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EX-11.1 - EXHIBIT 11.1 - COLONY BANKCORP INCex11.htm
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
 
 FOR QUARTER ENDED SEPTEMBER 30, 2010 COMMISSION FILE NUMBER 0-12436
                                                                                                           

COLONY BANKCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

115 SOUTH GRANT STREET, FITZGERALD, GEORGIA 31750
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES

229/426-6000
REGISTRANT’S TELEPHONE NUMBER INCLUDING AREA CODE


INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED REPORTS REQUIRED TO BE FILED BY SECTIONS 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES    x              NO o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED AND POSTED PURSUANT TO RULE 405 OF REGULATION S-T (§232.405 OF THIS CHAPTER) DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES).

YES    o              NO o

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

 
LARGE ACCELERATED FILER o
ACCELERATED FILER o
 
NON ACCELERATED FILER o
SMALLER REPORTING COMPANY  x
 
 (DO NOT CHECK IF A SMALLER REPORTING COMPANY)
 

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

YES    o              NO    x

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

CLASS
OUTSTANDING AT NOVEMBER 12, 2010
COMMON STOCK, $1 PAR VALUE
8,444,308
 


 
 

 
 
TABLE OF CONTENTS


     
Page
         
PART I – Financial Information
   
         
 
3
 
       
 
Item 1.
4
 
 
Item 2.
33  
 
Item 3.
58  
 
Item 4.
61
 
         
PART II – Other Information
   
         
 
Item 1.
62
 
 
Item 1A.
62
 
 
Item 2.
62
 
 
Item 3.
62
 
 
Item 4.
62
 
 
Item 5.
62
 
 
Item 6.
63
 
   
65
 

 
Forward Looking Statement Disclosure

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

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

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

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

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

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

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

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


PART 1.   FINANCIAL INFORMATION
ITEM 1

FINANCIAL STATEMENTS

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

 
A.
CONSOLIDATED BALANCE SHEETS – SEPTEMBER 30, 2010 AND DECEMBER 31, 2009.

 
B.
CONSOLIDATED STATEMENTS OF INCOME – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009.

 
C.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009.
 
 
D.
CONSOLIDATED STATEMENTS OF CASH FLOWS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009.

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

THE RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED FOR THE FULL YEAR.

 
Part I (Continued)
Item 1  (Continued)

COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
(DOLLARS IN THOUSANDS)

   
September 30, 2010
   
December 31, 2009
 
ASSETS
 
 (Unaudited)
   
(Audited)
 
             
Cash and Cash Equivalents
           
Cash and Due from Banks
  $ 21,243     $ 25,996  
Federal Funds Sold
    13,327       16,433  
      34,570       42,429  
Interest-Bearing Deposits
    21,285       6,479  
Investment Securities
               
Available for Sale, at Fair Value
    270,793       267,247  
Held to Maturity, at Cost (Fair Value of $52 and $57, as of September 30, 2010 and December 31, 2009, Respectively)
    50       54  
      270,843       267,301  
                 
Federal Home Loan Bank Stock, at Cost
    6,300       6,345  
Loans
    849,983       931,392  
Allowance for Loan Losses
    (27,754 )     (31,401 )
Unearned Interest and Fees
    (68 )     (140 )
      822,161       899,851  
Premises and Equipment
    27,578       28,826  
Other Real Estate
    20,738       19,705  
Other Intangible Assets
    304       331  
Other Assets
    27,710       35,822  
Total Assets
  $ 1,231,489     $ 1,307,089  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Noninterest-Bearing
  $ 76,149     $ 84,239  
Interest-Bearing
    929,083       973,348  
      1,005,232       1,057,587  
Borrowed Money
               
Securities Sold Under Agreements to Repurchase
    25,000       40,000  
Subordinated Debentures
    24,229       24,229  
Other Borrowed Money
    76,469       91,000  
      125,698       155,229  
                 
Other Liabilities
    4,600       4,999  
Commitments and Contingencies
               
Stockholders' Equity
               
Preferred Stock, No Par Value; Authorized 10,000,000 Shares, Issued 28,000 Shares
    27,468       27,357  
Common Stock, Par Value $1 a Share; Authorized 20,000,000 Shares, Issued 8,444,308 and 7,229,163 Shares as of September 30, 2010 and December 31, 2009, Respectively
    8,444       7,229  
Paid-In Capital
    29,186       25,393  
Retained Earnings
    28,564       29,554  
Restricted Stock - Unearned Compensation
    (70 )     (159 )
Accumulated Other Comprehensive Income (Loss), Net of Tax
    2,367       (100 )
      95,959       89,274  
Total Liabilities and Stockholders' Equity
  $ 1,231,489     $ 1,307,089  
 
The accompanying notes are an integral part of these statements.
 
