Colony Bankcorp (CBAN) 10-K 2010 FY Annual report

EXHIBIT NO. 13

McNair, McLemore, Middlebrooks & Co., LLC

CERTIFIED PUBLIC ACCOUNTANTS

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

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

www.mmmcpa.com

March 15, 2011

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Colony Bankcorp, Inc.

We have audited the accompanying consolidated balance sheets of Colony Bankcorp, Inc. and Subsidiary as of December 31, 2010 and 2009 and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Colony Bankcorp, Inc. and Subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine management’s assessment of the effectiveness of Colony Bankcorp, Inc.’s internal control over financial reporting as of December 31, 2010 included under Item 9A, Controls and Procedures, in Colony Bankcorp, Inc.’s Annual Report on Form 10-K and, accordingly, we do not express an opinion thereon.

McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

ASSETS

	2010			2009
Cash and Cash Equivalents
Cash and Due from Banks	$	16,613,187		$	25,995,486
Federal Funds Sold		32,536,482			16,433,256
Securities Purchased Under Agreements to Resell		5,000,000			-
		54,149,669			42,428,742
Interest-Bearing Deposits		50,726,734			6,478,801
Investment Securities
Available for Sale, at Fair Value		303,837,606			267,246,673
Held to Maturity, at Cost (Fair Value of $52,941 and $56,999 as of December 31, 2010 and 2009, Respectively)		48,412			53,906
		303,886,018			267,300,579
Federal Home Loan Bank Stock, at Cost		6,063,500			6,345,400
Loans		813,250,673			931,391,626
Allowance for Loan Losses		(28,280,077	)		(31,400,641	)
Unearned Interest and Fees		(61,311	)		(139,597	)
		784,909,285			899,851,388
Premises and Equipment		27,147,725			28,826,350
Other Real Estate (Net of Allowance of $1,293,174 and $467,408 in 2010 and 2009, Respectively)		20,207,806			19,705,044
Other Intangible Assets		295,007			330,756
Other Assets		28,272,629			35,822,274
Total Assets	$	1,275,658,373		$	1,307,089,334

The accompanying notes are an integral part of these balance sheets.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

LIABILITIES AND STOCKHOLDERS’ EQUITY

	2010			2009
Deposits
Noninterest-Bearing	$	102,959,423		$	84,238,839
Interest-Bearing		956,164,581			973,347,642
		1,059,124,004			1,057,586,481
Borrowed Money
Securities Sold Under Agreements to Repurchase		20,000,000			40,000,000
Subordinated Debentures		24,229,000			24,229,000
Other Borrowed Money		75,076,010			91,000,000
		119,305,010			155,229,000
Other Liabilities		4,270,776			4,999,229
Commitments and Contingencies
Stockholders’ Equity
Preferred Stock, No Par Value; Authorized 10,000,000 Shares, Issued 28,000 Shares		27,505,910			27,356,964
Common Stock, Par Value $1; Authorized 20,000,000 Shares, Issued 8,442,958 and 7,229,163 Shares as of December 31, 2010 and 2009, Respectively		8,442,958			7,229,163
Paid-In Capital		29,171,087			25,392,913
Retained Earnings		28,479,211			29,553,941
Restricted Stock - Unearned Compensation		(40,794	)		(158,548	)
Accumulated Other Comprehensive Income, Net of Tax		(599,789	)		(99,809	)
		92,958,583			89,274,624
Total Liabilities and Stockholders’ Equity	$	1,275,658,373		$	1,307,089,334

The accompanying notes are an integral part of these balance sheets.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

	2010			2009			2008
Interest Income
Loans, Including Fees	$	51,728,665		$	57,620,911		$	66,732,488
Federal Funds Sold and Securities Purchased Under Agreements to Resell		95,428			24,438			273,476
Deposits with Other Banks		38,085			553			27,452
Investment Securities
U. S. Government Agencies		6,613,030			7,626,856			7,140,902
State, County and Municipal		103,133			258,545			410,298
Corporate Obligations		137,831			296,273			414,319
Dividends on Other Investments		21,547			19,846			298,264
		58,737,719			65,847,422			75,297,199
Interest Expense
Deposits		17,212,312			21,642,734			32,801,362
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		721,044			876,484			513,961
Borrowed Money		3,589,847			3,761,924			4,607,347
		21,523,203			26,281,142			37,922,670
Net Interest Income		37,214,516			39,566,280			37,374,529
Provision for Loan Losses		13,350,000			43,445,000			12,937,750
Net Interest Income (Loss) After Provision for Loan Losses		23,864,516			(3,878,720	)		24,436,779
Noninterest Income
Service Charges on Deposits		3,597,416			4,198,019			4,699,616
Other Service Charges, Commissions and Fees		1,139,935			986,392			981,124
Mortgage Fee Income		313,005			447,989			609,044
Securities Gains		2,617,062			2,625,867			1,195,314
Gain on Sale of SBA Loans		1,004,585			140,122			11,633
Other		1,334,846			1,145,798			1,508,459
		10,006,849			9,544,187			9,005,190
Noninterest Expenses
Salaries and Employee Benefits		14,096,698			14,483,306			16,238,080
Occupancy and Equipment		4,422,152			4,287,006			4,190,845
Directors’ Fees		495,950			502,575			578,315
Legal and Professional Fees		1,369,864			1,362,536			1,379,696
Foreclosed Property		4,943,530			2,270,792			382,312
FDIC Assessment		1,866,956			2,662,042			603,093
Goodwill Impairment		-			2,412,338			-
Advertising		743,278			758,458			521,049
Software		630,543			498,657			345,995
Telephone		703,786			764,373			695,641
Other		4,583,606			4,842,139			5,920,889
		33,856,363			34,844,222			30,855,915
Income (Loss) Before Income Taxes		15,002			(29,178,755	)		2,586,054
Income Taxes (Benefits)		(459,214	)		(9,994,881	)		557,230
Net Income (Loss)		474,216			(19,183,874	)		2,028,824
Preferred Stock Dividends		1,400,000			1,365,000			-
Net Income (Loss) Available to Common Stockholders	$	(925,784	)	$	(20,548,874	)	$	2,028,824
Net Income (Loss) Per Share of Common Stock
Basic	$	(0.11	)	$	(2.85	)	$	0.28
Diluted	$	(0.11	)	$	(2.85	)	$	0.28
Cash Dividends Declared Per Share of Common Stock	$	0.00		$	0.146		$	0.39
Weighted Average Shares Outstanding		8,149,217			7,213,430			7,199,121

The accompanying notes are an integral part of these statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31

	2010			2009			2008
Net Income (Loss)	$	474,216		$	(19,183,874	)	$	2,028,824
Other Comprehensive Income, Net of Tax
Gains on Securities Arising During the Year		1,227,281			1,257,136			893,158
Reclassification Adjustment		(1,727,261	)		(1,733,072	)		(788,907	)
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of  Reclassification Adjustment and Tax Effects		(499,980	)		(475,936	)		104,251
Comprehensive Income (Loss)	$	(25,764	)	$	(19,659,810	)	$	2,133,075

The accompanying notes are an integral part of these statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

