SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2008 [ ] Transition report under Section 13 or 15(d) of the Exchange Act. For the transition period from __________ to __________ Commission file number 1-12053 SOUTHWEST GEORGIA FINANCIAL CORPORATION (Exact Name Of Small Business Issuer as specified in its Charter) Georgia 58-1392259 (State Or Other Jurisdiction Of (I.R.S. Employer Incorporation Or Organization) Identification No.) 201 FIRST STREET, S.E., MOULTRIE, GEORGIA 31768 Address Of Principal Executive Offices (229) 985-1120 Registrant's Telephone Number, Including Area Code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer [ ] Non-accelerated filer [ ] Accelerated filer [ ] Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding At April 21, 2008 Common Stock, $1 Par Value 2,547,837 SOUTHWEST GEORGIA FINANCIAL CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2008 TABLE OF CONTENTS PAGE # PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following financial statements are provided for Southwest Georgia Financial Corporation as required by this Item 1. a. Consolidated balance sheets - March 31, 2008 (unaudited) and December 31, 2007 (audited). 2 b. Consolidated statements of income (unaudited) - for the three months ended March 31, 2008 and 2007 3 c. Consolidated statements of comprehensive income (unaudited) - for the three months ended March 31, 2008 and 2007 4 d. Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2008 and 2007 5 e. Notes to Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21 ITEM 4(T). CONTROLS AND PROCEDURES 22 PART II - OTHER INFORMATION ITEM 6. EXHIBITS 23 SIGNATURE 24 -1- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET March 31, 2008 and December 31, 2007 (Unaudited) (Audited) March 31, December 31, 2008 2007 ASSETS Cash and due from banks $ 9,085,102 $ 8,736,079 Interest-bearing deposits in other banks 36,325,225 9,997,889 Federal funds sold 7,185,000 0 Cash and cash equivalents 52,595,327 18,733,968 Investment securities available for sale, at fair value 79,366,826 31,188,277 Investment securities held to maturity (fair value approximates $18,483,569 and $88,124,110) 18,229,949 88,226,049 Federal Home Loan Bank stock, at cost 1,843,300 1,652,800 Total investment securities 99,440,075 121,067,126 Loans 125,197,837 119,044,022 Less: Unearned income ( 34,288) ( 35,847) Allowance for loan losses ( 2,402,309) ( 2,399,115) Loans, net 122,761,240 116,609,060 Premises and equipment, net 6,184,270 6,290,658 Foreclosed assets, net 0 90,000 Intangible assets 1,211,881 1,283,096 Other assets 7,033,991 7,579,289 Total assets $ 289,226,784 $ 271,653,197 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: NOW accounts $ 28,552,762 $ 23,085,509 Money Market 41,238,285 42,031,450 Savings 22,154,601 20,560,963 Certificates of deposit $100,000 and over 32,175,655 29,588,737 Other time accounts 66,783,363 66,152,788 Total interest-bearing deposits 190,904,666 181,419,447 Noninterest-bearing deposits 38,483,287 35,373,243 Total deposits 229,387,953 216,792,690 Short-term borrowed funds 20,114,286 10,114,286 Long-term debt 10,000,000 15,000,000 Other liabilities 2,794,613 3,228,229 Total liabilities 262,296,852 245,135,205 Stockholders' equity: Common stock - $1 par value, 5,000,000 shares authorized, 4,293,835 shares issued 4,293,835 4,293,835 Capital surplus 31,701,533 31,701,533 Retained earnings 17,421,304 17,038,881 Accumulated other comprehensive income ( 372,945) ( 466,235) Treasury stock, at cost 1,745,998 shares for 2008 and 1,744,198 shares for 2007 ( 26,113,795) ( 26,050,022) Total stockholders' equity 26,929,932 26,517,992 Total liabilities and stockholders'equity $ 289,226,784 $ 271,653,197 -2- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME For The Three Months Ended March 31, (Unaudited) (Unaudited) 2008 2007 Interest income: Interest and fees on loans $ 2,421,553 $ 2,525,629 Interest on taxable securities available for sale 442,104 191,656 Interest on taxable securities held to maturity 467,082 982,500 Interest on tax exempt securities available for sale 234,882 158,827 Interest on tax exempt securities held to maturity 50,709 50,718 Dividends 28,229 30,465 Interest on federal funds sold 79,816 427 Interest on deposits in other banks 195,288 52,806 Total interest income 3,919,663 3,993,028 Interest expense: Interest on deposits 1,295,630 1,377,959 Interest on federal funds purchased 0 6,989 Interest on other short-term borrowings 194,080 128,625 Interest on long-term debt 111,073 173,592 Total interest expense 1,600,783 1,687,165 Net interest income 2,318,880 2,305,863 Provision for loan losses 0 0 Net interest income after provision for loan losses 2,318,880 2,305,863 Noninterest income: Service charges on deposit accounts 397,644 416,569 Income from trust services 69,340 71,631 Income from retail brokerage services 92,570 90,928 Income from insurance services 357,061 373,362 Income from mortgage banking services 685,315 1,263,942 Net gain(loss) on disposition of assets 12,500 