 
Part I (Continued)
Item 1  (Continued)
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
(DOLLARS IN THOUSANDS)
 
   
Three Months Ended
   
Nine Months Ended
 
   
9/30/2010
   
9/30/2009
   
9/30/2010
   
9/30/2009
 
Interest Income
                       
Loans, Including Fees
  $ 12,899     $ 14,569     $ 39,370     $ 43,342  
Federal Funds Sold
    28       3       68       14  
Deposits with Other Banks
    10       --       27       --  
Investment Securities
                               
U.S. Government Agencies
    1,448       1,932       5,119       5,886  
State, County and Municipal
    26       59       74       207  
Corporate Obligations and Asset-Backed Securities
    23       74       113       287  
Dividends on Other Investments
    7       13       15       13  
      14,441       16,650       44,786       49,749  
Interest Expense
                               
Deposits
    4,309       5,202       13,179       16,928  
Federal Funds Purchased
    182       222       549       658  
Borrowed Money
    888       922       2,722       2,860  
      5,379       6,346       16,450       20,446  
                                 
Net Interest Income
    9,062       10,304       28,336       29,303  
Provision for Loan Losses
    4,200       4,000       10,850       21,580  
Net Interest Income After Provision for Loan Losses
    4,862       6,304       17,486       7,723  
                                 
Noninterest Income
                               
Service Charges on Deposits
    879       1,125       2,722       3,155  
Other Service Charges, Commissions and Fees
    291       259       849       747  
Mortgage Fee Income
    89       129       229       352  
Securities Gains
    922       609       1,800       3,147  
Other
    483       210       1,623       889  
      2,664       2,332       7,223       8,290  
Noninterest Expenses
                               
Salaries and Employee Benefits
    3,474       3,556       10,538       10,946  
Occupancy and Equipment
    1,149       1,132       3,355       3,182  
Other
    4,492       3,416       11,231       9,632  
      9,115       8,104       25,124       23,760  
                                 
Income (Loss) Before Income Taxes
    (1,589 )     532       (415 )     (7,747 )
Income Tax (Benefits) Expense
    (555 )     164       (586 )     (2,796 )
Net Income (Loss)
    (1,034 )     368       171       (4,951 )
Preferred Stock Dividends
    350       350       1,050       1,015  
Net Income (Loss) Available to Common Stockholders
  $ (1,384 )   $ 18     $ ( 879 )   $ (5,966 )
Net Income (Loss) Per Share of Common Stock
                               
Basic
  $ (0.16 )   $ 0.00     $ (0.11 )   $ (0.83 )
Diluted
  $ (0.16 )   $ 0.00     $ (0.11 )   $ (0.83 )
Cash Dividends Declared Per Share of Common Stock
  $ .00     $ 0.00     $ 0.00     $ 0.15  
Weighted Average Basic Shares Outstanding
    8,447,855       7,217,006       8,049,267       7,209,852  
Weighted Average Diluted Shares Outstanding
    8,447,855       7,217,006       8,049,267       7,209,852  
 
The accompanying notes are an integral part of these statements.
 
 
Part I (Continued)
Item 1 (Continued)
 
COLONY BANKCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
(DOLLARS IN THOUSANDS)
 
   
Three Months Ended
   
Nine Months Ended
 
   
09/30/10
   
09/30/09
   
09/30/10
   
09/30/09
 
                         
Net Income (Loss)
  $ (1,034 )   $ 368     $ 171     $ (4,951 )
                                 
Other Comprehensive Income (Loss), Net of Tax
                               
Gains (Losses) on Securities Arising During the Year
    (161 )     710       3,654       1,858  
Reclassification Adjustment
    ( 609 )     (402 )     (1,188 )      (2,077
                                 
Change in Net Unrealized Gains (Losses) on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effect
     (770 )      308        2,466        (219 )
                                 
Comprehensive Income (Loss)
  $ (1,804 )   $ 676     $ 2,637     $ (5,170 )

The accompanying notes are an integral part of these statements.