	Preferred Stock		Shares Issued			Common Stock			Paid-In Capital			Retained Earnings			Restricted Stock - Unearned Compensation			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2007	$	-		7,200,913		$	7,200,913		$	24,420,497		$	52,086,834		$	(237,002	)	$	271,876		$	83,743,118
Issuance of Restricted Stock				15,500			15,500			220,100						(235,600	)					-
Forfeiture of Restricted Stock				(4,100	)		(4,100	)		(69,070	)					73,170						-
Tax Loss on Restricted Stock										(35,844	)											(35,844	)
Amortization of Unearned Compensation																188,439						188,439
Change in Net Unrealized Gains (Losses) on     Securities Available for Sale, Net of      Reclassification Adjustment and Tax Effects																			104,251			104,251
Dividends on Common Stock													(2,813,633	)								(2,813,633	)
Net Income (Loss)													2,028,824									2,028,824
Balance, December 31, 2008		-		7,212,313			7,212,313			24,535,683			51,302,025			(210,993	)		376,127			83,215,155
Issuance of Preferred Stock		27,215,218								784,782												28,000,000
Issuance of Restricted Stock				18,850			18,850			132,421						(151,271	)					-
Forfeiture of Restricted Stock				(2,000	)		(2,000	)		(14,050	)					16,050						-
Tax Loss on Restricted Stock										(45,923	)											(45,923	)
Amortization of Unearned Compensation																187,666						187,666
Change in Net Unrealized Gains (Losses) on     Securities Available for Sale, Net of      Reclassification Adjustment and Tax Effects																			(475,936	)		(475,936	)
Accretion of Fair Value of Warrant		141,746											(141,746	)								-
Dividends on Preferred Shares													(1,365,000	)								(1,365,000	)
Dividends on Common Stock													(1,057,464	)								(1,057,464	)
Net Income (Loss)													(19,183,874	)								(19,183,874	)
Balance, December 31, 2009		27,356,964		7,229,163			7,229,163			25,392,913			29,553,941			(158,548	)		(99,809	)		89,274,624
Issuance of Common Stock				1,216,545			1,216,545			3,861,710												5,078,255
Forfeiture of Restricted Stock				(2,750	)		(2,750	)		(27,570	)					30,320						-
Tax Loss on Restricted Stock										(55,966	)											(55,966	)
Amortization of Unearned Compensation																87,434						87,434
Change in Net Unrealized Gains (Losses) on     Securities Available for Sale, Net of      Reclassification Adjustment and Tax Effects																			(499,980	)		(499,980	)
Accretion of Fair Value of Warrant		148,946											(148,946	)								-
Dividends on Preferred Shares													(1,400,000	)								(1,400,000	)
Net Income (Loss)													474,216									474,216
Balance, December 31, 2010	$	27,505,910		8,442,958		$	8,442,958		$	29,171,087		$	28,479,211		$	(40,794	)	$	(599,789	)	$	92,958,583

The accompanying notes are an integral part of these statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

	2010			2009			2008
Cash Flows from Operating Activities
Net Income (Loss)	$	474,216		$	(19,183,874	)	$	2,028,824
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided from Operating Activities
Depreciation		2,140,735			2,092,845			2,028,158
Amortization and Accretion		4,043,795			3,807,011			777,051
Goodwill Impairment		-			2,412,338			-
Provision for Loan Losses		13,350,000			43,445,000			12,937,750
Deferred Income Taxes		639,607			(5,869,055	)		(250,215	)
Securities Gains		(2,617,062	)		(2,625,867	)		(1,195,314	)
(Gain) Loss on Sale of Equipment		28,146			(82,503	)		(857	)
Loss on Sale of Other Real Estate and Repossessions		1,827,704			163,642			59,623
Unrealized Loss on Other Real Estate		1,293,174			467,408			-
Increase in Cash Surrender Value of Life Insurance		(56,024	)		(184,905	)		(235,305	)
Change In
Interest Receivable		1,325,068			699,018			2,875,146
Prepaid Expenses		2,006,032			(5,785,826	)		18,698
Interest Payable		(452,764	)		(1,256,460	)		(816,819	)
Accrued Expenses and Accounts Payable		(148,591	)		315,879			(815,214	)
Other		3,500,575			(3,360,614	)		(121,645	)
		27,354,611			15,054,037			17,289,881
Cash Flows from Investing Activities
Interest-Bearing Deposits in Other Banks		(44,247,933	)		(6,331,814	)		1,319,703
Purchase of Investment Securities Available for Sale		(380,490,982	)		(488,257,181	)		(157,485,718	)
Proceeds from Sale of Investment Securities Available for Sale		286,387,727			368,575,701			65,298,695
Proceeds from Maturities, Calls and Paydowns of Investment Securities Available for Sale		55,648,274			58,599,391			52,666,161
Held to Maturity		14,001			12,688			13,573
Proceeds from Sale of Premises and Equipment		-			125,512			29,888
Net Loans to Customers		88,105,734			(18,973,081	)		(42,435,526	)
Purchase of Premises and Equipment		(490,256	)		(1,290,324	)		(3,920,230	)
Proceeds from Sale of Other Real Estate and Repossessions		9,866,063			12,158,095			3,392,500
Federal Home Loan Bank Stock		281,900			(73,000	)		(739,700	)
		15,074,528			(75,454,013	)		(81,860,654	)
Cash Flows from Financing Activities
Interest-Bearing Customer Deposits		(17,183,061	)		43,853,063			(2,995,624	)
Noninterest-Bearing Customer Deposits		18,720,584			6,741,949			(8,614,892	)
Proceeds from Other Borrowed Money		23,076,010			19,000,000			122,400,000
Principal Payments on Other Borrowed Money		(39,000,000	)		(19,000,000	)		(65,000,000	)
Dividends Paid on Preferred Stock		(1,400,000	)		(1,190,000	)		-
Dividends Paid on Common Stock		-			(1,760,665	)		(2,794,520	)
Issuance of Common Stock		5,078,255			-			-
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		(20,000,000	)		(2,274,000	)		928,000
Proceeds Allocated to Issuance of Preferred Stock		-			27,215,218			-
Proceeds Allocated to Warrants Issued		-			784,782			-
		(30,708,212	)		73,370,347			43,922,964
Net Increase (Decrease) in Cash and Cash Equivalents		11,720,927			12,970,371			(20,647,809	)
Cash and Cash Equivalents, Beginning		42,428,742			29,458,371			50,106,180
Cash and Cash Equivalents, Ending	$	54,149,669		$	42,428,742		$	29,458,371

The accompanying notes are an integral part of these statements.

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COLONY BANKCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Summary of Significant Accounting Policies

Principles of Consolidation

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

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 banking office network.

Use of Estimates

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and the valuation of deferred tax assets, 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 nonpublic nongovernmental 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 and note disclosures have been reclassified to conform to statement presentations selected for 2010.  Such reclassifications had no effect on previously reported stockholders’ equity or net income.

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(1)  Summary of Significant Accounting Policies (Continued)

Concentrations of Credit Risk

Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions.  The Company has a concentration in real estate loans as well as a geographic concentration that could pose an adverse credit risk, particularly with the current economic downturn in the real estate market.  At December 31, 2010, approximately 86 percent of the Company’s loan portfolio was concentrated in loans secured by real estate.  A substantial portion of borrowers’ ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector.  The continued downturn of the housing and real estate market that began in 2007 has resulted in an increase of problem loans secured by real estate.  These loans are centered primarily in the Company’s larger MSA markets.  Declining collateral real estate values that secure land development, construction and speculative real estate loans in the Company’s larger MSA markets have resulted in high loan loss provisions in 2010.  In addition, a large portion of the Company’s foreclosed assets are also located in these same geographic markets, making the recovery of the carrying amount of foreclosed assets susceptible to changes in market conditions.  Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis.

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

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

Investment Securities

The Company classifies its investment securities as trading, available for sale or held to maturity.  Securities that are held principally for resale in the near term are classified as trading.  Trading securities are carried at fair value, with realized and unrealized gains and losses included in noninterest income.  Currently, no securities are classified as trading.  Securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost.  All securities not classified as trading or held to maturity are considered available for sale.  Securities available for sale are reported at estimated fair value.  Unrealized gains and losses on securities available for sale are excluded from earnings and are reported, net of deferred taxes, in accumulated other comprehensive income (loss), a component of stockholders’ equity.  Gains and losses from sales of securities available for sale are computed using the specific identification method.  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.

