4.00
            
            
            $
            9,750
            
            
            
            5.00
            %Ashburn
            
            
            26,571
            
            
            
            7.92
            
            
            
            13,426
            
            
            
            4.00
            
            
            
            16,783
            
            
            
            5.00Worth
            
            
            14,043
            
            
            
            7.87
            
            
            
            7,139
            
            
            
            4.00
            
            
            
            8,924
            
            
            
            5.00Southeast
            
            
            20,364
            
            
            
            9.72
            
            
            
            8,377
            
            
            
            4.00
            
            
            
            10,471
            
            
            
            5.00Quitman
            
            
            11,592
            
            
            
            7.86
            
            
            
            5,899
            
            
            
            4.00
            
            
            
            7,374
            
            
            
            5.00





24
 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 June 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


JUNE
30, 2008 AND DECEMBER 31, 2007





ASSETS
            
            June 30, 2008
            
            
            December 31, 2007(Unaudited)
            
            
            (Audited)Cash
            
            $
            269
            
            
            $
            973Premises
      and Equipment, Net
            
            
            1,223
            
            
            
            1,236Investment
      in Subsidiaries, at Equity
            
            
            106,959
            
            
            
            105,323Other
            
            
            591
            
            
            
            1,491Totals
      Assets
            
            $
            109,042
            
            
            $
            109,023LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDividends
      Payable
            
            $
            704
            
            
            $
            684Other
            
            
            286
            
            
            
            367990
            
            
            
            1,051Subordinated
      Debt
            
            
            24,229
            
            
            
            24,229Stockholders’
      EquityCommon
      Stock, Par Value $1 a Share; Authorized 20,000,000 Shares, Issued
      7,215,463 and 7,200,913 Shares as of June 30, 2008 and December 31, 2007,
      Respectively
            
            
            7,215
            
            
            
            7,201Paid-In
      Capital
            
            
            24,589
            
            
            
            24,420Retained
      Earnings
            
            
            53,185
            
            
            
            52,087Restricted
      Stock - Unearned Compensation
            
            
            (346
            )
            
            
            (237
            )Accumulated
      Other Comprehensive Loss, Net of Tax
            
            
            (820
            )
            
            
            27283,823
            
            
            
            83,743Total
      Liabilities and Stockholders' Equity
            
            $
            109,042
            
            
            $
            109,023





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 INCOME AND COMPREHENSIVE INCOME


FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND JUNE 30, 2007


(UNAUDITED)





JUNE 30, 2008
            
            
            JUNE 30, 2007IncomeDividends
      from Subsidiaries
            
            $
            2,521
            
            
            $
            3,030Other
            
            
            47
            
            
            
            762,568
            
            
            
            3,106ExpensesInterest
            
            
            666
            
            
            
            985Salaries
      and Employee Benefits
            
            
            474
            
            
            
            549Other
            
            
            728
            
            
            
            5391,868
            
            
            
            2,073Income
      Before Taxes and Equity in Undistributed Earnings of
      Subsidiaries
            
            
            700
            
            
            
            1,033Income
      Tax (Benefits)
            
            
            (577
            )
            
            
            (612
            )Income
      Before Taxes and Equity in Undistributed Earnings of
      Subsidiaries
            
            
            1,277
            
            
            
            1,645Equity
      in Undistributed Earnings of Subsidiaries
            
            
            1,228
            
            
            
            3,531Net
      Income
            
            
            2,505
            
            
            
            5,176Other
      Comprehensive Income, Net of TaxGains
      (Losses) on Securities Arising During Year
            
            
            (311
            )
            
            
            (407
            )Reclassification
      Adjustment
            
            
            (781
            )
            
            
            (123
            )Unrealized
      Gains (Losses) in Securities
            
            
            (1,092
            )
            
            
            (530
            )Comprehensive
      Income
            
            $
            1,413
            
            
            $
            4,646





26
 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 SIX MONTHS ENDED JUNE 30, 2008 AND JUNE 30, 2007


(UNAUDITED)





2008
            
            
            2007Cash
      Flows from Operating ActivitiesNet
      Income
            
            $
            2,505
            
            
            $
            5,176Adjustments
      to Reconcile Net Income to Net Cash Provided from Operating
      ActivitiesDepreciation
      and Amortization
            
            
            152
            
            
            
            163Equity
      in Undistributed Earnings of Subsidiary
            
            
            (1,228
            )
            
            
            (3,531
            )Other
            
            
            784
            
            
            
            972,213
            
            
            
            1,905Cash
      Flows from Investing ActivitiesCapital
      Infusion in Subsidiary
            
            
            (1,500
            )
            
            
            ---Purchases
      of Premises and Equipment
            
            
            (29
            )
            
            
            (16
            )Investment
      in Capital Trust
            
            
            ---
            
            
            
            (279
            )Liquidation
      of Statutory Trust
            
            
            ---
            
            
            
            279(1,529
            )
            
            
            (16
            )Cash
      Flows from Financing ActivitiesDividends
      Paid
            
            
            (1,388
            )
            
            
            (1,242
            )Proceeds
      from Issuance of Subordinated Debentures
            
            
            ---
            
            
            
            9,279Principal
      Payment on Subordinated Debentures
            
            
            ---
            
            
            
            (9,279
            )(1,388
            )
            
            
            (1,242
            )Net
      Increase in Cash
            
            
            (704
            )
            
            
            647Cash,
      Beginning
            
            
            973
            
            
            
            2,224Cash,
      Ending
            
            $
            269
            
            
            $
            2,871





27
 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 six months ended June 30, 2008 and 2007, respectively,
under the requirements of Statement 128:





Three
      Months Ended
            
            
            Three
      Months EndedJune 30, 2008
            
            
            June 30, 2007Income
      Numerator
            
            
            Common
      Shares Denominator
            
            
            EPS
            
            
            Income
      Numerator
            
            
            Common
      Shares Denominator
            
            
            EPSBasic
      EPSIncome
      Available to Common Stockholders
            
            $
            292
            
            
            
            7,198
            
            
            $
            0.04
            
            
            $
            2,702
            
            
            
            7,188
            
            
            $
            0.38Dilutive
      Effect of Potential Common StockRestricted
      Stock
            
            
            
            
            
            
            0
            
            
            
            
            
            
            
            
            
            
            
            10Diluted
      EPSIncome
      Available to Common Stockholders After Assumed Conversions of Dilutive
      Securities
            
            $
            292
            
            
            
            7,198
            
            
            $
            0.04
            
            
            $
            2,702
            
            
            
            7,198
            
            
            $
            0.38











Six
      Months Ended
            
            
            Six
      Months EndedJune
      30, 2008
            
            
            June
      30, 2007Income
      Numerator
            
            
            Common
      Shares Denominator
            
            
            EPS
            
            
            Income
      Numerator
            
            
            Common
      Shares Denominator
            
            
            EPSBasic
      EPSIncome
      Available to Common Stockholders
            
            $
            2,505
            
            
            
            7,195
            
            
            $
            0.35
            
            
            $
            5,176
            
            
            
            7,185
            
            
            $
            0.72Dilutive
      Effect of Potential Common StockRestricted
      Stock
            
            
            
            
            
            
            0
            
            
            
            
            
            
            
            
            
            
            
            11Diluted
      EPSIncome
      Available to Common Stockholders After Assumed Conversions of Dilutive
      Securities
            
            $
            2,505
            
            
            
            7,195
            
            
            $
            0.35
            
            
            $
            5,176
            
            
            
            7,196
            
            
            $
            0.72





28
 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.





