SECURITIES
AND EXCHANGE COMMISSION
 
 WASHINGTON,
DC 20549
 
 FORM
10-Q
 
 QUARTERLY
REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
 EXCHANGE
ACT OF 1934
 
 
 FOR
      QUARTER ENDED SEPTEMBER 30, 2009
              
              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 HAS SUBMITTED ELECTRONICALLY AND POSTED ON
ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE
SUBMITTED AND POSTED PURSUANT TO RULE 405 OF REGULATION S-T (§232.405 OF THIS
CHAPTER) DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES).
 
 YES
              NO
 
 INDICATE
BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, A NONACCELERATED FILER OR A SMALLER REPORTING
COMPANY.   SEE DEFINITIONS OF ACCELERATED FILER, LARGE
ACCELERATED FILER AND SMALLER REPORTING COMPANY IN RULE 12b-2 OF THE EXCHANGE
ACT.  (CHECK ONE)
 
 LARGE
      ACCELERATED FILER
              ACCELERATED
      FILER      TNON
      ACCELERATED FILER
              SMALLER
      REPORTING COMPANY(DO
      NOT CHECK IF A SMALLER REPORTING
COMPANY)
 
 INDICATE
BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE
12B-2 OF THE ACT).
 
 YES
              NO    T
 
 INDICATE
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON
STOCK, AS OF THE LATEST PRACTICABLE DATE.
 
 
 CLASS
              
              OUTSTANDING AT NOVEMBER 6,
    2009COMMON
      STOCK, $1 PAR VALUE
              
              7,229,163
  
 
 TABLEOF
CONTENTS
 PagePART I – Financial
    InformationForward Looking Statement Disclosure
              3Item
      1.
              
              Financial Statements
              4Item
      2.
              
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operation
              31Item
      3.
              
              Quantitative and Qualitative Disclosures About
      Market Risk
              54Item
      4.
              
              Controls and Procedures
              57PART II – Other InformationItem
      1.
              
              Legal Proceedings
              58Item
      1A.
              
              Risk Factors
              58Item
      2.
              
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              58Item
      3.
              
              Defaults Upon Senior Securities
              58Item
      4.
              
              Submission of Matters to a Vote of Security
      Holders
              58Item
      5.
              
              Other Information
              58Item
      6.
              
              Exhibits
              59Signatures
              61
  2
 Table of Contents
  ForwardLooking 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
 ITEM1.
 
 FINANCIAL
STATEMENTS
 
 THE
FOLLOWING FINANCIAL STATEMENTS ARE PROVIDED FOR COLONY BANKCORP, INC. AND ITS
WHOLLY-OWNED SUBSIDIARY BANK, COLONY BANK
 
 A.
              CONSOLIDATED
      BALANCE SHEETS – SEPTEMBER 30, 2009 AND DECEMBER 31,
  2008.
 
 B.
              CONSOLIDATED
      STATEMENTS OF INCOME – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND
      2008 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
      2008.
  C.
              CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME – FOR THE THREE MONTHS ENDED SEPTEMBER
      30, 2009 AND 2008 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
      2008.
  D.
              CONSOLIDATED
      STATEMENTS OF CASH FLOWS – FOR THE NINE MONTHS ENDED SEPTEMBER 30,
      2009 AND 2008.
 
 THE
CONSOLIDATED FINANCIAL STATEMENTS FURNISHED HAVE NOT BEEN AUDITED BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS, BUT REFLECT, IN THE OPINION OF MANAGEMENT, ALL
ADJUSTMENTS (CONSISTING SOLELY OF NORMAL RECURRING ADJUSTMENTS) NECESSARY FOR A
FAIR PRESENTATION OF THE RESULTS OF OPERATIONS FOR THE PERIODS
PRESENTED.
 
 THE RESULTS OF OPERATIONS FOR THE NINE
MONTH PERIOD ENDED SEPTEMBER 30, 2009 ARE NOT NECESSARILY INDICATIVE OF THE
RESULTS TO BE EXPECTED FOR THE FULL YEAR.
  4
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
 
 COLONYBANKCORP, INC. AND SUBSIDIARYCONSOLIDATED
      BALANCE SHEETSSEPTEMBER
      30, 2009 AND DECEMBER 31, 2008(DOLLARS
      IN THOUSANDS)September 30, 2009
              
              
              December 31, 2008ASSETS
              
              (Unaudited)
              
              
              (Audited)Cash
      and Cash EquivalentsCash
      and Due from Banks
              
              $
              16,559
              
              
              $
              29,427Federal
      Funds Sold
              
              
              --
              
              
              
              3116,559
              
              
              
              29,458Interest-Bearing
      Deposits
              
              
              162
              
              
              
              147Investment
      SecuritiesAvailable
      for Sale, at Fair Value
              
              
              247,014
              
              
              
              207,645Held
      to Maturity, at Cost (Fair Value of $62 and $63, as of September 30, 2009
      and December 31, 2008, Respectively)
              
              
              60
              
              
              
              60247,074
              
              
              
              207,705Federal
      Home Loan Bank Stock, at Cost
              
              
              6,345
              
              
              
              6,272Loans
              
              
              971,132
              
              
              
              961,037Allowance
      for Loan Losses
              
              
              (21,359
              )
              
              
              (17,016
              )Unearned
      Interest and Fees
              
              
              (144
              )
              
              
              (179
              )949,629
              
              
              
              943,842Premises
      and Equipment
              
              
              29,022
              
              
              
              29,672Other
      Real Estate
              
              
              16,516
              
              
              
              12,812Goodwill
              
              
              2,412
              
              
              
              2,412Other
      Intangible Assets
              
              
              340
              
              
              
              367Other
      Assets
              
              
              22,832
              
              
              
              20,095Total
      Assets
              
              $
              1,290,891
              
              
              $
              1,252,782LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNoninterest-Bearing
              
              $
              70,345
              
              
              $
              77,497Interest-Bearing
              
              
              945,069
              
              
              
              929,4951,015,414
              
              
              
              1,006,992Borrowed
      MoneyFederal
      Funds Purchased
              
              
              5,697
              
              
              
              2,274Securities
      Sold Under Agreements to Repurchase
              
              
              45,232
              
              
              
              40,000Subordinated
      Debentures
              
              
              24,229
              
              
              
              24,229Other
      Borrowed Money
              
              
              91,000
              
              
              
              91,000166,158
              
              
              
              157,503Other
      Liabilities
              
              
              5,252
              
              
              
              5,072Commitments
      and ContingenciesStockholders'
      EquityPreferred
      Stock, Par Value $1,000 a Share, Authorized 10,000,000 Shares, Issued
      28,000 Shares
              
              
              27,321
              
              
              
              --Common
      Stock, Par Value $1 a Share, Authorized 20,000,000 Shares, Issued
      7,229,163 and 7,212,313 Shares as of September 30, 2009 and December 31,
      2008, Respectively
              
              
              7,229
              
              
              
              7,212Paid-In
      Capital
              
              
              25,393
              
              
              
              24,536Retained
      Earnings
              
              
              44,173
              
              
              
              51,302Restricted
      Stock - Unearned Compensation
              
              
              (206
              )
              
              
              (211
              )Accumulated
      Other Comprehensive Income (Loss), Net of Tax
              
              
              157
              
              
              
              376104,067
              
              
              
              83,215Total
      Liabilities and Stockholders' Equity
              
              $
              1,290,891
              
              
              $
              1,252,782
 The
accompanying notes are an integral part of these statements.
  5
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
 
 COLONYBANKCORP, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF INCOMETHREE
      MONTHS ENDED SEPTEMBER 30, 2009 AND 2008AND
      NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008(UNAUDITED)(DOLLARS
      IN THOUSANDS)Three
      Months Ended
              
              
              Nine
      Months Ended9/30/2009
              
              
              9/30/2008
              
              
              9/30/2009
              
              
              9/30/2008Interest
      IncomeLoans,
      Including Fees
              
              $
              14,569
              
              
              $
              16,295
              
              
              $
              43,342
              
              
              $
              51,386Federal
      Funds Sold
              
              
              3
              
              
              
              25
              
              
              
              14
              
              
              
              264Deposits
      with Other Banks
              
              
              --
              
              
              
              7
              
              
              
              --
              
              
              
              27Investment
      SecuritiesU.S.
      Government Agencies
              
              
              1,932
              
              
              
              1,809
              
              
              
              5,886
              
              
              
              5,076State,
      County and Municipal
              
              
              59
              
              
              
              92
              
              
              
              207
              
              
              
              322Corporate
      Obligations and Asset-Backed Securities
              
              
              74
              
              
              
              113
              
              
              
              287
              
              
              
              292Dividends
      on Other Investments
              
              
              13
              
              
              
              87
              
              
              
              13
              
              
              
              25316,650
              
              
              
              18,428
              
              
              
              49,749
              
              
              
              57,620Interest
      ExpenseDeposits
              
              
              5,202
              
              
              
              7,599
              
              
              
              16,928
              
              
              
              25,746Federal
      Funds Purchased
              
              
              222
              
              
              
              241
              
              
              
              658
              
              
              
              293Borrowed
      Money
              
              
              922
              
              
              
              1,103
              
              
              
              2,860
              
              
              
              3,4486,346
              
              
              
              8,943
              
              
              
              20,446
              
              
              
              29,487Net
      Interest Income
              
              
              10,304
              
              
              
              9,485
              
              
              
              29,303
              
              
              
              28,133Provision
      for Loan Losses
              
              
              4,000
              
              
              
              3,370
              
              
              
              21,580
              
              
              
              8,512Net
      Interest Income After Provision for Loan Losses
              
              
              6,304
              
              
              
              6,115
              
              
              
              7,723
              
              
              
              19,621Noninterest
      IncomeService
      Charges on Deposits
              
              
              1,125
              
              
              
              1,233
              
              
              
              3,155
              
              
              
              3,571Other
      Service Charges, Commissions and Fees
              
              
              259
              
              
              
              240
              
              
              
              747
              
              
              
              735Mortgage
      Fee Income
              
              
              137
              
              
              
              168
              
              
              
              368
              
              
              
              511Securities
      Gains
              
              
              609
              
              
              
              11
              
              
              
              3,147
              
              
              
              1,195Other
              
              
              210
              
              
              
              128
              
              
              
              889
              
              
              
              1,1732,340
              
              
              
              1,780
              
              
              
              8,306
              
              
              
              7,185Noninterest
      ExpensesSalaries
      and Employee Benefits
              
              
              3,556
              
              
              
              4,051
              
              
              
              10,946
              
              
              
              12,483Occupancy
      and Equipment
              
              
              1,132
              
              
              
              1,098
              
              
              
              3,182
              
              
              
              3,166Other
              
              
              3,424
              
              
              
              2,664
              
              
              
              9,648
              
              
              
              7,6358,112
              
              
              
              7,813
              
              
              
              23,776
              
              
              
              23,284Income
      Before Income Taxes
              
              
              532
              
              
              
              82
              
              
              
              (7,747
              )
              
              
              3,522Income
      Tax (Benefits) Expense
              
              
              164
              
              
              
              (112
              )
              
              
              (2,796
              )
              
              
              823Net
      Income (Loss)
              
              
              368
              
              
              
              194
              
              
              
              (4,951
              )
              
              
              2,699Preferred
      Stock Dividends
              
              
              350
              
              
              
              --
              
              
              
              1,015
              
              
              
              --Net
      Income (Loss) Available to Common Stockholders
              
              $
              18
              
              
              $
              194
              
              
              $
              (5,966
              )
              
              $
              2,699Net
      Income (Loss) Per Share of Common StockBasic
              
              $
              .00
              
              
              $
              0.03
              
              
              $
              (0.83
              )
              
              $
              0.38Diluted
              
              $
              .00
              
              
              $
              0.03
              
              
              $
              (0.83
              )
              
              $
              0.38Cash
      Dividends Declared Per Share of Common Stock
              
              $
              .00
              
              
              $
              0.10
              
              
              $
              0.15
              
              
              $
              0.29Weighted
      Average Basic Shares Outstanding
              
              
              7,217,006
              
              
              
              7,201,580
              
              
              
              7,209,852
              
              
              
              7,197,016Weighted
      Average Diluted Shares Outstanding
              
              
              7,217,006
              
              
              
              7,201,580
              
              
              
              7,209,852
              
              
              
              7,197,016
 
 The
accompanying notes are an integral part of these statements.
  6
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
 
 COLONYBANKCORP INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOMETHREE
      MONTHS ENDED SEPTEMBER 30, 2009 AND 2008AND
      NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008(UNAUDITED)(DOLLARS
      IN THOUSANDS)Three
      Months Ended
                
                
                Nine
      Months Ended09/30/09
                
                
                09/30/08
                
                
                09/30/09
                
                
                09/30/08Net
      Income (Loss)
                
                $
                368
                
                
                $
                194
                
                
                $
                (4,951
                )
                
                $
                2,699Other
      Comprehensive Income (Loss), Net of TaxGains
      (Losses) on Securities Arising During the Year
                
                
                710
                
                
                
                (541
                )
                
                
                1,858
                
                
                
                (852
                )Reclassification
      Adjustment
                
                
                ( 402
                )
                
                
                (8
                )
                
                
                (2,077
                )
                
                
                (789
                )Change
      in Net Unrealized Gains (Losses) on Securities Availablefor Sale,
      Net of Reclassification Adjustment and Tax Effect
                
                
                308
                
                
                
                (549
                )
                
                
                (219
                )
                
                
                (1,641
                )Comprehensive
      Income (Loss)
                
                $
                676
                
                
                $
                (355
                )
                
                $
                (5,170
                )
                
                $
                1,058
   The
accompanying notes are an integral part of these statements.
  7
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
 
 COLONYBANKCORP, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENTS OF CASH FLOWSNINE
      MONTHS ENDED SEPTEMBER 30, 2009 AND 2008(UNAUDITED)(DOLLARS
      IN THOUSANDS)2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Income (Loss)
              
              $
              (4,951
              )
              
              $
              2,699Adjustments
      to Reconcile Net Income (Loss) to Net CashProvided
      by Operating Activities:Depreciation
              
              
              1,561
              
              
              
              1,526Provision
      for Loan Losses
              
              
              21,580
              
              
              
              8,512Securities
      Gains
              
              
              (3,147
              )
              
              
              (1,195
              )Amortization
      and Accretion
              
              
              2,743
              
              
              
              552Loss
      on Sale of Other Real Estate and Repossessions
              
              
              386
              
              
              
              62Gain
      on Sale of Property/Equipment
              
              
              (79
              )
              
              
              (11
              )Cash
      Surrender Value of Life Insurance
              
              
              (124
              )
              
              
              (155
              )Other
      Prepaids, Deferrals and Accruals, Net
              
              
              (2,115
              )
              
              
              (474
              )15,854
              
              
              
              11,516CASH
      FLOWS FROM INVESTING ACTIVITIESFederal
      Home Loan Bank Stock
              
              
              (73
              )
              
              
              (785
              )Purchases
      of Investment Securities Available for Sale
              
              
              (450,470
              )
              
              
              (116,756
              )Proceeds
      from Maturities, Calls, and Paydowns ofInvestment
      Securities:Available
      for Sale
              
              
              42,945
              
              
              
              45,203Held
      to Maturity
              
              
              5
              
              
              
              7Proceeds
      from Sale of Investment SecuritiesAvailable
      for Sale
              
              
              368,576
              
              
              
              65,299(Increase)
      Decrease in Interest-Bearing Deposits in Other Banks
              
              
              (15
              )
              
              
              1,032Net
      Loans to Customers
              
              
              (39,008
              )
              
              
              (37,981
              )Purchase
      of Premises and Equipment
              
              
              (953
              )
              
              
              (3,117
              )Other
      Real Estate and Repossessions
              
              
              7,673
              
              
              
              2,815Proceeds
      from Sale of Premises and Equipment
              
              
              122
              
              
              
              12Other
      Additions and Adjustments
              
              
              (32
              )
              
              
              --(71,230
              )
              
              
              (44,271
              )CASH
      FLOWS FROM FINANCING ACTIVITIESNoninterest-Bearing
      Customer Deposits
              
              
              (7,152
              )
              
              
              (17,074
              )Increase
      (Decrease) in Interest-Bearing Customer Deposits
              
              
              15,574
              
              
              
              (23,776
              )Federal
      Funds Purchased
              
              
              3,423
              
              
              
              11,318Securities
      Sold Under Agreements to Repurchase
              
              
              5,232
              
              
              
              20,000Dividends
      Paid On Common Stock
              
              
              (1,760
              )
              
              
              (2,091
              )Dividends
      Paid On Preferred Stock
              
              
              (840
              )
              
              
              --Proceeds
      from Other Borrowed Money
              
              
              19,000
              
              
              
              51,500Principal
      Payments on Other Borrowed Money
              
              
              (19,000
              )
              
              
              (34,100
              )Proceeds
      Allocated to Issuance of Preferred Stock
              
              
              27,215
              
              
              
              --Proceeds
      Allocated to Warrants Issued
              
              
              785
              
              
              
              --42,477
              
              
              
              5,777Net
      Decrease in Cash and Cash Equivalents
              
              
              (12,899
              )
              
              
              (26,978
              )Cash
      and Cash Equivalents at Beginning of Period
              
              
              29,458
              
              
              
              50,106Cash
      and Cash Equivalents at End of Period
              
              $
              16,559
              
              
              $
              23,128
 
 The
accompanying notes are an integral part of these statements.
  8
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  COLONYBANKCORP, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 (1)
              Summary
      of Significant Accounting Policies
 
 Principles
of Consolidation
 
 Colony
Bankcorp, Inc. (the Company) is a bank holding company located in Fitzgerald,
Georgia. The Company merged all of its operations into one sole subsidiary
effective August 1, 2008.  The consolidated financial statements
include the accounts of Colony Bankcorp, Inc. and its wholly-owned subsidiary,
Colony Bank (which includes its wholly-owned subsidiary, Colony Mortgage Corp.),
Fitzgerald, Georgia.  All significant intercompany accounts have been
eliminated in consolidation. The accounting and reporting policies of Colony
Bankcorp, Inc. conform to generally accepted accounting principles and practices
utilized in the commercial banking industry.  The Company has
evaluated subsequent events for potential recognition and/or disclosure through
November 6, 2009, the date the consolidated financial statements included in
this quarterly input on Form 10-Q were issued.
 
 All
dollars in notes to consolidated financial statements are rounded to the nearest
thousand.
 
 Nature
of Operations
 
 The Bank
provides a full range of retail and commercial banking services for consumers
and small- to medium-size businesses located primarily in middle and south
Georgia. Colony Bank is headquartered in Fitzgerald, Georgia with banking
offices in Albany, Ashburn, Broxton, Centerville, Chester, Columbus, Cordele,
Douglas, Eastman, Fitzgerald, Leesburg, Moultrie, Pitts, Quitman, Rochelle,
Savannah, Soperton, Sylvester, Thomaston, Tifton, Valdosta and Warner
Robins.  Lending and investing activities are funded primarily by
deposits gathered through its retail branch office network.
 
 Use
of Estimates
 
 In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
balance sheet date and revenues and expenses for the period. Actual results
could differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans and the
valuation of goodwill and other intangible assets.
 
 Accounting
Standards Codification
 
 The
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective on July 1, 2009.  At that date, the ASC became
FASB’s officially recognized source of authoritative U.S. generally accepted
accounting principles (GAAP) applicable to all public and non-public
non-governmental entities, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and
related literature.  Rules and interpretive releases of the SEC under
the authority of federal securities laws are also sources of authoritative GAAP
for SEC registrants.  All other accounting literature is considered
nonauthoritative.  The switch to the ASC affects the way companies
refer to U.S. GAAP in financial statements and accounting
policies.  Citing particular content in the ASC involves specifying
the unique numeric path to the content through the Topic, Subtopic, Section and
Paragraph structure.
 