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(1)  Summary of Significant Accounting Policies (Continued)

Investment Securities (Continued)

The Bank evaluates each held to maturity and available for sale security in a loss position for other-than-temporary impairment (OTTI).  In estimating other-than-temporary impairment losses, management considers such factors as the length of time and the extent to which the market value has been below cost, the financial condition of the issuer and the Bank’s intent to sell and whether it is more likely than not that the Bank will be required to sell the security before anticipated recovery of the amortized cost basis.  If the Bank intends to sell or if it is more likely than not that the Bank will be required to sell the security before recovery, the OTTI write-down is recognized in earnings.  If the Bank does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income (loss).

Federal Home Loan Bank Stock

Investment in stock of a Federal Home Loan Bank (FHLB) is required for every federally insured institution that utilizes its services.  FHLB stock is considered restricted, as defined in the accounting standards.  The FHLB stock is reported in the consolidated financial statements at cost.  Dividend income is recognized when earned.

Loans

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

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

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

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.

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(1)  Summary of Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

The allowance consists of specific, historical and general components.  The specific component relates to loans that are classified as either doubtful, substandard or special mention.  For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The historical component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors.  A general component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and historical losses in the portfolio.  General valuation allowances are based on internal and external qualitative risk factors such as (i) changes in the composition of the loan portfolio, (ii) the extent of loan concentrations within the portfolio, (iii) the effectiveness of the Company’s lending policies, procedures and internal controls, (iv) the experience, abililty and effectiveness of the Company’s lending management and staff, and (v) national and local economics and business conditions.

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

During 2010, the Company continued its methodology regarding the look-back period for charge-off experience to one year.  The current methodology has resulted in significant loan loss provisions for 2010 and 2009.

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

Premises and Equipment

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

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

Description	Life in Years	Method
Banking Premises	15-40	Straight-Line and Accelerated
Furniture and Equipment	5-10	Straight-Line and Accelerated

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

- 11 -

(1)  Summary of Significant Accounting Policies (Continued)

Goodwill and Intangible Assets

Goodwill represents the excess of the cost over the fair value of the net assets purchased in a business combination.  The Company did not have any goodwill on its books at December 31, 2010.

Intangible assets consist of core deposit intangibles acquired in connection with a business combination.  The core deposit intangible is initially recognized based on an independent valuation performed as of the consummation date.  The core deposit intangible is amortized by the straight-line method over the average remaining life of the acquired customer deposits.  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, federal funds sold and securities purchased under agreement to resell.  Cash flows from demand deposits, NOW accounts, savings accounts, loans and certificates of deposit are reported net.

Securities Purchased and Sold Under Agreements to Resell or Repurchase

The Company purchases certain securities under agreements to resell.  The amounts advanced under these agreements represent short-term loans and are reflected as assets in the consolidated balance sheets.

The Company sells securities under agreements to repurchase.  These repurchase agreements are treated as borrowings.  The obligations to repurchase securities sold are reflected as a liability and the securities underlying the agreements are reflected as assets in the consolidated balance sheets.

Advertising Costs

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

Income Taxes

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

- 12 -

(1)  Summary of Significant Accounting Policies (Continued)

Income Taxes (Continued)

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

Other Real Estate

Other real estate generally represents real estate acquired through foreclosure and is initially recorded at estimated fair value at the date of acquisition less the cost of disposal.  Losses from the acquisition of property in full or partial satisfaction of debt are recorded as loan losses.  Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and valuation allowances are recorded as necessary to reduce the carrying amount to fair value less estimated cost of disposal.  Routine holding costs and gains or losses upon disposition are included in 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 operations but as a separate component of the equity section of the consolidated balance sheets.  Such items are considered components of other comprehensive income (loss).  Accounting standards codification requires the presentation in the consolidated financial statements of net income and all items of other comprehensive income (loss) as total comprehensive income.

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.

- 13 -

(1)  Summary of Significant Accounting Policies (Continued)

Changes in Accounting Principles and Effects of New Accounting Pronouncements

In the first quarter of 2010, a new accounting standard was issued for Fair Value Measurements and Disclosures - Improving Disclosures About Fair Value Measurements.  This standard requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements.  The new standard further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) the Company should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in levels 2 and 3 of the fair value hierarchy.  The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011.  The remaining disclosure requirements and clarifications made by this standard became effective for the Company on January 1, 2010 and did not have a significant impact on the Company’s consolidated financial statements.

In July 2010, a new standard was issued for Receivables - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  This standard requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses.  Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment.  The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, nonaccrual and past due loans and credit quality indicators.  This standard became effective for the Company’s consolidated financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period.  Disclosures that relate to activity during a reporting period will be required for the Corporation’s financial statements that include periods beginning on or after January 1, 2011.  Subsequently, the effective date of the disclosure requirements related to troubled debt restructurings was temporarily deferred to coincide with the effective date of a proposed accounting standards update related to troubled debt restructurings, which is currently expected to be effective for periods ending after June 15, 2011.

- 14 -

(1)  Summary of Significant Accounting Policies (Continued)

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

Revised standards on Business Combinations apply 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 establish 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 (loss) must be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.  Also required are disclosures, on the face of the consolidated statements of operations, of the amounts of consolidated net income (loss) 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.

Revised standards for Recognition and Presentation of Other-Than-Temporary Impairments became effective for the Company in the second quarter of 2009.  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 consolidated financial statements.  The existing recognition and measurement guidance related to other-than-temporary impairments of equity securities is not amended.  The adoption of these amendments did not have a significant impact on the Company’s consolidated 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 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.  Adoption of these standards on June 15, 2009 did not have a significant impact on the Company’s consolidated financial statements.

- 15 -

(1)  Summary of Significant Accounting Policies (Continued)

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

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 consolidated financial statements (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its consolidated financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date.  This guidance became effective for the Company’s financial statements for periods ending after June 15, 2009.  Implementation resulted in no significant impact on the Company’s consolidated financial statements.

In June 2009, standards were issued for Transfers and Servicing, which enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets.  The guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets.  The guidance also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset.  The guidance became effective on January 1, 2010 and did not have a material impact on the Company’s consolidated financial statements.

Revised standards for Earnings per Share became effective for the Company on January 1, 2009.  These standards provide that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.  Adoption of the new guidance did not have a significant impact on the Company’s consolidated financial statements.

(2)  Cash and Balances Due from Banks

Components of cash and balances due from banks are as follows as of December 31:

	2010		2009
Cash on Hand and Cash Items	$	8,897,618	$	8,773,237
Noninterest-Bearing Deposits with Other Banks		7,715,569		17,222,249
	$	16,613,187	$	25,995,486

The Company is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a percentage of deposits.  Reserve balances totaled approximately $916,000 and $555,000 at December 31, 2010 and 2009.

- 16 -

(3)  Investment Securities

Investment securities as of December 31, 2010 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	299,018,595	$	1,763,198	$	(2,319,337	)	$	298,462,456
State, County and Municipal		3,248,533		34,391		(26,691	)		3,256,233
Corporate Obligations		2,000,000		101,920		(115,430	)		1,986,490
Asset-Backed Securities		479,249		-		(346,822	)		132,427
	$	304,746,377	$	1,899,509	$	(2,808,280	)	$	303,837,606
Securities Held to Maturity
State, County and Municipal	$	48,412	$	4,529	$	-		$	52,941

The amortized cost and fair value of investment securities as of December 31, 2010, 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.