 
 Part I (Continued)
Item 1 (Continued)
 
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
(DOLLARS IN THOUSANDS)

 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income (Loss)
  $ 171     $ (4,951 )
Adjustments to Reconcile Net Income to Net Cash
               
Provided by Operating Activities:
               
Depreciation
    1,631       1,561  
Provision for Loan Losses
    10,850       21,580  
Securities Gains
    (1,800 )     (3,147 )
Amortization and Accretion
    2,982       2,743  
Loss on Sale of Other Real Estate and Repossessions
    1,691       104  
Unrealized Loss on Other Real Estate
    824       282  
Gain on Sale of Property/Equipment
    2       (79 )
(Increase) Decrease in Cash Surrender Value of Life Insurance
    1       (124 )
Other Prepaids, Deferrals and Accruals, Net
    6,255       (2,115 )
      22,607       15,854  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Federal Home Loan Bank Stock
    45       (73 )
Purchases of Investment Securities Available for Sale
    (250,973 )     (450,470 )
Proceeds from Maturities, Calls, and Paydowns of
               
Investment Securities:
               
Available for Sale
    38,636       42,945  
Held to Maturity
    8       5  
Proceeds from Sale of Investment Securities
               
Available for Sale
    211,597       368,576  
Increase in Interest-Bearing Deposits in Other Banks
    (14,806 )     (15 )
(Increase) Decrease in Net Loans to Customers
    54,488       (39,008 )
Purchase of Premises and Equipment
    (384 )     (953 )
Proceeds from Sale of Other Real Estate and Repossessions
    8,794       7,673  
Proceeds from Sale of Premises & Equipment
    --       122  
Other Additions and Adjustments
     --       (32 )
      47,405       (71,230 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Noninterest-Bearing Customer Deposits
    (8,103 )     (7,152 )
Interest-Bearing Customer Deposits
    (44,265 )     15,574  
Federal Funds Purchased
    --       3,423  
Securities Sold Under Agreements to Repurchase
    (15,000 )     5,232  
Dividends Paid On Common Stock
    --       (1,760 )
Dividends Paid On Preferred Stock
    (1,050 )     (840 )
Proceeds from Issuance of Common Stock
    5,078       --  
Proceeds from Other Borrowed Money
    19,000       19,000  
Principal Payments on Other Borrowed Money
    (39,000 )     (19,000 )
Proceeds from Secured Borrowings
    5,469       --  
Proceeds Allocated to Issuance of Preferred Stock
    --       27,215  
Proceeds Allocated to Warrants Issued
     --       785  
      (77,871 )     42,477  
                 
Net (Decrease) in Cash and Cash Equivalents
    (7,859 )     (12,899 )
Cash and Cash Equivalents at Beginning of Period
    42,429       29,458  
Cash and Cash Equivalents at End of Period
  $ 34,570     $ 16,559  
 
 
Part I (Continued)
Item 1  (Continued)
 
COLONY BANKCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Summary of Significant Accounting Policies

Presentation

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

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

In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations for the interim dates and interim periods are included herein.

Nature of Operations

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

Use of Estimates

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

Accounting Standards Codification

The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009.  At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature.  Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  All other accounting literature is considered nonauthoritative.  The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.  Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to statement presentations selected for 2010.   Such reclassifications had no effect on previously reported stockholders’ equity or net income.

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
 
 
Part I (Continued)
Item 1  (Continued)
 
(1)  Summary of Significant Accounting Policies (Continued)

Concentrations of Credit Risk (Continued)

September 30, 2010, approximately 84 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 Colony depend primarily on its net interest income. Accordingly, operations are subject to risks and uncertainties surrounding the exposure to changes in the interest rate environment.

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

Investment Securities

The Company classifies its investment securities as trading, available for sale or held to maturity. Securities that are held principally for resale in the near term are classified as trading. Trading securities are carried at fair value, with realized and unrealized gains and losses included in noninterest income. 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, a component of stockholders’ equity. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.  The amount of impairment related to other factors is recognized in other comprehensive income.  In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses from sales of securities available for sale are computed using the specific identification method. This caption includes securities, which may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital requirements, or unforeseen changes in market conditions.

Federal Home Loan Bank Stock

Investment in stock of a Federal Home Loan Bank (FHLB) 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.
 
 
Part I (Continued)
Item 1  (Continued)

(1)  Summary of Significant Accounting Policies (Continued)

Loans (Continued)

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.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful or 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 general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.  During the fourth quarter 2009, the Company changed its methodology regarding the look back period for charge-off experience from five years to one year.  With the significant net charge-offs during 2009, this change resulted in a significant increase in loan loss provisions.

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
 
Leasehold Improvements
 
5-20
 
Straight-Line
 
 
 
Part I (Continued)
Item 1  (Continued)
 
(1)  Summary of Significant Accounting Policies (Continued)

Premises and Equipment (Continued)

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

Goodwill and Intangible Assets

Goodwill represents the excess of the cost over the fair value of the net assets purchased in a business combination.  Impairment testing of goodwill is performed annually or more frequently if events or circumstances indicate possible impairment.  Testing performed during 2009 indicated total impairment of goodwill and, accordingly, $2,412,338 was expensed as an impairment during 2009.