 Reclassifications
 
 In
certain instances, amounts reported in prior years’ consolidated financial
statements have been reclassified to conform to statement presentations selected
for 2009.   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 loans primarily to local
borrowers. The Company has a high concentration of real estate loans that could
pose an adverse credit risk particularly with the current economic downturn in
the real estate market.  In management’s opinion, the balance of the
loan portfolio is sufficiently diversified to avoid significant concentration of
credit risk. Although the Company has a diversified loan portfolio, a
substantial portion of borrowers’ ability to honor their contracts is dependent
upon the viability of the real estate economic sector.  The continued
downturn of the housing and real estate market that began in 2007 has resulted
in an increase of real estate dependent problem loans.  These loans
are centered primarily in the Company’s larger MSA
  9
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (1)
              Summary
      of Significant Accounting Policies
(Continued)
 
 Concentrations
of Credit Risk (Continued)
 
 markets.  Declining
collateral real estate values that secure land development, construction and
speculative real estate loans in the Company’s larger MSA markets have resulted
in increased loan loss provisions in 2009.
 
 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.
 
 Investment
Securities
 
 The
Company classifies its investment securities as trading, available for sale or
held to maturity. Securities that are held principally for resale in the near
term are classified as trading. Trading securities are carried at fair value,
with realized and unrealized gains and losses included in noninterest income.
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 the accounting standards.  The
FHLB stock is reported in the consolidated financial statements at cost.
Dividend income is recognized when earned.
 
 Loans
 
 Loans
that the Company has the ability and intent to hold for the foreseeable future
or until maturity are recorded at their principal amount outstanding, net of
unearned interest and fees.  Loan origination fees, net of certain
direct origination costs, are deferred and amortized over the estimated terms of
the loans using the straight-line method.  Interest income on loans is
recognized using the effective interest method.
 
 A loan is
considered to be delinquent when payments have not been made according to
contractual terms, typically evidenced by nonpayment of a monthly installment by
the due date.
 
 When
management believes there is sufficient doubt as to the collectibility of
principal or interest on any loan or generally when loans are 90 days or more
past due, the accrual of applicable interest is discontinued and the loan is
designated as nonaccrual, unless the loan is well secured and in the process of
collection. Interest payments received on nonaccrual loans are either applied
against principal or reported as income, according to management’s judgment as
to the collectibility of principal. Loans are returned to an accrual status when
factors indicating doubtful collectibility on a timely basis no longer
exist.
  10
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (1)
              Summary
      of Significant Accounting Policies
(Continued)
 
 Allowance
for Loan Losses
 
 The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
 
 The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revisions as more information becomes
available.
 
 The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as either doubtful or
substandard. For such loans that are also classified as impaired, an allowance
is established when the discounted cash flows (or collateral value or observable
market price) of the impaired loan is lower than the carrying value of that
loan. The general component covers nonclassified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.
 
 A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan-by-loan basis by either the present value of expected future cash
flows discounted at the loan’s effective interest rate, the loan’s obtainable
market price or the fair value of the collateral if the loan is collateral
dependent.
 
 Premises
and Equipment
 
 Premises
and equipment are recorded at acquisition cost net of accumulated
depreciation.
 
 Depreciation
is charged to operations over the estimated useful lives of the assets. The
estimated useful lives and methods of depreciation are as follows:
 
 Description
              
              Life
      in Years
              
              MethodBanking
      Premises
              
              15-40
              
              
              Straight-Line
      and AcceleratedFurniture
      and Equipment
              
              5-10
              
              
              Straight-Line
      and AcceleratedLeasehold
      Improvements
              
              5-20
              
              
              Straight-Line
 
 Expenditures
for major renewals and betterments are capitalized. Maintenance and repairs are
charged to operations as incurred. When property and equipment are retired or
sold, the cost and accumulated depreciation are removed from the respective
accounts and any gain or loss is reflected in other income or
expense.
 
 Goodwill
and Intangible Assets
 
 Goodwill
represents the excess of the cost over the fair value of the net assets
purchased in a business combination.  Impairment testing of goodwill
is performed annually or more frequently if events or circumstances indicate
possible impairment.  No impairment has been identified as a result of
the testing performed during 2009 or 2008.
 
 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
  11
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (1)
              Summary
      of Significant Accounting Policies
(Continued)
 
 Goodwill
and Intangible Assets (Continued)
 
 straight-line
method over the average remaining life of the acquired customer
deposits.  Amortization periods are reviewed annually in connection
with the annual impairment testing of goodwill.
 
 Transfers
of Financial Assets
 
 Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets and (3) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
 
 Statement
of Cash Flows
 
 For
reporting cash flows, cash and cash equivalents include cash on hand,
noninterest-bearing amounts due from banks and federal funds sold. Cash flows
from demand deposits, NOW accounts, savings accounts, loans and certificates of
deposit are reported net.
 
 Securities
Sold Under Repurchase Agreements
 
 The
Company sells securities under agreements to repurchase.  These
repurchase agreements are treated as borrowings.  The obligations to
repurchase securities sold are reflected as a liability and the securities
underlying the agreements are reflected as assets in the consolidated balance
sheets.
 
 Advertising
Costs
 
 The
Company expenses the cost of advertising in the periods in which those costs are
incurred.
 
 Income
Taxes
 
 The
provision for income taxes is based upon income for financial statement
purposes, adjusted for nontaxable income and nondeductible expenses. Deferred
income taxes have been provided when different accounting methods have been used
in determining income for income tax purposes and for financial reporting
purposes.
 
 Deferred
tax assets and liabilities are recognized based on future tax consequences
attributable to differences arising from the financial statement carrying values
of assets and liabilities and their tax bases. The differences relate primarily
to depreciable assets (use of different depreciation methods for financial
statement and income tax purposes) and allowance for loan losses (use of the
allowance method for financial statement purposes and the direct write-off
method for tax purposes). In the event of changes in the tax laws, deferred tax
assets and liabilities are adjusted in the period of the enactment of those
changes, with effects included in the income tax provision. The Company and its
subsidiary file a consolidated federal income tax return. The subsidiary pays
its proportional share of federal income taxes to the Company based on its
taxable income.
 
 Positions
taken in the Company’s tax returns may be subject to challenge by the taxing
authorities upon examination.  Uncertain tax positions are initially
recognized in the financial statements when it is more likely than not the
position will be sustained upon examination by the tax
authorities.  Such tax positions are both initially and subsequently
measured as the largest amount of tax benefit that is greater than 50 percent
likely of being realized upon settlement with the tax authority, assuming full
knowledge of the position and all relevant facts.  The Company
provides for interest and, in some cases, penalties on tax positions that may be
challenged by the taxing authorities.  Interest expense is recognized
beginning in the first period that such interest would begin
accruing.  Penalties are recognized in the period that the Company
claims the position in the tax return.  Interest and penalties on
income tax uncertainties are classified within income tax expense in the
consolidated statement of income.
 
 Other
Real Estate
 
 Other
real estate generally represents real estate acquired through foreclosure and is
initially recorded at the lower of cost or estimated market value at the date of
acquisition. Losses from the acquisition of property in full or partial
satisfaction of debt are recorded as
  12
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (1)
              Summary
      of Significant Accounting Policies
(Continued)
 
 Other
Real Estate (Continued)
 
 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. Accounting standards
require the presentation in the financial statements of net income and all items
of other comprehensive income as total comprehensive income.
 
 Off-Balance
Sheet Credit Related Financial Instruments
 
 In the
ordinary course of business, the Company has entered into commitments to extend
credit, commercial letters of credit and standby letters of credit. Such
financial instruments are recorded when they are funded.
 
 Changes
in Accounting Principles and Effects of New Accounting
Pronouncements
 
 Newly
revised standards on Business
Combinationsapplies to all transactions and other events in
which one entity obtains control over one or more other
businesses.  An acquirer, upon initially obtaining control of another
entity, must recognize the assets, liabilities and any noncontrolling interest
in the acquiree at fair value as of the acquisition date.  Contingent
consideration is required to be recognized and measured at fair value on the
date of acquisition rather than at a later date when the amount of that
consideration may be determinable beyond a reasonable doubt.  This
fair value approach replaces the cost-allocation process whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities
assumed based on their estimated fair value.  Acquirers must expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed, as was previously the
case.  Pre-acquisition contingencies are to be recognized at fair
value, unless it is a noncontractual contingency that is not likely to
materialize, in which case, nothing should be recognized in purchase accounting
and, instead, that contingency would be subject to the probable and estimable
recognition criteria of contingency accounting.  The revised standards
are expected to have an impact on the Company’s accounting for business
combinations closing on or after January 1, 2009.
 Revised
standards for Noncontrolling
Interest in Consolidated Financial Statements,establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  A noncontrolling interest in a
subsidiary, which is sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as a component of
equity in the consolidated financial statements.  Among other
requirements, consolidated net income must be reported at amounts that include
the amounts attributable to both the parent and the noncontrolling
interest.  Also required are 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.  Requirements were effective for the Company on January 1,
2009 and did not have a significant impact on the Company’s consolidated
financial statements.
 
 In April
2009, standards were issued to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements.  The standards are effective for
interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009 under certain
circumstances.  Implementation on June 15, 2009 did not have a
significant impact on the Company’s financial statements.
 
 In April
2009, standards were issued for Recognition and Presentation of
Other-Than-Temporary Impairments.These standards amend the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements.  The existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities is not
amended.  Changes are effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009.  The adoption of the other-than-temporary
impairment amendments on June 15, 2009 did not have a significant impact on the
Company’s financial statements.
 
 In April
2009, new standards were issued providing additional guidance for estimating
fair value when the volume and level of activity for the asset or liability have
significantly decreased.  The standard emphasizes that even if there
has been a significant
  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)
 
 decrease
in the volume and level of activity for the asset or liability and regardless of
the valuation techniques(s) used, the objective of a fair value measurement
remains the same.  Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction (that
is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions.  The standard is
effective for interim and annual reporting periods ending after June 15, 2009,
and shall be applied prospectively.  Early adoption is permitted for
periods ending after March 15, 2009.  Adoption on June 15, 2009 did
not have a significant impact on the Company’s financial
statements.
 
 New
requirements for subsequent events establish general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued.  The
standards define (i) the period after the balance sheet date during which a
reporting entity’s management should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements (ii)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and (iii)
the disclosures an entity should make about events or transactions that occurred
after the balance sheet date.  The effective date for the
Corporation’s financial statements is for periods ending after June 15,
2009.  Implementation resulted in no significant impact on the
Corporation’s financial statements.
 
 (2)
              Cash
      and Balances Due from Banks
 
 Components
of cash and balances due from banks are as follows as of September 30, 2009 and
December 31, 2008:
 
 September 30, 2009
              
              
              December 31, 2008Cash
      on Hand and Cash Items
              
              $
              10,207
              
              
              $
              9,228Noninterest-Bearing
      Deposits with Other Banks
              
              
              6,352
              
              
              
              20,199$
              16,559
              
              
              $
              29,427
 
 
 3)
              Investment
      Securities
 
 Investment
securities as of September 30, 2009 are summarized as follows:
 
 
 Gross
              
              
              GrossAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              ValueSecurities
      Available for Sale:U.S.
      Government AgenciesMortgage-Backed
              
              $
              235,547
              
              
              $
              1,559
              
              
              $
              (504
              )
              
              $
              236,602State,
      County & Municipal
              
              
              5,741
              
              
              
              103
              
              
              
              (19
              )
              
              
              5,825Corporate
      Obligations
              
              
              4,456
              
              
              
              87
              
              
              
              (361
              )
              
              
              4,182Asset-Backed
      Securities
              
              
              1,032
              
              
              
              --
              
              
              
              (627
              )
              
              
              405$
              246,776
              
              
              $
              1,749
              
              
              $
              (1,511
              )
              
              $
              247,014Securities
      Held to Maturity:State,
      County and Municipal
              
              $
              60
              
              
              $
              2
              
              
              $
              --
              
              
              $
              62
  14
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  3)
              Investment Securities
      (Continued)
 
 The
amortized cost and fair value of investment securities as of September 30, 2009,
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
              
              $
              101
              
              
              
              102
              
              
              
              --
              
              
              
              --Due
      After One Year Through Five Years
              
              
              4,511
              
              
              
              4,312
              
              
              
              --
              
              
              
              --Due
      After Five Years Through Ten Years
              
              
              3,564
              
              
              
              3,738
              
              
              $
              60
              
              
              $
              62Due
      After Ten Years
              
              
              3,053
              
              
              
              2,260
              
              
              
              --
              
              
              
              --11,229
              
              
              
              10,412
              
              
              
              60
              
              
              
              62Mortgage-Backed
      Securities
              
              
              235,547
              
              
              
              236,602
              
              
              
              --
              
              
              
              --$
              246,776
              
              
              $
              247,014
              
              
              $
              60
              
              
              $
              62
 
 
 Investment
securities as of December 31, 2008 are summarized as follows:
 
 Gross
              
              
              GrossAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              ValueSecurities
      Available for Sale:U.S.
      Government AgenciesMortgage-Backed
              
              $
              190,198
              
              
              $
              1,862
              
              
              $
              (310
              )
              
              $
              191,750State,
      County & Municipal
              
              
              9,227
              
              
              
              44
              
              
              
              (220
              )
              
              
              9,051Corporate
      Obligations
              
              
              6,650
              
              
              
              155
              
              
              
              (629
              )
              
              
              6,176Asset-Backed
      Securities
              
              
              1,000
              
              
              
              --
              
              
              
              (332
              )
              
              
              668$
              207,075
              
              
              $
              2,061
              
              
              $
              (1,491
              )
              
              $
              207,645Securities
      Held to Maturity:State,
      County and Municipal
              
              $
              60
              
              
              $
              3
              
              
              $
              --
              
              
              $
              63
 
 
 Proceeds
from the sale of investments available for sale during first nine months of 2009
totaled $368,576 compared to $65,299 for the first nine months of
2008.  The sale of investments available for sale during 2009 resulted
in gross realized gains of $3,205 and gross realized losses of $58 and the sale
of investments available for sale during 2008 resulted in gross realized gain of
$1,202 and losses of $7.
 
 Investment
securities having a carry value approximating $162,601 and $145,647 as of
September 30, 2009 and December 31, 2008, respectively, were pledged to secure
public deposits and for other purposes.
  15
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  3)
              Investment Securities
      (Continued)
 
 Information
pertaining to securities with gross unrealized losses at September 30, 2009 and
December 31, 2008 aggregated by investment category and length of time that
individual securities have been in a continuous loss position,
follows:
 
 
 Less
      Than 12 Months
              
              
              12
      Months or Greater
              
              
              TotalGross
              
              
              
              
              
              Gross
              
              
              
              
              
              GrossFair
              
              
              Unrealized
              
              
              Fair
              
              
              Unrealized
              
              
              Fair
              
              
              UnrealizedValue
              
              
              Losses
              
              
              Value
              
              
              Losses
              
              
              Value
              
              
              LossesSeptember
      30, 2009U.S.
      Government Agencies Mortgage-Backed
              
              $
              69,433
              
              
              $
              (498
              )
              
              $
              513
              
              
              $
              ( 6
              )
              
              $
              69,946
              
              
              $
              (504
              )State,
      County and Municipal
              
              
              --
              
              
              
              --
              
              
              
              1,454
              
              
              
              ( 19
              )
              
              
              1,454
              
              
              
              ( 19
              )Corporate
      Obligations
              
              
              850
              
              
              
              (150
              )
              
              
              2,244
              
              
              
              (211
              )
              
              
              3,094
              
              
              
              (361
              )Asset-Backed
      Securities
              
              
              405
              
              
              
              (627
              )
              
              
              ---
              
              
              
              ---
              
              
              
              405
              
              
              
              (627
              )$
              70,688
              
              
              $
              (1,275
              )
              
              $
              4,211
              
              
              $
              (236
              )
              
              $
              74,899
              
              
              $
              (1,511
              )December
      31, 2008U.S.
      Government Agencies Mortgage-Backed
              
              $
              52,277
              
              
              $
              (267
              )
              
              $
              708
              
              
              $
              (43
              )
              
              $
              52,985
              
              
              $
              (310
              )State,
      County and Municipal
              
              
              5,053
              
              
              
              (212
              )
              
              
              92
              
              
              
              (8
              )
              
              
              5,145
              
              
              
              (220
              )Corporate
      Obligations
              
              
              5,021
              
              
              
              (629
              )
              
              
              ---
              
              
              
              ---
              
              
              
              5,021
              
              
              
              (629
              )Asset-Backed
      Securities
              
              
              668
              
              
              
              (332
              )
              
              
              ---
              
              
              
              ---
              
              
              
              668
              
              
              
              (332
              )$
              63,019
              
              
              $
              (1,440
              )
              
              $
              800
              
              
              $
              (51
              )
              
              $
              63,819
              
              
              $
              (1,491
              )
 
 
 Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer and (3) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
 
 At
September 30, 2009, the debt securities with unrealized losses have depreciated
1.98 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 types of securities.  In analyzing an
issuer’s financial condition, management considers whether the securities are
issued by the federal government or its agencies, whether downgrades by bond
rating agencies have occurred and the results of reviews of the issuer’s
financial condition.  As management has the ability to hold debt
securities until maturity, or for the foreseeable future if classified as
available-for-sale, no declines are deemed to be
other-than-temporary.
 
 (4)
              Loans
 
 The
composition of loans as of  September 30, 2009 and December 31, 2008
was as follows:
 
 September 30, 2009
              
              
              December 31, 2008Commercial,
      Financial and Agricultural
              
              $
              94,555
              
              
              $
              86,379Real
      Estate – Construction
              
              
              131,233
              
              
              
              160,374Real
      Estate – Farmland
              
              
              57,896
              
              
              
              54,159Real
      Estate – Other
              
              
              628,802
              
              
              
              600,654Installment
      Loans to Individuals
              
              
              40,320
              
              
              
              44,163All
      Other Loans
              
              
              18,326
              
              
              
              15,308$
              971,132
              
              
              $
              961,037
  16
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (4)
              Loans
      (Continued)
 
 Nonaccrual
loans are loans for which principal and interest are doubtful of collection in
accordance with original loan terms and for which accruals of interest have been
discontinued due to payment delinquency.  Nonaccrual loans totaled
$38,691 and $35,124 as of September 30, 2009 and December 31, 2008, respectively
and total recorded investment in loans past due 90 days or more and still
accruing interest approximated $41 and $250, respectively.
 
 (5)
              Allowance for Loan
      Losses
 
 Transactions
in the allowance for loan losses are summarized below for nine months ended
September 30, 2009 and September 30, 2008 as follows:
 
 September 30, 2009
              
              
              September 30, 2008Balance,
      Beginning
              
              $
              17,016
              
              
              $
              15,513Provision
      Charged to Operating Expenses
              
              
              21,580
              
              
              
              8,512Loans
      Charged Off
              
              
              (17,549
              )
              
              
              (6,534
              )Loan
      Recoveries
              
              
              312
              
              
              
              461Balance,
      Ending
              
              $
              21,359
              
              
              $
              17,952
 
 
 (6)
              Premises and
      Equipment
 
 Premises
and equipment are comprised of the following as of September 30, 2009 and
December 31, 2008:
 
 September 30, 2009
              
              
              December 31, 2008Land
              
              $
              7,805
              
              
              $
              7,805Building
              
              
              23,626
              
              
              
              23,461Furniture,
      Fixtures and Equipment
              
              
              14,099
              
              
              
              13,530Leasehold
      Improvements
              
              
              995
              
              
              
              990Construction
      in Progress
              
              
              211
              
              
              
              12746,736
              
              
              
              45,913Accumulated
      Depreciation
              
              
              (17,714
              )
              
              
              (16,241
              )$
              29,022
              
              
              $
              29,672
 
 
 Depreciation
charged to operations totaled $1,561 and $1,526 for September 30, 2009 and
September 30, 2008, respectively.
 