29
 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 subsidiaries (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.





30
 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 June 30, 2008 and 2007, and
results of operations for each of the six months in the periods ended June 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 $0.29 million,
or $0.04 diluted per common share, in three months ended June 30, 2008 compared
to $2.70 million, or $0.38 diluted per common share, in three months ended June
30, 2007.  Net income totaled $2.51 million, or $0.35 diluted per
common share, in six months ended June 30, 2008 compared to $5.18 million, or
$0.72 diluted per common share, in six months ended June 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
            
            
            Six
      Months EndedJune 30
            
            
            June 302008
            
            
            2007
            
            
            2008
            
            
            2007Taxable-equivalent
      net interest income
            
            $
            9,119
            
            
            $
            10,916
            
            
            $
            18,818
            
            
            $
            21,446Taxable-equivalent
      adjustment
            
            
            76
            
            
            
            91
            
            
            
            170
            
            
            
            170Net
      interest income
            
            
            9,043
            
            
            
            10,825
            
            
            
            18,648
            
            
            
            21,276Provision
      for possible loan losses
            
            
            4,071
            
            
            
            914
            
            
            
            5,142
            
            
            
            1,828Noninterest
      income
            
            
            3,034
            
            
            
            2,056
            
            
            
            5,405
            
            
            
            4,166Noninterest
      expense
            
            
            7,714
            
            
            
            7,965
            
            
            
            15,471
            
            
            
            15,874Income
      before income taxes
            
            
            292
            
            
            
            4,002
            
            
            
            3,440
            
            
            
            7,740Income
      Taxes
            
            
            ---
            
            
            
            1,300
            
            
            
            935
            
            
            
            2,564Net
      income
            
            $
            292
            
            
            $
            2,702
            
            
            $
            2,505
            
            
            $
            5,176Net
      Income per common share:Basic
            
            $
            0.04
            
            
            $
            0.38
            
            
            $
            0.35
            
            
            $
            0.72Diluted
            
            $
            0.04
            
            
            $
            0.38
            
            
            $
            0.35
            
            
            $
            0.72Return
      on average assets
            
            
            0.10
            %
            
            
            0.90
            %
            
            
            0.42
            %
            
            
            0.86
            %Return
      on average equity
            
            
            1.36
            %
            
            
            13.58
            %
            
            
            5.86
            %
            
            
            13.17
            %





31
 Table of Contents





Part
I (Continued)


Item 2
(Continued)





Income
from operations for three months ended June 30, 2008 decreased $2.41 million, or
89.19 percent, compared to the same period in 2007.  The decrease was
primarily the result of a $1.78 million decrease in net interest income, an
increase of $0.98 million in noninterest income, an increase of $3.16 million in
provision for possible loan losses, a decrease of $1.30 million in income
taxes  and a decrease of $0.25 million in noninterest
expense.





Net
income for six months ended June 30, 2008 decreased $2.67 million, or 51.6
percent compared to the same period in 2007. The decrease was primarily the
result of a decrease of $2.63 million in net interest income and an increase of
$3.31 million in provision for possible loan loss.  This was offset by
an increase of $1.24 million in non-interest income, a decrease of $0.40 in
non-interest expense and a decrease of $1.63 in income taxes.





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 77.53 percent of
total revenue for six months ended June 30, 2008 and 83.63 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 half of 2008 the
federal funds rate ended the quarter at 2.00 percent.  We anticipate
the Federal Reserve holding interest rates at the current level the last half of
2008 with a bias toward tightening policy in 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.





32
 Table of Contents





Part
I (Continued)


Item 2
(Continued)





Rate/Volume
Analysis





The
rate/volume analysis presented hereafter illustrates the change from June 30,
2007 to June 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 June 30, 2007 to June 30, 2008 (1)($ in thousands)
            
            Volume
            
            
            Rate
            
            
            TotalInterest
      IncomeLoans,
      Net-taxable
            
            $
            544
            
            
            $
            (5,637
            )
            
            $
            (5,093
            )Investment
      SecuritiesTaxable
            
            
            ---
            
            
            
            170
            
            
            
            170Tax-exempt
            
            
            (23
            )
            
            
            11
            
            
            
            (12
            )Total
      Investment Securities
            
            
            (23
            )
            
            
            181
            
            
            
            158Interest-Bearing
      Deposits in other Banks
            
            
            (33
            )
            
            
            (22
            )
            
            
            (55
            )Federal
      Funds Sold
            
            
            (539
            )
            
            
            (189
            )
            
            
            (728
            )Other
      Interest - Earning Assets
            
            
            21
            
            
            
            (4
            )
            
            
            17Total
      Interest Income
            
            
            (30
            )
            
            
            (5,671
            )
            
            
            (5,701
            )Interest
      ExpenseInterest-Bearing
      Demand and Savings Deposits
            
            
            96
            
            
            
            (537
            )
            
            
            (441
            )Time
      Deposits
            
            
            (1,214
            )
            
            
            (1,478
            )
            
            
            (2,692
            )Federal
      Funds Purchased and Repurchase Agreements
            
            
            48
            
            
            
            (33
            )
            
            
            15Subordinated
      Debentures
            
            
            (28
            )
            
            
            (291
            )
            
            
            (319
            )Other
      Borrowed Money
            
            
            446
            
            
            
            (82
            )
            
            
            364Total
      Interest Expense
            
            
            (652
            )
            
            
            (2,421
            )
            
            
            (3,073
            )Net
      Interest Income
            
            $
            622
            
            
            $
            (3,250
            )
            
            $
            (2,628
            )





(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.