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

Transfers of Financial Assets

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

Statement of Cash Flows

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

Securities Sold Under Repurchase Agreements

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

Advertising Costs

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

Income Taxes

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

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

 
Part I (Continued)
Item 1  (Continued)
 
(1)  Summary of Significant Accounting Policies (Continued)

Income Taxes (Continued)

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

Other Real Estate

Other real estate generally represents real estate acquired through foreclosure and is initially recorded at estimated fair value at the date of acquisition less costs to sell.  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.

Accounting Standards Updates

Accounting Standards Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets.”  ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets.  ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets.  ASU 2009-16 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period.  The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2009-17, “Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”  ASU 2009-17 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.  ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements.  As further discussed below, ASU No. 2010-10, “Consolidations (Topic 810),” deferred the effective date of ASU 2009-17 for a reporting entity’s interests in investment companies.  The provisions of ASU 2009-17 became effective on January 1, 2010 and did not have a significant impact on the Company’s financial statements.
 
 
Part I (Continued)
Item 1  (Continued)

(1)  Summary of Significant Accounting Policies (Continued)

Accounting Standards Updates (Continued)

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures About Fair Value Measurements.”  ASU 2010-06 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.  ASU 2010-06 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) companies 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 ASU 2010-06 became effective for the Company on January 1, 2010.

ASU No. 2010-20, “Receivables (Topic 830) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  ASU 2010-20 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, non-accrual and past due loans and credit quality indicators.  ASU 2010-20 will be effective for the Company’s 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 Company’s financial statements that include periods beginning on or after January 1, 2011.

(2)  Cash and Balances Due from Banks

Components of cash and balances due from banks are as follows as of September 30, 2010 and December 31, 2009:
 
   
September 30, 2010
   
December 31, 2009
 
Cash on Hand and Cash Items
  $ 9,128     $ 8,773  
Noninterest-Bearing Deposits with Other Banks
     12,115       17,223  
 
  $ 21,243     $ 25,996  
 
 
Part I (Continued)
Item 1  (Continued)
 
3)  Investment Securities

Investment securities as of September 30, 2010 are summarized as follows:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Securities Available for Sale:
                       
U.S. Government Agencies
                       
Mortgage-Backed
  $ 261,463     $ 3,899     $ (170 )   $ 265,192  
State, County & Municipal
    3,265       76       --       3,341  
Corporate Obligations
    2,000       147       (19 )     2,128  
Asset-Backed Securities
    479        --       (347 )     132  
    $ 267,207     $ 4,122     $ (536 )   $ 270,793  
                                 
Securities Held to Maturity:
                               
State, County and Municipal
  $ 50     $ 2     $ --     $ 52  

The amortized cost and fair value of investment securities as of September 30, 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
  $ 501     $ 527       --       --  
Due After Five Years Through Ten Years
    2,753       2,947     $ 50     $ 52  
Due After Ten Years
    2,490       2,127       --       --  
      5,744       5,601       50       52  
                                 
Mortgage-Backed Securities
    261,463       265,192       --       --  
    $ 267,207     $ 270,793     $ 50     $ 52  

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

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Securities Available for Sale:
                       
U.S. Government Agencies
                       
Mortgage-Backed
  $ 258,433     $ 1,536     $ (1,059 )   $ 258,910  
State, County & Municipal
    4,027       75       (35 )     4,067  
Corporate Obligations
    4,458       65       (385 )     4,138  
Asset-Backed Securities
    479        --       (347 )     132  
    $ 267,397     $ 1,676     $ (1,826 )   $ 267,247  
                                 
Securities Held to Maturity:
                               
State, County and Municipal
  $ 54     $ 3     $ --     $ 57  

 
Part I (Continued)
Item 1  (Continued)
 
3)  Investment Securities (Continued)

Proceeds from the sale of investments available for sale during first nine months of 2010 totaled $211,597 compared to $368,576 for the first nine months of 2009.  The sale of investments available for sale during 2010 resulted in gross realized gains of $1,800 and gross realized losses of $0 and the sale of investments available for sale during 2009 resulted in gross realized gain of $3,205 and losses of $58.

Investment securities having a carry value approximating $141,348 and $157,868 as of September 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits and for other purposes.