 Certain
Company facilities and equipment are leased under various operating
leases.  Rental expense approximated $273 and $282 for nine months
ended September 30, 2009 and September 30, 2008, 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 nine months ended September 30, 2009 and September 30,
2008:
 
 Nine
      Months Ended
              
              
              Nine
      Months EndedSeptember 30, 2009
              
              
              September 30, 2008GoodwillBalance,
      Beginning
              
              $
              2,412
              
              
              $
              2,412Goodwill
      Acquired
              
              
              --
              
              
              
              --Balance,
      Ending
              
              $
              2,412
              
              
              $
              2,412Net
      Core Deposit, IntangibleBalance,
      Beginning
              
              $
              367
              
              
              $
              402Amortization
      Expense
              
              
              (27
              )
              
              
              (27
              )Balance,
      Ending
              
              $
              340
              
              
              $
              375
 
 
 The
following table reflects the expected amortization for the core deposit
intangible at September 30, 2009:
 
 2009
              
              $
              92010
              
              
              362011
              
              
              362012
              
              
              362013
      and thereafter
              
              
              223$
              340
 
 (8)  Income
Taxes
 
 The
Company records income taxes under accounting standards requiring 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
 
 Generally
accepted accounting principles related to Fair Value Measurements,defines fair value, establishes a framework for measuring fair value,
establishes a three-level valuation hierarchy for disclosure of fair value
measurements 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 termof
      the financial instrument.
  ·
              Level
      3
              inputs
      to the valuation methodology are unobservable and significant to the fair
      value measurement.
 
 Following
is a description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy:
  18
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (9)
              Fair Value
      Measurements (Continued)
 
 Assets
 
 Securities
 
 Where
quoted prices are available in an active market, securities are classified
within level 1 of the valuation hierarchy.  Level 1 inputs include
securities that have quoted prices in active markets for identical
assets.  If quoted market prices are not available, then fair values
are estimated by using pricing models, quoted prices of securities with similar
characteristics, or discounted cash flow.  Examples of such
instruments, which would generally be classified within level 2 of the valuation
hierarchy, include certain   collateralized mortgage and debt
obligations and certain high-yield debt securities.  In certain cases
where there is limited activity or less transparency around inputs to the
valuation, securities are classified within level 3 of the valuation
hierarchy.  When measuring fair value, the valuation techniques
available under the market approach, income approach and/or cost approach are
used.  The Company’s evaluations are based on market data and the
Company employs combinations of these approaches for its valuation methods
depending on the asset class.
 
 Impaired
loans
 
 Fair
value accounting principles also apply to loans measured for impairment
including impaired loans measured at an observable market price (if available),
or at the fair value of the loan’s collateral (if the loan is collateral
dependent).  Fair value of the loan’s collateral, when the loan is
dependent on collateral, is determined by appraisals or independent valuation
which is then adjusted for the cost related to liquidation of the
collateral.
 
 Assets
measured at fair value at September 30, 2009 are as follows:
 
 Fair
      Value Measurements at Reporting Date UsingSeptember
      30, 2009
              
              
              Quoted
      Prices inActive Markets forIdentical Assets(Level
      1)
              
              
              Significant
      OtherObservableInputs (Level 2)
              
              
              SignificantUnobservableInputs(Level
      3)RecurringSecurities
      Available for SaleMortgage-backed
              
              $
              236,602
              
              
              $
              ---
              
              
              $
              236,602
              
              
              $
              ---State,County
      & Municipal
              
              
              5,825
              
              
              
              ---
              
              
              
              5,825
              
              
              
              ---Corporate
      Obligations
              
              
              4,182
              
              
              
              ---
              
              
              
              3,332
              
              
              
              850Asset-Backed
      Securities
              
              
              405
              
              
              
              ---
              
              
              
              ---
              
              
              
              405$
              247,014
              
              
              $
              ---
              
              
              $
              245,759
              
              
              $
              1,255NonrecurringImpaired
      Loans
              
              $
              34,537
              
              
              $
              ---
              
              
              $
              ---
              
              
              $
              34,537
 
 
 Liabilities
 
 The
Company did not identify any liabilities that are required to be presented at
fair value.
 
 The table
below presents a reconciliation and statement of income classification of gains
and losses for all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the nine months ended September
30, 2009.
  19
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (9)
              Fair Value
      Measurements (Continued)
 
 Fair
      Value Measurement Using Significant Unobservable Inputs (Level
      3)
              
              Available
      forSale Securities(In
      Thousands)Balance,
      Beginning
              
              $
              1,427Total
      Unrealized Gains (Losses) Included InNet
      Income
              
              
              ---Other
      Comprehensive Income
              
              
              (172
              )Purchases,
      Sales, Issuances and Settlements, Net
              
              
              ---Transfers
      In and (Out) of Level 3
              
              
              ---Balance,
      Ending
              
              $
              1,255
 
 (10)
              Deposits
 
 The
aggregate amount of overdrawn deposit accounts reclassified as loan balances
totaled $284 and $322 as of September 30, 2009 and December 31,
2008.
 
 Components
of interest-bearing deposits as of September 30, 2009 and December 31, 2008 are
as follows:
 
 September 30, 2009
              
              
              December 31, 2008Interest-Bearing
      Demand
              
              $
              190,918
              
              
              $
              194,211Savings
              
              
              35,994
              
              
              
              33,349Time,
      $100,000 and Over
              
              
              355,177
              
              
              
              333,498Other
      Time
              
              
              362,980
              
              
              
              368,437$
              945,069
              
              
              $
              929,495
 
 At
September 30, 2009 and December 31, 2008, the Company had brokered deposits of
$138,854 and $131,958 respectively.  Of the $138,854 brokered deposits
at September 30, 2009, $28,835 represented Certificate of Deposits Account
Registry Service (CDARS) reciprocal deposits in which customers placed core
deposits into the CDARS program for FDIC insurance coverage and the Company
received reciprocal brokered deposits in a like amount.  Thus,
brokered deposits less the reciprocal deposits totaled $110,019 at September 30,
2009.  The aggregate amount of short-term jumbo certificates of
deposit, each with a minimum denomination of $100,000 was approximately $309,755
and $301,151 as of  September 30, 2009 and December 31, 2008,
respectively.
 
 As
of  September 30, 2009 and December 31, 2008,  the scheduled
maturities of certificates of deposits are as follows:
 
 Maturity
              
              September 30, 2009
              
              
              December 31, 2008One
      Year and Under
              
              $
              622,659
              
              
              $
              632,562One
      to Three Years
              
              
              91,701
              
              
              
              62,929Three
      Years and Over
              
              
              3,797
              
              
              
              6,444$
              718,157
              
              
              $
              701,935
  (11)
              Securities Sold Under
      Repurchase Agreements
 
 The
Company has securities sold under repurchase agreements in the amount of $45,232
at September 30, 2009.  Barclay’s Master Repurchase Agreement
originated on June 26, 2008 with the initial draw of $20,000 on June 30,
2008.  The Repurchase Agreement matures on June 30, 2011 and has a
one-time call option on December 30, 2009.  Interest payments are due
quarterly at a fixed rate of 3.34 percent.  The Repurchase Agreement
is secured by U.S. Government mortgage-backed securities.
 
 South
Street Securities Master Repurchase Agreement originated on October 27, 2008
with the initial draw of $20,000 on October 31, 2008 and the current draw of
$25,232 on September 2, 2009.  The Repurchase Agreement is overnight
borrowing at a floating interest rate.  Interest payments are due
monthly, and at September 30, 2009, the floating interest rate was 0.78
percent.  The Repurchase Agreement is secured by U.S. Government
mortgage-backed securities.
  20
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (12)
              Other Borrowed
      Money
 
 Other
borrowed money at September 30, 2009 and December 31, 2008 is summarized as
follows:
 
 September 30, 2009
              
              
              December 31, 2008Federal
      Home Loan Bank Advances
              
              $
              91,000
              
              
              $
              91,000
 
 Advances
from the Federal Home Loan Bank (FHLB) have maturities ranging from 2010 to 2019
and interest rates ranging from 0.36  percent to 5.93
percent.  Under the Blanket Agreement for Advances and Security
Agreement with the FHLB, residential first mortgage loans and cash balances held
by the FHLB are pledged as collateral for the FHLB advances
outstanding.  At September 30, 2009, the Company had available line of
credit commitments totaling $193,670, of which $102,610 was
available.
 
 The
aggregate stated maturities of  other borrowed money at September 30,
2009 are as follows:
 
 Year
              
              Amount2010
              
              $
              20,0002011
              
              
              --2012
              
              
              41,0002013
      and Thereafter
              
              
              30,000$
              91,000
 
 The
Company also has available federal funds lines of credit with various financial
institutions totaling $42,000, of which $5,697 was outstanding at September 30,
2009.
 
 (13)
              Preferred Stock and
      Warrants
 
 On
January 9, 2009, Colony sold 28,000 shares of preferred stock with a warrant to
purchase 500,000 shares of the Company’s common stock, to the U.S. Treasury
under the Treasury’s Capital Purchase Program.  The initial exercise
price applicable to the warrant is $8.40 per share of common stock for which the
warrant may be exercised.  The warrant may be exercised at any time on
or before January 9, 2019.  The proceeds from the sale of $28 million
were allocated between the preferred stock and the warrant based on their
relative fair values at the time of the sale.  Of the $28 million in
proceeds, $27.22 million was allocated to the preferred stock and $0.78 million
was allocated to the warrant.  The discount recorded on the preferred
stock that resulted from allocating a portion of the proceeds to the warrant is
being accreted directly to retained earnings over a 5 year period applying a
level yield.
 
 The
preferred stock qualifies as Tier 1 capital and will pay cumulative dividends at
a rate of 5% per annum for the first five years and 9% per annum
thereafter.  The preferred stock is redeemable at any time at $1,000
per share plus any accrued and unpaid dividends with the consent of the
Company’s primary federal regulator.
 
 (14)
              Subordinated
      Debentures (Trust Preferred
Securities)
 
 During
the second quarter of 2004, the Company formed a third subsidiary whose sole
purpose was to issue $4,500 in Trust Preferred Securities through a pool
sponsored by FTN Financial Capital Markets.  The Trust Preferred
Securities have a maturity of 30 years and are redeemable after five years with
certain exceptions.  At September 30, 2009, the floating rate
securities had a 2.97 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 September 30, 2009 the floating-rate securities had a
1.78  percent interest rate, which will reset quarterly at the
three-month LIBOR rate plus 1.50 percent.
 
 During
the first quarter of 2007, the Company formed a fifth subsidiary whose sole
purpose was to issue $9,000 in Trust Preferred Securities through a pool
sponsored by Trapeza Capital Management, LLC.  The Trust Preferred
Securities have a maturity of 30 years and are redeemable after five years with
certain exceptions.  At September 30, 2009, the floating-rate
securities had a 1.93 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
  21
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (14)
              Subordinated
      Debentures (Trust Preferred Securities)
  (Continued)
 
 years and
are redeemable after five years with certain exceptions.  At September
30, 2009, the floating-rate securities had a 1.89 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.
 
 (15)
              Restricted Stock –
      Unearned Compensation
 
 In 1999,
the board of directors of Colony Bankcorp, Inc. adopted a restricted stock grant
plan which awards certain executive officers common shares of the
Company.  The maximum number of shares (split-adjusted) which may be
subject to restricted stock awards 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, there are not any shares
available for restricted stock awards at September 30, 2009.  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, 53,256
shares have been issued under this plan and since the plan’s inception 10,148
shares have been forfeited, thus remaining shares which may be subject to
restricted stock awards are 100,392 at September 30, 2009.  During
2009, 18,850 shares of restricted stock have been issued and 2,000 shares have
been forfeited.  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).
 
 (16)
              Profit Sharing
      Plan
 
 The
Company has a profit sharing plan that covers substantially all employees who
meet certain age and service requirements.  It is the Company’s policy
to make contributions to the plan as approved annually by the board of
directors.  The provision for the nine   months ended
September 30, 2009 was $(19) compared to $455 for the nine months ended
September 30, 2008.  The total provision for contributions to the plan
was $206 for 2008, $584 for 2007, and $663 for 2006.
 
 (17)
              Commitments and
      Contingencies
 
 Credit-Related Financial
Instruments.The Company is a party to credit related
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers.  These
financial instruments include commitments to extend credit, standby letters of
credit and commercial letters of credit.  Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
 
 The
Company’s exposure to credit loss is represented by the contractual amount of
these commitments.  The Company follows the same credit policies in
making commitments as it does for on-balance sheet instruments.
 
 At
September 30, 2009 and December 31, 2008 the following financial instruments
were outstanding whose contract amounts represent credit risk:
 
 Contract
      AmountSeptember 30, 2009
              
              
              December 31, 2008Loan
      Commitments
              
              $
              64,422
              
              
              $
              73,610Standby
      Letters of Credit
              
              
              1,587
              
              
              
              2,710
 
 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
  22
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (17)
              Commitments and
      Contingencies (Continued)
 
 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.
 
 At
September 30, 2009, a standby letter of credit in the amount of $60 was issued
by Federal Home Loan Bank of Atlanta on behalf of Colony Bank.
 
 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.
 
 (18)
              Deferred Compensation
      Plan
 
 Two of
the Bank branches 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.
 
 Liabilities
accrued under the plans totaled $1,073 and $1,123 as of September 30, 2009 and
December 31, 2008, respectively.  Benefit payments under the contracts
were $155 and $165 for the nine month period ended September 30, 2009 and
September 30, 2008, respectively.   Provisions charged to
operations totaled $89 and $128 for the nine month period ended September 30,
2009 and September 30, 2008, respectively.
 
 Fee
income recognized with deferred compensation plans totaled $124 and $117 for
nine month period ended September 30, 2009 and September 30, 2008,
respectively.
 
 (19)
              Fair Value of
      Financial Instruments
 
 Generally
accepted accounting standards in the U.S. require disclosure of fair value
information about financial instruments, whether or not recognized on the face
of the balance sheet, for which it is practicable to estimate that
value.  The assumptions used in the estimation of the fair value of
Colony Bankcorp, Inc. and Subsidiary’s financial instruments are detailed
hereafter.  Where quoted prices are not available, fair values are
based on estimates using discounted cash flows and other valuation
techniques.  The use of discounted cash flows can be significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows.  The following disclosures should not be considered
a surrogate of the liquidation value of the Company, but rather a good-faith
estimate of the increase or decrease in value of financial instruments held by
the Company since purchase, origination or issuance.
 
 Cash and Short-Term Investments– For cash, due from banks, bank-owned deposits and federal funds sold, the
carrying amount is a reasonable estimate of fair value.
 
 Investment Securities– Fair
values for investment securities are based on quoted market prices where
available. If quoted
market prices are not available, estimated fair values are based on quoted
market prices of comparable instruments.
 
 Federal Home Loan Bank Stock–
The fair value of Federal Home Loan Bank stock approximates carrying
value.
 
 Loans– The fair value of
fixed rate loans is estimated by discounting the future cash flows using the
current rates at which
similar loans would be made to borrowers with similar credit
ratings.  For variable rate loans, the
  23
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (19)
              Fair Value of
      Financial Instruments
(Continued)
 
 carrying
amount is a reasonable estimate of fair value.
 
 Deposit Liabilities– The fair
value of demand deposits, savings accounts and certain money market deposits is
the amount
payable on demand at the reporting date.  The fair value of fixed
maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for deposits
of similar remaining maturities.
 
 Federal Funds Purchased– The
carrying value of federal funds purchased approximates fair value.
 
 Subordinated Debentures– Fair
value approximates carrying value due to the variable interest rates of the subordinated
debentures.
 
 Securities Sold Under Agreements to
Repurchase and Other Borrowed Money– The fair value of other borrowed
money is calculated by discounting contractual cash flows using an estimated
interest rate based on current
rates available to the Company for debt of similar remaining maturities and
collateral terms.
 
 Unrecognized Financial Instruments– Fair values for off-balance sheet, credit-related financial instruments are based
on fees currently charged to enter into similar agreements, taking into account
the remaining terms of the
agreements and the counterparties’ credit standing.  The fees
associated with these instruments are not material.
 
 Disclosures
of the fair value of financial assets and financial liabilities, including those
financial assets and financial liabilities that are not measured and reported at
fair value on a recurring basis or non-recurring basis, are required in the
financial statements.
 
 The
carrying amount and estimated fair values of the Company’s financial instruments
as of September 30, 2009 and December 31, 2008 are as follows:
 
 September
      30, 2009
              
              
              December
      31, 2008Carrying
              
              
              Estimated
              
              
              Carrying
              
              
              EstimatedAmount
              
              
              Fair
      Value
              
              
              Amount
              
              
              Fair
      Value(in
      thousands)AssetsCash
      and Short-Term Investments
              
              $
              16,721
              
              
              $
              16,721
              
              
              $
              29,605
              
              
              $
              29,605Investment
      Securities Available for Sale
              
              
              247,014
              
              
              
              247,014
              
              
              
              207,645
              
              
              
              207,645Investment
      Securities Held to Maturity
              
              
              60
              
              
              
              62
              
              
              
              60
              
              
              
              63Federal
      Home Loan Bank Stock
              
              
              6,345
              
              
              
              6,345
              
              
              
              6,272
              
              
              
              6,272Loans,
      Net
              
              
              949,629
              
              
              
              974,912
              
              
              
              943,841
              
              
              
              959,613LiabilitiesDeposits
              
              
              1,015,414
              
              
              
              1,018,210
              
              
              
              1,006,991
              
              
              
              1,009,967Federal
      Funds Purchased
              
              
              5,697
              
              
              
              5,697
              
              
              
              2,274
              
              
              
              2,274Subordinated
      Debentures
              
              
              24,229
              
              
              
              24,229
              
              
              
              24,229
              
              
              
              24,229Securities
      Sold Under Agreements to Repurchase
              
              
              45,232
              
              
              
              45,907
              
              
              
              40,000
              
              
              
              40,756Other
      Borrowed Money
              
              
              91,000
              
              
              
              91,843
              
              
              
              91,000
              
              
              
              94,067
 
 Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument.  These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company’s entire holdings of a particular financial
instrument.  Because no market exists for a significant portion of the
Company’s financial instruments, fair value estimates are based on many
judgments.  These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision.  Changes in assumptions could significantly
affect the estimates.
 
 Fair
value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.  Significant assets and liabilities that are
not considered financial instruments include deferred income taxes and premises
and equipment.  In addition, the tax
  24
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (19)
              Fair Value of
      Financial Instruments
(Continued)
 
 ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates.
 
 (20)
              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 September 30, 2009, the company
meets all capital adequacy requirements to which it is subject under the
regulatory framework for prompt corrective action.  In the opinion of
management, there are no conditions or events since prior notification of
capital adequacy from the regulators that have changed the institution’s
category.
 
 The
following table summarizes regulatory capital information as of September 30,
2009 and December 31, 2008 on a consolidated basis and for each significant
subsidiary, as defined.
 