33
 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 38.5 percent of its loan portfolio in adjustable
rate loans that reprice with prime rate changes, while the bulk of its other
loans mature within 3 years. The liabilities to fund assets are primarily in
short term 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 six months
ended June 30, 2008 compared to 3.78 percent for the same period a year ago. We
anticipate improved net interest margin the balance of 2008 given the Federal
Reserve’s present interest rate forecast of neutral to tightening for the
balance of 2008.





Taxable-equivalent
net interest income for six months ended June 30, 2008 decreased $2.63 million,
or 12.25 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 six months ended June 30, 2008 decreased almost $9.49 million compared to
the same period a year ago while over the same period the net interest margin
decreased by 44 basis points from 3.78  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 $12.7 million in six months ended June 30,
2008 compared to the same period a year ago.  The average yield on
loans decreased 119 basis points in six months ended June 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 $36.4 million in six months ended June 30, 2008
compared to the same period a year ago, with interest-bearing deposits
decreasing $38 million in six months ended June 30,
2008.  Accordingly, the ratio of average interest-bearing deposits to
total average deposits was 92.2 percent in six months ended June 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 48 basis points in six months ended June 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 2.96 percent in six months ended June 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 $5.14 million in six months ended June 30,
2008 compared to $1.83 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.





34
 Table of Contents





Part
I (Continued)


Item 2
(Continued)





Noninterest
Income





The
components of noninterest income were as follows:





Three
      Months Ended
            
            
            Six
      Months EndedJune 30
            
            
            June 302008
            
            
            2007
            
            
            2008
            
            
            2007Service
      Charges on Deposit Accounts
            
            $
            1,173
            
            
            $
            1,214
            
            
            $
            2,338
            
            
            $
            2,332Other
      Charges, Commissions and Fees
            
            
            241
            
            
            
            239
            
            
            
            495
            
            
            
            485Other
            
            
            832
            
            
            
            315
            
            
            
            1,045
            
            
            
            625Mortgage
      Fee Income
            
            
            174
            
            
            
            286
            
            
            
            343
            
            
            
            538Securities
      Gains
            
            
            614
            
            
            
            2
            
            
            
            1,184
            
            
            
            186Total
            
            $
            3,034
            
            
            $
            2,056
            
            
            $
            5,405
            
            
            $
            4,166





Total
noninterest income for three months ended June 30, 2008 increased $978 thousand,
or 47.57 percent compared to the same period a year ago. Total noninterest
income for six months ended June 30, 2008 increased $1.24 million, or 29.74
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 June 30, 2008 decreased $41 thousand, or 3.38 percent, compared to the
same period a year ago.   Service charges on deposit accounts for
the six months ended June 30, 2008 increased $6 thousand, or 0.26 percent,
compared to the same year ago period.





Mortgage Fee
Income.  Mortgage fee income for three months ended June 30,
2008 decreased $112 thousand, or 39.16 percent, compared to the same period year
ago.   Mortgage fee income for six months ended June 30, 2008
decreased $195 thousand, or 36.25 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 June 30, 2008 was $1.07 million compared to $554 thousand
in the same year ago period, or an increase of 93.7 percent.  Other
charges, commissions and fees, and other income for six months ended June 30,
2008 was $1.54 million compared to $1.11 million in the same year ago period, or
an increase of 38.74 percent.  The significant increase impacting both
periods 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 $614 thousand in three months ended June 30, 2008  compared to $2
thousand in the same year ago period and realized gains from the sale of
securities of $1.18 million in six months ended June 30, 2008 compared to $186
thousand in the same year ago period.





Noninterest
Expense





The
components of noninterest expense were as follows:





Three
      Months Ended
            
            
            Six
      Months EndedJune 30
            
            
            June 302008
            
            
            2007
            
            
            2008
            
            
            2007Salaries
      and Employee Benefits
            
            $
            4,029
            
            
            $
            4,687
            
            
            $
            8,432
            
            
            $
            9,229Occupancy
      and Equipment
            
            
            1,061
            
            
            
            1,010
            
            
            
            2,068
            
            
            
            2,011Other
            
            
            2,624
            
            
            
            2,268
            
            
            
            4,971
            
            
            
            4,634Total
            
            $
            7,714
            
            
            $
            7,965
            
            
            $
            15,471
            
            
            $
            15,874





35
 Table of Contents





Part
I (Continued)


Item 2
(Continued)





Total
noninterest expense for three months ended June 30, 2008 decreased $251
thousand, or 3.15 percent, compared to the same period a year ago. Total
noninterest expense for six months ended June 30, 2007 decreased $403 thousand,
or 2.54 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 June 30, 2008 decreased $658  thousand, or 14.04 percent,
compared to the same period a year ago.  Salaries and employee
benefits expense for the six months ended June 30, 2008 decreased $797 thousand,
or 8.64 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 first half of 2008 was
adjusted as projected payouts based on company performance the first half of
2008 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 $51  thousand for
three months ended June 30, 2008 compared to the same year ago period and an
increase of $57 thousand for six months ended June 30, 2008 compared to the same
year ago period.





All Other Non-Interest
Expense.  All other noninterest expense for three months ended
June 30, 2008 increased $356 thousand, or 15.70 percent compared to the same
year ago period.  All other noninterest expense for six months ended
June 30, 2008 increased $337 thousand, or 7.27 percent compared to the same year
ago period.  Significant increases impacting the comparable periods
include the FDIC insurance assessment and consultation expenses.  For
the six months ended June 30, 2008, FDIC insurance assessments increased to $263
thousand from $82 thousand in the same year ago period, or an increase of 220.73
percent and consultation expense increased to $484 thousand from $164 thousand,
or an increase of 195.12 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 to account 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 $1.188  billion in six months ended June 30,
2008 compared to $1.199 billion in six months ended June 30, 2007.