Information pertaining to securities with gross unrealized losses at September 30, 2010 and December 31, 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
 
                                     
         
Gross
         
Gross
         
Gross
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
                                     
September 30, 2010
                                   
U.S. Government Agencies
                                   
Mortgage-Backed
  $ 31,652     $ (170 )   $ --     $ --     $ 31,652     $ (170 )
State, County and Municipal
    --       --       --       --       --       --  
Corporate Obligations
    --       --       981       (19 )     981       (19 )
Asset-Backed Securities
    --       --       132       (347 )     132       (347 )
    $ 31,652     $ (170 )   $ 1,113     $ (366 )   $ 32,765     $ (536 )
                                                 
December 31, 2009
                                               
U.S. Government Agencies
                                               
Mortgage-Backed
  $ 114,223     $ (1,056 )   $ 419     $ (3 )   $ 114,642     $ (1,059 )
State, County and Municipal
    --       --       1,425       (35 )     1,425       (35 )
Corporate Obligations
    --       --       3,073       (385 )     3,073       (385 )
Asset-Backed Securities
    --       --       132       (347 )     132       (347 )
    $ 114,223     $ (1,056 )   $ 5,049     $ (770 )   $ 119,272     $ (1,826 )

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

At September 30, 2010, the debt securities with unrealized losses have depreciated 1.61 percent from the Company’s amortized cost basis.  These securities are guaranteed by either U.S. Government, other governments, or U.S. corporations.  These unrealized losses relate principally to current interest rates for similar types of securities.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.  As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.
 
 
Part I (Continued)
Item 1  (Continued)

(4) Loans

The composition of loans as of  September 30, 2010 and December 31, 2009 was as follows:

   
September 30, 2010
   
December 31, 2009
 
             
Commercial, Financial and Agricultural
  $ 79,585     $ 80,984  
Real Estate – Construction
    88,361       113,117  
Real Estate – Farmland
    51,958       54,965  
Real Estate – Other
    572,890       626,993  
Installment Loans to Individuals
    35,667       38,383  
All Other Loans
    21,522       16,950  
    $ 849,983     $ 931,392  

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 $26,628 and $33,535 as of September 30, 2010 and December 31, 2009, respectively and total recorded investment in loans past due 90 days or more and still accruing interest approximated $0 and $31, respectively.

 (5)  Allowance for Loan Losses

Transactions in the allowance for loan losses are summarized below for nine months ended September 30, 2010 and September 30, 2009 as follows:

   
September 30, 2010
   
September 30, 2009
 
             
Balance, Beginning
  $ 31,401     $ 17,016  
Provision Charged to Operating Expenses
    10,850       21,580  
Loans Charged Off
    (15,510 )     (17,549 )
Loan Recoveries
    1,013       312  
                 
Balance, Ending
  $ 27,754     $ 21,359  


(6)  Premises and Equipment

Premises and equipment are comprised of the following as of September 30, 2010 and December 31, 2009:

   
September 30, 2010
   
December 31, 2009
 
             
Land
  $ 7,813     $ 7,805  
Building
    23,768       23,642  
Furniture, Fixtures and Equipment
    14,604       14,365  
Leasehold Improvements
    993       993  
Construction in Progress
    6       7  
      47,184       46,812  
                 
Accumulated Depreciation
    (19,606 )     (17,986 )
    $ 27,578     $ 28,826  
 
Depreciation charged to operations totaled $1,631 and $1,561 for September 30, 2010 and September 30, 2009, respectively.

Certain Company facilities and equipment are leased under various operating leases.  Rental expense approximated $281 and $273 for nine months ended September 30, 2010 and September 30, 2009, respectively.
 
 
Part I (Continued)
Item 1  (Continued)

(7)  Goodwill and Intangible Assets

The following is an analysis of the goodwill and core deposit intangible asset activity for the nine months ended September 30, 2010 and September 30, 2009:

 
Nine Months Ended
September 30, 2010
 
Nine Months Ended
September 30, 2009
 
               
Goodwill
               
Balance, Beginning
   
--
    $
2,412
 
Goodwill Acquired
   
--
     
--
 
Balance, Ending
   
--
    $
2,412
 
                 
Net Core Deposit, Intangible
               
Balance, Beginning
  $
331
    $
367
 
Amortization Expense
   
(27)
     
(27)
 
Balance, Ending
  $
304
    $
340
 
 
The following table reflects the expected amortization for the core deposit intangible at September 30, 2010:

2010
  $ 9  
2011
    36  
2012
    36  
2013
    36  
2014 and thereafter
    187  
    $ 304  

(8)  Income Taxes

The Company records income taxes under accounting standards requiring an asset and liability approach to financial accounting and reporting for income taxes.  Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.  Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

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.  Once the statute of limitations has passed, the Company reverses income tax expenses recorded.  For the nine month period ended September 30, 2010, the expected Federal Income tax benefit approximating $131,000 was increased by actual permanent differences of $138,000, reversals of prior year over accruals of $159,000 and reversals of Fin 48 income taxes of $158,000.