 Actual
              
              
              For
      CapitalAdequacy
    Purposes
              
              
              To
      Be Well Capitalized Under Prompt CorrectiveAction ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of September 30, 2009Total
      Capital to Risk-Weighted AssetsConsolidated
              
              $
              136,597
              
              
              
              14.44
              %
              
              $
              75,655
              
              
              
              8.00
              %
              
              NA
              
              
              NAColony
      Bank
              
              
              133,920
              
              
              
              14.19
              
              
              
              75,511
              
              
              
              8.00
              
              
              $
              94,389
              
              
              
              10.00
              %Tier
      1 Capital to Risk-Weighted AssetsConsolidated
              
              
              124,658
              
              
              
              13.18
              
              
              
              37,827
              
              
              
              4.00
              
              
              NA
              
              
              NAColony
      Bank
              
              
              122,003
              
              
              
              12.93
              
              
              
              37,756
              
              
              
              4.00
              
              
              
              56,634
              
              
              
              6.00Tier
      1 Capital to Average AssetsConsolidated
              
              
              124,658
              
              
              
              9.64
              
              
              
              51,726
              
              
              
              4.00
              
              
              NA
              
              
              NAColony
      Bank
              
              
              122,003
              
              
              
              9.45
              
              
              
              51,622
              
              
              
              4.00
              
              
              
              64,527
              
              
              
              5.00
  25
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (20)
              Regulatory Capital
      Matters (Continued)
 
 
 Actual
              
              
              For
      CapitalAdequacy
    Purposes
              
              
              To
      Be Well Capitalized Under Prompt CorrectiveAction ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of December 31, 2008Total
      Capital to Risk-Weighted AssetsConsolidated
              
              $
              115,604
              
              
              
              12.06
              %
              
              $
              76,684
              
              
              
              8.00
              %
              
              NA
              
              
              NAColony
      Bank
              
              
              114,545
              
              
              
              11.97
              
              
              
              76,547
              
              
              
              8.00
              
              
              $
              95,684
              
              
              
              10.00
              %Tier
      1 Capital to Risk-Weighted AssetsConsolidated
              
              
              103,560
              
              
              
              10.80
              
              
              
              38,342
              
              
              
              4.00
              
              
              NA
              
              
              NAColony
      Bank
              
              
              102,522
              
              
              
              10.71
              
              
              
              38,273
              
              
              
              4.00
              
              
              
              57,470
              
              
              
              6.00Tier
      1 Capital to Average AssetsConsolidated
              
              
              103,560
              
              
              
              8.39
              
              
              
              49,380
              
              
              
              4.00
              
              
              NA
              
              
              NAColony
      Bank
              
              
              102,522
              
              
              
              8.33
              
              
              
              49,205
              
              
              
              4.00
              
              
              
              61,506
              
              
              
              5.00
  26
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (21)
              Financial Information
      of Colony Bankcorp, Inc. (Parent
Only)
 
 The
parent company’s balance sheets as of September 30, 2009 and December 31, 2008
and the related statements of income and comprehensive income and cash flows are
as follows:
 
 COLONY
      BANKCORP, INC. (PARENT ONLY)BALANCE
      SHEETSSEPTEMBER
      30, 2009 AND DECEMBER 31, 2008ASSETS
              
              September 30, 2009
              
              
              December 31, 2008(Unaudited)
              
              
              (Audited)Cash
              
              $
              1,179
              
              
              $
              2Premises
      and Equipment, Net
              
              
              1,564
              
              
              
              1,542Investment
      in Subsidiaries, at Equity
              
              
              125,469
              
              
              
              105,506Other
              
              
              377
              
              
              
              1,294Totals
      Assets
              
              $
              128,589
              
              
              $
              108,344LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDividends
      Payable
              
              
              175
              
              
              $
              703Other
              
              
              118
              
              
              
              197293
              
              
              
              900Subordinated
      Debt
              
              
              24,229
              
              
              
              24,229Stockholders’
      EquityPreferred
      Stock, Par Value $1,000 a Share; Authorized 10,000,000Shares, Issued
      28,000 Shares as of September 30, 2009
              
              
              27,321
              
              
              
              ---Common
      Stock, Par Value $1 a Share; Authorized 20,000,000Shares, Issued 7,229,163
      and 7,212,313 Shares as of September 30, 2009 and December 31, 2008,
      Respectively
              
              
              7,229
              
              
              
              7,212Paid-In
      Capital
              
              
              25,393
              
              
              
              24,536Retained
      Earnings
              
              
              44,173
              
              
              
              51,302Restricted
      Stock - Unearned Compensation
              
              
              (206
              )
              
              
              (211
              )Accumulated
      Other Comprehensive Loss, Net of Tax
              
              
              157
              
              
              
              376104,067
              
              
              
              83,215Total
      Liabilities and Stockholders' Equity
              
              $
              128,589
              
              
              $
              108,344
  27
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (21)
              Financial Information
      of Colony Bankcorp, Inc. (Parent Only)
  (Continued)
 
 COLONY
      BANKCORP, INC. (PARENT ONLY)STATEMENT
      OF INCOME AND COMPREHENSIVE INCOMEFOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30,
      2008(UNAUDITED)SEPTEMBER 30, 2009
              
              
              SEPTEMBER 30, 2008IncomeDividends
      from Subsidiaries
              
              $
              2,167
              
              
              $
              3,779Management
      Fees
              
              
              114
              
              
              
              --Other
              
              
              76
              
              
              
              712,357
              
              
              
              3,850ExpensesInterest
              
              
              531
              
              
              
              951Salaries
      and Employee Benefits
              
              
              638
              
              
              
              708Other
              
              
              622
              
              
              
              1,0361,791
              
              
              
              2,695Income
      (Loss) Before Taxes and Equity in UndistributedEarnings of
      Subsidiaries
              
              
              566
              
              
              
              1,155Income
      Tax (Benefits)
              
              
              (530
              )
              
              
              (763
              )Income
      Before Equity in UndistributedEarnings of
    Subsidiaries
              
              
              1,096
              
              
              
              1,918Equity
      in Undistributed Earnings of Subsidiaries
              
              
              (6,047
              )
              
              
              781Net
      Income (Loss)
              
              
              (4,951
              )
              
              
              2,699Preferred
      Stock Dividends
              
              
              1,015
              
              
              
              --Net
      Income (Loss) Available to Common Shareholders
              
              
              (5,966
              )
              
              
              2,699Net
      Income (Loss)
              
              
              (4,951
              )
              
              
              2,699Other
      Comprehensive Income, Net of TaxGains
      (Losses) on Securities Arising During Year
              
              
              1,858
              
              
              
              (852
              )Reclassification
      Adjustment
              
              
              (2,077
              )
              
              
              (789
              )Unrealized
      Losses in Securities
              
              
              (219
              )
              
              
              (1,641
              )Comprehensive
      Income (Loss)
              
              $
              (5,170
              )
              
              $
              1,058
  28
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (21)
              Financial Information
      of Colony Bankcorp, Inc. (Parent Only)
  (Continued)
 
 
 COLONY
      BANKCORP, INC. (PARENT ONLY)STATEMENT
      OF CASH FLOWSFOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30,
      2008(UNAUDITED)2009
              
              
              2008Cash
      Flows from Operating ActivitiesNet
      Income (Loss)
              
              $
              (4,951
              )
              
              $
              2,699Adjustments
      to Reconcile Net Income (Loss) to Net CashProvided
      from Operating ActivitiesDepreciation
      and Amortization
              
              
              219
              
              
              
              215Equity
      in Undistributed Earnings of Subsidiary
              
              
              6,047
              
              
              
              (781
              )Other
              
              
              63
              
              
              
              8441,378
              
              
              
              2,977Cash
      Flows from Investing ActivitiesCapital
      Infusion in Subsidiary
              
              
              (25,500
              )
              
              
              (1,500
              )Purchases
      of Premises and Equipment
              
              
              (100
              )
              
              
              (156
              )(25,600
              )
              
              
              (1,656
              )Cash
      Flows from Financing ActivitiesDividends
      Paid Preferred Stock
              
              
              (840
              )
              
              
              ---Dividends
      Paid Common Stock
              
              
              (1,761
              )
              
              
              (2,091
              )Proceeds
      Allocated to Issuance of Preferred Stock
              
              
              27,215
              
              
              
              ---Proceeds
      Allocated to Warrants Issued
              
              
              785
              
              
              
              ---25,399
              
              
              
              (2,091
              )Net
      Increase (Decrease) in Cash
              
              
              1,177
              
              
              
              (770
              )Cash,
      Beginning
              
              
              2
              
              
              
              973Cash,
      Ending
              
              $
              1,179
              
              
              $
              203
  29
 Table of Contents
 Part
I (Continued)
 Item
1 (Continued)
  (22)
              Earnings Per
      Share
 
 Basic and
diluted earnings per share are computed and presented
hereafter.  Basic earnings per share is calculated and presented based
on income available to common stockholders divided by the weighted average
number of shares outstanding during the reporting periods.  Diluted
earnings per share reflects the potential dilution of restricted
stock.  The following presents earnings per share for the three months
and nine months ended September 30, 2009 and 2008, respectively, under the
requirements of accounting standards:
 
 
 Three
      Months Ended
              
              
              Three
      Months EndedSeptember
      30, 2009
              
              
              September
      30, 2008Common
              
              
              
              
              
              
              
              
              CommonIncome
              
              
              Shares
              
              
              
              
              
              Income
              
              
              SharesNumerator
              
              
              Denominator
              
              
              EPS
              
              
              Numerator
              
              
              Denominator
              
              
              EPSBasic
      EPSIncome
      (Loss) Available to Common Stockholders
              
              $
              18
              
              
              
              7,217
              
              
              $
              0.00
              
              
              $
              194
              
              
              
              7,202
              
              
              $
              0.03Dilutive
      Effect of Potential Common StockRestricted
      Stock
              
              
              
              
              
              
              0
              
              
              
              
              
              
              
              
              
              
              
              0Diluted
      EPSIncome
      (Loss) Available to Common StockholdersAfter Assumed Conversions
      of Dilutive Securities
              
              $
              18
              
              
              
              7,217
              
              
              $
              0.00
              
              
              $
              194
              
              
              
              7,202
              
              
              $
              0.03Nine
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30, 2009
              
              
              September
      30, 2008Common
              
              
              
              
              
              
              
              
              
              
              CommonIncome
              
              
              Shares
              
              
              
              
              
              
              Income
              
              
              SharesNumerator
              
              
              Denominator
              
              
              EPS
              
              
              Numerator
              
              
              Denominator
              
              
              EPSBasic
      EPSIncome
      (Loss) Available to Common Stockholders
              
              $
              (5,966
              )
              
              
              7,210
              
              
              $
              (0.83
              )
              
              $
              2,699
              
              
              
              7,197
              
              
              $
              0.38Dilutive
      Effect of Potential Common StockRestricted
      Stock
              
              
              
              
              
              
              0
              
              
              
              
              
              
              
              
              
              
              
              0Diluted
      EPSIncome
      (Loss) Available to Common StockholdersAfter Assumed Conversions
      of Dilutive Securities
              
              $
              (5,966
              )
              
              
              7,210
              
              
              $
              (0.83
              )
              
              $
              2,699
              
              
              
              7,197
              
              
              $
              0.38
  30
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  MANAGEMENT’SDISCUSSION 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.
  31
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  ·
              Greater
      than expected costs or difficulties related to the integration of new
      lines of business.
 
 ·
              The
      Company’s success at managing the risks involved in the foregoing
      items.
 
 Forward-looking
statements speak only as of the date on which such statements are made. The
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made,
or to reflect the occurrence of unanticipated events.
 
 The
Company
 
 Colony
Bankcorp, Inc. (Colony) is a bank holding company headquartered in Fitzgerald,
Georgia that provides, through its wholly owned subsidiary (collectively
referred to as the Company), a broad array of products and services throughout
18 Georgia markets. The Company offers commercial, consumer and mortgage banking
services.
 
 Application
of Critical Accounting Policies and Accounting Estimates
 
 The
accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry.  The
Company’s financial position and results of operations are affected by
management’s application of accounting policies, including judgments made to
arrive at the carrying value of assets and liabilities and amounts reported for
revenues, expenses and related disclosures.  Different assumptions in
the application of these policies could result in material changes in the
Company’s financial position and/or results of operations.  Critical
accounting policies are those policies that management believes are the most
important to the portrayal of the Company’s financial condition and results of
operations, and they require management to make estimates that are difficult,
subjective or complete.
 
 Allowance for Loan Losses –
The allowance for loan losses provides coverage for probable losses inherent in
the Company’s loan portfolio.  Management evaluates the adequacy of
the allowance for loan losses quarterly based on changes, if any, in
underwriting activities, the loan portfolio composition (including product mix
and geographic, industry or customer-specific concentrations), trends in loan
performance, regulatory guidance and economic factors.  This
evaluation is inherently subjective, as it requires the use of significant
management estimates.  Many factors can affect management’s estimates
of specific and expected losses, including volatility of default probabilities,
collateral values, rating migrations, loss severity and economic and political
conditions.   The allowance is increased through provisions
charged to operating earnings and reduced by net charge-offs.
 
 The
Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio.  The allowance recorded for
loans is based on reviews of individual credit relationships and historical loss
experience.  The allowance for losses relating to impaired loans is
based on the loan’s observable market price, the discounted cash flows using the
loan’s effective interest rate, or the value of collateral for collateral
dependent loans.
 
 Regardless
of the extent of the Company’s analysis of customer performance, portfolio
trends or risk management processes, certain inherent but undetected losses are
probable within the loan portfolio.  This is due to several factors,
including inherent delays in obtaining information regarding a customer’s
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends.  Volatility of economic or
customer-specific conditions affecting the identification and estimation of
losses for larger nonhomogeneous credits and the sensitivity of assumptions
utilized to establish allowances for homogeneous groups of loans are among other
factors.  The Company estimates a range of inherent losses related to
the existence of these exposures.  The estimates are based upon the
Company’s evaluation of risk associated with the commercial and consumer levels
and the estimated impact of the current economic environment.
 
 Goodwill and Other Intangibles
– The Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair
value.  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.
  32
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Overview
 
 The
following discussion and analysis presents the more significant factors
affecting the Company’s financial condition as of September 30, 2009 and 2008,
and results of operations for each of the three months and nine months in the
periods ended September 30, 2009 and 2008.  This discussion and
analysis should be read in conjunction with the Company’s consolidated financial
statements, notes thereto and other financial information appearing elsewhere in
this report.
 
 Taxable-equivalent
adjustments are the result of increasing income from tax-free loans and
investments by an amount equal to the taxes that would be paid if the income
were fully taxable based on a 34 percent federal tax rate, thus making
tax-exempt yields comparable to taxable asset yields.
 
 Dollar
amounts in tables are stated in thousands, except for per share
amounts.
 
 Results
of Operations
 
 The
Company’s results of operations are determined by its ability to effectively
manage interest income and expense, to minimize loan and investment losses, to
generate noninterest income and to control noninterest expense.  Since
market forces and economic conditions beyond the control of the Company
determine interest rates, the ability to generate net interest income is
dependent upon the Company’s ability to obtain an adequate spread between the
rate earned on earning assets and the rate paid on interest-bearing
liabilities.  Thus, the key performance for net interest income is the
interest margin or net yield, which is taxable-equivalent net interest income
divided by average earning assets.  Net income available to
shareholders totaled $0.02 million, or $0.00 diluted per common share, in three
months ended September 30, 2009 compared to net income available to shareholders
of $0.19 million, or $0.03 diluted per common share, in three months ended
September 30, 2008.  Net loss available to shareholders totaled
$(5.97) million, or $(0.83) diluted per common share, in nine months ended
September 30, 2009 compared to net income available to shareholder of
$2.70  million, or $0.38 diluted per common share, in nine months
ended September 30, 2008.
 
 Selected
income statement data, returns on average assets and average equity and
dividends per share for the comparable periods were as follows:
 
 Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30
              
              
              September
      302009
              
              
              2008
              
              
              2009
              
              
              2008Taxable-equivalent
      net interest income
              
              $
              10,373
              
              
              $
              9,578
              
              
              $
              29,519
              
              
              $
              28,396Taxable-equivalent
      adjustment
              
              
              69
              
              
              
              93
              
              
              
              216
              
              
              
              263Net
      interest income
              
              
              10,304
              
              
              
              9,485
              
              
              
              29,303
              
              
              
              28,133Provision
      for possible loan losses
              
              
              4,000
              
              
              
              3,370
              
              
              
              21,580
              
              
              
              8,512Noninterest
      income
              
              
              2,340
              
              
              
              1,780
              
              
              
              8,306
              
              
              
              7,185Noninterest
      expense
              
              
              8,112
              
              
              
              7,813
              
              
              
              23,776
              
              
              
              23,284Income
      (loss) before income taxes
              
              
              532
              
              
              
              82
              
              
              
              (7,747
              )
              
              
              3,522Income
      taxes
              
              
              164
              
              
              
              (112
              )
              
              
              (2,796
              )
              
              
              823Net
      income (loss)
              
              $
              368
              
              
              $
              194
              
              
              $
              (4,951
              )
              
              $
              2,699Preferred
      stock dividends
              
              
              350
              
              
              
              ---
              
              
              
              1,015
              
              
              
              ---Net
      income (loss) available to common shareholders
              
              $
              18
              
              
              $
              194
              
              
              $
              (5,966
              )
              
              $
              2,699Net
      income (loss) available to common shareholders:Basic
              
              $
              0.00
              
              
              $
              0.03
              
              
              $
              (0.83
              )
              
              $
              0.38Diluted
              
              $
              0.00
              
              
              $
              0.03
              
              
              $
              (0.83
              )
              
              $
              0.38Return
      on average assets
              
              
              0.01
              %
              
              
              0.06
              %
              
              
              (0.62
              )%
              
              
              0.30
              %Return
      on average common equity
              
              
              0.07
              %
              
              
              0.93
              %
              
              
              (7.42
              )%
              
              
              4.24
              %
  33
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Net
income from operations for three months ended September 30, 2009 increased $0.17
million, or 89.69 percent, compared to the same period in 2008.  The
increase was primarily the result of an increase of $0.82 million in net
interest income and an increase of $0.56 million in noninterest
income.  This was offset by an increase of $0.63 million in provision
for possible loan loss, an increase of $0.30 million in noninterest expense, and
an increase of $0.28 million in income taxes.
 
 Net
income for nine months ended September 30, 2009 decreased $7.65 million, or
283.44 percent, compared to the same period a year ago.  The decrease
was primarily the result of an increase of $13.07 million in provision for
possible loan loss and an increase of $0.49 in noninterest
expense.  This was offset by an increase of $1.17 million in net
interest income, an increase of $1.12 million in noninterest income, and a
decrease of $3.62 million 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 77.91 percent of
total revenue for nine months ended September 30, 2009 and 79.66 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 3.25 percent to 7.75 percent during 2007 to
2009.  At year end 2007, the prime rate was 7.25 percent and with the
400 basis point reduction during 2008 the prime rate at September 30, 2009 is
currently at 3.25 percent.  The federal funds rate moved similar to
prime rate with interest rates ranging from .25 percent to 4.75 percent during
2007 to 2009.  At year end 2007, the federal funds rate was 4.25
percent and with the 400 basis point reduction during 2008 the federal funds
rate at September 30, 2009 is currently at 0.25 percent.  We
anticipate the Federal Reserve tightening interest rate policy in 2010, which
should improve Colony’s net interest margin.
 The
following table presents the changes in taxable-equivalent net interest income
and identifies the changes due to differences in the average volume of earning
assets and interest-bearing liabilities and the changes due to changes in the
average interest rate on those assets and liabilities. The changes in net
interest income due to changes in both average volume and average interest rate
have been allocated to the average volume change or the average interest rate
change in proportion to the absolute amounts of the change in each. The
Company’s consolidated average balance sheets along with an analysis of
taxable-equivalent net interest earnings are presented in the Quantitative and
Qualitative Disclosures About Market Risk included elsewhere in this
report.
  34
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Rate/Volume
Analysis
 
 The
rate/volume analysis presented hereafter illustrates the change from September
30, 2008 to September 30, 2009 for each component of the taxable equivalent net
interest income separated into the amount generated through volume changes and
the amount generated by changes in the yields/rates.
 