Six
      Months EndedJune 30,Sources
      of Funds:
            
            2008
            
            
            2007Deposits:Noninterest-Bearing
            
            $
            77,602
            
            
            
            6.53
            %
            
            $
            76,053
            
            
            
            6.35
            %Interest-Bearing
            
            
            912,188
            
            
            
            76.78
            
            
            
            950,182
            
            
            
            79.26Federal
      Funds Purchased and Repo Agreements
            
            
            3,233
            
            
            
            0.27
            
            
            
            1,413
            
            
            
            0.12Long-term
      Debt and Other Borrowings
            
            
            103,345
            
            
            
            8.70
            
            
            
            84,030
            
            
            
            7.01Other
      Noninterest-Bearing Liabilities
            
            
            6,150
            
            
            
            0.52
            
            
            
            8,534
            
            
            
            0.71Equity
      Capital
            
            
            85,483
            
            
            
            7.20
            
            
            
            78,580
            
            
            
            6.55Total
            
            $
            1,188,001
            
            
            
            100.00
            %
            
            $
            1,198,792
            
            
            
            100.00
            %Uses
      of Funds:Loans
            
            $
            932,828
            
            
            
            78.52
            %
            
            $
            923,301
            
            
            
            77.02
            %Securities
            
            
            153,847
            
            
            
            12.95
            
            
            
            154,674
            
            
            
            12.90Federal
      Funds Sold
            
            
            16,492
            
            
            
            1.39
            
            
            
            37,266
            
            
            
            3.11Interest-Bearing
      Deposits in Other Banks
            
            
            1,604
            
            
            
            0.13
            
            
            
            2,867
            
            
            
            0.24Other
      Interest-Earning Assets
            
            
            5,784
            
            
            
            0.49
            
            
            
            5,068
            
            
            
            0.42Other
      Noninterest-Earning Assets
            
            
            77,446
            
            
            
            6.52
            
            
            
            75,616
            
            
            
            6.31Total
            
            $
            1,188,001
            
            
            
            100.00
            %
            
            $
            1,198,792
            
            
            
            100.00
            %





36
 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 92.16
percent of total average deposits in six months ended June 30, 2008 compared to
92.59 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 $954 million at June 30, 2008, up 0.95
percent, compared to loans of $945 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
June 30, 2008 and December 31, 2007:








June 30, 2008
            
            
            December 31, 2007Commercial,
      Financial and Agricultural
            
            $
            88,641
            
            
            $
            52,323Real
      EstateConstruction
            
            
            183,168
            
            
            
            211,484Mortgage,
      Farmland
            
            
            53,537
            
            
            
            42,439Mortgage,
      Other
            
            
            568,316
            
            
            
            544,655Consumer
            
            
            45,230
            
            
            
            72,350Other
            
            
            15,395
            
            
            
            22,028954,287
            
            
            
            945,279Unearned
      Interest and Fees
            
            
            (213
            )
            
            
            (301
            )Allowance
      for Loan Losses
            
            
            (17,466
            )
            
            
            (15,513
            )Loans
            
            $
            936,608
            
            
            $
            929,465





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





Maturity and Repricing
      Opportunity
            
            ($ in Thousands)One
      Year or Less
            
            $
            617,243After
      One Year through Three Years
            
            
            271,753After
      Three Years through Five Years
            
            
            52,575Over
      Five Years
            
            
            12,716$
            954,287





Overview. Loans totaled
$954.1 million at June 30, 2008, up 0.93 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 59.55 percent and 57.62 percent of total loans, real estate
construction made up 19.19 percent and 22.37 percent, while commercial,
financial and agricultural made up 9.29 percent and 5.54 percent of total loans
at June 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.





37
 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
June 30, 2008 increased 69.4 percent from December 31, 2007 to $88.6 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; however, these loans are well collateralized
and, in management’s opinion, do not pose an adverse credit risk.  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.





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.





June 30, 2008
            
            
            December 31, 2007Number
      of
            
            
            Period
      End Balances
            
            
            Number
      of
            
            
            Period
      End BalancesRelationships
            
            
            Committed
            
            
            Outstanding
            
            
            Relationships
            
            
            Committed
            
            
            OutstandingLarge
      Credit Relationships:$10
      million and greater
            
            
            2
            
            
            $
            30,032
            
            
            $
            19,512
            
            
            
            3
            
            
            $
            38,957
            
            
            $
            23,441$5
      million to $9.9 million
            
            
            11
            
            
            $
            68,845
            
            
            $
            66,301
            
            
            
            15
            
            
            $
            92,595
            
            
            $
            89,677








Maturities and Sensitivities of
Loans to Changes in Interest Rates.  The following table
presents the maturity distribution of the Company’s loans at June 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.





38
 Table of Contents





Part
I (Continued)


Item 2
(Continued)





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
            
            $
            253,442
            
            
            $
            269,403
            
            
            $
            52,508
            
            
            $
            12,378
            
            
            $
            587,731Loans
      with floating interest rates
            
            
            363,801
            
            
            
            2,350
            
            
            
            67
            
            
            
            338
            
            
            
            366,556Total
            
            $
            617,243
            
            
            $
            271,753
            
            
            $
            52,575
            
            
            $
            12,716
            
            
            $
            954,287





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 June 30, 2008 and December 31, 2007
were as follows:





June 30, 2008
            
            
            December 31, 2007Loans
      accounted for on nonaccrual
            
            $
            17,953
            
            
            $
            14,956Loans
      past due 90 days or more
            
            
            ---
            
            
            
            60Other
      real estate foreclosed
            
            
            3,198
            
            
            
            1,332Total
      non-performing assets
            
            $
            21,151
            
            
            $
            16,348Non-performing
      assets as a percentage of:Total
      loans and foreclosed assets
            
            
            2.21
            %
            
            
            1.73
            %Total
      assets
            
            
            1.75
            %
            
            
            1.35
            %Accruing
      past due loans:30-89
      days past due
            
            $
            12,154
            
            
            $
            15,68190
      or more days past due
            
            
            ---
            
            
            
            60Total
      accruing past due loans
            
            $
            12,154
            
            
            $
            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 June 30,
2008 increased 29.38 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.





39
 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.





June 30, 2008
            
            
            December 31,
2007Reserve
            
            
            
            %
            *
            
            Reserve
            
            
            
            %
            *Commercial,
      Financial and Agricultural
            
            $
            4,978
            
            
            
            9
            %
            
            $
            3,645
            
            
            
            6
            %Real
      Estate – Construction
            
            
            2,882
            
            
            
            19
            %
            
            
            2,560
            
            
            
            22
            %Real
      Estate – Farmland
            
            
            699
            
            
            
            6
            %
            
            
            621
            
            
            
            4
            %Real
      Estate – Other
            
            
            6,113
            
            
            
            59
            %
            
            
            5,430
            
            
            
            58
            %Loans
      to Individuals
            
            
            1,834
            
            
            
            5
            %
            
            
            2,404
            
            
            
            8
            %All
      other Loans
            
            
            960
            
            
            
            2
            %
            
            
            853
            
            
            
            2
            %Total
            
            $
            17,466
            
            
            
            100
            %
            
            $
            15,513
            
            
            
            100
            %





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





40
 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)
            
            June 30, 2008
            
            
            June 30, 2007Allowance
      for Loan Losses at Beginning of Quarter
            
            $
            15,220
            
            
            $
            12,170Charge-OffCommercial,
      Financial and Agricultural
            
            
            411
            
            
            