 (9) Fair Value Measurements

Generally accepted accounting principles related to Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:
 
 
Part I (Continued)
Item 1  (Continued)

(9) Fair Value Measurements (Continued)

 
·
Level 1
inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
 
·
Level 2
inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
 
·
Level 3
inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

Assets

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

Impaired loans – Fair value accounting principles also apply to loans measured for impairment, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent).  Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals for 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.

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 basis as of September 30, 2010 aggregated by the level in the fair value hierarchy within which those measurements fall.
 
 
Part I (Continued)
Item 1  (Continued)

(9) Fair Value Measurements (Continued)
 
         
Fair Value Measurements at Reporting Date Using
 
         
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
   
September 30, 2010
 
Recurring
                       
Securities Available for Sale
                       
Mortgage-backed
  $ 265,192     $ ---     $ 265,192     $ ---  
State,County & Municipal
    3,341       ---       3,341       ---  
Corporate Obligations
    2,128       ---       1,147       981  
Asset-Backed Securities
     132        ---        ---        132  
    $ 270,793     $ ---     $ 269,680     $ 1,113  
                                 
Nonrecurring
                               
Impaired Loans
  $ 26,477     $ ---     $ ---     $ 26,477  
                                 
Other Real Estate
  $ 20,738     $ ---     $ ---     $ 20,738  
 
Liabilities

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

The table below presents a reconciliation and statement of income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2010.

Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
Available for
   
Sale Securities
   
(In Thousands)
         
Balance, Beginning
  $
982
 
Total Unrealized Gains (Losses) Included In
       
Net Income
   
---
 
Other Comprehensive Income
   
131
 
Purchases, Sales, Issuances and Settlements, Net
   
---
 
Transfers In and (Out) of Level 3
   
---
 
         
Balance, Ending
  $
1,113
 
 
(10) Deposits

The aggregate amount of overdrawn deposit accounts reclassified as loan balances totaled $244 and $232 as of September 30, 2010 and December 31, 2009.

Components of interest-bearing deposits as of September 30, 2010 and December 31, 2009 are as follows:

   
September 30, 2010
   
December 31, 2009
 
                 
Interest-Bearing Demand
  $ 204,059     $ 220,168  
Savings
    36,352       34,851  
Time, $100,000 and Over
    294,016       364,064  
Other Time
    394,656       354,265  
    $ 929,083     $ 973,348  

 
Part I (Continued)
Item 1  (Continued)
 
(10) Deposits (Continued)

At September 30, 2010 and December 31, 2009, the Company had brokered deposits of $37,650 and $136,453 respectively.  Of the $37,650 brokered deposits at September 30, 2010, $32,450 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 at September 30, 2010.  The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000 was approximately $213,462 and $316,896 as of  September 30, 2010 and December 31, 2009, respectively.

As of  September 30, 2010 and December 31, 2009,  the scheduled maturities of certificates of deposits are as follows:
 
 
Maturity
 
September 30, 2010
   
December 31, 2009
 
One Year and Under
  $ 484,147     $ 620,165  
One to Three Years
    193,670       94,055  
Three Years and Over
     10,855        4,109  
    $ 688,672     $ 718,329  
 
(11) Securities Sold Under Repurchase Agreements

The Company has securities sold under repurchase agreements in the amount of $25,000 at September 30, 2010.  Barclay’s Master Repurchase Agreement originated on June 26, 2008 with the initial draw of $20,000 on June 30, 2008.  The Repurchase Agreement matures on June 30, 2011 and had a one-time call option on December 30, 2009.  Interest payments are due quarterly at a fixed rate of 3.34 percent.  The Repurchase Agreement is secured by U.S. Government mortgage-backed securities.

South Street Securities Master Repurchase Agreement originated on October 27, 2008 with the initial draw of $20,000 on October 31, 2008 and the current draw of $5,000 on September 30, 2010.  The Repurchase Agreement is overnight borrowing at a floating interest rate.  Interest payments are due monthly, and at September 30, 2010, the floating interest rate was 1.05 percent.  The Repurchase Agreement is secured by U.S. Government mortgage-backed securities.

(12) Other Borrowed Money

Other borrowed money at September 30, 2010 and December 31, 2009 is summarized as follows:
 
   
September 30, 2010
   
December 31, 2009
 
 Secured Borrowings 
 
$
5,469
   
$
--
 
 Federal Home Loan Bank Advances  
   
 71,000
     
 91,000
 
   
$
76,469
   
$
91,000
 
 
Advances from the Federal Home Loan Bank (FHLB) have maturities ranging from 2012 to 2019 and interest rates ranging from 3.17 percent to 4.75 percent.  Under the Blanket Agreement for Advances and Security Agreement with the FHLB, residential first mortgage loans and cash balances held by the FHLB are pledged as collateral for the FHLB advances outstanding.  At September 30, 2010, the Company had available line of credit commitments totaling $187,400, of which $116,340 was available.