9,497 Other income 96,995 90,337 Total noninterest income 1,711,425 2,316,266 Noninterest expense: Salaries and employee benefits 1,780,461 1,979,203 Occupancy expense 207,073 206,436 Equipment expense 164,462 156,681 Data processing expense 161,528 166,697 Amortization of intangible assets 71,215 121,379 Other operating expenses 671,911 569,170 Total noninterest expenses 3,056,650 3,199,566 Income before income taxes 973,655 1,422,563 Provision for income taxes 234,535 410,855 Net income $ 739,120 $ 1,011,708 Earnings per share of common stock: Net income, basic $ 0.29 $ 0.39 Net income, diluted $ 0.29 $ 0.39 Dividends declared $ 0.14 $ 0.14 Weighted average shares outstanding 2,548,196 2,615,077 Diluted average shares outstanding 2,556,093 2,626,008 -3- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For The Three Months Ended March 31, (Unaudited) (Unaudited) 2008 2007 Net income 739,120 1,011,708 Other comprehensive income, net of tax: Unrealized gain(loss) on securities available for sale, net of tax expense (benefit) $48,058 and $4,619 for the quarter 93,291 8,966 Total comprehensive income 832,411 1,020,674 -4- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For The Three Months Ended March 31, (Unaudited) (Unaudited) 2008 2007 Cash flows from operating activities: Net income $ 739,120 $ 1,011,708 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 180,228 182,198 Net amortization and (accretion) of investment securities ( 16,052) ( 2,967) Amortization of intangibles 71,215 121,379 Net loss(gain) on sale and disposal of assets ( 12,500) ( 9,497) Funds held related to mortgage banking activities ( 374,918) ( 247,074) Change in: Other assets 497,239 104,990 Other liabilities ( 58,153) ( 145,478) Net cash provided by operating activities 1,026,179 1,015,259 Cash flows from investing activities: Proceeds from calls and maturities of securities held to maturity 72,000,000 4,027,963 Proceeds from calls, paydowns and maturities of securities AFS 9,586,687 1,083,900 Purchase of securities available for sale (59,802,235) ( 219,800) Net change in loans ( 6,152,180) ( 5,540,447) Purchase of premises and equipment ( 73,840) ( 115,302) Proceeds from sales of other assets 102,500 22,500 Net cash provided(used) for investing activities 15,660,932 ( 741,186) Cash flows from financing activities: Net change in deposits 12,595,263 9,474,611 Payment of short-term debt and short-term portion of long-term debt ( 5,000,000) 0 Proceeds from issuance of short-term debt 10,000,000 0 Proceeds from issuance of long-term debt 0 5,000,000 Cash dividends paid ( 357,243) ( 363,656) Payment for common stock ( 63,773) ( 822,704) Net cash provided(used) for financing activities 17,174,247 13,288,251 Increase(decrease) in cash and cash equivalents 33,861,358 13,562,324 Cash and cash equivalents - beginning of period 18,733,968 12,384,777 Cash and cash equivalents - end of period $ 52,595,326 $ 25,947,101 NONCASH ITEMS: Increase in foreclosed properties and decrease in loans $ 0 $ 72,325 Unrealized gain(loss) on securities available for sale $ 141,349 $ 13,585 -5- SOUTHWEST GEORGIA FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS _________ Basis of Presentation Southwest Georgia Financial Corporation (the "Corporation"), a bank-holding company organized under the laws of Georgia, provides deposit, lending, and other financial services to businesses and individuals primarily in the Southwest region of Georgia. The Corporation and its subsidiaries are subject to regulation by certain federal and state agencies. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and changes in financial position in conformity with generally accepted accounting principles. The interim financial statements furnished reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The interim consolidated financial statements should be read in conjunction with the Corporation's 2007 Annual Report on Form 10K. NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Southwest Georgia Financial Corporation and Subsidiaries (the "Corporation") conform to generally accepted accounting principles and to general practices within the banking industry. The following is a description of the more significant of those policies. Principles of Consolidation The consolidated financial statements include the accounts of Southwest Georgia Financial Corporation and its wholly-owned direct and indirect Subsidiaries, Southwest Georgia Bank (the "Bank") and Empire Financial Services, Inc. ("Empire"). All significant intercompany accounts and transactions have been eliminated in the consolidation. Nature of Operations The Corporation offers comprehensive financial services to consumer, business, and governmental customers through its banking offices in southwest Georgia. Its primary deposit products are savings and certificates of deposit, and its primary lending products are consumer and commercial mortgage loans. The Corporation provides, in addition to conventional banking services, investment planning