 
 Changes
      from September 30, 2008 to September 30, 2009 (1)($
      in thousands)
              
              Volume
              
              
              Rate
              
              
              TotalInterest
      IncomeLoans,
      Net-taxable
              
              $
              523
              
              
              $
              (
      8,561
              )
              
              $
              (8,038
              )Investment
      SecuritiesTaxable
              
              
              2,854
              
              
              
              (2,063
              )
              
              
              791Tax-exempt
              
              
              (162
              )
              
              
              9
              
              
              
              (153
              )Total
      Investment Securities
              
              
              2,692
              
              
              
              (2,054
              )
              
              
              638Interest-Bearing
      Deposits in other Banks
              
              
              (20
              )
              
              
              6
              
              
              
              (14
              )Federal
      Funds Sold
              
              
              (110
              )
              
              
              (140
              )
              
              
              (250
              )Other
      Interest - Earning Assets
              
              
              16
              
              
              
              (269
              )
              
              
              (253
              )Total
      Interest Income
              
              
              3,101
              
              
              
              (11,018
              )
              
              
              (7,917
              )Interest
      ExpenseInterest-Bearing
      Demand andSavings Deposits
              
              
              186
              
              
              
              (1,431
              )
              
              
              (1,245
              )Time
      Deposits
              
              
              540
              
              
              
              (8,113
              )
              
              
              (7,573
              )Federal
      Funds Purchased andRepurchase Agreements
              
              
              723
              
              
              
              (358
              )
              
              
              365Subordinated
      Debentures
              
              
              ---
              
              
              
              (420
              )
              
              
              (420
              )Other
      Borrowed Money
              
              
              245
              
              
              
              (413
              )
              
              
              (168
              )Total
      Interest Expense
              
              
              1,694
              
              
              
              (10,735
              )
              
              
              (9,041
              )Net
      Interest Income
              
              $
              1,407
              
              
              $
              ( 283
              )
              
              $
              1,124
 
 (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.
  35
 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 about 33 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 until 2008.  During
2006 interest rates increased 100 basis points and during 2007 interest rates
decreased 100 basis points.  The 100 basis point decrease by the
Federal Reserve in 2007 followed by 400 basis point decrease in 2008 resulted in
significant pressure in net interest margins.  Net interest margin
decreased to 3.24 percent for nine months ended September 30, 2009 compared to
3.34 percent for the same period a year ago.  Given the Federal
Reserve’s aggressive posture during 2008 that ended the year with a range of 0 –
0.25 percent federal funds target rate, we have seen our net interest margin
reach a low of 3.06 percent for first quarter 2009 to a high of 3.38 percent for
third quarter 2009.
 
 Taxable-equivalent
net interest income for nine months ended September 30, 2009 increased $1.12
million, or 3.96 percent compared to the same period a year ago. The fluctuation
between the comparable periods resulted from the negative impact of the
significant decrease in interest rates.  The average volume of earning
assets during nine months ended September 30, 2009 increased almost $79.4
million compared to the same period a year ago while over the same period the
net interest margin decreased by 10 basis points from 3.34 percent to 3.24
percent.  Growth in average earning assets during 2009 and 2008 was
primarily in loans and investment securities.  The decrease in the net
interest margin in 2009 was primarily the result of the Federal Reserve reducing
interest rates along with sluggish loan activity.  The Company
realized an increase in net interest margin for third quarter 2009 of 3.38
percent compared to second quarter 2009 net interest margin of 3.28
percent.
 
 The
average volume of loans increased $9.7 million in nine months ended September
30, 2009 compared to the same period a year ago.  The average yield on
loans decreased 119 basis points in nine months ended September 30, 2009
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 increased $26.8 million in nine
months ended September 30, 2009 compared to the same period a year ago, with
interest-bearing deposits increasing $31.9 million in nine months ended
September 30, 2009.  Accordingly, the ratio of average
interest-bearing deposits to total average deposits was 93.1 percent in nine
months ended September 30, 2009 compared to 92.4 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 126 basis points in nine months ended September 30, 2009
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 3.01 percent in nine months ended September
30, 2009 compared to 2.98 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 $21.58 million in nine months ended September
30, 2009 compared to $8.51 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.
  36
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Noninterest
Income
 
 The
components of noninterest income were as follows:
 
 Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30
              
              
              September
      302009
              
              
              2008
              
              
              2009
              
              
              2008Service
      Charges on Deposit Accounts
              
              $
              1,125
              
              
              $
              1,233
              
              
              $
              3,155
              
              
              $
              3,571Other
      Charges, Commissions and Fees
              
              
              259
              
              
              
              240
              
              
              
              747
              
              
              
              735Other
              
              
              210
              
              
              
              128
              
              
              
              889
              
              
              
              1,173Mortgage
      Fee Income
              
              
              137
              
              
              
              168
              
              
              
              368
              
              
              
              511Securities
      Gains
              
              
              609
              
              
              
              11
              
              
              
              3,147
              
              
              
              1,195Total
              
              $
              2,340
              
              
              $
              1,780
              
              
              $
              8,306
              
              
              $
              7,185
 
 Total
noninterest income for three months ended September 30, 2009 increased $0.56
million, or 31.46 percent compared to the same period a year ago. Total
noninterest income for nine months ended September 30, 2009 increased $1.12
million, or 15.60 percent, compared to the same year ago
period.  Growth in noninterest income was primarily in securities
gains.  Changes in these items and the other components of noninterest
income are discussed in more detail below.
 
 Service Charges on Deposit
Accounts.  Service charges on deposit accounts for three months
ended September 30, 2009 decreased $108 thousand, or 8.76 percent, compared to
the same period a year ago.   Service charges on deposit accounts
for the nine months ended September 30, 2009 decreased $416 thousand, or 11.65
percent, compared to the same year ago period.
 
 Mortgage Fee
Income.  Mortgage fee income for three months ended September
30, 2009 decreased $31 thousand, or 18.45 percent, compared to the same period
year ago.   Mortgage fee income for nine months ended September
30, 2009 decreased $143 thousand, or 27.98 percent, compared to the same year
ago period.  The company anticipates fee income to continue to show a
decrease over the previous year due to the current mortgage market and slowing
economy.
 
 All Other Noninterest
Income.  Other charges, commissions and fees and other income
for three months ended September 30, 2009 was $469 thousand compared to $368
thousand in the same year ago period, or an increase of 27.45
percent.  Other charges, commissions and fees, and other income for
nine months ended September 30, 2009 was $1.64 million compared to $1.91 million
in the same year ago period, or a decrease of 14.26 percent.  The
significant decrease in 2009 was a net result of the $670 thousand gain realized
from the Company’s unwinding of its position in $19 million FHLB advances during
the second quarter of 2008.  The decrease was offset by an increase in
deferred ATM fee of $222 thousand for 2009.
 
 Securities
Gains.  The Company realized gains from the sale of securities
of $609 thousand in three months ended September 30, 2009  compared to
$11 thousand in the same year ago period and realized gains from the sale of
securities of $3.2 million in nine months ended September 30, 2009 compared to
$1.2 million in the same year ago period.
 
 Noninterest
Expense
 
 The
components of noninterest expense were as follows:
 
 Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30
              
              
              September
      302009
              
              
              2008
              
              
              2009
              
              
              2008Salaries
      and Employee Benefits
              
              $
              3,556
              
              
              $
              4,051
              
              
              $
              10,946
              
              
              $
              12,483Occupancy
      and Equipment
              
              
              1,132
              
              
              
              1,098
              
              
              
              3,182
              
              
              
              3,166Other
              
              
              3,424
              
              
              
              2,664
              
              
              
              9,648
              
              
              
              7,635Total
              
              $
              8,112
              
              
              $
              7,813
              
              
              $
              23,776
              
              
              $
              23,284
  37
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Total
noninterest expense for three months ended September 30, 2009 increased $299
thousand, or 3.83 percent, compared to the same period a year ago. Total
noninterest expense for nine months ended September 30, 2009 increased $492
thousand, or 2.11 percent, compared to the same period a year
ago.  These items and the changes in the various components of
noninterest expense are discussed in more detail below.
 
 Salaries and Employee
Benefits.  Salaries and employee benefits expense for three
months ended September 30, 2009 decreased $495 thousand, or 12.22 percent,
compared to the same period a year ago.  Salaries and employee
benefits expense for the nine months ended September 30, 2009 decreased $1,537
thousand, or 12.31 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.  Restructuring due to
consolidation efforts initiated during 2008 also reduced salaries and
benefits.
 Occupancy and
Equipment.  Occupancy and equipment expense has remained
relatively flat in both periods with an increase of $34  thousand for
three months ended September 30, 2009 compared to the same year ago period and
an increase of $16 thousand for nine  months ended September 30, 2009
compared to the same year ago period.
 
 All Other Non-Interest
Expense.  All other noninterest expense for three months ended
September 30, 2009 increased $760 thousand, or 28.53 percent compared to the
same year ago period.  All other noninterest expense for nine months
ended September  30, 2009 increased $2,013 thousand, or 26.37 percent
compared to the same year ago period.  Significant increases impacting
the comparable periods include the FDIC insurance assessment and
repossession/foreclosure expenses.  For the nine months ended
September 30, 2009, FDIC insurance assessments increased to $2,208 thousand from
$50 thousand in the same year ago period, or an increase of 4,316 percent and
credit related foreclosure and repossession expenses increased to $932 thousand
from $52 thousand in the same year ago period, or an increase of 1,692
percent.  FDIC insurance premiums for the entire banking industry have
been adjusted up by the FDIC to maintain the FDIC reserve at adequate levels,
while the Company has experienced a significant increase in credit related
expenses due to the elevation of non-performing assets.
 
 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 $1.282   billion in nine months ended
September 30, 2009 compared to $1.194 billion in nine months ended September 30,
2008.
 
 Nine
      Months EndedSeptember
      30,Sources
      of Funds:
              
              2009
              
              
              2008Deposits:Noninterest-Bearing
              
              $
              69,601
              
              
              
              5.43
              %
              
              $
              74,749
              
              
              
              6.26
              %Interest-Bearing
              
              
              941,655
              
              
              
              73.43
              
              
              
              909,744
              
              
              
              76.18Federal
      Funds Purchased and Repo Agreements
              
              
              42,341
              
              
              
              3.30
              
              
              
              12,207
              
              
              
              1.02Long-term
      Debt and Other Borrowings
              
              
              115,229
              
              
              
              8.99
              
              
              
              107,091
              
              
              
              8.97Other
      Noninterest-Bearing Liabilities
              
              
              6,321
              
              
              
              0.49
              
              
              
              5,494
              
              
              
              0.46Equity
      Capital
              
              
              107,249
              
              
              
              8.36
              
              
              
              84,967
              
              
              
              7.11Total
              
              $
              1,282,396
              
              
              
              100.00
              %
              
              $
              1,194,252
              
              
              
              100.00
              %Uses
      of Funds:Loans
              
              $
              945,128
              
              
              
              73.70
              %
              
              $
              936,483
              
              
              
              78.41
              %Securities
              
              
              236,298
              
              
              
              18.43
              
              
              
              160,671
              
              
              
              13.45Federal
      Funds Sold
              
              
              7,322
              
              
              
              0.57
              
              
              
              12,518
              
              
              
              1.05Interest-Bearing
      Deposits in Other Banks
              
              
              408
              
              
              
              0.03
              
              
              
              1,529
              
              
              
              0.13Other
      Interest-Earning Assets
              
              
              6,322
              
              
              
              0.49
              
              
              
              5,951
              
              
              
              0.50Other
      Noninterest-Earning Assets
              
              
              86,918
              
              
              
              6.78
              
              
              
              77,100
              
              
              
              6.46Total
              
              $
              1,282,396
              
              
              
              100.00
              %
              
              $
              1,194,252
              
              
              
              100.00
              %
  38
 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 93.12
percent of total average deposits in nine months ended September 30, 2009
compared to 92.41 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 $971 million at September 30, 2009, up 1.05
percent, compared to loans of $961 million at December 31, 2008.  See
additional discussion regarding the Company’s loan portfolio in the section
captioned “Loans” included elsewhere in this discussion.  The majority
of funds provided by deposit growth have been invested in loans.
 
 Loans
 
 The
following table presents the composition of the Company’s loan portfolio as of
September 30, 2009 and December 31, 2008:
 
 September 30, 2009
              
              
              December 31, 2008Commercial,
      Financial and Agricultural
              
              $
              94,555
              
              
              $
              86,379Real
      EstateConstruction
              
              
              131,233
              
              
              
              160,374Mortgage,
      Farmland
              
              
              57,896
              
              
              
              54,159Mortgage,
      Other
              
              
              628,802
              
              
              
              600,654Consumer
              
              
              40,320
              
              
              
              44,163Other
              
              
              18,326
              
              
              
              15,308971,132
              
              
              
              961,037Unearned
      Interest and Fees
              
              
              (144
              )
              
              
              (179
              )Allowance
      for Loan Losses
              
              
              (21,359
              )
              
              
              (17,016
              )Loans
              
              $
              949,629
              
              
              $
              943,842
 
 The
following table presents total loans as of September 30, 2009 according to
maturity distribution and/or repricing opportunity on adjustable rate
loans:
 
 Maturity and Repricing
      Opportunity
              
              ($ in Thousands)One
      Year or Less
              
              $
              584,536After
      One Year through Three Years
              
              
              320,249After
      Three Years through Five Years
              
              
              55,808Over
      Five Years
              
              
              10,539$
              971,132
 
 Overview. Loans totaled
$971.1 million at September 30, 2009, up 1.05 percent from December 31, 2008
loans of $961 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 64.75 percent and 62.5 percent of total loans, real estate
construction made up 13.51 percent and 16.69 percent, while commercial,
financial, and agricultural based loans made up 9.74 percent and 8.99 percent of
total loans at September 30, 2009 and December 31, 2008,
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.
  39
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  The
Company extends loans to builders and developers that are secured by non-owner
occupied properties.  In such cases, the Company reviews the overall
economic conditions and trends for each market to determine the desirability of
loans to be extended for residential construction and
development.  Sources of repayment for these types of loans may be
pre-committed permanent loans from approved long-term lenders, sales of
developed property or an interim mini-perm loan commitment from the Company
until permanent financing is obtained.  In some cases, loans are
extended for residential loan construction for speculative purposes and are
based on the perceived present and future demand for housing in a particular
market served by the Company.  These loans are monitored by on-site
inspections and are considered to have higher risks than other real estate loans
due to their ultimate repayment being sensitive to interest rate changes,
general economic conditions and trends, the demand for the properties, and the
availability of long-term financing.
 
 The
Company originates consumer loans at the bank level.  Due to the
diverse economic markets served by the Company, underwriting criterion may vary
slightly by bank.  The Company is committed to serving the borrowing
needs of all markets served and, in some cases, adjusts certain evaluation
methods to meet the overall credit demographics of each
market.  Consumer loans represent relatively small loan amounts that
are spread across many individual borrowers that helps minimize
risk.  Additionally, consumer trends and outlook reports are reviewed
by management on a regular basis.
 
 The
Company maintains an independent loan review department that reviews and
validates the credit risk program on a periodic basis. Results of these reviews
are presented to management. The loan review process complements and reinforces
the risk identification and assessment decisions made by lenders and credit
personnel, as well as the Company’s policies and procedures.
 
 Commercial, Financial and
Agricultural.Commercial, financial and agricultural loans at
September 30, 2009 increased 9.47 percent from December 31, 2008 to $94.6
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 Dougherty, Lowndes, Houston, Chatham and
Muscogee counties.  As a result, the Company originates and maintains
large credit relationships with several commercial customers in the ordinary
course of business.  The Company considers large credit relationships
to be those with commitments equal to or in excess of $5.0 million prior to any
portion being sold.  Large relationships also include loan
participations purchased if the credit relationship with the agent is equal to
or in excess of $5.0 million.  In addition to the Company’s normal
policies and procedures related to the origination of large credits, the
Company’s Senior Credit Committee must approve all new and renewed credit
facilities which are part of large credit relationships.  The
following table provides additional information on the Company’s large credit
relationships outstanding at period end.
 
 September
      30, 2009
              
              
              December
      31, 2008Period
      End Balances
              
              
              
              
              
              Period
      End BalancesNumber
      of Relationships
              
              
              Committed
              
              
              Outstanding
              
              
              Number
      of Relationships
              
              
              Committed
              
              
              OutstandingLarge
      Credit Relationships:$10
      million and greater
              
              2
              
              
              $
              28,700
              
              
              $
              27,981
              
              
              2
              
              
              $
              27,605
              
              
              $
              21,345$5
      million to $9.9 million
              
              7
              
              
              $
              46,662
              
              
              $
              45,724
              
              
              12
              
              
              $
              74,679
              
              
              $
              71,215
  40
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Maturities and Sensitivities of
Loans to Changes in Interest Rates.  The following table
presents the maturity distribution of the Company’s loans at September 30, 2009.
The table also presents the portion of loans that have fixed interest rates or
variable interest rates that fluctuate over the life of the loans in accordance
with changes in an interest rate index such as the prime rate.
 
 Due
      in One
                Year or
      Less
              
              
              After
      One,
                but
      Within
                Three
      Years
              
              
              After
      Three,
                but
      Within
                Five
      Years
              
              
              After
                Five
                Years
              
              
              TotalLoans
      with fixed interest rates
              
              $
              273,204
              
              
              $
              315,599
              
              
              $
              55,745
              
              
              $
              10,212
              
              
              $
              654,760Loans
      with floating interest rates
              
              
              311,332
              
              
              
              4,650
              
              
              
              63
              
              
              
              327
              
              
              
              316,372Total
              
              $
              584,536
              
              
              $
              320,249
              
              
              $
              55,808
              
              
              $
              10,539
              
              
              $
              971,132
 
 The
Company may renew loans at maturity when requested by a customer whose financial
strength appears to support such renewal or when such renewal appears to be in
the Company’s best interest. In such instances, the Company generally requires
payment of accrued interest and may adjust the rate of interest, require a
principal reduction or modify other terms of the loan at the time of
renewal.
 
 Non-Performing
Assets and Potential Problem Loans
 
 Non-performing
assets and accruing past due loans as of September 30, 2009 and December 31,
2008 were as follows:
 
 September 30,
      2009
              
              
              December 31,
      2008Loans
      accounted for on nonaccrual
              
              $
              38,691
              
              
              $
              35,124Loans
      past due 90 days or more
              
              
              41
              
              
              
              250Loans
      restructured
              
              
              1,064
              
              
              
              --Other
      real estate foreclosed
              
              
              16,516
              
              
              
              12,812Total
      non-performing assets
              
              $
              56,312
              
              
              $
              48,186Non-performing
      assets as a percentage of:Total
      loans and foreclosed assets
              
              
              5.70
              %
              
              
              4.95
              %Total
      assets
              
              
              4.36
              %
              
              
              3.85
              %Accruing
      past due loans:30-89
      days past due
              
              $
              14,547
              
              
              $
              18,67590
      or more days past due
              
              
              41
              
              
              
              250Total
      accruing past due loans
              
              $
              14,588
              
              
              $
              18,925
 
 Non-performing
assets include non-accrual loans, loans past due 90 days or more, restructured
loans and foreclosed real estate.  Non-performing assets at September
30, 2009 increased 16.86 percent from December 31, 2008.
 
 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
  41
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  and
applicable regulations. Write-downs are provided for subsequent declines in
value and are included in other non-interest expense along with other expenses
related to maintaining the properties.
 