            81Real
      Estate
            
            
            1,479
            
            
            
            208Consumer
            
            
            88
            
            
            
            155All
      Other
            
            
            49
            
            
            
            592,027
            
            
            
            503RecoveriesCommercial,
      Financial and Agricultural
            
            
            44
            
            
            
            3Real
      Estate
            
            
            112
            
            
            
            4Consumer
            
            
            39
            
            
            
            49All
      Other
            
            
            7
            
            
            
            10202
            
            
            
            66Net
      Charge-Offs
            
            
            1,825
            
            
            
            437Provision
      for Loan Losses
            
            
            4,071
            
            
            
            914Allowance
      for Loan Losses at End of Quarter
            
            $
            17,466
            
            
            $
            12,647Ratio
      of Net Charge-Offs to Average Loans
            
            
            0.19
            %
            
            
            0.05
            %





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 $3.16 million from $914 thousand in three months ended June 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 2.21 percent at June 30, 2008 compared to 0.72
percent at June 30, 2007 and 1.73 percent at December 31, 2007.





Net
charge-offs in three months ended June 30, 2008 increased $1.39 million compared
to the same period a year ago.  Net charge- offs of 0.19 percent for
second quarter 2008 annualizes to 0.76 percent for the year.  Net
charge-offs the past three years have averaged 0.30 percent; however, we
anticipate an increase 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 adequate as of June 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.





41
 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.





Six Months Ended
            
            
            Six Months Ended($ in
      thousands)
            
            June 30, 2008
            
            
            June 30, 2007Allowance
      for Loan Losses at Beginning of Quarter
            
            $
            15,513
            
            
            $
            11,989Charge-OffCommercial,
      Financial and Agricultural
            
            
            662
            
            
            
            525Real
      Estate
            
            
            2,514
            
            
            
            658Consumer
            
            
            230
            
            
            
            196All
      Other
            
            
            52
            
            
            
            1063,458
            
            
            
            1,485RecoveriesCommercial,
      Financial and Agricultural
            
            
            59
            
            
            
            22Real
      Estate
            
            
            123
            
            
            
            205Consumer
            
            
            68
            
            
            
            71All
      Other
            
            
            19
            
            
            
            17269
            
            
            
            315Net
      Charge-Offs
            
            
            3,189
            
            
            
            1,170Provision
      for Loan Losses
            
            
            5,142
            
            
            
            1,828Allowance
      for Loan Losses at End of Quarter
            
            $
            17,466
            
            
            $
            12,647Ratio
      of Net Charge-Offs to Average Loans
            
            
            0.34
            %
            
            
            0.13
            %





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 $3.31 million from $1,828 thousand in six months ended June 30,
2007 to $5,142 thousand in six months ended June 30, 2008.  Provisions
increased during first half of 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 six months ended June 30, 2008 increased $2,019 thousand compared
to the same period a year ago.  Net charge-offs of 0.34 percent for
first half of 2008 that annualizes to 0.68 percent is above our net charge-off
ratio for the past several years.   We anticipate annual net
charge-offs to be in the 0.70 to 0.80 percent range for 2008.





Management
believes the level of the allowance for loan losses was adequate as of June 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.





42
 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 June 30, 2008 and December 31, 2007.





($ in
      thousands)
            
            June 30, 2008
            
            
            December 31, 2007U.S.
      Government Agencies
            
            $
            3,405
            
            
            $
            37,096State,
      County and Municipal
            
            
            10,143
            
            
            
            13,983Corporate
      Obligations
            
            
            4,768
            
            
            
            5,787Asset-Backed
      Securities
            
            
            1,000
            
            
            
            1,00019,316
            
            
            
            57,866Marketable
      Equity Securities
            
            
            2
            
            
            
            2Mortgage
      Backed Securities
            
            
            157,799
            
            
            
            109,323Total
      Investment Securities and Mortgage Backed Securities
            
            $
            177,117
            
            
            $
            167,191





The
following table represents maturities and weighted-average yields of investment
securities held by the Company as of June 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.)








After
      1 Year But
            
            
            After
      5 Years But
            
            
            After
      10 YearsWithin 1 Year
            
            
            Within 5 Years
            
            
            Within 10 YearsAmount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            YieldU.
      S. Government Agencies
            
            $
            3,405
            
            
            
            3.89
            %
            
            $
            ---
            
            
            
            ---
            %
            
            $
            ---
            
            
            
            ---
            %
            
            $
            ---
            
            
            
            ---
            %Mortgage
      Backed Securities
            
            
            8,114
            
            
            
            4.45
            
            
            
            91,546
            
            
            
            4.72
            
            
            
            53,712
            
            
            
            5.12
            
            
            
            4,427
            
            
            
            4.92State,
      County and Municipal
            
            
            1,416
            
            
            
            4.12
            
            
            
            3,322
            
            
            
            5.49
            
            
            
            3,587
            
            
            
            5.80
            
            
            
            1,818
            
            
            
            5.10Corporate
      Obligations
            
            
            449
            
            
            
            3.99
            
            
            
            3,288
            
            
            
            6.20
            
            
            
            1,031
            
            
            
            5.67
            
            
            
            ---
            
            
            
            ---Marketable
      Securities
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            2
            
            
            
            ---Asset-Backed
      Securities
            
            
            ---
            
            
            
            ---
            
            
            
            1,000
            
            
            
            6.33
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Total
      Investment Portfolio
            
            $
            13,384
            
            
            
            4.26
            %
            
            $
            99,156
            
            
            
            4.81
            %
            
            $
            58,330
            
            
            
            5.17
            %
            
            $
            6,247
            
            
            
            4.97
            %





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 June
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 4.92 percent in six months ended
June 30, 2008 compared to 4.69 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.





43
 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 three month periods ended June 30, 2008
and June 30, 2007.