	Securities
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due After One Year Through Five Years	$	500,087	$	518,929	$	48,412	$	52,941
Due After Five Years Through Ten Years		2,740,136		2,844,431		-		-
Due After Ten Years		2,487,559		2,011,790		-		-
		5,727,782		5,375,150		48,412		52,941
Mortgage-Backed Securities		299,018,595		298,462,456		-		-
	$	304,746,377	$	303,837,606	$	48,412	$	52,941

Investment securities as of December 31, 2009 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	258,432,952	$	1,535,588	$	(1,059,532	)	$	258,909,008
State, County and Municipal		4,027,322		74,749		(34,843	)		4,067,228
Corporate Obligations		4,458,376		64,810		(385,176	)		4,138,010
Asset-Backed Securities		479,249		-		(346,822	)		132,427
	$	267,397,899	$	1,675,147	$	(1,826,373	)	$	267,246,673
Securities Held to Maturity
State, County and Municipal	$	53,906	$	3,093	$	-		$	56,999

- 17 -

(3)  Investment Securities (Continued)

Proceeds from sales of investments available for sale were $286,387,727 in 2010, $368,575,701 in 2009 and $65,298,695 in 2008.  Gross realized gains totaled $2,617,062 in 2010, $3,204,669 in 2009 and $1,201,896 in 2008.  Gross realized losses totaled $0 in 2010, $578,802 in 2009 and $6,582 in 2008.

Investment securities having a carrying value approximating $123,789,118 and $157,868,000 as of December 31, 2010 and 2009, respectively, were pledged to secure public deposits and for other purposes.

Information pertaining to securities with gross unrealized losses at December 31, 2010 and 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
December 31, 2010
U.S. Government Agencies Mortgage-Backed	$	152,286,738	$	(2,319,337	)	$	-	$	-		$	152,286,738	$	(2,319,337	)
State, County and Municipal		1,776,763		(26,691	)		-		-			1,776,763		(26,691	)
Corporate Obligations		-		-			884,570		(115,430	)		884,570		(115,430	)
Asset-Backed Securities		-		-			132,427		(346,822	)		132,427		(346,822	)
	$	154,063,501	$	(2,346,028	)	$	1,016,997	$	(462,252	)	$	155,080,498	$	(2,808,280	)
December 31, 2009
U.S. Government Agencies Mortgage-Backed	$	114,222,812	$	(1,056,502	)	$	419,159	$	(3,030	)	$	114,641,971	$	(1,059,532	)
State, County and Municipal		-		-			1,424,697		(34,843	)		1,424,697		(34,843	)
Corporate Obligations		-		-			3,073,200		(385,176	)		3,073,200		(385,176	)
Asset-Backed Securities		-		-			132,427		(346,822	)		132,427		(346,822	)
	$	114,222,812	$	(1,056,502	)	$	5,049,483	$	(769,871	)	$	119,272,295	$	(1,826,373	)

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 December 31, 2010, the debt securities with unrealized losses have depreciated 1.78 percent from the Company’s amortized cost basis. These securities are guaranteed by either the U.S. Government, other governments or U.S. corporations. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.  The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other than temporary.

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(4)  Loans

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

	2010		2009
Commercial and Industrial
Commercial	$	53,220,341	$	64,485,345
Industrial		10,551,791		16,499,065
Real Estate
Commercial Construction		72,309,231		103,676,394
Residential Construction		4,373,011		9,440,662
Commercial		362,878,565		395,795,782
Residential		207,471,813		231,197,658
Farmland		52,778,389		54,965,260
Consumer and Other
Consumer		33,563,863		38,382,831
Other		16,103,669		16,948,629
Total Loans	$	813,250,673	$	931,391,626

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

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

The Company uses a risk grading matrix to assign a risk grade to each of its loans.  Loans are graded on a scale of 1 to 8.  A description of the general characteristics of the grades is as follows:

· Grades 1 and 2 - Borrowers with these assigned grades range in risk from virtual absence of risk to minimal risk.  Such loans may be secured by Company-issued and controlled certificates of deposit or properly margined equity securities or bonds.  Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans.  Loans in this category fall into the “pass” classification.

· Grades 3 and 4 - Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk.  The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

- 19 -

(4)  Loans (Continued)

· Grade 5 - This grade includes “special mention” loans on management’s watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.

· Grade 6 - This grade includes “substandard” loans in accordance with regulatory guidelines.  This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms.  Loans considered to be impaired are assigned this grade, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses.  Generally, loans on which interest accrual has been stopped would be included in this grade.

· Grades 7 and 8 - These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively.  In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades.  Management manages the Company’s problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

The following table presents the loan portfolio by credit quality indicator (risk grade) as of December 31, 2010. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

	Pass		Special Mention		Substandard		Total Loans
Commercial and Industrial
Commercial	$	48,731,982	$	2,498,305	$	1,990,054	$	53,220,341
Industrial		10,059,081		169,381		323,329		10,551,791
Real Estate
Commercial Construction		33,522,709		10,064,271		28,722,251		72,309,231
Residential Construction		3,974,130		204,000		194,881		4,373,011
Commercial		294,186,347		11,847,051		56,845,167		362,878,565
Residential		183,518,173		9,195,410		14,758,230		207,471,813
Farmland		49,499,619		1,838,814		1,439,956		52,778,389
Consumer and Other
Consumer		32,046,108		726,933		790,822		33,563,863
Other		14,553,167		1,185,260		365,242		16,103,669
Total Loans	$	670,091,316	$	37,729,425	$	105,429,932	$	813,250,673

A loan’s risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral.  Loan risk grades are subject to reassessment at various times throughout the year as part of the Company’s ongoing loan review process.  Loans with an assigned risk grade of 6 or below and an outstanding balance of $50,000 or more are reassessed on a quarterly basis.  During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

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

- 20 -

(4)  Loans (Continued)

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provision.  Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of December 31, 2010:

	Accruing Loans
	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans
Commercial and Industrial
Commercial	$	382,728	$	-	$	382,728	$	393,823	$	52,443,790	$	53,220,341
Industrial		100,810		-		100,810		175,062		10,275,919		10,551,791
Real Estate
Commercial Construction		1,514,127		-		1,514,127		10,181,795		60,613,309		72,309,231
Residential Construction		194,881		-		194,881		-		4,178,130		4,373,011
Commercial		11,790,383		-		11,790,383		13,567,530		337,520,652		362,878,565
Residential		4,268,098		15,876		4,283,974		3,057,049		200,130,790		207,471,813
Farmland		566,868		-		566,868		1,157,528		51,053,993		52,778,389
Consumer and Other
Consumer		702,795		3,312		706,107		290,115		32,567,641		33,563,863
Other		218,887		-		218,887		79,072		15,805,710		16,103,669
Total Loans	$	19,739,577	$	19,188	$	19,758,765	$	28,901,974	$	764,589,934	$	813,250,673

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1,621,700, $2,318,100 and $1,328,600 for the years ended December 31, 2010, 2009 and 2008, respectively.

- 21 -

(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 $28,901,974 and $33,535,160 as of December 31, 2010 and 2009, respectively, and total recorded investment in loans past due 90 days or more and still accruing interest approximated $19,188 and $31,200, respectively.  During its review of impaired loans, the Company determined the majority of its exposures on these loans were known losses.  As a result, the exposures were charged off, reducing the specific allowances on impaired loans.

