Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company

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

Application of Critical Accounting Policies and Accounting Estimates

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

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

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

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

Goodwill and Other Intangibles - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.

Overview

The following discussion and analysis presents the more significant factors affecting the Company's financial condition as of December 31, 2008 and 2007, and results of operations for each of the years in the three-year period ended December 31, 2008. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements, notes thereto and other financial information appearing elsewhere in this report.

Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 34 percent federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.

Dollar amounts in tables are stated in thousands, except for per share amounts.

Results of Operations

The Company's results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since market forces and economic conditions beyond the control of the Company determine interest rates, the ability to generate net interest income is dependent upon the Company's ability to obtain an adequate spread between the rate earned on earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets. Net income totaled $2.03 million, or $0.28 diluted per common share in 2008 compared to $8.55 million, or $1.19 diluted per common share in 2007 and $10.15 million, or $1.41 diluted per common share in 2006.

Part II (Continued)
Item 7 (Continued)

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

                                                  2008         2007         2006

       Taxable-Equivalent Net Interest Income   $ 37,740     $ 42,817     $ 42,158
       Taxable-Equivalent Adjustment                 365          359          270

       Net Interest Income                        37,375       42,458       41,888
       Provision for Possible Loan Losses         12,938        5,931        3,987
       Noninterest Income                          9,005        7,817        7,350
       Noninterest Expense                        30,856       31,579       29,882

       Income Before Income Taxes                  2,586       12,765       15,369
       Income Taxes                                  557        4,218        5,217

       Net Income                               $  2,029     $  8,547     $ 10,152

       Basic per Common Share
       Net Income                               $   0.28     $   1.19     $   1.41
       Diluted per Common Share
       Net Income                               $   0.28     $   1.19     $   1.41
       Return on Average Assets
       Net Income                                   0.17 %       0.71 %       0.87 %
       Return on Average Equity
       Net Income                                   2.40 %      10.60 %      14.10 %

Net income for 2008 decreased $6.52 million, or 76.26 percent, compared to 2007. The decrease was primarily the result of a $7.01 million increase in provision for loan losses and a decrease of $5.08 million in net interest income. The impact of these items was partly offset by a $1.19 million increase in noninterest income, a decrease of $0.72 million in noninterest expense and a decrease of $3.66 million in income tax expense. Net income for 2007 decreased $1.61 million, or 15.81 percent, compared to 2006. The decrease was primarily the result of a $1.95 million increase in provision for loan losses and an increase of $1.70 million in noninterest expense. The impact of these items was partly offset by a $0.57 million increase in net interest income, an increase of $0.47 million in noninterest income and a decrease of $1.00 million in income tax expense.

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

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company's largest source of revenue, representing 80.58 percent of total revenue during 2008 and 84.45 percent during 2007.

Net interest margin is the taxable-equivalent net interest income as a percentage of average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.

The Federal Reserve Board influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The Company's loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit has ranged from 3.25 percent to 8.25 percent during 2001 to 2008. At year end 2007, the prime rate was 7.25 percent and with the 400 basis point reduction during 2008 the prime rate ended the year at 3.25 percent. The federal funds rate moved similar to prime rate with interest rates ranging from 0.25 percent to 5.25 percent during 2001 to 2008. At year end 2007, the federal funds rate was 4.25 percent and with the 400 basis point reduction during 2008 the federal funds rate ended the year at 0.25 percent. We anticipate the Federal Reserve tightening interest rate policy toward the latter part of 2009, which should improve Colony's net interest margin.

The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each. The Company's consolidated average balance sheets along with an analysis of taxable-equivalent net interest earnings are presented in the Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Part II (Continued)
Item 7 (Continued)

Rate/Volume Analysis

The rate/volume analysis presented hereafter illustrates the change from year to
year for each component of the taxable equivalent net interest income separated
into the amount generated through volume changes and the amount generated by
changes in the yields/rates.

                                    Changes From                              Changes From
                                  2007 to 2008 (a)                          2006 to 2007 (a)
($ in thousands)         Volume         Rate          Total        Volume         Rate          Total

Interest Income
Loans, Net-Taxable      $     943     $ (15,143 )   $ (14,200 )   $   2,855     $   3,028     $   5,883

Investment Securities
Taxable                       645           132           777           704           627         1,331
Tax-Exempt                   (121 )          20          (101 )         278            (7 )         271
Total Investment
Securities                    524           152           676           982           620         1,602

Interest-Bearing
Deposits in
Other Banks                   (82 )         (34 )        (116 )           6             4            10
Federal Funds Sold           (940 )        (265 )      (1,205 )        (613 )          56          (557 )
Other
Interest-Earning
Assets                         45           (56 )         (11 )           6            24            30
Total Interest Income         490       (15,346 )     (14,856 )       3,236         3,732         6,968

Interest Expense
Interest-Bearing
Demand and
Savings Deposits              139        (1,509 )      (1,370 )          72           328           400
Time Deposits              (2,017 )      (6,542 )      (8,559 )       1,090         4,631         5,721
Total Interest
Expense on Deposits        (1,878 )      (8,051 )      (9,929 )       1,162         4,959         6,121