and management, trust management, mortgage banking, and commercial and individual insurance products. Insurance products and advice are provided by the Bank's Southwest Georgia Insurance Services Division. Mortgage banking for primarily commercial properties is provided by Empire, a mortgage banking services subsidiary. -6- Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with these evaluations, management obtains independent appraisals for significant properties. A substantial portion of the Corporation's loans are secured by real estate located primarily in Georgia. Accordingly, the ultimate collection of these loans is susceptible to changes in the real estate market conditions of this market area. Cash and Cash Equivalents and Statement of Cash Flows For purposes of reporting cash flows, the Corporation considers cash and cash equivalents to include all cash on hand, deposit amounts due from banks, interest-bearing deposits in other banks, and federal funds sold. The Corporation maintains its cash balances in several financial institutions. Accounts at the financial institutions are secured by the Federal Deposit Insurance Corporation up to $100,000. Uninsured deposits aggregate to $1,962,521.74 at March 31, 2008. Investment Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value with unrealized gains and losses reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation 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 on the sale of securities are recorded on the trade date and are determined using the specific identification method. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation has been calculated primarily using the straight- line method for buildings and building improvements over the assets estimated useful lives. Equipment and furniture are depreciated using the modified -7- accelerated recovery system method over the assets estimated useful lives for financial reporting and income tax purposes for assets purchased on or before December 31, 2003. For assets acquired since 2003, the Corporation used the straight-line method of depreciation. The following estimated useful lives are used for financial statement purposes: Land improvements 5 - 31 years Building and improvements 10 - 40 years Machinery and equipment 5 - 10 years Computer equipment 3 - 5 years Office furniture and fixtures 5 - 10 years All of the Corporation's leases are operating leases and are not capitalized as assets for financial reporting purposes. Maintenance and repairs are charged to expense and betterments are capitalized. Long-lived assets are evaluated regularly for other-than-temporary impairment. If circumstances suggest that their value may be impaired and the write-down would be material, an assessment of recoverability is performed prior to any write-down of the asset. Impairment on intangibles is evaluated at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount should be assessed. Impairment, if any, is recognized through a valuation allowance with a corresponding charge recorded in the income statement. Loans and Allowances for Loan Losses Loans are stated at principal amounts outstanding less unearned income and the allowance for loan losses. Interest income is credited to income based on the principal amount outstanding at the respective rate of interest except for interest on certain installment loans made on a discount basis which is recognized in a manner that results in a level-yield on the principal outstanding. Accrual of interest income is discontinued on loans when, in the opinion of management, collection of such interest income becomes doubtful. Accrual of interest on such loans is resumed when, in management's judgment, the collection of interest and principal becomes probable. Fees on loans and costs incurred in origination of most loans are recognized at the time the loan is placed on the books. Because loan fees are not significant, the results on operations are not materially different from the results which would be obtained by accounting for loan fees and costs as amortized over the term of the loan as an adjustment of the yield. A loan is considered impaired when, based on current information and events, it is probable that the Corporation 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 -8- 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 for commercial and construction loans 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. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collection of the principal is unlikely. The allowance is an amount which management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on evaluation of the collectibility of loans and prior loss experience. This evaluation takes into consideration such factors as changes in the nature and volume of the loan portfolios, current economic conditions that may affect the borrowers' ability to pay, overall portfolio quality, and review of specific problem loans. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based upon changes in economic conditions. Also, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. Foreclosed Assets Properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Credit Related Financial Instruments In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. Retirement Plans The Corporation and its subsidiaries have retirement plans covering substantially all employees. The Corporation makes annual contributions to the plans in amounts not exceeding the regulatory requirements. -9- Income Taxes The Corporation and the Bank file a consolidated income tax return. The Bank's subsidiary provides for income taxes based on its contribution to income taxes (benefits) of the consolidated group. Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reportable amounts in the financial statements that will result in taxable or deductible amounts in future years. Recognition of deferred tax assets is based on management's belief that it is more likely than not that the tax benefit associated with certain temporary differences and tax credits will be realized. Recent Accounting Pronouncements In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159 (The Fair Value Option for Financial Assets and Financial Liabilities). The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The effective date for entities that elect to apply its provisions is as of the beginning of an entity's first fiscal year that begins after November 15, 2007. The effect of applying the provisions of this statement should the Corporation elect to apply its provisions have not been determined. On December 31, 2006, the Corporation adopted Statement of Financial Accounting Standards No. 158, Employer's Accounting for Deferred Benefit Pension and Other Postretirement Plans. The adoption date requirement for this standard was for fiscal year ending after December 15, 2006. This standard requires an employer to recognize in its statement of financial position an asset for a pension retirement plan's overfunded status or a liability for an underfunded status. The Corporation's funded status of pension retirement plan is the difference between the fair value of the plan assets and the projected benefit obligation on December 31, 2006. In September 2006, the Emerging Issue Task Force (EITF) issued EITF Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements," (EITF 06- 4). EITF 06-4 requires the accrual of post-retirement benefit over the service period. EITF 06-4 is effective for fiscal years beginning after December 31, 2007. The Corporation does not anticipate the new accounting principle to have a material effect on its financial position or results of operation. In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (Accounting for Uncertainty in Income Taxes). This document is an interpretation of Statement No. 109 (Accounting for Income Taxes). The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation was initially effective for fiscal years beginning after December 15, 2006 but has been extended until 2008. The effect of applying the provisions of the interpretation has not been determined. -10- Trust Department Trust income is included in the accompanying consolidated financial statements on the cash basis in accordance with established industry practices. Reporting of such fees on the accrual basis would have no material effect on reported income. Servicing and Origination Fees on Loans The Corporation from the Bank's subsidiary, Empire, recognizes as income in the current period all loan origination and brokerage fees collected on loans originated and closed for investing participants. Loan servicing fees are based on a percentage of loan interest paid by the borrower and recognized over the term of the loan as loan payments are received. Empire does not directly fund any mortgages and acts as a service-oriented broker for participating mortgage lenders. Fees charged for continuing servicing fees are comparable with market rates charged in the industry. Based on these facts and after a thorough analysis and evaluation of deferred mortgage servicing costs as defined under FASB 122 and amended by FASB 140, they are insignificant and immaterial to be recognized. Late charges assessed on past due payments are recognized as income by the Corporation when collected. Advertising Costs It is the policy of the Corporation to expense advertising costs as they are incurred. The Corporation does not engage in any direct-response advertising and accordingly has no advertising costs reported as assets on its balance sheet. Costs expensed during the first quarter of 2008 were $48,631. NOTE 2 FAIR VALUE MEASUREMENTS AND FAIR VALUE OPTION Fair Value Measurements The Corporation adopted SFAS 157, "Fair Value Measurements," on January 1, 2008. SFAS 157 establishes a framework for measuring fair value, expands disclosures about fair value measurements and provides new income recognition criteria for certain derivative contracts. SFAS 157 requires that a fair value measurement reflect assumptions market participants would use in pricing an asset or liability. SFAS 157 defines "fair value" as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or liability at the measurement date (referred to as an exit price). SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy under SFAS 157 are: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities at the measurement date. Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. -11- A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. SFAS 157 requires the Corporation to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Determination of Fair Value In determining fair value, the Corporation uses market prices of the same or similar instruments whenever such prices are available. A fair value measurement assumes that an asset or liability is exchanged in an orderly transaction between market participants, and accordingly, fair value is not determined based upon a forced liquidation or distressed. Securities Activities When available, the Corporation uses quoted market prices in active markets to determine the fair value of securities. Such instruments are classified within Level 1 of the fair value hierarchy. Examples include exchange-traded equity securities and some highly liquid government securities such as U.S. Treasuries. When instruments are traded in secondary markets and quoted market prices do not exist for such securities, the Corporation generally relies on internal valuation techniques or on prices obtained from independent vendors. The majority of fair values derived using internal valuation techniques are verified against prices obtained from independent vendors. Vendors compile prices from various sources and often apply matrix pricing for similar securities when no price is observable. Securities measured with these internal valuation techniques are generally classified within Level 2 of the hierarchy and often involve using quoted market prices for similar securities, pricing models or discounted cash flow analyses using inputs observable in the market where available. Examples include corporate bonds and U.S. Government agency and Government-sponsored entity mortgage-backed securities and collateralized mortgage obligations. Items Measured at Fair Value on a Recurring Basis The following table presents the Corporation's assets that are measured at fair value on a recurring basis at March 31, 2008, for each of the fair value hierarchy levels. Fair Value Measurements at March 31, 2008 Using (Dollars in thousands) Quoted Prices in Significant Significant Active Markets Other Other Fair Value for Identical Observable Observable Measurements Assets Inputs Inputs Description 3/31/08 (Level 1) (Level 2) (Level 3) Assets: Investment Securities available for sale $ 79,367 $ 20 $ 79,347 $ 0 Total assets at fair value $ 79,367 $ 20 $ 79,347 $ 0 -12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements In addition to historical information, this Form 10-Q report contains forward-looking statements within the meaning of the federal securities laws. The Corporation cautions that there are various factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the Corporation's forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include risks related to the Corporation's construction and land development loans; asset quality; the adequacy of the allowance for loan losses; technology difficulties or failures; the Corporation's ability to execute its business strategy; the loss of key personnel; competition; changes in regulation and monetary policy; losses due to fraudulent and negligent conduct of customers, service providers and employees; acquisitions or dispositions of assets or internal restructuring, that may be pursued by the Corporation; changes in or application of environmental and other laws and regulations to which the Corporation is subject; political, legal and local economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in the Corporation's other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of the Corporation. Any such statement speaks only as of the date the statement was made. The Corporation undertakes no obligation to update or revise any forward-looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in the Corporation's current and subsequent filings with the Securities and Exchange Commission. Overview The Corporation is a full-service community bank holding company headquartered in Moultrie, Georgia. The community of Moultrie has been served by the Corporation and its predecessors since 1928. We provide comprehensive financial services to consumer, business and governmental customers, which, in addition to conventional banking products, include a full range of mortgage banking, trust, investment and insurance services. Our primary market area incorporates Colquitt County, where we are headquartered, and Baker, Lowndes, Thomas, and Worth Counties, each contiguous with Colquitt County. We have four full service banking facilities, six automated