 Allowance
for 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 current U.S. accounting standards.  The level of the
allowance reflects management’s continuing evaluation of industry
concentrations, specific credit risks, loan loss experience, current loan
portfolio quality, present economic, political and regulatory conditions and
unidentified losses inherent in the current loan portfolio. Portions of the
allowance may be allocated for specific credits; however, the entire allowance
is available for any credit that, in management’s judgment, should be charged
off. While management utilizes its best judgment and information available, the
ultimate adequacy of the allowance is dependent upon a variety of factors beyond
the Company’s control, including the performance of the Company’s loan
portfolio, the economy, changes in interest rates and the view of the regulatory
authorities toward loan classifications. The company’s allowance for loan losses
consists of specific valuation allowances established for probable losses on
specific loans and historical valuation allowances for other loans with similar
risk characteristics.
 
 The
allowances established for probable losses on specific loans are based on a
regular analysis and evaluation of classified loans.  Loans are
classified based on an internal credit risk grading process that evaluates,
among other things: (i) the obligor’s ability to repay; (ii) the underlying
collateral, if any; and (iii) the economic environment and industry in which the
borrower operates.  This analysis is performed at the subsidiary bank
level and is reviewed at the parent company level.  Once a loan is
classified, it is reviewed to determine whether the loan is impaired and, if
impaired, a portion of the allowance for possible loan losses is specifically
allocated to the loan.  Specific valuation allowances are determined
after considering the borrower’s financial condition, collateral deficiencies,
and economic conditions affecting the borrower’s industry, among other
things.
 
 Historical
valuation allowances are calculated from loss factors applied to loans with
similar risk characteristics.  The loss factors are based on loss
ratios for groups of loans with similar risk characteristics.  The
loss ratios are derived from the proportional relationship between actual loan
losses and the total population of loans in the risk category.  The
historical loss ratios are periodically updated based on actual charge-off
experience.  The Company’s groups of similar loans include similarly
risk-graded groups of loans not reviewed for individual impairment.
 
 Management
evaluates the adequacy of the allowance for each of these components on a
quarterly basis.  Peer comparisons, industry comparisons, and
regulatory guidelines are also used in the determination of the general
valuation allowance.
 
 Loans
identified as losses by management, internal loan review, and/or bank examiners
are charged-off.
 
 An
allocation for loan losses has been made according to the respective amounts
deemed necessary to provide for the possibility of incurred losses within the
various loan categories.  The allocation is based primarily on
previous charge-off experience adjusted for changes in experience among each
category.  Additional amounts are allocated by evaluating the loss
potential of individual loans that management has considered
impaired.  The reserve for loan loss allocation is subjective since it
is based on judgment and estimates, and therefore is not necessarily indicative
of the specific amounts or loan categories in which the charge-offs may
ultimately occur.  The following table shows a comparison of the
allocation of the reserve for loan losses for the periods
indicated.
 
 September 30,
      2009
              
              
              December 31,
      2008Reserve
              
              
              
              %
              *
              
              Reserve
              
              
              
              %
              *Commercial,
      Financialand Agricultural
              
              $
              3,203
              
              
              
              10
              %
              
              $
              4,254
              
              
              
              9
              %Real
      Estate – Construction
              
              
              6,407
              
              
              
              13
              %
              
              
              2,808
              
              
              
              17
              %Real
      Estate – Farmland
              
              
              640
              
              
              
              6
              %
              
              
              681
              
              
              
              6
              %Real
      Estate – Other
              
              
              8,331
              
              
              
              65
              %
              
              
              5,955
              
              
              
              62
              %Loans
      to Individuals
              
              
              1,923
              
              
              
              4
              %
              
              
              2,467
              
              
              
              4
              %All
      Other Loans
              
              
              855
              
              
              
              2
              %
              
              
              851
              
              
              
              2
              %Total
              
              $
              21,359
              
              
              
              100
              %
              
              $
              17,016
              
              
              
              100
              %
 
 *
              Loan
      balance in each category expressed as a percentage of total end of period
      loans.
  42
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Activity
in the allowance for loan losses is presented in the following table. There were
no charge-offs or recoveries related to foreign loans during any of the periods
presented.
 
 The
following table presents an analysis of the Company’s loan loss experience for
the periods indicated.
 
 Three
      Months Ended
              
              
              Three
      Months Ended($ in thousands)
              
              September 30, 2009
              
              
              September 30, 2008Allowance
      for Loan Losses at Beginning of Quarter
              
              $
              18,375
              
              
              $
              17,466Charge-OffCommercial,
      Financial and Agricultural
              
              
              24
              
              
              
              682Real
      Estate – Construction & Land Development
              
              
              74
              
              
              
              1,357Real
      Estate – Residential
              
              
              769
              
              
              
              522Real
      Estate – Nonfarm Residential
              
              
              41
              
              
              
              27Consumer
              
              
              188
              
              
              
              455All
      Other
              
              
              32
              
              
              
              331,128
              
              
              
              3,076RecoveriesCommercial,
      Financial and Agricultural
              
              
              39
              
              
              
              7Real
      Estate – Construction & Land Development
              
              
              6
              
              
              
              --Real
      Estate – Residential
              
              
              9
              
              
              
              8Real
      Estate – Nonfarm Residential
              
              
              1
              
              
              
              140Consumer
              
              
              55
              
              
              
              37All
      Other
              
              
              2
              
              
              
              --112
              
              
              
              192Net
      Charge-Offs
              
              
              1,016
              
              
              
              2,884Provision
      for Loan Losses
              
              
              4,000
              
              
              
              3,370Allowance
      for Loan Losses at End of Quarter
              
              $
              21,359
              
              
              $
              17,952Ratio
      of Net Charge-Offs to Average Loans
              
              
              0.11
              %
              
              
              0.30
              %
 
 The
allowance for loan losses is maintained at a level considered appropriate by
management, based on estimated probable losses within the existing loan
portfolio. The allowance, in the judgment of management, is necessary to reserve
for estimated loan losses and risks inherent in the loan portfolio. The
provision for loan losses reflects loan quality trends, including the level of
net charge-offs or recoveries, among other factors. The provision for loan
losses increased $0.63 million from $3.37 million in three months ended
September 30, 2008 to $4.0 million in three months ended September 30,
2009.  The provision for loan losses charged to earnings was based
upon management’s judgment of the amount necessary to maintain the allowance at
an adequate level to absorb losses inherent in the loan portfolio at
quarter-end.  The amount each period is dependent upon many factors,
including changes in the risk ratings of the loan portfolio, net charge-offs,
past due ratios, the value of collateral, and other environmental factors that
include portfolio loan quality indicators; portfolio growth and composition of
commercial real estate and concentrations; portfolio policies, procedures,
underwriting standards, loss recognition, collection and recovery practices;
local economic business conditions; and the experience, ability, and depth of
lending management and staff.  Of significance to changes in the
allowance during the third quarter was the provision of $4.0
million.  Charge-offs consisted of one multifamily residential
property loan totaling $0.28 million and one 1-4 family residential loan
totaling $0.29 million.  The remainder of the charge-offs were made up
of several small loans, most of which were real estate dependent
loans.  The large charge-offs were attributable to significant
declines in collateral value based upon current real estate
values.  Charge-offs for third quarter 2008 totaled $2.88 million, of
which several small loans totaling $1.06 million were construction, land
development and other loans.  The remainder of the charge-offs were
made up of several small loans, most of which were real estate dependent loans
and commercial loans.
 
 Provisions
were higher in 2009 compared to 2008 primarily due to the elevated risk of
residential real estate and land development loans that began during 2007 with
the housing and real estate downturn.  Nonperforming assets as a
percentage of total loans and foreclosed assets increased to 5.70 percent at
September 30, 2009 compared to 4.74 percent at June 30, 2009 and 4.95 percent at
December 31, 2008.  Total nonperforming assets at September 30, 2009
were $56.3 million, of which $28.7 million were construction,
  43
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  land
development and other land loans; $5.4 million were 1-4 family residential
properties; $4.1 million were multifamily residential properties; $14.6 million
were nonfarm nonresidential properties; $1.4 million were farmland properties;
and the remainder of nonperforming assets totaling $2.1 million were commercial
and consumer loans.  All of the classified loans greater than $50
thousand, including the nonperforming loans, are reviewed throughout the quarter
for impairment review.  Total nonperforming assets at September 30,
2008 were $34.4 million, of which $20.20 million were construction, land
development and other land loans; $0.69 million were farmland; $4.85 million
were 1-4 family residential properties; $3.47 million were multifamily
properties; $4.08 million were nonfarm nonresidential properties; and the
remainder of nonperforming assets totaling $1.13 million were commercial and
consumer loans.  The allowance for loan losses of $21.36 million at
September 30, 2009 was 2.20 percent of total loans which compares to $18.38
million at June 30, 2009, or 1.91 percent of total loans and to $17.02 million
at December 31, 2008, or 1.77 percent.  Unusually high levels of loan
loss provision have been required as Company management addresses asset quality
deterioration.  While the nonperforming loans as a percentage of total
loans was 4.10 percent, 3.45 percent, 4.17 percent, and 3.68 percent,
respectively as of September 30, 2009, June 30, 2009, March 31, 2009 and
December 31, 2008, the Company’s allowance for loan losses as a percentage of
nonperforming loans was 53.67 percent, 55.31 percent, 47.29 percent, and 48.10
percent, respectively as of September 30, 2009, June 30, 2009, March 31, 2009
and December 31, 2008.  We continued to identify new problem loans
during third quarter 2009, though at a slower pace than in previous
quarters.
 
 While the
allowance for loan losses increased from $18.38 million, or 1.91 percent of
total loans at June 30, 2009 to $21.36 million, or 2.20 percent of total loans
at September 30, 2009, the Company also reflected an increase in nonperforming
loans from $33.2 million at June 30, 2009 to $39.8 million at September 30,
2009.  The allowance for loan losses is inherently judgmental,
nevertheless the Company’s methodology is consistently applied based
on standards for current accounting by creditors for impairment of a loan
and allowance allocations determined in accordance with accounting for
contingencies. Loans individually selected for impairment review consist of all
loans classified substandard that are $50 thousand and over. The remaining
portfolio is analyzed based on historical loss data. Loans selected for
individual review where no individual impairment amount is identified do not
receive any contribution to the allowance for loan losses based on historical
data. Historical loss rates are updated annually to provide the annual loss
rate which is applied to the appropriate portfolio grades in conjunction with
average portfolio life.  In addition, environmental factors as
discussed earlier are evaluated for any adjustments needed to the allowance for
loan losses determination produced by individual loan impairment analysis and
remaining portfolio segmentation analysis.  The allowance for loan
losses determination is based on reviews throughout the quarter and an
environmental analysis at quarter-end.
 
 As part
of our monitoring and evaluation of collateral values for nonperforming and
problem loans in determining adequate allowance for loan losses, regional credit
officers along with lending officers submit monthly problem loan reports for
loans greater than $50 thousand in which impairment is
identified.  This process typically determines collateral shortfall
based upon local market real estate value estimates should the collateral be
liquidated.  Once the loan is deemed uncollectible, it is transferred
to our problem loan department for workout, foreclosure and/or
liquidation.  The problem loan department gets a current appraisal on
the property in order to record a fair market value (less selling expenses) when
the property is foreclosed on and moved into other real
estate.  Trends the past several quarters reflect a decrease in
collateral values from two to three years ago on improved properties of fifteen
to twenty five percent and on land development and land loans of thirty to fifty
percent.  The significant reduction in collateral values on
nonperforming assets has resulted in the increased loan loss provisions and
charge-offs, particularly during this quarter.
 
 Net
charge-offs in three months ended September 30, 2009 decreased $1,868 thousand
compared to the same period a year ago.  Net charge-offs of 0.11
percent for third quarter 2009 annualizes to 0.44 percent.  Net
charge-offs were fairly consistent during 2007, 2006 and 2005; however, the net
charge-offs increased significantly in 2008 primarily from the write-down of
nonperforming credits to appraised values.  We anticipate an elevated
amount of charge-offs in 2009 as problem credits run through the collection
process to resolution.
 
 The
allowance for loan losses is $2.98 million more than the prior quarter end,
after factoring in net-charge offs, additional provisions, and the normal
determination for an adequate funding level, management believes the level of
the allowance for loan losses was adequate as of September 30, 2009. 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.
  44
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  The
following table presents an analysis of the Company’s loan loss experience for
the periods indicated.
 
 Nine
      Months Ended
              
              
              Nine
      Months Ended($ in thousands)
              
              September 30, 2009
              
              
              September 30, 2008Allowance
      for Loan Losses at Beginning of Period
              
              $
              17,016
              
              
              $
              15,513Charge-OffCommercial,
      Financial and Agricultural
              
              
              310
              
              
              
              1,344Real
      Estate – Construction & Land Development
              
              
              7,880
              
              
              
              3,074Real
      Estate - Farmland
              
              
              43
              
              
              
              --Real
      Estate – Residential
              
              
              4,627
              
              
              
              1,286Real
      Estate – Nonfarm Residential
              
              
              3,978
              
              
              
              60Consumer
              
              
              461
              
              
              
              685All
      Other
              
              
              250
              
              
              
              8517,549
              
              
              
              6,534RecoveriesCommercial,
      Financial and Agricultural
              
              
              54
              
              
              
              66Real
      Estate – Construction & Land Development
              
              
              33
              
              
              
              7Real
      Estate – Residential
              
              
              55
              
              
              
              119Real
      Estate – Nonfarm Residential
              
              
              4
              
              
              
              145Consumer
              
              
              161
              
              
              
              105All
      Other
              
              
              5
              
              
              
              19312
              
              
              
              461Net
      Charge-Offs
              
              
              17,237
              
              
              
              6,073Provision
      for Loan Losses
              
              
              21,580
              
              
              
              8,512Allowance
      for Loan Losses at End of Period
              
              $
              21,359
              
              
              $
              17,952Ratio
      of Net Charge-Offs to Average Loans
              
              
              1.79
              %
              
              
              0.64
              %
 
 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 $13.07 million from $8.51 million in nine months ended
September 30, 2008 to $21.58 million in nine months ended September 30,
2009.  Of significance to changes in the allowance for loan losses
during nine months 2009 was net charge-offs of $17.2
million.  Charge-offs largely consisted of five construction and land
development loans totaling $6.3 million; two 1-4 family residence property of
$0.76 million; three multifamily residential property  loans totaling
$2.78 million; and one nonfarm nonresidential loan totaling $2.87
million.  The remainder of the charge-offs were made up of several
small loans most of which were real estate dependent loans.  All of
the large charge-offs were attributable to significant declines in collateral
value based upon current real estate values.
 
 Net
charge-offs in nine months ended September 30, 2009 increased $11,164 thousand
compared to the same period a year ago.  Net charge-offs of 1.79
percent year to date 2009 that annualizes to 2.39 percent.  Net
charge-offs were fairly consistent during 2007, 2006 and 2005; however, the net
charge-offs increased significantly in 2008 primarily from the write-down of
non-performing credits to appraised values.  We anticipate an elevated
amount of charge-offs in 2009 as problem credits run through the collection
process to resolution.
 
 Management
believes the level of the allowance for loan losses was adequate as of September
30, 2009. 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.
  45
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Investment
Portfolio
 
 The
following table presents carrying values of investment securities held by the
Company as of September 30, 2009 and December 31, 2008.
 
 ($ in thousands)
              
              September 30, 2009
              
              
              December 31, 2008State,
      County and Municipal
              
              $
              5,885
              
              
              $
              9,110Corporate
      Obligations
              
              
              4,182
              
              
              
              6,176Asset-Backed
      Securities
              
              
              405
              
              
              
              668Investment
      Securities
              
              
              10,472
              
              
              
              15,954Mortgage-Backed
      Securities
              
              
              236,602
              
              
              
              191,750Total
      Investment Securities andMortgage Backed Securities
              
              $
              247,074
              
              
              $
              207,704
 
 The
following table represents maturities and weighted-average yields of investment
securities held by the Company as of September  30,
2009.  (Mortgage backed securities are based on the average life at
the projected speed, while Agencies, State and Political
subdivisions  and Corporates reflect anticipated calls being
exercised.)
 
 Within
      1 Year
              
              
              After
      5 Years But Within 10 Years
              
              
              After
      5 Years But Within 10 Years
              
              
              After
      10 YearsAmount
              
              
              Yield
              
              
              Amount
              
              
              Yield
              
              
              Amount
              
              
              Yield
              
              
              Amount
              
              
              YieldMortgage-Backed
      Securities
              
              $
              4,865
              
              
              
              3.65
              %
              
              $
              134,937
              
              
              
              3.22
              %
              
              $
              81,333
              
              
              
              3.35
              %
              
              $
              15,467
              
              
              
              4.12
              %State,
      County, and Municipal
              
              
              3,020
              
              
              
              4.09
              
              
              
              417
              
              
              
              4.57
              
              
              
              2,448
              
              
              
              3.73
              
              
              
              ---
              
              
              
              ---Corporate
      Obligations
              
              
              ---
              
              
              
              ---
              
              
              
              2,244
              
              
              
              5.41
              
              
              
              1,088
              
              
              
              5.67
              
              
              
              850
              
              
              
              4.12Asset-Backed
      Securities
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              405
              
              
              
              6.33Total
      Investment Portfolio
              
              $
              7,885
              
              
              
              3.82
              %
              
              $
              137,598
              
              
              
              3.26
              %
              
              $
              84,869
              
              
              
              3.39
              %
              
              $
              16,722
              
              
              
              4.25
              %
 
 Securities
are classified as held to maturity and carried at amortized cost when management
has the positive intent and ability to hold them to maturity. Securities are
classified as available for sale when they might be sold before maturity.
Securities available for sale are carried at fair value, with unrealized holding
gains and losses reported in other comprehensive income. The Company has 99.9
percent of its portfolio classified as available for sale.
 
 At
September 30, 2009, 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 3.66 percent in nine months ended
September 30, 2009 compared to 4.85 percent in the same period a year ago. The
decrease in the average yield over the comparable periods primarily resulted
from reinvestment of proceeds from the sale of mortgage-backed securities into
lower yielding securities and the lower yield on securities as the Federal
Reserve lowered interest rates during 2008.
  46
 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 September 30,
2009 and September 30, 2008.
  
 September
      30, 2009
              
              
              September
      30, 2008Average
              
              
              Average
              
              
              Average
              
              
              Average($
      in thousands)
              
              Amount
              
              
              Rate
              
              
              Amount
              
              
              RateNoninterest-Bearing
      Demand Deposits
              
              $
              69,601
              
              
              
              
              
              $
              74,749Interest-Bearing
      Demand and Savings Deposits
              
              
              237,260
              
              
              
              0.75
              %
              
              
              221,395
              
              
              
              1.56
              %Time
      Deposits
              
              
              704,395
              
              
              
              2.95
              %
              
              
              688,349
              
              
              
              4.49
              %Total
      Deposits
              
              $
              1,011,256
              
              
              
              2.23
              %
              
              $
              984,493
              
              
              
              3.49
              %
 
 The
following table presents the maturities of the Company's time deposits as of
September 30, 2009.
 