Secured Borrowings represent the transfer of the guaranteed portion of SBA loans at a premium in which the Company is obligated by the SBA to refund the premium to the “purchaser” if the loan is repaid within 90 days of the transfer.  Under Current Accounting Standards, this premium refund obligation is a form of recourse, which means that the transferred guaranteed portion of the loan does not meet the definition of a “participating interest” for the 90-day period that the premium refund obligation exists.  As a result, the transfer must be accounted for as a secured borrowing during this period.
 
 
Part I (Continued)
Item 1  (Continued)
 
(12) Other Borrowed Money (Continued)

The aggregate stated maturities of  other borrowed money at September 30, 2010 are as follows:
 
       
Year
 
Amount
 
2010
  $ 5,469  
2011
    --  
2012
    41,000  
2013 and Thereafter
    30,000  
    $ 76,469  

The Company also has available federal funds lines of credit with various financial institutions totaling $47,000, of which $0 was outstanding at September 30, 2010.

(13) Preferred Stock and Warrants

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 thousand 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.

(14) Subordinated Debentures (Trust Preferred Securities)

During the second quarter of 2004, the Company formed a third subsidiary whose sole purpose was to issue $4,500 in Trust Preferred Securities through a pool sponsored by FTN Financial Capital Markets.  The Trust Preferred Securities have a maturity of 30 years and are redeemable after five years with certain exceptions.  At September 30, 2010, the floating rate securities had a 2.97 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 2.68 percent.

During the second quarter of 2006, the Company formed a fourth subsidiary whose sole purpose was to issue $5,000 in Trust Preferred Securities through a pool sponsored by SunTrust Capital Markets.  The Trust Preferred Securities have a maturity of 30 years and are redeemable after five years with certain exceptions.  At September 30, 2010 the floating-rate securities had a 1.79 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 1.50 percent.

During the first quarter of 2007, the Company formed a fifth subsidiary whose sole purpose was to issue $9,000 in Trust Preferred Securities through a pool sponsored by Trapeza Capital Management, LLC.  The Trust Preferred Securities have a maturity of 30 years and are redeemable after five years with certain exceptions.  At September 30, 2010, the floating-rate securities had a 1.94 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 1.65 percent.  Proceeds from this issuance were used to payoff the trust preferred securities with the first subsidiary formed in March 2002 as the Company exercised its option to call.
 
 
Part I (Continued)
Item 1  (Continued)
 
(14) Subordinated Debentures (Trust Preferred Securities) (Continued)

During the third quarter of 2007, the company formed a sixth subsidiary whose sole purpose was to issue $5,000 in Trust Preferred Securities through a pool sponsored by Trapeza Capital Management, LLC.  The Trust Preferred Securities have a maturity of 30 years and are redeemable after five years with certain exceptions.  At September 30, 2010, the floating-rate securities had a 1.88 percent interest rate, which will reset quarterly at the three-month LIBOR rate plus 1.40 percent.  Proceeds from this issuance were used to payoff the trust preferred securities with the second subsidiary formed in December 2002 as the Company exercised its option to call.

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

(15)  Restricted Stock – Unearned Compensation

In 1999, the board of directors of Colony Bankcorp, Inc. adopted a restricted stock grant plan which awards certain executive officers common shares of the Company.  The maximum number of shares (split-adjusted) which may be subject to restricted stock awards was 64,701.  To date, 77,052 split-adjusted shares have been issued under this plan and since the plan’s inception, 12,351 shares have been forfeited; thus, there are not any shares available for restricted stock awards at September 30, 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 restricted stock grant plan which awards certain executive officers common shares of the Company.  The maximum number of shares which may be subject to restricted stock awards (split-adjusted) is 143,500.  To date, 53,256 shares have been issued under this plan and since the plan’s inception 12,748 shares have been forfeited, thus remaining shares which may be subject to restricted stock awards are 102,992 at September 30, 2010.  During 2010, there has not been any shares of restricted stock issued and 1,400 shares have been forfeited.  The shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity.  The cost of these shares is being amortized against earnings using the straight-line method over three years (the restriction period).

(16) Profit Sharing Plan

The Company has a profit sharing plan that covers substantially all employees who meet certain age and service requirements.  It is the Company’s policy to make contributions to the plan as approved annually by the board of directors.  The provision for the nine  months ended September 30, 2010 was $0 compared to $(19) for the nine months ended September 30, 2009.  The total provision for contributions to the plan was $0 for 2010, $(19) for 2009, and $206 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 September 30, 2010 and December 31, 2009 the following financial instruments were outstanding whose contract amounts represent credit risk:

   
Contract Amount
 
   
September 30, 2010
   
December 31, 2009
 
             
Loan Commitments
  $ 37,464     $ 56,100  
Standby Letters of Credit
    1,492       1,475  

 
Part I (Continued)
Item 1  (Continued)
 
(17) Commitments and Contingencies (Continued)

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.