Other
Interest-Bearing
Liabilities
Federal Funds
Purchased and
Repurchase Agreements         891          (436 )         455            29             1            30
Subordinated
Debentures                   (137 )        (598 )        (735 )         272          (145 )         127
Other Debt                    865          (434 )         431            18            13            31

Total Interest
Expense                      (259 )      (9,519 )      (9,778 )       1,481         4,828         6,309
Net Interest Income
(Loss)                  $     749     $  (5,827 )   $  (5,078 )   $   1,755     $  (1,096 )   $     659

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

Our financial performance is impacted by, among other factors, interest rate risk and credit risk. We do not utilize derivatives to mitigate our credit risk, relying instead on an extensive loan review process and our allowance for loan losses.

Interest rate risk is the change in value due to changes in interest rates. The Company is exposed only to U.S. dollar interest-rate changes and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of its investment portfolio as held for trading. The Company does not engage in any hedging activity or utilize any derivatives. The Company has no exposure to foreign currency exchange rate risk, commodity price risk and other market risks. Interest rate risk is addressed by our Asset & Liability Management Committee (ALCO) which includes senior management representatives. The ALCO monitors interest rate risk by analyzing the potential impact to the net portfolio of equity value and net interest income from potential changes to interest rates and considers the impact of alternative strategies or changes in balance sheet structure.

Interest rates play a major part in the net interest income of financial institutions. The repricing of interest-earnings assets and interest-bearing liabilities can influence the changes in net interest income. The timing of repriced assets and liabilities is Gap management and our Company has established its policy to maintain a Gap ratio in the one-year time horizon of .80 to 1.20.

Our exposure to interest rate risk is reviewed at least quarterly by our Board of Directors and the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net portfolio value in the event of assumed changes in interest rates. In order to reduce the exposure to interest rate fluctuations, we have implemented strategies to more closely match our balance sheet composition. The Company has engaged FTN Financial to run a quarterly asset/liability model for interest rate risk analysis. We are generally focusing our investment activities on securities with terms or average lives in the 3-7 year range.

The Company maintains about 36.5 percent of its loan portfolio in adjustable rate loans that reprice with prime rate changes, while the bulk of its other loans mature within 3 years. The liabilities to fund assets are primarily in short-term certificates of deposit that mature within one year. This balance sheet composition has allowed the Company to be relatively constant with its net interest margin until 2008. During 2006 interest rates increased 100 basis points and during 2007 interest rates decreased 100 basis points. The 100 basis point decrease by the Federal Reserve in 2007 followed by 400 basis point decrease in 2008 resulted in significant pressure in net interest margins. Net interest margin decreased to 3.30 percent for 2008 compared to 3.75 percent for 2007 and 3.84 percent for 2006. Given the Federal Reserve's aggressive posture during 2008 that ended the year with a range of 0 - 0.25 percent federal funds target rate, we anticipate a slightly improved net interest margin in 2009.

Taxable-equivalent net interest income for 2008 decreased $5.08 million, or 11.86 percent, compared to 2007, while taxable-equivalent net interest income for 2007 increased by $0.66 million, or 1.56 percent, compared to 2006. The fluctuation between the comparable periods resulted from the slight positive impact of growth in the average volume of earning assets and a negative impact from the decreasing average interest rates. The average volume of earning assets during 2008 increased almost $3.28 million compared to 2007 while over the same period the net interest margin decreased to 3.30 percent from 3.75 percent. Similarly, the average volume of earning assets during 2007 increased $43.9 million compared to 2006 while over the same period the net interest margin decreased to 3.75 percent from 3.84 percent. Growth in average earning assets during 2008 and 2007 was primarily in loans. The reduction in the net interest margin in 2008 was primarily the result of the Federal Reserve reducing interest rates 400 basis points during 2008 along with sluggish loan growth in 2008.

The average volume of loans increased $11.0 million in 2008 compared to 2007 and increased $34.6 million in 2007 compared to 2006. The average yield on loans decreased 158 basis points in 2008 compared to 2007 and increased 32 basis points in 2007 compared to 2006. Funding for this growth was primarily provided by other borrowings in 2008 and by deposit growth in 2007. The average volume of other borrowings increased $35 million in 2008 compared to 2007 while average deposits decreased $35 million in 2008 compared to 2007. The average volume of deposits increased $30.6 million in 2007 compared to 2006. Interest-bearing deposits made up 91.6 percent of the decrease in average deposits in 2008 and 89.6 percent of the growth in average deposits in 2007. Accordingly, the ratio of average interest-bearing deposits to total average deposits was 92.5 percent in 2008, 92.5 percent in 2007 and 92.6 percent in 2006. This deposit mix, combined with a general decrease in interest rates, had the effect of (i) decreasing the average cost of total deposits by 85 basis points in 2008 compared to 2007 and increasing the average cost of total deposits by 49 basis points in 2007 compared to 2006, and (ii) mitigating a portion of the impact of decreasing yields on earning assets on the Company's net interest income.