 Time
              
              
              TimeDeposits
              
              
              Deposits$100,000
              
              
              Less
      Than($
      in thousands)
              
              or
      Greater
              
              
              $100,000
              
              
              TotalMonths
      to Maturity3
      or Less
              
              $
              114,039
              
              
              $
              98,162
              
              
              $
              212,201Over
      3 through 12 Months
              
              
              195,716
              
              
              
              214,742
              
              
              
              410,458Over
      12 Months through 36 Months
              
              
              44,524
              
              
              
              47,178
              
              
              
              91,702Over
      36 Months
              
              
              898
              
              
              
              2,898
              
              
              
              3,796$
              355,177
              
              
              $
              362,980
              
              
              $
              718,157
 
 Average
deposits increased $26.76 million to $1,011 million at September 30, 2009 from
$984 million at September 30, 2008.  The increase  included
a decrease of $5.2 million, or 6.89 percent, related to noninterest-bearing
deposits.  Accordingly the ratio of average noninterest-bearing
deposits to total average deposits was 6.89 percent for nine months ended
September 30, 2009 compared to 7.59 percent for nine months ended September 30,
2008.  The general decrease in market rates, had the effect of (i)
decreasing the average cost of total deposits by 126 basis points in nine months
ended September 30, 2009 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 increased $31.9 million, or 3.51 percent in
nine months ended September 30, 2009 compared to the same period a year
ago.  The increase in average deposits at September 30, 2009 compared
to September 30, 2008 was primarily in interest bearing demand accounts and time
deposits.  With the current interest rate environment, it appears that
many customers continue to maintain time deposit accounts, with the prevalent
investment period continuing to be short term time deposits.
 
 Off-Balance-Sheet
Arrangements, Commitments, Guarantees, and Contractual Obligations
 
 The
following table summarizes the Company’s contractual obligations and other
commitments to make future payments as of September 30,
2009.  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.
  47
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
 
 Payments
      Due by Period1
      Year or Less
              
              
              More
      than 1Year 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 andrepurchase agreements
              
              
              30,929
              
              
              
              20,000
              
              
              
              ----
              
              
              
              ----
              
              
              
              50,929Federal
      Home Loan Bank advances
              
              
              20,000
              
              
              
              41,000
              
              
              
              ----
              
              
              
              30,000
              
              
              
              91,000Operating
      leases
              
              
              129
              
              
              
              252
              
              
              
              127
              
              
              
              ----
              
              
              
              508Deposits
      with stated maturity dates
              
              
              622,659
              
              
              
              91,701
              
              
              
              3,653
              
              
              
              144
              
              
              
              718,157673,717
              
              
              
              152,953
              
              
              
              3,780
              
              
              
              54,373
              
              
              
              884,823Other
      commitments:Loan
      commitments
              
              
              64,422
              
              
              
              ----
              
              
              
              ----
              
              
              
              ----
              
              
              
              64,422Standby
      letters of credit
              
              
              1,587
              
              
              
              ----
              
              
              
              ----
              
              
              
              ----
              
              
              
              1,587Standby
      letter of credit issued byFederal
      Home Loan Bank for Bank
              
              
              60
              
              
              
              ----
              
              
              
              ----
              
              
              
              ----
              
              
              
              6066,069
              
              
              
              ----
              
              
              
              ----
              
              
              
              ----
              
              
              
              66,069Total
      contractual obligations andOther commitments
              
              $
              739,786
              
              
              $
              152,953
              
              
              $
              3,780
              
              
              $
              54,373
              
              
              $
              950,892
 
 In the
ordinary course of business, the Company enters into off-balance sheet financial
instruments which are not reflected in the consolidated financial
statements.  These instruments include commitments to extend credit,
standby letters of credit, performance letters of credit, guarantees and
liability for assets held in trust.  Such financial instruments are
recorded in the financial statements when funds are disbursed or the instruments
become payable.  The Company uses the same credit policies for these
off-balance sheet financial instruments as they do for instruments that are
recorded in the consolidated financial statements.
 
 Loan Commitments. The Company
enters into contractual commitments to extend credit, normally with fixed
expiration dates or termination clauses, at specified rates and for specific
purposes. Substantially all of the Company’s commitments to extend credit are
contingent upon customers maintaining specific credit standards at the time of
loan funding. The Company minimizes its exposure to loss under these commitments
by subjecting them to credit approval and monitoring procedures. Management
assesses the credit risk associated with certain commitments to extend credit in
determining the level of the allowance for possible loan losses. Loan
commitments outstanding at September 30, 2009 are included in the table
above.
 
 Standby Letters of
Credit.  Letters of credit are written conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. In the event the customer does not perform in accordance with the terms
of the agreement with the third party, the Company would be required to fund the
commitment. The maximum potential amount of future payments the Company could be
required to make is represented by the contractual amount of the commitment. If
the commitment is funded, the Company would be entitled to seek recovery from
the customer. The Company’s policies generally require that standby letters of
credit arrangements contain security and debt covenants similar to those
contained in loan agreements. Standby letters of credit outstanding at September
30, 2009 are included in the table above.
 
 Capital
and Liquidity
 
 At
September 30, 2009, stockholders’ equity totaled $104.1 million compared to
$83.2 million at December 31, 2008. In addition to net loss of $5.0
million, other significant changes in stockholders’ equity during nine months
ended September 30, 2009 included $2.1  million of dividends declared
and an increase of $0.14 million resulting from the amortization of the stock
grant plan. The Company increased  stockholders’ equity by $28 million
through the sale of preferred stock and warrants to U.S. Treasury Department
during first quarter 2009.  The accumulated other comprehensive income
(loss) component of stockholders’ equity totaled $157 thousand at September 30,
2009 compared to $376 thousand at December 31, 2008. 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.
  48
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Using the
capital requirements presently in effect, the Tier 1 ratio as of September 30,
2009 was 13.18 percent and total Tier 1 and 2 risk-based capital was 14.44
percent.  Both of these measures compare favorably with the regulatory
minimum to be adequately capitalized  of 4 percent for Tier 1 and 8
percent for total risk-based capital.  The Company’s Tier 1 leverage
ratio as of September  30, 2009 was 9.64 percent, which exceeds the
required ratio standard of 4 percent.
 
 For nine
months ended September 30, 2009, average capital was $107 million, representing
8.36 percent of average assets for the year.   This compares to
7.11 percent for nine months ended September 30, 2008 and 7.0 percent for
calendar year 2008.
 
 The
Company declared cash dividends of $0.15 per common share during the first three
quarters of 2009, and cash dividends of $0.29 per common share during the first
three quarters of 2008, respectively.
 
 The
Company, primarily through the actions of its subsidiary bank, engages in
liquidity management to ensure adequate cash flow for deposit withdrawals,
credit commitments and repayments of borrowed funds.  Needs are met
through loan repayments, net interest and fee income and the sale or maturity of
existing assets.  In addition, liquidity is continuously provided
through the acquisition of new deposits, the renewal of maturing deposits and
external borrowings.
 
 Management
monitors deposit flow and evaluates alternate pricing structures to retain and
grow deposits.   To the extent needed to fund loan demand,
traditional local deposit funding sources are supplemented by the use of FHLB
borrowings, brokered deposits and other wholesale deposit sources outside the
immediate market area.  Internal policies have been updated to monitor
the use of various core and non-core funding sources, and to balance ready
access with risk and cost.  Through various asset/liability management
strategies, a balance is maintained among goals of liquidity, safety and
earnings potential.  Internal policies that are consistent with
regulatory liquidity guidelines are monitored and enforced by the
banks.
 
 The
investment portfolio provides a ready means to raise cash if liquidity needs
arise.  As of September 30 2009, the Company held $247.0 million in
bonds (excluding FHLB stock), at current market value in the available for sale
portfolio.  At December 31, 2008, the available for sale bond
portfolio totaled $207.6 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 95.6 percent as of September 30, 2009 and 95.4 percent at
December 31, 2008.  Management employs alternative funding sources
when deposit balances will not meet loan demands.  The ratios of loans
to all funding sources (excluding Subordinated Debentures) at September 30, 2009
and December 31, 2008 were 83.9 percent and 84.3 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 September 30, 2009
and December 31, 2008, Colony had $355.2 million and $333.5 million in
certificates of deposit of $100,000 or more.  These larger deposits
represented 34.98 percent and 33.12 percent of respective total
deposits.  Management seeks to monitor and control the use of these
larger certificates, which tend to be more volatile in nature, to ensure an
adequate supply of funds as needed.  Relative interest costs to
attract local core relationships are compared to market rates of interest on
various external deposit sources to help minimize the Company’s overall cost of
funds.
 
 Local
market deposit sources proved insufficient to fund the strong loan growth trends
at Colony over the past several years.  The Company supplemented
deposit sources with brokered deposits.  As of September 30, 2009, the
Company had $138.9 million, or 13.67 percent of total deposits, in brokered
certificates of deposit attracted by external third
parties.  Additionally, Colony uses external wholesale or Internet
services to obtain out-of-market certificates of deposit at competitive interest
rates when funding is needed.
 
 To plan
for contingent sources of funding not satisfied by both local and out-of-market
deposit balances, Colony and its subsidiaries have established multiple
borrowing sources to augment their funds management.  The Company has
borrowing capacity through membership of the Federal Home Loan Bank
program.  The 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.
  49
 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 its subsidiary bank and borrowings from outside
sources.
 
 The
liquidity position of the Company is continuously monitored and adjustments are
made to the balance between sources and uses of funds as deemed appropriate.
Management is not aware of any events that are reasonably likely to have a
material adverse effect on the Company’s liquidity, capital resources or
operations. In addition, management is not aware of any regulatory
recommendations regarding liquidity, which if implemented, would have a material
adverse effect on the Company.
 
 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.
  50
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  Return
on Assets and Stockholders’ Equity
 
 The
following table presents selected financial ratios for each of the periods
indicated.
 
 Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30
              
              
              September
      302009
              
              
              2008
              
              
              2009
              
              
              2008Return
      on Assets (1)
              
              
              0.01
              %
              
              
              0.06
              %
              
              
              (0.62
              )%
              
              
              0.30
              %Return
      on Equity (1)
              
              
              0.07
              %
              
              
              0.93
              %
              
              
              (7.42
              )%
              
              
              4.24
              %Dividend
      Payout
              
              NM
      (2)
              
              
              
              333.33
              %
              
              NM
      (2)
              
              
              
              76.32
              %Avg.
      Equity to Avg. Assets
              
              
              8.01
              %
              
              
              6.94
              %
              
              
              8.36
              %
              
              
              7.11
              %Dividends
      Declared
              
              $
              0.00
              
              
              $
              0.10
              
              
              $
              0.15
              
              
              $
              0.29
 
 (1)
Computed using net income available to common shareholders.
 (2) Not
meaningful due to net loss recorded.
 
 Future
Outlook
 
 During
2008, the financial services industry experienced tremendous adversities as a
result of the collapse of the real estate markets across the
country.  Colony, like most banking companies, has been affected by
these economic challenges that started with a rapid stall of real estate sales
and development throughout the country.  We anticipate 2009 to be a
difficult and challenging period as we work toward resolution of problem
assets.
 
 Also
during 2008, Colony made significant strides to reduce our operating leverage by
seeking a more efficient structure and more consistent products and services
throughout the company.  We successfully completed the consolidation
of our seven banking subsidiaries into the single banking company – Colony
Bank.  The momentum created by this strategic move will allow Colony
to improve future profitability while better positioning the company to take
advantage of future growth opportunities.  In response to the elevated
risk of residential real estate and land development loans, management has
extensively reviewed our loan portfolio with a particular emphasis on our
residential and land development real estate exposure.  Senior
management with experience in problem loan workouts have been identified and
assigned responsibility to oversee the workout and resolution of problem
loans.  The Company will continue to closely monitor our real estate
dependent loans throughout the company and focus on asset quality during this
economic downturn.  Focus during 2009 will be directed toward
addressing and bringing resolution to problem assets.
 
 On
January 9, 2009, Colony consummated the sale of $28,000,000 in preferred stock
and related warrants to the U.S. Treasury Department in the U.S. Treasury
Capital Program (“CPP”).  Colony elected to participate to take
advantage of the likely one-time opportunity to receive a very low-cost source
of capital.  Colony’s participation in the CPP strengthens its current
well-capitalized position and increases liquidity.  Colony management
believes maintenance of capital at elevated levels during the current
challenging economic environment is desirable.  In the spirit of the
program Colony anticipates using this capital to expand its business through
extension of credit to worthy borrowers, to purchase mortgage-backed securities
pooled and issued by Freddie Mac, Fannie Mae, and Ginnie Mae to enhance the
housing market and to reduce brokered deposits on our
books.  Utilization of these funds during
third   quarter 2009 were new and renewed loan originations
totaling $156 million, of which $64 million represented new loan extensions
either funded or committed.
 
 BUSINESS
 General
 
 Colony
Bankcorp, Inc. (the “Company” or “Colony”) is a Georgia business corporation
which was incorporated on November 8, 1982.  The Company was organized
for the purpose of operating as a bank holding company under the Federal Bank
Holding Company Act of 1956, as amended, and the bank holding company laws of
Georgia (Georgia Laws 1976, p. 168, et. seq.).  On
July 22, 1983, the Company, after obtaining the requisite regulatory approvals,
acquired 100 percent of the issued and outstanding common stock of Colony Bank
(formerly Colony Bank of Fitzgerald and The Bank of Fitzgerald), Fitzgerald,
Georgia, through the merger of the Bank with a subsidiary of the Company which
was created for the purpose of organizing the Bank into a one-bank
holding
  51
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  company.  Since
that time, Colony Bank has operated as a wholly-owned subsidiary of the
Company.  Our business is conducted primarily through our wholly-owned
subsidiary, which provides a broad range of banking services to its retail and
commercial     customers.  The company
headquarters are located at 115 South Grant Street, Fitzgerald, Georgia 31750,
its telephone number is 229-426-6000 and its Internet address is http://www.colonybank.com.  We
operate twenty-eight domestic banking offices and one mortgage company office
and at September 30, 2009, we had approximately $1.30 billion in total assets,
$949.63 million in total loans, $1.02 billion in total deposits and $104.1
million in stockholder’s equity.  Deposits are insured, up to
applicable limits, by the Federal Deposit Insurance Corporation.
 
 The
Parent Company
 
 Because
Colony Bankcorp, Inc. is a bank holding company, its principal operations are
conducted through its subsidiary bank, Colony Bank (the “Bank”).  It
has 100 percent ownership of its subsidiary and maintains systems of financial,
operational and administrative controls that permit centralized evaluation of
the operations of the subsidiary bank in selected functional areas including
operations, accounting, marketing, investment management, purchasing, human
resources, computer services, auditing, compliance and credit
review.  As a bank holding company, we perform certain stockholder and
investor relations functions.
 
 Colony
Bank – Banking Services
 
 Our
principal subsidiary is the Bank.  The Bank, headquartered in
Fitzgerald, Georgia, offers traditional banking products and services to
commercial and consumer customers in our markets.  Our product line
includes, among other things, loans to small and medium-sized businesses,
residential and commercial construction and land development loans, commercial
real estate loans, commercial loans, agri-business and production loans,
residential mortgage loans, home equity loans, consumer loans and a variety of
demand, savings and time deposit products.  We also offer internet
banking services, electronic bill payment services, safe deposit box rentals,
telephone banking, credit and debit card services, remote depository products
and access to a network of ATMs to our customers.  Colony Bank
conducts a general full service commercial, consumer and mortgage banking
business through twenty-nine offices located in the middle and south Georgia
cities of Fitzgerald, Warner Robins, Centerville, Ashburn, Leesburg, Cordele,
Albany, Thomaston, Columbus, Sylvester, Tifton, Moultrie, Douglas, Broxton,
Savannah, Eastman, Chester, Soperton, Rochelle, Pitts, Quitman and Valdosta,
Georgia.
 
 For
additional discussion of our loan portfolio and deposit accounts, see
“Management’s Discussion of Financial Condition and Results of Operations –
Loans and Deposits.”
 
 Subordinated
Debentures (Trust Preferred Securities)
 
 During
the second quarter of 2004, the Company formed Colony Bankcorp Statutory Trust
III for the sole purpose of issuing $4,500,000 in Trust Preferred Securities
through a pool sponsored by FTN Financial Capital Market.  The
securities have a maturity of thirty years and are redeemable after five years
with certain exceptions.
 
 During
the second quarter of 2006, the Company formed Colony Bankcorp Capital Trust I
for the sole purpose of issuing $5,000,000 in Trust Preferred Securities through
a pool sponsored by SunTrust Bank Capital Markets.  The securities
have a maturity of thirty years and are redeemable after five years with certain
exceptions.
 
 During
the first quarter of 2007, the Company formed Colony Bankcorp Capital Trust II
for the sole purpose of issuing $9,000,000 in Trust Preferred Securities through
a pool sponsored by Trapeza Capital Management, LLC.  The securities
have a maturity of thirty years and are redeemable after five years with certain
exceptions.  Proceeds from this issuance were used to pay off trust
preferred securities issued on March 26, 2002 through Colony Bankcorp Statutory
Trust I.
 
 During
the third quarter of 2007, the Company formed Colony Bankcorp Capital Trust III
for the sole purpose of issuing $5,000,000 in Trust Preferred Securities through
a pool sponsored by Trapeza Capital Management, LLC.  The securities
have a maturity of thirty years and are redeemable after five years with certain
exceptions.  Proceeds from this issuance were used to pay off trust
preferred securities issued on December 19, 2002 through Colony Bankcorp
Statutory Trust II.
 
 Corporate
Restructuring and Business Combinations
 
 On April
30, 1984, after acquiring the requisite regulatory approvals, the Company
acquired 100 percent of the issued and outstanding stock of Colony Bank Wilcox
(formerly Community Bank of Wilcox and Pitts Banking Company), Pitts, Wilcox
County, Georgia.  As part of the transaction, Colony issued an
additional 17,872 shares of its $10.00 par value common stock, all of which was
exchanged with the holders of shares of common stock of Pitts Banking Company
for 100 percent of the 250 issued and outstanding
  52
 Table of Contents
 Part
I (Continued)
 Item
2 (Continued)
  shares of
common stock of Pitts Banking Company.  Since the date of acquisition,
Colony Bank Wilcox operated as a wholly-owned subsidiary of the Company until it
was merged into Colony Bank effective August 1, 2008.
 
 On
November 1, 1984, after obtaining the requisite regulatory approvals, the
Company acquired 100 percent of the issued and outstanding common stock of
Colony Bank Ashburn (formerly Ashburn Bank), Ashburn, Turner County, Georgia,
for a combination of cash and interest-bearing promissory
notes.  Since the date of acquisition, Colony Bank Ashburn operated as
a wholly-owned subsidiary of the Company until it was merged into Colony Bank
effective August 1, 2008.
 
 On
September 30, 1985, after obtaining the requisite regulatory approvals, the
Company acquired 100 percent of the issued and outstanding common stock of
Colony Bank of Dodge County, (formerly The Bank of Dodge County), Chester, Dodge
County, Georgia.  The stock was acquired in exchange for the issuance
of 3,500 shares of common stock of Colony.  Since the date of
acquisition, Colony Bank of Dodge County operated as a wholly-owned subsidiary
of the Company until it was merged into Colony Bank effective August 1,
2008.
 
 On July
31, 1991, after obtaining the requisite regulatory approvals, the Company
acquired 100 percent of the issued and outstanding common stock of colony Bank
Worth, (formerly Worth Federal Savings and Loan Association and Bank of Worth),
Sylvester, Worth County, Georgia.  The stock was acquired in exchange
for cash and the issuance of 7,661 shares of common stock of Colony for an
aggregate purchase price of approximately $718,000.  Since the date of
acquisition, Colony Bank Worth operated as a wholly-owned subsidiary of the
Company until it was merged into Colony Bank effective August 1,
2008.
 
 On
November 8, 1996, Colony organized Colony Management Services, Inc. to provide
support services to each subsidiary.  Services provided include loan
and compliance review, internal audit and data processing.  Colony
Management Services, Inc. operated as a wholly-owned subsidiary of the Company
until it was merged into Colony Bank effective August 1, 2008.
 