At September 30, 2010, a standby letter of credit in the amount of $60 was issued by Federal Home Loan Bank of Atlanta on behalf of Colony Bank.

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

(18) Deferred Compensation Plan

Two of the Bank branches have deferred compensation plans covering directors choosing to participate through individual deferred compensation contracts.  In accordance with terms of the contracts, the Banks are committed to pay the directors deferred compensation over a specified number of years, beginning at age 65.  In the event of a director’s death before age 65, payments are made to the director’s named beneficiary over a specified number of years, beginning on the first day of the month following the death of the director.

Liabilities accrued under the plans totaled $1,249 and $1,299 as of September 30, 2010 and December 31, 2009, respectively.  Benefit payments under the contracts were $163 and $155 for the nine month period ended September 30, 2010 and September 30, 2009, respectively.   Provisions charged to operations totaled $114 and $89 for the nine month period ended September 30, 2010 and September 30, 2009, respectively.

Fee income recognized with deferred compensation plans totaled $126 and $124 for nine month period ended September 30, 2010 and September 30, 2009, respectively.

(19) Fair Value of Financial Instruments

Generally accepted accounting standards in the U.S. require disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value.  The assumptions used in the estimation of the fair value of Colony Bankcorp, Inc. and Subsidiary’s financial instruments are detailed hereafter.  Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques.  The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Cash and Short-Term Investments – For cash, due from banks, bank-owned deposits and federal funds sold, the carrying amount is a reasonable estimate of fair value.

Investment Securities – Fair values for investment securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments.

Federal Home Loan Bank Stock – The fair value of Federal Home Loan Bank stock approximates carrying value.
 
 
Part I (Continued)
Item 1  (Continued)
(19) 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.

Disclosures of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis, are required in the financial statements.

The carrying amount and estimated fair values of the Company’s financial instruments as of September 30, 2010 and December 31, 2009 are as follows:
 
   
September 30, 2010
   
December 31, 2009
 
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
 
    (in thousands)  
                         
Assets
                       
Cash and Short-Term Investments
  $ 55,855     $ 55,855     $ 48,908     $ 48,908  
Investment Securities Available for Sale
    270,793       270,793       267,247       267,247  
Investment Securities Held to Maturity
    50       52       54       57  
Federal Home Loan Bank Stock
    6,300       6,300       6,345       6,345  
Loans, Net
    822,161       827,013       899,851       908,638  
                                 
Liabilities
                               
Deposits
    1,005,232       1,009,662       1,057,586       1,059,037  
Subordinated Debentures
    24,229       24,229       24,229       24,229  
Securities Sold Under Agreements to Repurchase
    25,000       25,457       40,000       40,671  
Other Borrowed Money
    76,469       81,284       91,000       91,703  
                                 
                                 
 
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.
 
 
Part I (Continued)
Item 1  (Continued)
 
(19) Fair Value of Financial Instruments (Continued)

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.

(20) 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, in the third quarter of 2009, the Company suspended the payment of dividends to common shareholders.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets.  The amounts and ratios as defined in regulations are presented hereafter.  Management believes, as of September 30, 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 following table summarizes regulatory capital information as of September 30, 2010 and December 31, 2009 on a consolidated basis and for each significant 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 September 30, 2010
                                   
Total Capital
                                   
to Risk-Weighted Assets
                                   
Consolidated
  $ 118,566       14.69 %   $ 64,580       8.00 %  
NA
   
NA
 
Colony Bank
    114,077       14.15       64,502       8.00     $ 80,628       10.00 %
                                                 
Tier 1 Capital
                                               
to Risk-Weighted Assets
                                               
Consolidated
    108,258       13.41       32,290       4.00    
NA
   
NA
 
Colony Bank
    103,781       12.87       32,251       4.00       48,377       6.00  
                                                 
Tier 1 Capital
                                               
to Average Assets
                                               
Consolidated
    108,258       8.74       49,562       4.00    
NA
   
NA
 
Colony Bank
    103,781       8.39       49,501       4.00       61,876       5.00  

 
Part I (Continued)
Item 1  (Continued)

20) Regulatory Capital Matters (Continued)
 
   
Actual
   
For Capital
 Adequacy Purposes
   
To Be Well Capitalized 
Under Prompt Corrective 
Action Provisions
 
 
                                     
                                     
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
As of December 31, 2009
                                   
Total Capital
                                   
to Risk-Weighted Assets