The following table details impaired loan data as of December 31, 2010:

	Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected
With No Related Allowance Recorded
Commercial	$	258,676	$	-	$	308,508	$	(987	)	$	5,465
Agricultural		175,062		-		220,716		689			689
Commercial Construction		10,181,795		-		11,760,840		7,320			31,963
Residential Construction		-		-		8,248		-			-
Commercial Real Estate		4,270,905		-		9,041,753		80,585			85,448
Residential Real Estate		3,057,049		-		3,931,449		41,420			53,813
Farmland		1,157,528		-		645,619		(6,571	)		10,969
Consumer		290,115		-		296,301		17,166			19,342
Other		79,072		-		129,249		4,550			7,760
		19,470,202		-	$	26,342,683		144,172			215,449
With An Allowance Recorded
Commercial		135,146		116,159		33,787		(1,125	)		3,316
Commercial Real Estate		9,296,626		539,671		2,324,156		341,937			475,999
		9,431,772		655,830		2,357,943		340,812			479,315
Total
Commercial		393,822		116,159		342,295		(2,112	)		8,781
Agricultural		175,062		-		220,716		689			689
Commercial Construction		10,181,795		-		11,760,840		7,320			31,963
Residential Construction		-		-		8,248		-			-
Commercial Real Estate		13,567,531		539,671		11,365,909		422,522			561,447
Residential Real Estate		3,057,049		-		3,931,449		41,420			53,813
Farmland		1,157,528		-		645,619		(6,571	)		10,969
Consumer		290,115		-		296,301		17,166			19,342
Other		79,072		-		129,249		4,551			7,760
	$	28,901,974	$	655,830	$	28,700,626	$	484,985		$	694,764

- 22 -

(4)  Loans (Continued)

The following table details impaired loan data for 2009:

Total Investment in Impaired Loans	$	33,535,160
Less Allowance for Impaired Loan Losses		(17,000	)
Net Investment, December 31	$	33,518,160
Average Investment During the Year	$	36,394,731
Income Recognized During the Year	$	684,940
Income Collected During the Year	$	913,255

(5)  Allowance for Loan Losses

The following table details activity in the allowance for loan losses, segregated by class of loan, for the year ended December 31, 2010.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other loan categories.

	Beginning Balance		Charge-Offs			Recoveries		Provision		Ending Balance
Commercial and Industrial
Commercial	$	3,930,760	$	(469,214	)	$	80,181	$	873,090	$	4,414,817
Industrial		779,337		(255,627	)		1,377		173,550		698,637
Real Estate
Commercial Construction		7,402,484		(4,648,124	)		184,868		1,186,815		4,126,043
Residential Construction		447,676		-			-		72,090		519,766
Commercial		8,790,443		(7,459,619	)		141,931		6,556,770		8,029,525
Residential		5,025,839		(2,929,668	)		439,940		3,405,585		5,941,696
Farmland		942,019		(271,750	)		7,639		266,415		944,323
Consumer and Other
Consumer		2,826,058		(548,834	)		245,641		551,355		3,074,220
Other		1,256,025		(1,039,618	)		50,313		264,330		531,050
	$	31,400,641	$	(17,622,454	)	$	1,151,890	$	13,350,000	$	28,280,077

- 23 -

(5)  Allowance for Loan Losses (Continued)

	Ending Balance
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and Industrial
Commercial	$	336,011	$	4,078,806	$	4,414,817
Industrial		-		698,637		698,637
Real Estate
Commercial Construction		3,501,117		624,926		4,126,043
Residential Construction		-		519,766		519,766
Commercial		7,539,533		489,992		8,029,525
Residential		1,561,952		4,379,744		5,941,696
Farmland		-		944,323		944,323
Consumer and Other
Consumer		3,033		3,071,187		3,074,220
Other		-		531,050		531,050
Total End of Period Allowance Balance	$	12,941,646	$	15,338,431	$	28,280,077
Total End of Period Loan Balance	$	104,807,855	$	708,442,818	$	813,250,673

The Company determines its individual reserves during its quarterly review of substandard loans.  Although not all loans in the substandard category are considered impaired, this quarterly reassessment often results in the identification of individual reserves which are placed against certain loans as part of management’s allowance for loan loss calculation.

Transactions in the allowance for loan losses for years 2009 and 2008 are summarized below:

	2009			2008
Balance, Beginning	$	17,015,883		$	15,512,940
Provision Charged to Operating Expenses		43,445,000			12,937,750
Loans Charged Off		(29,493,324	)		(11,966,439	)
Loan Recoveries		433,082			531,632
Balance, Ending	$	31,400,641		$	17,015,883

- 24 -

(6)  Premises and Equipment

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

	2010			2009
Land	$	7,787,667		$	7,805,167
Building		23,790,525			23,642,043
Furniture, Fixtures and Equipment		13,737,177			14,365,687
Leasehold Improvements		993,086			993,086
Construction in Progress		-			6,775
		46,308,455			46,812,758
Accumulated Depreciation		(19,160,730	)		(17,986,408	)
	$	27,147,725		$	28,826,350

Depreciation charged to operations totaled $2,140,735 in 2010, 2,092,845 in 2009 and $2,028,158 in 2008.

Certain Company facilities and equipment are leased under various operating leases.  Rental expense approximated $377,000 for 2010, $365,000 for 2009 and $374,000 for 2008.

Future minimum rental payments as of December 31, 2010 are as follows:

Year Ending December 31	Amount
2011	$	129,138
2012		122,813
2013		88,658
2014		10,139
	$	350,748

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(7)  Goodwill and Intangible Assets

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

	2010		2009
Goodwill
Balance, Beginning	$	-	$	2,412,338
Goodwill Impairment Expense		-		(2,412,338	)
Balance, Ending	$	-	$	-

	Core Deposit Intangible		Accumulated Amortization			Net Core Deposit Intangible
Core Deposit Intangible
Balance, December 31, 2009	$	1,056,693	$	(725,937	)	$	330,756
Amortization Expense		-		(35,749	)		(35,749	)
Balance, December 31, 2010	$	1,056,693	$	(761,686	)	$	295,007

Amortization expense related to the core deposit intangible was $35,749, $35,749 and $35,748 for the years ended December 31, 2010, 2009 and 2008, respectively.

The following table reflects the expected amortization schedule for the core deposit intangible at December 31, 2010:

2011	$	35,749
2012		35,749
2013		35,749
2014		35,749
2015 and Thereafter		152,011
	$	295,007

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(8)  Income Taxes

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

	2010			2009			2008
Current Federal (Benefit) Expense	$	(1,037,717	)	$	(4,075,442	)	$	861,723
Deferred Federal (Benefit) Expense		639,607			(5,869,055	)		(250,215	)
Federal Income Tax (Benefit) Expense		(398,110	)		(9,944,497	)		611,508
Current State Income Tax (Benefit) Expense		(61,104	)		(50,384	)		(54,278	)
	$	(459,214	)	$	(9,994,881	)	$	557,230

The federal income tax (benefit) expense of $(398,110) in 2010, $(9,944,497) in 2009 and $611,508 in 2008 is less than the income taxes computed by applying the federal statutory rates to income before income taxes.  The reasons for the differences are as follows:

	2010			2009			2008
Statutory Federal Income Taxes	$	5,101		$	(9,920,776	)	$	879,258
Tax-Exempt Interest		(117,586	)		(185,775	)		(239,097	)
Interest Expense Disallowance		8,400			16,729			35,869
Premiums on Officers’ Life Insurance		(134,106	)		(58,906	)		(54,464	)
Meal and Entertainment Disallowance		24,972			32,068			13,810
State Income Taxes		-			-			-
Goodwill		-			58,507			-
Other		(184,891	)		113,656			(23,868	)
Actual Federal Income Taxes	$	(398,110	)	$	(9,944,497	)	$	611,508

- 27 -

(8)  Income Taxes (Continued)

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

	2010			2009
Deferred Tax Assets
Allowance for Loan Losses	$	9,615,226		$	10,676,218
Other Real Estate		511,839			158,919
Deferred Compensation		423,233			441,514
Restricted Stock		504,772			475,045
Goodwill		439,100			486,077
Other		470,435			447,472
		11,964,605			12,685,245
Deferred Tax Liabilities
Premises and Equipment		(1,184,064	)		(1,340,773	)
Vested Restricted Stock		(412,715	)		(337,039	)
Other		(4,185	)		(4,185	)
		(1,600,964	)		(1,681,997	)
Deferred Tax Assets (Liabilities) on Unrealized Securities Gains (Losses)		308,982			51,417
Net Deferred Tax Assets	$	10,672,623		$	11,054,665

As discussed in Note 1, certain positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities.  An analysis of activity related to unrecognized taxes follows as of December 31, 2010.