June 30,
      2008
            
            
            June 30,
      2007Average
            
            
            Average
            
            
            Average
            
            
            Average($
      in thousands)
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            RateNoninterest-Bearing
      Demand Deposits
            
            $
            77,602
            
            
            
            
            
            $
            76,053Interest-Bearing
      Demand and Savings Deposits
            
            
            222,169
            
            
            
            1.65
            %
            
            
            213,112
            
            
            
            2.13
            %Time
      Deposits
            
            
            690,019
            
            
            
            4.73
            %
            
            
            737,070
            
            
            
            5.16
            %Total
      Deposits
            
            $
            989,790
            
            
            
            3.67
            %
            
            $
            1,026,235
            
            
            
            4.15
            %





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





($
      in thousands)
              
              Time Deposits $100,000 or
      Greater
              
              
              Time Deposits Less Than
      $100,000
              
              
              TotalMonths
      to Maturity3
      or Less
              
              $
              110,179
              
              
              $
              89,190
              
              
              $
              199,369Over
      3 through 12 Months
              
              
              196,905
              
              
              
              203,855
              
              
              
              400,760Over
      12 Months through 36 Months
              
              
              28,395
              
              
              
              30,950
              
              
              
              59,345Over
      36 Months
              
              
              3,293
              
              
              
              6,055
              
              
              
              9,348$
              338,772
              
              
              $
              330,050
              
              
              $
              668,822





Average
deposits decreased $36.4 million to $990 million at June 30, 2008 from $1,026
million at June 30, 2007.  The decrease included an increase of $1.55
million, or 2.04 percent, related to noninterest-bearing
deposits.  Accordingly the ratio of average noninterest-bearing
deposits to total average deposits was 7.84 percent for six months ended June
30, 2008 compared to 7.41 percent for six months ended June 30,
2007.  The general decrease in market rates, had the effect of (i)
decreasing the average cost of total deposits by 48 basis points in six months
ended June 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 $38 million, or 4.00 percent in six
months ended June 30, 2008 compared to the same period a year
ago.  The decline in average deposits at June 30, 2008 compared to
June 30, 2007 was primarily in time accounts.    With the
current interest rate environment, it appears that many customers are looking
for an alternative to invest their funds and are not choosing to maintain such
funds 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 June 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.





44
 Table of Contents





Part
I (Continued)


Item 2
(Continued)





Payments
      Due by Period1 Year or Less
            
            
            More than 1 Year but Less Than 3
      Years
            
            
            3 Years or More but Less Than 5
      Years
            
            
            5 Years or More
            
            
            TotalContractual
      obligations:Subordinated
      debentures
            
            $
            ----
            
            
            $
            ----
            
            
            $
            ----
            
            
            $
            24,229
            
            
            $
            24,229Federal
      Funds purchased and repurchase agreements
            
            
            16,465
            
            
            
            20,000
            
            
            
            ----
            
            
            
            ----
            
            
            
            36,465Other
      Borrowed money
            
            
            600
            
            
            
            ----
            
            
            
            ----
            
            
            
            ----
            
            
            
            600Federal
      Home Loan Bank advances
            
            
            30,000
            
            
            
            1,000
            
            
            
            41,000
            
            
            
            12,000
            
            
            
            84,000Operating
      leases
            
            
            126
            
            
            
            179
            
            
            
            158
            
            
            
            31
            
            
            
            494Deposits
      with stated maturity dates
            
            
            600,129
            
            
            
            59,345
            
            
            
            9,228
            
            
            
            120
            
            
            
            668,822647,320
            
            
            
            80,524
            
            
            
            50,386
            
            
            
            36,380
            
            
            
            814,610Other
      commitments:Loan
      commitments
            
            
            87,385
            
            
            
            ----
            
            
            
            ----
            
            
            
            ----
            
            
            
            87,385Standby
      letters of credit
            
            
            2,651
            
            
            
            ----
            
            
            
            ----
            
            
            
            ----
            
            
            
            2,651Construction
      contracts
            
            
            698
            
            
            
            ----
            
            
            
            ----
            
            
            
            ----
            
            
            
            69890,734
            
            
            
            ----
            
            
            
            ----
            
            
            
            ----
            
            
            
            90,734Total
      contractual obligations andOther
      commitments
            
            $
            738,054
            
            
            $
            80,524
            
            
            $
            50,386
            
            
            $
            36,380
            
            
            $
            905,344





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 June 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 June 30,
2008 are included in the table above.





Capital
and Liquidity





At June
30, 2008, stockholders’ equity totaled $83.82 million compared to $83.74 million
at December 31, 2007. In addition to net income of $2.51 million, other
significant changes in stockholders’ equity during six months ended June 30,
2008 included $1.41 million of dividends declared and an increase of $0.11
million resulting from the amortization of the stock grant plan. The accumulated
other comprehensive income (loss) component of stockholders’ equity totaled
$(820) thousand at June 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.





45
 Table of Contents





Part
I (Continued)


Item 2
(Continued)





Using the
capital requirements presently in effect, the Tier 1 ratio as of June 30, 2008
was 11.14 percent and total Tier 1 and 2 risk-based capital was 12.40
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 June 30, 2008 was
8.90 percent, which exceeds the required ratio standard of 4
percent.





For six
months ended June 30, 2008, average capital was $85.5 million, representing 7.20
percent of average assets for the year.   This compares to 6.55
percent for six months ended June 30, 2007 and 6.69 percent for calendar year
2007.





The
Company declared cash dividends of $0.195 per common share during the first half
of 2008, and a cash dividend of $0.1775 per common share during the first half
of 2007, respectively.  This equates to a dividend payout ratio of
55.71 percent for first half  2008 compared to 24.65 percent for the
same period a year ago.





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





Management
monitors deposit flow and evaluates alternate pricing structures to retain and
grow deposits.   To the extent needed to fund loan demand,
traditional local deposit funding sources are supplemented by the use of FHLB
borrowings, brokered deposits and other wholesale deposit sources outside the
immediate market area.  Internal policies have been updated to monitor
the use of various core and 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 June 30 2008, the Company held $177 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 banks’ bond portfolios are
encumbered as pledges to secure various public funds deposits, repurchase
agreements, and for other purposes, management can restructure and free up
investment securities for a sale if required to meet liquidity
needs.





Management
continually monitors the relationship of loans to deposits as it primarily
determines the Company’s liquidity posture.  Colony had ratios of
loans to deposits of 97.7 percent as of June 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 June 30, 2008 and
December 31, 2007 were 86.9 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 banks’ core deposit base is an important factor in Colony’s
liquidity position.  A heavy percentage of the deposit base is
comprised of accounts of individuals and small business with comprehensive
banking relationships and limited volatility.  At June 30, 2008 and
December 31, 2007, the banks had $338.8 million and $347.2 million in
certificates of deposit of $100,000 or more.  These larger deposits
represented 34.70 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 June 30, 2008, the
Company had $63.3 million, or 6.49  percent of total deposits, in
brokered certificates of deposit attracted by external third
parties.  Additionally, the banks use external wholesale or Internet
services to obtain out-of-market certificates of deposit at competitive interest
rates when funding is needed.





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





46
 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 subsidiary banks 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.