 On
November 30, 1996, after obtaining the requisite regulatory approvals, the
Company acquired 100 percent of the issued and outstanding common stock of
Colony Bank Southeast (formerly Broxton State Bank), Broxton, Coffee County,
Georgia in a business combination accounted for as a pooling of
interests.  Broxton State Bank became a wholly-owned subsidiary of the
Company through the exchange of 157,735 shares of the Company’s common stock for
all of the outstanding stock of Broxton State Bank.  Since the date of
acquisition, Colony Bank Southeast operated as a wholly-owned subsidiary of the
Company until it was merged into Colony Bank effective August 1,
2008.
 
 On March
2, 2000, Colony Bank Ashburn purchased the capital stock of Colony Mortgage Corp
(formerly Georgia First Mortgage Company) in a business combination accounted
for as a purchase.  The purchase price of $346,725 was the fair value
of the net assets of Georgia First Mortgage Company at the date of
purchase.  Colony Mortgage Corp is primarily engaged in residential
real estate mortgage lending in the state of Georgia.  Colony Mortgage
Corp operates as a subsidiary of Colony Bank effective with the August 1, 2008
merger.
 
 On March
29, 2002, after obtaining the requisite regulatory approvals, the Company
acquired 100 percent of the issued and outstanding stock of Colony Bank Quitman,
FSB, (formerly Quitman Federal Saving Bank), Quitman, Brooks County,
Georgia.  Quitman Federal Savings Bank became a wholly-owned
subsidiary of the Company through the exchange of 367,093 shares of the
Company’s common stock and cash for an aggregate acquisition price of
$7,446,163.  Since the date of acquisition, Colony Bank Quitman, FSB
operated as a wholly-owned subsidiary of the Company until it was merged into
Colony Bank effective August 1, 2008.
 
 On March
19, 2004, Colony Bank Ashburn purchased Flag Bank – Thomaston office in a
business combination accounted for as a purchase.  Since the date of
acquisition, the Thomaston office operated as an office of Colony Bank Ashburn
until August 1, 2008 when it became an office of Colony Bank.
 
 On August
1, 2008, the Company effected a merger of its seven banking subsidiaries and its
one nonbank subsidiary into one surviving bank subsidiary, Colony Bank (formerly
Colony Bank of Fitzgerald).
 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 2,054 shareholders as
of September 30, 2009.  “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.
  53
 Table of Contents
 Part
I (Continued)
 Item
3
  Item3 - Quantitative and Qualitative Disclosures About Market
Risk
 AVERAGE
      BALANCE SHEETS
              
              Nine
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30, 2009
              
              
              September
      30, 2008Average
              
              
              Income/
              
              
              Yields/
              
              
              Average
              
              
              Income/
              
              
              Yields/($
      in thousands)
              
              Balances
              
              
              Expense
              
              
              Rates
              
              
              Balances
              
              
              Expense
              
              
              RatesAssetsInterest-Earning
      AssetsLoans,
      Net of Unearned Interest and feesTaxable
      (1)
              
              $
              963,737
              
              
              $
              43,456
              
              
              
              6.01
              %
              
              $
              954,045
              
              
              $
              51,494
              
              
              
              7.20
              %Investment
      SecuritiesTaxable
              
              
              229,465
              
              
              
              6,182
              
              
              
              3.59
              %
              
              
              150,017
              
              
              
              5,391
              
              
              
              4.79
              %Tax-Exempt
      (2)
              
              
              6,833
              
              
              
              300
              
              
              
              5.85
              %
              
              
              10,654
              
              
              
              453
              
              
              
              5.67
              %Total
      Investment Securities
              
              
              236,298
              
              
              
              6,482
              
              
              
              3.66
              %
              
              
              160,671
              
              
              
              5,844
              
              
              
              4.85
              %Interest-Bearing
      Deposits
              
              
              408
              
              
              
              13
              
              
              
              4.25
              %
              
              
              1,529
              
              
              
              27
              
              
              
              2.35
              %Federal
      Funds Sold
              
              
              7,322
              
              
              
              14
              
              
              
              0.25
              %
              
              
              12,518
              
              
              
              264
              
              
              
              2.81
              %Interest-Bearing
      Other Assets
              
              
              6,322
              
              
              
              --
              
              
              
              --
              
              
              
              5,951
              
              
              
              253
              
              
              
              5.67
              %Total
      Interest-Earning Assets
              
              
              1,214,087
              
              
              $
              49,965
              
              
              
              5.49
              %
              
              
              1,134,714
              
              
              $
              57,882
              
              
              
              6.80
              %Non-interest-Earning
      AssetsCash
      and Cash Equivalents
              
              
              21,684
              
              
              
              
              
              
              
              
              
              
              
              20,496Allowance
      for Loan Losses
              
              
              (18,609
              )
              
              
              
              
              
              
              
              
              
              
              (16,256
              )Other
      Assets
              
              
              65,234
              
              
              
              
              
              
              
              
              
              
              
              55,298Total
      Noninterest-Earning Assets
              
              
              68,309
              
              
              
              
              
              
              
              
              
              
              
              59,538Total
      Assets
              
              $
              1,282,396
              
              
              
              
              
              
              
              
              
              
              $
              1,194,252Liabilities
      and Stockholders' EquityInterest-Bearing
      LiabilitiesInterest-Bearing
      DepositsInterest-Bearing
      Demand and Savings
              
              $
              237,260
              
              
              $
              1,340
              
              
              
              0.75
              %
              
              $
              221,395
              
              
              $
              2,585
              
              
              
              1.56
              %Other
      Time
              
              
              704,395
              
              
              
              15,588
              
              
              
              2.95
              %
              
              
              688,349
              
              
              
              23,161
              
              
              
              4.49
              %Total
      Interest-Bearing Deposits
              
              
              941,655
              
              
              
              16,928
              
              
              
              2.40
              %
              
              
              909,744
              
              
              
              25,746
              
              
              
              3.77
              %Other
      Interest-Bearing LiabilitiesOther
      Borrowed Money
              
              
              91,000
              
              
              
              2,329
              
              
              
              3.41
              %
              
              
              82,862
              
              
              
              2,497
              
              
              
              4.02
              %Subordinated
      Debentures
              
              
              24,229
              
              
              
              531
              
              
              
              2.92
              %
              
              
              24,229
              
              
              
              951
              
              
              
              5.23
              %Federal
      Funds Purchased and Repurchase Agreements
              
              
              42,341
              
              
              
              658
              
              
              
              2.07
              %
              
              
              12,207
              
              
              
              293
              
              
              
              3.20
              %Total
      Other Interest-Bearing Liabilities
              
              
              157,570
              
              
              
              3,518
              
              
              
              2.98
              %
              
              
              119,298
              
              
              
              3,741
              
              
              
              4.18
              %Total
      Interest-Bearing Liabilities
              
              
              1,099,225
              
              
              $
              20,446
              
              
              
              2.48
              %
              
              
              1,029,042
              
              
              $
              29,487
              
              
              
              3.82
              %Noninterest-Bearing
      Liabilities andStockholders' EquityDemand
      Deposits
              
              
              69,601
              
              
              
              
              
              
              
              
              
              
              
              74,749Other
      Liabilities
              
              
              6,321
              
              
              
              
              
              
              
              
              
              
              
              5,494Stockholders'
      Equity
              
              
              107,249
              
              
              
              
              
              
              
              
              
              
              
              84,967Total
      Noninterest-Bearing Liabilitiesand Stockholders'
    Equity
              
              
              183,171
              
              
              
              
              
              
              
              
              
              
              
              165,210Total
      Liabilities and Stockholders' Equity
              
              $
              1,282,396
              
              
              
              
              
              
              
              
              
              
              $
              1,194,252Interest
      Rate Spread
              
              
              
              
              
              
              
              
              
              
              3.01
              %
              
              
              
              
              
              
              
              
              
              
              2.98
              %Net
      Interest Income
              
              
              
              
              
              $
              29,519
              
              
              
              
              
              
              
              
              
              
              $
              28,395Net
      Interest Margin
              
              
              
              
              
              
              
              
              
              
              3.24
              %
              
              
              
              
              
              
              
              
              
              
              3.34
              %
 
 (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 $114 and
      $108 for nine month periods ended September 30, 2009 and 2008,
      respectively, are included in tax-exempt interest on
  loans.
 
 (2)
              Taxable-equivalent
      adjustments totaling $102 and $154 for nine month periods ended September
      30, 2009 and 2008, respectively, are included in tax-exempt interest on
      investment securities.  The adjustments are based on a federal
      tax rate of 34 percent with appropriate reductions for the effect of
      disallowed interest expense incurred in carrying tax-exempt
      obligations.
  54
 Table of Contents
 Part
I (Continued)
 Item
3 (Continued)
  Colony
Bankcorp, Inc. and Subsidiary
 Interest
Rate Sensitivity
 
 The
following table is an analysis of the Company’s interest rate-sensitivity
position at September 30, 2009.  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
              
              $
              162
              
              
              $
              ---
              
              
              $
              162
              
              
              $
              ---
              
              
              
              ---
              
              
              $
              162Federal
      Funds Sold
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---Investment
      Securities
              
              
              850
              
              
              
              2,401
              
              
              
              3,251
              
              
              
              124,447
              
              
              
              119,376
              
              
              
              247,074Loans,
      Net of Unearned Income
              
              
              405,836
              
              
              
              178,700
              
              
              
              584,536
              
              
              
              375,913
              
              
              
              10,539
              
              
              
              970,988Other
      Interest-Bearing Assets
              
              
              6,345
              
              
              
              ---
              
              
              
              6,345
              
              
              
              ---
              
              
              
              ---
              
              
              
              6,345Total
      Interest-Earning Assets
              
              
              413,193
              
              
              
              181,101
              
              
              
              594,294
              
              
              
              500,360
              
              
              
              129,915
              
              
              
              1,224,569INTEREST-BEARING
      LIABILITIES:Interest-Bearing
      Demand Deposits (1)
              
              
              190,917
              
              
              
              ---
              
              
              
              190,917
              
              
              
              ---
              
              
              
              ---
              
              
              
              190,917Savings
      (1)
              
              
              35,994
              
              
              
              ---
              
              
              
              35,994
              
              
              
              ---
              
              
              
              ---
              
              
              
              35,994Time
      Deposits
              
              
              212,201
              
              
              
              410,458
              
              
              
              622,659
              
              
              
              95,354
              
              
              
              144
              
              
              
              718,157Other
      Borrowings (2)
              
              
              19,000
              
              
              
              1,000
              
              
              
              20,000
              
              
              
              41,000
              
              
              
              30,000
              
              
              
              91,000Subordinated
      Debentures
              
              
              24,229
              
              
              
              ---
              
              
              
              24,229
              
              
              
              ---
              
              
              
              ---
              
              
              
              24,229Federal
      Funds Purchased
              
              
              5,697
              
              
              
              ---
              
              
              
              5,697
              
              
              
              ---
              
              
              
              ---
              
              
              
              5,697Repurchase
      Agreements
              
              
              25,232
              
              
              
              ---
              
              
              
              25,232
              
              
              
              20,000
              
              
              
              ---
              
              
              
              45,232Total
      Interest-Bearing Liabilities
              
              
              513,270
              
              
              
              411,458
              
              
              
              924,728
              
              
              
              156,354
              
              
              
              30,144
              
              
              
              1,111,226Interest
      Rate-Sensitivity Gap
              
              
              (100,077
              )
              
              
              (230,357
              )
              
              
              (330,434
              )
              
              
              344,006
              
              
              
              99,771
              
              
              
              113,343Cumulative
      Interest-Sensitivity Gap
              
              
              (100,077
              )
              
              
              (330,434
              )
              
              
              (330,434
              )
              
              
              13,572
              
              
              
              113,343Interest
      Rate-Sensivitiy Gap as aPercentage of Interest-Earning
      Assets
              
              
              (8.17
              )%
              
              
              (18.81
              )%
              
              
              (26.98
              )%
              
              
              28.09
              %
              
              
              8.15
              %Cumulative
      Interest Rate-Sensitivity asas a Percentage of Interest-Earning
      Assets
              
              
              (8.17
              )%
              
              
              (26.98
              )%
              
              
              (26.98
              )%
              
              
              1.11
              %
              
              
              9.26
              %
   (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.
  55
 Table of Contents
 Part
I (Continued)
 Item
3 (Continued)
  The
foregoing table indicates that we had a one year negative gap of ($330) million,
or (26.98) percent of total assets at September 30, 2009.  In theory,
this would indicate that at September 30, 2009, $330 million more in liabilities
than assets would reprice if there were a change in interest rates over the next
365 days.  Thus, if interest rates were to increase, the gap would
indicate a resulting decrease in net interest margin.  However,
changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity.  In addition, the interest rate spread between an asset
and our supporting liability can vary significantly while the timing of
repricing of both the assets and our supporting liability can remain the same,
thus impacting net interest income.  This characteristic is referred
to as a basis risk and, generally, relates to the repricing characteristics of
short-term funding sources such as certificates of deposits.
 
 Gap
analysis has certain limitations.  Measuring the volume of repricing
or maturing assets and liabilities does not always measure the full impact on
the portfolio value of equity or net interest income.  Gap analysis
does not account for rate caps on products; dynamic changes such as increasing
prepay speeds as interest rates decrease, basis risk, or the benefit of non-rate
funding sources.  The majority of our loan portfolio reprices quickly
and completely following changes in market rates, while non-term deposit rates
in general move slowly and usually incorporate only a fraction of the change in
rates.  Products categorized as non-rate sensitive, such as our
noninterest-bearing demand deposits, in the gap analysis behave like long term
fixed rate funding sources.  Both of these factors tend to make our
actual behavior more asset sensitive than is indicated in the gap
analysis.  In fact, we experience higher net interest income when
rates rise, opposite what is indicated by the gap analysis.  In fact,
during the recent period of declines in interest rates, our net interest margin
has declined.  Therefore, management uses gap analysis, net interest
margin analysis and market value of portfolio equity as our primary interest
rate risk management tools.
 
 The
Company utilizes FTN 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 June 30, 2009 indicates that net interest income would deteriorate 16.02
percent with a 200 basis point decrease and would improve 9.03 percent with a
200 basis point increase.  The increased exposure to declining rates
is mitigated by the low likelihood of a further decline of 200 basis points from
the current rate levels.  The Company has established equity at risk
in a +/- 200 basis points rate shock to be no more than a twenty percent
decline.  The most recent analysis as of June 30, 2009 indicates that
net economic value of equity percentage change would decrease 12.29 percent with
a 200 basis point decrease and would decrease 0.35 percent with a 200 basis
point increase.  The Company has established its one year gap to be
0.80 percent to 1.20 percent.  The most recent analysis as of June 30,
2009 indicates a one year gap of 0.87 percent.  The analysis suggests
net interest margin compression in a declining interest rate
environment.  Given that interest rates have basically “bottomed-out”
with the recent Federal Reserve action, the Company is anticipating interest
rates to increase in the future though we believe that interest rates will
remain flat most of 2009.  The Company is focusing on areas to
minimize margin compression in the future by minimizing longer term fixed rate
loans, shortening on the yield curve with investments, securing longer term FHLB
advances, securing brokered certificates of deposit for longer terms and
focusing on reduction of nonperforming assets.
  56
 Table of Contents
 Part
I (Continued)
 Item
4
  CONTROLSAND PROCEDURES
 
 The
Company’s Chief Executive Officer and Chief Financial Officer have evaluated the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)), as of the end of the period covered by this
report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange
Act.  Based on such evaluation, such officers have concluded that, as
of the end of the period covered by this report, the Company’s disclosure
controls and procedures are effective.
 
 During
the quarter ended September 30, 2009, there was not any change in the Company’s
internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange
Act that has materially affected, or is reasonably likely to materially affect,
the Company’s internal control over financial reporting.
  57
 Table of Contents
  PART
II – OTHER INFORMATION
 
 ITEM 1 – LEGAL PROCEEDINGS
 
 None
 
 ITEM1A – 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 13,
2009 in response to Item 1A to Part I of Form 10-K.
 
 ITEM2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 None
 
 ITEM3 – DEFAULTS UPON SENIOR SECURITIES
 
 None
 
 ITEM4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (ANNUAL
MEETING)
 
 None
 
 ITEM5 – OTHER INFORMATION
 
 None
  58
 Table of Contents
 Part
I (Continued)
 Item
6
  ITEM6 – EXHIBITS
 
 3.1
              Articles
      of Incorporation
 
 -filed as
Exhibit 3(a) to the Registrant’s Registration Statement on Form 10 (File No.
0-18486), filed with the Commission on April 25, 1990 and incorporated herein by
reference
 
 3.2
              Bylaws,
      as Amended
 
 -filed as
Exhibit 3(b) to the Registrant’s Registration Statement on Form 10 (File No.
0-18486), filed with the Commission on April 25, 1990 and incorporated herein by
reference
 
 3.3
              Article
      of Amendment to the Company’s Articles of Incorporation Authorizing
      Additional Capital Stock in the Form of Ten Million Shares of Preferred
      Stock
 
 -filed as
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 000-12436)
filed with the Commission on January 13, 2009 and incorporated herein by
reference.
 
 3.4
              Articles
      of Amendment to the Company’s Articles of Incorporation Establishing the
      Terms of the Series A Preferred
Stock
 
 -filed as
Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436)
filed with the Commission on January 13, 2009 and incorporated herein by
reference.
 
 4.1
              Instruments
      Defining the Rights of Security
Holders
 
 -incorporated
herein by reference to page 1 of the Company’s Definitive Proxy Statement for
Annual Meeting of Stockholders to be held on April 27, 2004, filed with the
Securities and Exchange Commission on March 3, 2004 (File No.
000-12436)
 
 4.2
              Warrant
      to Purchase up to 500,000 shares of Common
Stock
 
 -filed as
Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 000-12436),
filed with the Commission on January 13, 2009 and incorporated herein by
reference.
 
 4.3
              Form
      of Series A Preferred Stock
Certificate
 
 -filed as
Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 000-12436),
filed with the Commission on January 13, 2009 and incorporated herein by
reference.
 
 10.1
              Deferred
      Compensation Plan and Sample Director
Agreement
 
 -filed as
Exhibit 10(a) to the Registrant’s Registration Statement on Form 10 (File No.
0-18486), filed with the Commission on April 25, 1990 and incorporated herein by
reference
 
 10.2
              Profit-Sharing
      Plan Dated January 1, 1979
 
 -filed as
Exhibit 10(b) to the Registrant’s Registration Statement on Form 10 (File No.
0-18486), filed with the Commission on April 25, 1990 and incorporated herein by
reference
 
 10.3
              1999
      Restricted Stock Grant Plan and Restricted Stock Grant
      Agreement
 
 -filed as
Exhibit 10(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
  59
 Table of Contents
 Part
I (Continued)
 Item
6
  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
 
 10.6
              Letter
      Agreement, Dated January 9, 2009, Including Securities Purchase Agreement
      – Standard Terms Incorporated by Reference Therein, Between the Company
      and the United States Department of the
Treasury
 
 - filed
as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.
000-12436), filed with the Commission on January 13, 2009 and incorporated
herein by reference.
 
 10.7
              Form
      of Waiver, Executed by Each of Messrs Al D. Ross, Terry L. Hester, Henry
      F. Brown, Jr., Walter P. Patten and Larry E.
  Stevenson
 
 - filed
as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No.
000-12436), filed with the  Commission on January 13, 2009 and
incorporated herein by reference.
 
 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
  60
 Table of Contents
  SIGNATURES
 
 Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
 
 
 /s/
      Al D. RossDate:
              November
      6, 2009
              
              Al
      D. Ross,President
      and Chief Executive Officer/s/
      Terry L. HesterDate:
              November
      6, 2009
              
              Terry
      L. Hester,Executive
      Vice President and Chief Financial
Officer





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