Balance, Beginning	$	221,584
Positions Taken During the Current Year		17,259
Reductions Resulting from Lapse of Statutes of Limitation		(160,722	)
Balance, Ending	$	78,121

The net reduction of $143,463 is included in income tax benefits for the year ended December 31, 2010.

- 28 -

(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 measurement and enhances disclosure requirements for fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:

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

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

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

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

Assets

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

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.

Other Real Estate - Certain foreclosed assets, upon initial recognition, are remeasured and reported at fair value less cost to sale through a charge-off to the allowance for loan losses based on the fair value of the foreclosed asset.  The fair value of a foreclosed asset is estimated using level 2 inputs based on observable market price or appraised value.  When appraised value is not available and management determines the fair value, the fair value of the foreclosed assets is considered level 3.

- 29 -

(9)  Fair Value Measurements (Continued)

Assets (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis -The following table presents the recorded amount of the Company’s assets measured at fair value on a recurring and nonrecurring basis as of December 31, 2010 and 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

			Fair Value Measurements at Reporting Date Using
2010	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring
Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	298,462,456	$	-	$	298,462,456	$	-
State, County and Municipal		3,256,233		-		3,256,233		-
Corporate Obligations		1,986,490		-		1,101,920		884,570
Asset-Backed Securities		132,427		-		-		132,427
	$	303,837,606	$	-	$	302,820,609	$	1,016,997
Nonrecurring
Impaired Loans	$	28,246,144	$	-	$	-	$	28,246,144
Other Real Estate	$	20,207,806	$	-	$	20,207,806	$	-
2009
Recurring
Securities Available for Sale
U.S. Government Agencies Mortgage-Backed	$	258,909,008	$	-	$	258,909,008	$	-
State, County and Municipal		4,067,228		-		4,067,228		-
Corporate Obligations		4,138,010		-		3,288,010		850,000
Asset-Backed Securities		132,427		-		-		132,427
	$	267,246,673	$	-	$	266,264,246	$	982,427
Nonrecurring
Impaired Loans	$	33,518,160	$	-	$	-	$	33,518,160
Other Real Estate	$	19,705,044	$	-	$	19,705,044	$	-

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

The following table presents a reconciliation and statement of income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the years ended December 31, 2010 and 2009.

- 30 -

(9)  Fair Value Measurements (Continued)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

	Available for Sale Securities
	2010		2009
Balance, Beginning	$	982,427	$	1,426,220
Total Realized/Unrealized Gains (Losses) Included In Loss on OTTI Impairment		-		(520,751	)
Other Comprehensive Income		34,570		76,958
Purchases, Sales, Issuances and Settlements, Net		-		-
Transfers In and (Out) of Level 3		-		-
Balance, Ending	$	1,016,997	$	982,427

(10) Deposits

The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $250,200 and $231,993 as of December 31, 2010 and 2009, respectively.

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

	2010		2009
Interest-Bearing Demand	$	235,855,037	$	220,168,255
Savings		36,629,698		34,850,882
Time, $100,000 and Over		298,009,596		364,064,083
Other Time		385,670,250		354,264,422
	$	956,164,581	$	973,347,642

At December 31, 2010 and 2009, the Company had brokered deposits of $36,328,659 and $136,453,418, respectively.  Of the $36,328,659 brokered deposits at December 31, 2010, $31,128,659 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 $5,200,000 at December 31, 2010.  The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $216,656,200 and $316,896,500 as of December 31, 2010 and 2009, respectively.

As of December 31, 2010, the scheduled maturities of certificates of deposit are as follows:

Year	Amount
2011	$	480,445,908
2012		101,801,446
2013		88,077,653
2014		8,314,804
2015 and Thereafter		5,040,035
	$	683,679,846

- 31 -

(11) Securities Sold Under Repurchase Agreements

The Company has securities sold under repurchase agreements in the amount of $20,000,000 at December 31, 2010.  Barclay’s Master Repurchase Agreement originated on June 26, 2008 with the initial draw of $20,000,000 on June 30, 2008.  The Repurchase Agreement matures on June 30, 2011.  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 $20,000,000 on October 31, 2008.  The Repurchase Agreement is overnight borrowing at a floating interest rate due monthly.  At December 31, 2010, the Company had an available line totaling $50,000,000, of which the entire $50,000,000 was available.  The Repurchase Agreement is secured by U.S. Government mortgage-backed securities.

(12) Other Borrowed Money

Other borrowed money at December 31 is summarized as follows:

	2010		2009
Federal Home Loan Bank Advances	$	71,000,000	$	91,000,000
Other Secured Borrowing		4,076,010		-
	$	75,076,010	$	91,000,000

Advances from the Federal Home Loan Bank (FHLB) have maturities ranging from 2011 to 2019 and interest rates ranging from 3.17 percent to 4.75 percent.  As collateral on the outstanding FHLB advances, the Company has provided a blanket lien on its portfolio of qualifying residential first mortgage loans and commercial loans.  In addition, the Company has pledged certain available-for-sale investment securities with carrying values at December 31, 2010 of approximately $47,424,000 as additional collateral, as well as cash balances held on deposit with the FHLB.  At December 31, 2010, the Company had available line of credit commitments totaling $184,320,000, of which $113,260,000 was available.

Other secured borrowing represents SBA loans sold in the secondary market that must be accounted for as a secured borrowing.  These sales agreements contain recourse provisions (generally 90 days) that initially require the Company to account for the transfer of a portion of these financial assets as a secured borrowing, until such time that the recourse provision expires.  Once the recourse provision expires, transfers of a portion of these financial assets are re-evaluated to determine if they meet the participating interest definition and subsequently accounted for as a sale.

The aggregate stated maturities of other borrowed money at December 31, 2010 are as follows:

Year	Amount
2011	$	4,076,010
2012		41,000,000
2013		-
2014		-
2015 and Thereafter		30,000,000
	$	75,076,010

- 32 -

(12) Other Borrowed Money (Continued)

The Company also has available federal funds lines of credit with various financial institutions totaling $47,000,000, of which there were none outstanding at December 31, 2010.

In addition, the Company has the ability to borrow funds from the Federal Reserve Bank (FRB) of Atlanta utilizing the discount window.  The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the FRB on a short-term basis to meet temporary liquidity shortages needs caused by internal or external disruptions.  At December 31, 2010, the Company had approximately $7.8 million of borrowing capacity available under this arrangement, with no outstanding balances.  Certain available-for-sale investment securities totaling approximately $8.0 million were pledged as collateral under this agreement.