The Company's net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 2.97 percent in 2008 compared to 3.34 percent in 2007 and 3.50 percent in 2006. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in Quantitative and Qualitative Disclosures About Interest Rate Sensitivity included elsewhere in this report.

Provision for Possible Loan Losses

The provision for possible loan losses is determined by management as the amount to be added to the allowance for possible loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for possible loan losses totaled $12.94 million in 2008 compared to $5.93 million in 2007 and $3.99 million in 2006. See the section captioned "Allowance for Possible Loan Losses" elsewhere in this discussion for further analysis of the provision for possible loan losses.

Part II (Continued)
Item 7 (Continued)

Noninterest Income

The components of noninterest income were as follows:

                                                 2008        2007        2006

          Service Charges on Deposit Accounts   $ 4,700     $ 4,771     $ 4,580
          Other Charges, Commissions and Fees       981         921         831
          Other                                   1,520         974       1,171
          Mortgage Fee Income                       609         967         768
          Securities Gains                        1,195         184           -

                                                $ 9,005     $ 7,817     $ 7,350

Total noninterest income for 2008 increased $1.19 million, or 15.20 percent, compared to 2007 while total noninterest income for 2007 increased $0.47 million, or 6.35 percent, compared to 2006. The increase in 2008 noninterest income compared to 2007 was primarily in securities gains and other income, while the increase in 2007 noninterest income compared to 2006 was primarily in mortgage fee income and service charges on deposit accounts. Changes in these items and the other components of noninterest income are discussed in more detail below.

Service Charges on Deposit Accounts. Service charges on deposit accounts for 2008 decreased $71 thousand, or 1.49 percent, compared to 2007. The decrease was primarily due to a decrease in volume of consumer and business account overdraft fees. Service charges on deposit accounts for 2007 increased $191 thousand, or 4.17 percent, compared to 2006. The increase was primarily due to an increase in overdraft fees, which were mostly related to consumer accounts.

Mortgage Fee Income. Mortgage fee income for 2008 decreased $358 thousand, or 37.02 percent, compared to 2007. The decrease was primarily due to decreased mortgage loan activity with the housing and real estate downturn. Mortgage fee income for 2007 increased $199 thousand, or 25.91 percent, compared to 2006 due to a company-wide focus on mortgage loans to be sold into the secondary market.

All Other Noninterest Income. The aggregate of all other noninterest income accounts increased $1,617 thousand, or 77.78 percent, compared to 2007. The increase was primarily due to gains realized from the sale of securities of $1,195 thousand for 2008 compared to $184 thousand for 2007, or an increase of $1,011 thousand. In addition other income increased to $1,520 thousand for 2008 compared to $974 thousand for 2007, or an increase of $546 thousand. The significant increase was gains realized of $670 thousand resulting from the company's unwinding of its position in $19 million FHLB advances during 2008. These increases were offset by a reduction in gains realized from the sale of SBA and FSA governmental loans as gains realized were $12 thousand for 2008 compared to a $150 thousand for 2007, or a reduction of $138 thousand.

The aggregate of all other noninterest income accounts increased $77 thousand, or 3.85 percent compared to 2006. The increase was primarily due to gains from the sale of securities of $184 thousand for 2007 compared to no security gains for 2006, or an increase of $184 thousand. In addition ATM fee income increased to $765 thousand for 2007 compared to $652 thousand for 2006, or an increase of $113 thousand and fee income on check orders increased to $147 thousand for 2007 compared to $78 thousand for 2006, or an increase of $69 thousand. These increases were offset by a reduction in gains realized from the sale of SBA and FSA governmental loans as gains realized were $150 thousand for 2007 compared to $512 thousand for 2006, or a reduction of $362 thousand.

Noninterest Expense

The components of noninterest expense were as follows:

                                              2008         2007         2006

           Salaries and Employee Benefits   $ 16,238     $ 17,866     $ 16,870
           Occupancy and Equipment             4,191        4,039        4,035
           Other                              10,427        9,674        8,977

                                            $ 30,856     $ 31,579     $ 29,882

Total noninterest expense for 2008 decreased $723 thousand, or 2.29 percent compared to 2007 while total noninterest expense for 2007 increased $1.70 million, or 5.68 percent, compared to 2006. Reduction in noninterest expense in 2008 was primarily in salaries and employee benefits while the Company had an increase in occupancy and equipment expense and other noninterest expense. Growth in noninterest expense in 2007 was primarily in salaries and employee benefits and other noninterest expense.

Salaries and Employee Benefits. Salaries and employee benefits expense for 2008 decreased $1,628 thousand, or 9.11 percent, compared to 2007. The slowing economy and lack of growth resulted in decreases in headcount as a result of normal attrition and restructuring due to consolidation efforts initiated in 2008. In addition bonuses and profit sharing payouts were down significantly based on Company performance being significantly below targeted goals. Bonus and . . .