47
 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
            
            
            Six
      Months EndedJune 30
            
            
            June 302008
            
            
            2007
            
            
            2008
            
            
            2007Return
      on Assets
            
            
            0.10
            %
            
            
            0.91
            %
            
            
            0.42
            %
            
            
            0.86
            %Return
      on Equity
            
            
            1.36
            %
            
            
            13.58
            %
            
            
            5.86
            %
            
            
            13.17
            %Dividend
      Payout
            
            
            243.75
            %
            
            
            23.68
            %
            
            
            55.71
            %
            
            
            24.65
            %Avg.
      Equity to Avg. Assets
            
            
            7.23
            %
            
            
            6.67
            %
            
            
            7.20
            %
            
            
            6.55
            %Dividends
      Declared
            
            $
            0.0975
            
            
            $
            0.09
            
            
            $
            0.195
            
            
            $
            0.1775





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.  Presently Colony is constructing its second office in
Savannah with October 1, 2008 targeted for opening the
office.  Likewise, Colony has secured real estate in the Albany market
for another office though no established date for construction has been
set.  Colony is currently operating with seven separate bank charters
and to gain efficiencies in operations has approved a merger of the seven
charters into a single charter with a target date of 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.  The surviving charter will be Colony Bank and with
iniatives to enhance revenues and reduce operational overhead, this should
positively impact our bottom-line.





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.





Through
its seven subsidiary banks, 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.  Each of the
Banks is a member of Federal Deposit Insurance Corporation  whose
customer deposits are insured up to applicable limits by the Federal Deposit
Insurance Corporation.





48
 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 2,008 shareholders as
of June 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.





49
 Table of Contents





Part
I (Continued)


Item 3





Item
3 - Quantitative and Qualitative Disclosures About Market Risk





AVERAGE
      BALANCE SHEETS
            
            Six
      Months Ended
            
            
            Six
      Months EndedJune 30, 2008
            
            
            June 30, 2007Average
            
            
            Income/
            
            
            Yields/
            
            
            Average
            
            
            Income/
            
            
            Yields/($ in thousands)
            
            Balances
            
            
            Expense
            
            
            Rates
            
            
            Balances
            
            
            Expense
            
            
            RatesAssetsInterest-Earning
      AssetsLoans,
      Net of Unearned Interest and feesTaxable
      (1)
            
            $
            948,432
            
            
            $
            35,153
            
            
            
            7.41
            %
            
            $
            935,774
            
            
            $
            40,246
            
            
            
            8.60
            %Investment
      SecuritiesTaxable
            
            
            142,657
            
            
            
            3,466
            
            
            
            4.86
            %
            
            
            142,650
            
            
            
            3,296
            
            
            
            4.62
            %Tax-Exempt
      (2)
            
            
            11,190
            
            
            
            318
            
            
            
            5.68
            %
            
            
            12,024
            
            
            
            330
            
            
            
            5.49
            %Total
      Investment Securities
            
            
            153,847
            
            
            
            3,784
            
            
            
            4.92
            %
            
            
            154,674
            
            
            
            3,626
            
            
            
            4.69
            %Interest-Bearing
      Deposits
            
            
            1,604
            
            
            
            20
            
            
            
            2.49
            %
            
            
            2,867
            
            
            
            75
            
            
            
            5.23
            %Federal
      Funds Sold
            
            
            16,492
            
            
            
            239
            
            
            
            2.90
            %
            
            
            37,266
            
            
            
            967
            
            
            
            5.19
            %Interest-Bearing
      Other Assets
            
            
            5,784
            
            
            
            166
            
            
            
            5.74
            %
            
            
            5,068
            
            
            
            149
            
            
            
            5.88
            %Total
      Interest-Earning Assets
            
            
            1,126,159
            
            
            $
            39,362
            
            
            
            6.99
            %
            
            
            1,135,649
            
            
            $
            45,063
            
            
            
            7.94
            %Non-interest-Earning
      AssetsCash
      and Cash Equivalents
            
            
            21,512
            
            
            
            
            
            
            
            
            
            
            
            21,594Allowance
      for Loan Losses
            
            
            (15,604
            )
            
            
            
            
            
            
            
            
            
            
            (12,473
            )Other
      Assets
            
            
            55,934
            
            
            
            
            
            
            
            
            
            
            
            54,022Total
      Noninterest-Earning Assets
            
            
            61,842
            
            
            
            
            
            
            
            
            
            
            
            63,143Total
      Assets
            
            $
            1,188,001
            
            
            
            
            
            
            
            
            
            
            $
            1,198,792Liabilities
      and Stockholders' EquityInterest-Bearing
      LiabilitiesInterest-Bearing
      DepositsInterest-Bearing
      Demand and Savings
            
            $
            222,169
            
            
            $
            1,828
            
            
            
            1.65
            %
            
            $
            213,112
            
            
            $
            2,269
            
            
            
            2.13
            %Other
      Time
            
            
            690,019
            
            
            
            16,319
            
            
            
            4.73
            %
            
            
            737,070
            
            
            
            19,011
            
            
            
            5.16
            %Total
      Interest-Bearing Deposits
            
            
            912,188
            
            
            
            18,147
            
            
            
            3.98
            %
            
            
            950,182
            
            
            
            21,280
            
            
            
            4.48
            %Other
      Interest-Bearing LiabilitiesOther
      Borrowed Money
            
            
            79,116
            
            
            
            1,679
            
            
            
            4.24
            %
            
            
            59,083
            
            
            
            1,315
            
            
            
            4.45
            %Subordinated
      Debentures
            
            
            24,229
            
            
            
            666
            
            
            
            5.50
            %
            
            
            24,947
            
            
            
            985
            
            
            
            7.90
            %Federal
      Funds Purchased and Repurchase Agreements
            
            
            3,233
            
            
            
            52
            
            
            
            3.22
            %
            
            
            1,413
            
            
            
            37
            
            
            
            5.24
            %Total
      Other Interest-Bearing Liabilities
            
            
            106,578
            
            
            
            2,397
            
            
            
            4.50
            %
            
            
            85,443
            
            
            
            2,337
            
            
            
            5.47
            %Total
      Interest-Bearing Liabilities
            
            
            1,018,766
            
            
            $
            20,544
            
            
            
            4.03
            %
            
            
            1,035,625
            
            
            $
            23,617
            
            
            
            4.56
            %Noninterest-Bearing
      Liabilities andStockholders'
      EquityDemand
      Deposits
            
            
            77,602
            
            
            
            
            
            
            
            
            
            
            
            76,053Other
      Liabilities
            
            
            6,150
            
            
            
            
            
            
            
            
            
            
            
            8,534Stockholders'
      Equity
            
            
            85,483
            
            
            
            
            
            
            
            
            
            
            
            78,580Total
      Noninterest-Bearing Liabilities and Stockholders' Equity
            
            
            169,235
            
            
            
            
            
            
            
            
            
            
            
            163,167Total
      Liabilities and Stockholders' Equity
            
            $
            1,188,001
            
            
            
            
            
            
            
            
            
            
            $
            1,198,792Interest
      Rate Spread
            
            
            
            
            
            
            
            
            
            
            2.96
            %
            
            
            
            
            
            
            
            
            
            
            3.38
            %Net
      Interest Income
            
            
            
            
            
            $
            18,818
            
            
            
            
            
            
            
            
            
            
            $
            21,446Net
      Interest Margin
            
            
            
            
            
            
            
            
            
            
            3.34
            %
            
            
            
            
            
            
            
            
            
            
            3.78
            %





(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 $62 and $58 for
      six month periods ended June 30, 2008 and 2007, respectively, are included
      in tax-exempt interest on
loans.