(13) Subordinated Debentures (Trust Preferred Securities)

During the second quarter of 2004, the Company formed a third subsidiary whose sole purpose was to issue $4,500,000 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 5 years with certain exceptions.  At December 31, 2010, the floating rate securities had a 2.98 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 $5,000,000 in Trust Preferred Securities in a private placement by SunTrust Bank Capital Markets.  The Trust Preferred Securities have a maturity of 30 years and are redeemable after 5 years with certain exceptions.  At December 31, 2010, the floating rate securities had a 1.80 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 $9,000,000 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 5 years with certain exceptions.  At December 31, 2010, the floating rate securities had a 1.95 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 1.65 percent.  Proceeds from this issuance were used to pay off 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 $5,000,000 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 5 years with certain exceptions.  At December 31, 2010, the floating rate securities had a 1.69 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 1.40 percent.  Proceeds from this issuance were used to pay off 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 a liability on the consolidated balance sheets, but, subject to certain limitations, qualify as Tier 1 capital for regulatory capital purposes.  The proceeds from the offerings were used to fund the cash portion of the Quitman acquisition, pay off holding Company debt, and inject capital into the bank subsidiary.

The total aggregate principal amount of trust preferred certificates outstanding at December 31, 2010 was $23,500,000.  The total aggregate principal amount of subordinated debentures outstanding at December 31, 2010 was $24,229,000.

- 33 -

(14) Preferred Stock

On January 9, 2009, the Company issued to the United States Department of the Treasury (Treasury), in exchange for aggregate consideration of $28.0 million, (i) 28,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, (the Preferred Stock), and (ii) a warrant (the Warrant) to purchase up to 500,000 shares (the Warrant Common Stock) of the Company’s common stock.

The Preferred Stock qualifies as Tier 1 capital and pays cumulative cash dividends quarterly at a rate of 5 percent per annum for the first five years, and 9 percent per annum thereafter. The Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Preferred Stock. The Preferred Stock may be redeemed by the Company on or after February 15, 2012 at the liquidation preference of $1,000 per share plus any accrued and unpaid dividends.  Prior to this date, the Preferred Stock may not be redeemed unless the Company has received aggregate gross proceeds from one or more qualified equity offerings of any Tier 1 perpetual preferred or common stock of the Company equal to $7.0 million. Subject to certain limited exceptions, until January 9, 2012, or such earlier time as all Preferred Stock has been redeemed, the Company will not, without the Treasury’s consent, be able to increase its dividend rate per share of common stock or repurchase its common stock.

The Warrant may be exercised on or before January 9, 2019 at an exercise price of $8.40 per share.  The Treasury may not exercise voting power with respect to any shares of Warrant Common Stock until the Warrant has been exercised.

Upon receipt of the aggregate consideration from the Treasury on January 9, 2009, the Company allocated the $28,000,000 proceeds on a pro rata basis to the Preferred Stock and the Warrant based on relative fair values.  As a result, the Company allocated $27,220,000 of the aggregate proceeds to the Preferred Stock, and $780,000 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.

(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 is 64,701.  To date, 77,052 shares have been issued under this plan and 12,351 shares have been forfeited; thus, there are no remaining shares which may be issued at December 31, 2010.  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 second 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 14,098 shares have been forfeited; thus, remaining shares which may be issued are 104,342 at December 31, 2010.   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).

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(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 total provision for contributions to the plan was $0 for 2010, $(19,411) for 2009 and $206,179 for 2008.

(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 December 31, 2010 and 2009, the following financial instruments were outstanding whose contract amounts represent credit risk:

	Contract Amount
	2010		2009
Commitments to Extend Credit	$	39,457,000	$	56,100,000
Standby Letters of Credit		1,540,000		1,475,000

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

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

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

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(17) Commitments and Contingencies (Continued)

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

IRS Exam.  Colony Bankcorp, Inc. and subsidiary are currently under examination by the Internal Revenue Service (IRS) for the year ended December 31, 2009.  The IRS is examining areas of nonaccrual interest, other real estate and bad debts, and may propose income adjustments, most of which, in the opinion of management, will reverse in 2010.  As a result, management anticipates a net adjustment which would have no material impact on the consolidated financial statements.  In addition to 2009, tax returns for calendar years 2008 and 2007 remain subject to examination by the IRS.

(18) Deferred Compensation Plan

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

Liabilities accrued under the plans totaled $1,244,803 and $1,298,572 as of December 31, 2010 and 2009, respectively.  Benefit payments under the contracts were $206,955 in 2010 and $187,655 in 2009.  Provisions charged to operations totaled $154,553 in 2010, $361,171 in 2009 and $178,542 in 2008.

Fee income recognized with deferred compensation plans totaled $182,685 in 2010, $173,253 in 2009 and $160,187 in 2008.

(19) Interest Income and Expense

Interest income of $109,240, $267,553 and $426,779 from state, county and municipal bonds was exempt from regular income taxes in 2010, 2009 and 2008, respectively.

Interest on deposits includes interest expense on time certificates of $100,000 or more totaling $7,050,415, $9,598,455 and $14,596,774 for the years ended December 31, 2010, 2009 and 2008, respectively.

(20) Supplemental Cash Flow Information

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

	2010		2009		2008
Interest Expense	$	21,975,968	$	27,537,602	$	38,739,489
Income Taxes	$	275,000	$	-	$	1,875,000

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(20) Supplemental Cash Flow Information (Continued)

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

	2010		2009		2008
Acquisitions of Real Estate Through Loan Foreclosures	$	13,159,402	$	19,258,910	$	14,748,105
Unrealized (Gain) Loss on Investment Securities	$	757,545	$	721,116	$	(157,957	)

(21) Related Party Transactions

The aggregate balance of direct and indirect loans to directors, executive officers or principal holders of equity securities of the Company was $9,797,492 as of December 31, 2010 and $6,473,238 as of December 31, 2009. All such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than a normal risk of collectibility.  A summary of activity of related party loans is shown below:

	2010			2009
Balance, Beginning	$	6,473,238		$	7,641,037
New Loans		12,533,229			4,829,291
Repayments		(9,208,975	)		(5,997,090	)
Transactions Due to Changes in Directors		-			-
Balance, Ending	$	9,797,492		$	6,473,238

(22) 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.

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(22) Fair Value of Financial Instruments (Continued)

Loans - The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.  For variable rate loans, the carrying amount is a reasonable estimate of fair value.

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.

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

	2010				2009
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(in Thousands)
Assets
Cash and Short-Term Investments	$	104,876	$	104,876	$	48,908	$	48,908
Investment Securities Available for Sale		303,838		303,838		267,247		267,247
Investment Securities Held to Maturity		48		53		54		57
Federal Home Loan Bank Stock		6,064		6,064		6,345		6,345
Loans, Net		784,909		788,455		899,851		908,638
Liabilities
Deposits		1,059,124		1,064,695		1,057,586		1,059,037
Subordinated Debentures		24,229		24,229		24,229		24,229
Securities Sold Under Agreements to Repurchase		20,000		20,308		40,000		40,671
Other Borrowed Money		75,076		77,119		91,000		91,703

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(22) Fair Value of Financial Instruments (Continued)

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

(23) Regulatory Capital Matters

The amount of dividends payable to the parent company from the subsidiary bank is limited by various banking regulatory agencies.  Upon approval by regulatory authorities, the Bank may pay cash dividends to the parent company in excess of regulatory limitations.  Additionally, the Company suspended the payment of dividends to its stockholders in the third quarter of 2009.  At December 31, 2010, the Company is subject to certain regulatory restrictions that preclude the declaration of or payment of any dividends to its common stockholders, without prior approval from the Federal Reserve Bank.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets.  The amounts and ratios as defined in regulations are presented hereafter.  Management believes, as of December 31, 2010, 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 Company is also subject to certain other regulatory requirements as discussed in Part 1 Item 1 of its December 31, 2010 Form 10-K filed with the Securities and Exchange Commission on March 15, 2011.  Failure to comply with the abovementioned requirements could have an adverse impact on the Company’s financial condition.

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(23) Regulatory Capital Matters (Continued)

The following table summarizes regulatory capital information as of December 31, 2010 and 2009 on a consolidated basis and for its wholly-owned subsidiary, as defined.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2010	(In Thousands)
Total Capital to Risk-Weighted Assets
Consolidated	$	116,914		14.85	%	$	62,981		8.00	%		N/A		N/A
Colony Bank		113,119		14.39			62,905		8.00		$	78,631		10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated		106,845		13.57			31,491		4.00			N/A		N/A
Colony Bank		103,062		13.11			31,452		4.00			47,179		6.00
Tier I Capital to Average Assets
Consolidated		106,845		8.59			49,748		4.00			N/A		N/A
Colony Bank		103,062		8.30			49,697		4.00			62,122		5.00
As of December 31, 2009
Total Capital to Risk-Weighted Assets
Consolidated		118,848		13.07			72,768		8.00			N/A		N/A
Colony Bank		117,756		12.97			72,622		8.00		$	90,777		10.00	%
Tier I Capital to Risk-Weighted Assets
Consolidated		107,231		11.79			36,384		4.00			N/A		N/A
Colony Bank		106,161		11.69			36,311		4.00			54,466		6.00
Tier I Capital to Average Assets
Consolidated		107,231		8.30			51,708		4.00			N/A		N/A
Colony Bank		106,161		8.22			51,641		4.00			64,551		5.00

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

The parent company’s balance sheets as of December 31, 2010 and 2009 and the related statements of income and comprehensive income and cash flows for each of the years in the three-year period then ended are as follows:

COLONY BANKCORP, INC. (PARENT ONLY)

BALANCE SHEETS

DECEMBER 31

ASSETS
	2010			2009
Cash	$	3,173,061		$	556,209
Premises and Equipment, Net		1,478,045			1,553,652
Investment in Subsidiary, at Equity		112,389,013			111,450,651
Other		484,008			257,252
Total Assets	$	117,524,127		$	113,817,764
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Dividends Payable	$	175,000		$	175,000
Other		161,544			139,140
		336,544			314,140
Subordinated Debt		24,229,000			24,229,000
Stockholders’ Equity
Preferred Stock, No Par Value; Authorized 10,000,000 Shares, Issued 28,000 Shares		27,505,910			27,356,964
Common Stock, Par Value $1; Authorized 20,000,000 Shares, Issued 8,442,958 and 7,229,163Shares as of December 31, 2010 and 2009, Respectively		8,442,958			7,229,163
Paid-In Capital		29,171,087			25,392,913
Retained Earnings		28,479,211			29,553,940
Restricted Stock - Unearned Compensation		(40,794	)		(158,547	)
Accumulated Other Comprehensive Income, Net of Tax		(599,789	)		(99,809	)
		92,958,583			89,274,624
Total Liabilities and Stockholders’ Equity	$	117,524,127		$	113,817,764

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

COLONY BANKCORP, INC. (PARENT ONLY)

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

	2010			2009			2008
Income
Dividends from Subsidiary	$	15,536		$	2,170,827		$	5,038,854
Management Fees		455,241			227,620			-
Other		119,776			100,157			92,111
		590,553			2,498,604			5,130,965
Expenses
Interest		516,170			659,456			1,270,942
Amortization		2,250			2,250			2,250
Salaries and Employee Benefits		761,873			848,076			876,166
Goodwill Impairment		-			172,029			-
Other		807,209			799,924			1,240,339
		2,087,502			2,481,735			3,389,697
Income (Loss) Before Taxes and Equity in Undistributed Earnings of Subsidiary		(1,496,949	)		16,869			1,741,268
Income Tax Benefits		532,823			608,062			979,911
Income (Loss) Before Equity in Undistributed Earnings of Subsidiary		(964,126	)		624,931			2,721,179
Equity in Undistributed Earnings (Losses) of Subsidiary		1,438,342			(19,808,805	)		(692,355	)
Net Income (Loss)		474,216			(19,183,874	)		2,028,824
Preferred Stock Dividends		1,400,000			1,365,000			-
Net Income (Loss) Available to Common Stockholders	$	(925,784	)	$	(20,548,874	)	$	2,028,824

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

COLONY BANKCORP, INC. (PARENT ONLY)

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31

	2010			2009			2008
Net Income (Loss)	$	474,216		$	(19,183,874	)	$	2,028,824
Other Comprehensive Income, Net of Tax
Gains on Securities Arising During the Year		1,227,281			1,257,136			893,158
Reclassification Adjustment		(1,727,261	)		(1,733,072	)		(788,907	)
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of     Reclassification Adjustment and Tax Effects		(499,980	)		(475,936	)		104,251
Comprehensive Income (Loss)	$	(25,764	)	$	(19,659,810	)	$	2,133,075

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

COLONY BANKCORP, INC. (PARENT ONLY)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

	2010			2009			2008
Cash Flows from Operating Activities
Net Income (Loss)	$	474,216		$	(19,183,874	)	$	2,028,824
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities
Depreciation and Amortization		194,918			295,209			275,299
Goodwill Impairment		-			172,029			-
Equity in Undistributed (Earnings) Losses of Subsidiary		(1,438,342	)		19,808,805			692,355
Other		(260,318	)		31,634			720,701
		(1,029,526	)		1,123,803			3,717,179
Cash Flows from Investing Activities
Capital Infusion in Subsidiary		-			(25,500,000	)		(1,500,000	)
Purchases of Premises and Equipment		(31,877	)		(119,156	)		(393,392	)
		(31,877	)		(25,619,156	)		(1,893,392	)
Cash Flows from Financing Activities
Dividends Paid on Preferred Stock		(1,400,000	)		(1,190,000	)		-
Dividends Paid on Common Stock		-			(1,760,665	)		(2,794,520	)
Principal Payments on Notes and Debentures		-			-			-
Proceeds from Issuance of Common Stock		5,078,225			-			-
Proceeds Allocated to Issuance of Preferred Stock		-			27,215,218			-
Proceeds Allocated to Warrants Issued		-			784,782			-
		3,678,255			25,049,335			(2,794,520	)
Increase (Decrease) in Cash		2,616,852			553,982			(970,733	)
Cash, Beginning		556,209			2,227			972,960
Cash, Ending	$	3,173,061		$	556,209		$	2,227

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(25) 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 and common stock warrants.  The following presents earnings per share for the years ended December 31, 2010, 2009 and 2008:

December 31, 2010	Income Numerator			Common Shares Denominator			EPS
Basic EPS
Income (Loss) Available to Common Stockholders	$	(925,784	)	$	8,149,217		$	(0.11	)
Dilutive Effect of Potential Common Stock
Restricted Stock					-
Stock Warrants					-
Diluted EPS
Income (Loss) Available to Common Stockholders After Assumed Conversions of Dilutive Securities	$	(925,784	)	$	8,149,217		$	(0.11	)
December 31, 2009
Basic EPS
Income (Loss) Available to Common Stockholders	$	(20,548,874	)		7,213,430		$	(2.85	)
Dilutive Effect of Potential Common Stock
Restricted Stock					-
Stock Warrants					-	��
Diluted EPS
Income (Loss) Available to Common Stockholders After Assumed Conversions of Dilutive Securities	$	(20,548,874	)		7,213,430		$	(2.85	)
December 31, 2008
Basic EPS
Income Available to Common Stockholders	$	2,028,824			7,199,121		$	0.28
Dilutive Effect of Potential Common Stock
Restricted Stock					-
Diluted EPS
Income Available to Common Stockholders After Assumed Conversions of Dilutive Securities	$	2,028,824			7,199,121		$	0.28

For the years ended December 31, 2010 and 2009, 505,283 and 504,774 shares of common stock equivalents, respectively, were excluded from the calculation of diluted earnings per share because they would have an anti-dilutive effect.

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