(2)
            Taxable-equivalent
      adjustments totaling $108 and $112 for six month periods ended June 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.





50
 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 June 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
            
            $
            1,783
            
            
            $
            ---
            
            
            $
            1,783
            
            
            
            ---
            
            
            $
            1,783Federal
      Funds Sold
            
            
            5,579
            
            
            
            ---
            
            
            
            5,579
            
            
            
            ---
            
            
            
            5,579Investment
      Securities
            
            
            8,546
            
            
            
            8,493
            
            
            
            17,039
            
            
            
            107,644
            
            
            
            52,434
            
            
            
            177,117Loans,
      Net of Unearned Income
            
            
            451,066
            
            
            
            166,070
            
            
            
            617,136
            
            
            
            324,222
            
            
            
            12,716
            
            
            
            954,074Other
      Interest-Bearing Assets
            
            
            6,092
            
            
            
            ---
            
            
            
            6,092
            
            
            
            ---
            
            
            
            6,092Total
      Interest-Earning Assets
            
            
            473,066
            
            
            
            174,563
            
            
            
            647,629
            
            
            
            431,866
            
            
            
            65,150
            
            
            
            1,144,645INTEREST-BEARING
      LIABILITIES:Interest-Bearing
      Demand Deposits (1)
            
            
            196,261
            
            
            
            ---
            
            
            
            196,261
            
            
            
            ---
            
            
            
            196,261Savings
      (1)
            
            
            35,293
            
            
            
            ---
            
            
            
            35,293
            
            
            
            ---
            
            
            
            35,293Time
      Deposits
            
            
            199,369
            
            
            
            400,760
            
            
            
            600,129
            
            
            
            68,573
            
            
            
            120
            
            
            
            668,822Other
      Borrowings (2)
            
            
            6,600
            
            
            
            27,000
            
            
            
            33,600
            
            
            
            42,000
            
            
            
            9,000
            
            
            
            84,600Subordinated
      Debentures
            
            
            24,229
            
            
            
            ---
            
            
            
            24,229
            
            
            
            ---
            
            
            
            24,229Federal
      Funds Purchased
            
            
            16,465
            
            
            
            ---
            
            
            
            16,465
            
            
            
            ---
            
            
            
            16,465Repurchase
      Agreements
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            20,000Total
      Interest-Bearing Liabilities
            
            
            478,217
            
            
            
            427,760
            
            
            
            905,977
            
            
            
            130,573
            
            
            
            9,120
            
            
            
            1,045,670Interest
      Rate-Sensitivity Gap
            
            
            (5,151
            )
            
            
            (253,197
            )
            
            
            (258,348
            )
            
            
            301,293
            
            
            
            56,030
            
            
            
            98,975Cumulative
      Interest-Sensitivity Gap
            
            
            (5,151
            )
            
            
            (258,348
            )
            
            
            (258,348
            )
            
            
            42,945
            
            
            
            98,975Interest
      Rate-Sensivitiy Gap as a Percentage of Interest-Earning
    Assets
            
            
            (0.45
            %)
            
            
            (22.12
            %)
            
            
            (22.57
            %)
            
            
            26.32
            %
            
            
            4.89
            %Cumulative
      Interest Rate-Sensitivity as as a Percentage of Interest-Earning
      Assets
            
            
            (0.45
            %)
            
            
            (22.57
            %)
            
            
            (22.57
            %)
            
            
            3.75
            %
            
            
            8.65
            %








(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.





51
 Table of Contents





Part
I (Continued)


Item 3
(Continued)





The
foregoing table indicates that we had a one year negative gap of ($258) million,
or (22.57) percent of total assets at June 30, 2008.  In theory, this
would indicate that at June 30, 2008, $258 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 SunTrust 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 March 31, 2008 indicates that net interest income would deteriorate 10.71
percent with a 200 basis point decrease and would improve 6.41 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 March 31, 2008 indicates that
net economic value of equity percentage change would decrease 3.33 percent with
a 200 basis point increase and would decrease 15.05 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 March
31, 2008 indicates a one year gap of 0.97 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 in late 2008 or early 2009, we will look at
security investments in the shorter term (2-4 years) and look to book loans with
an adjustable rate.





52
 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.








53
 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)





The
annual meeting of the shareholders of the Company was held on April 24,
2008.  At the Annual Meeting of the Shareholders, proxies were
solicited under Regulation 14 of the Securities and Exchange Act of
1934.  Total shares eligible to vote amounted to
7,216,113.  A total of 5,216,544.58 shares (72.29%) were represented
by shareholders in attendance or by proxy.  The following directors
were elected to serve one year until the next annual meeting:





For
            
            AgainstMorris Downing
            
            5,105,653.32
            
            110,891.26Dan Minix
            
            5,110,654.32
            
            105,890.26Jonathan Ross
            
            5,098,054.32
            
            118,490.26Jerry Harrell
            
            5,012,327.32
            
            204,217.26Terry Hester
            
            5,105,653.32
            
            110,891.26Terry Coleman
            
            5,110,526.32
            
            106,018.26Gene Waldron
            
            5,105,654.32
            
            110,890.26Bill Roberts
            
            5,106,054.32
            
            110,490.26Al Ross
            
            5,105,654.32
            
            110,890.26Charles Myler
            
            5,110,654.32
            
            105,890.26Mark Massee
            
            5,105,654.32
            
            110,890.26








ITEM 5 – OTHER INFORMATION





None





54
 Table of Contents





Part
II (Continued)


Item 6





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 withthe 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 withthe 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





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





55
 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:           August
      8, 2008
            Al
      D. Ross,President
      and Chief Executive Officer/s/ Terry L. HesterDate:           August
      8, 2008
            Terry
      L. Hester, Executive Vice President andChief
      Financial Officer






56