teller machines, and one loan production office. Our strategy is to: * maintain the diversity of our revenue, including growth in both interest and noninterest income through a broad base of business, * strengthen our sales and marketing efforts while developing our employees to provide the best possible service to our customers, * expand our market share where opportunity exists, and * grow outside of our current geographic market, through business combinations and de novo branching into areas proximate to our current market area. -13- We believe that investing in sales and marketing in this challenging market will provide us with a competitive advantage. To that end, we have continued with our plans to expand geographically with currently a loan production office in Valdosta, Georgia. We have leadership in place and are looking to identify a permanent site for a de novo branch. The Corporation's profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets, such as loans, securities and federal funds sold, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Net interest income is highly sensitive to the fluctuations in interest rates. This quarter the Federal Reserve Bank lowered short-term rates by 200 basis points to 2.25%. After holding the banks overnight borrowing rate at 5.25% for 15 months, the Federal Reserve has decreased the short-term interest rate by 3% since September 2007. With the rapid change in the Federal funds rate, there was the same movement in our prime-indexed adjustable loan rates. This rapid drop in the prime-indexed loan yields combined with lagging changes in the interest cost of certificates of deposit and other interest-bearing funds makes it a very challenging rate environment in order to maintain our interest rate spread. Our profitability is impacted as well by operating expenses such as salaries and employee benefits, occupancy and other operating expenses, including income taxes. Our lending activities are significantly influenced by regional and local factors. Some specific factors include changes in population, competition among lenders, interest rate conditions and prevailing market rates on competing uses of funds and investments, customer preferences and levels of personal income and savings in the Corporation's primary market area. To address interest rate fluctuations out of our control, we manage our balance sheet in an effort to diminish the impact of sudden interest rates changes by broadening our revenue sources to reduce the risk and exposure of our financial results to the impact of changes in interest rates, which is outside of our control. As a result of our strategy to diversify revenue, noninterest income has grown over the last few years and was 74% of first quarter 2008 net interest income and 30% of first quarter 2008 total revenue. Sources of noninterest income include our insurance agency and Empire, the Corporation's commercial mortgage banking subsidiary, as well as fees on customer accounts, trust and retail brokerage services. In 2008, we continued to focus on asset quality. At the end of the first quarter of 2008, we had one large $3.2 million fully secured loan in nonaccrual loans of which no loss is anticipated. Last year, we had a single $2.2 million nonaccrual loan which was foreclosed, and the collateral property was sold for a loss of $110,000 during the fourth quarter. Critical Accounting Policies In the course of the Corporation's normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial statements of the Corporation. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates can have on the Corporation's results of -14- operations. We believe that the allowance for loan losses as of March 31, 2008 is adequate, however, under adversely different conditions or assumptions, future additions to the allowance may be necessary. There have been no significant changes in the methods or assumptions used in our accounting policies that require material estimates and assumptions. Note 1 to the Consolidated Financial Statements provides a description of our significant accounting policies and contributes to the understanding of how our financial performance is reported. LIQUIDITY AND CAPITAL RESOURCES Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw their funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. In the ordinary course of business, the Corporation's cash flows are generated from interest and fee income as well as from loan repayments and the maturity or sale of other earning assets. In addition, liquidity is continuously provided through the acquisition of new deposits and borrowings or the rollover of maturing deposits and borrowings. The Corporation strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-earning liabilities so its short-term investments balance, at any given time, will adequately cover any reasonably anticipated immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks that could provide funds on short notice, if needed. The liquidity and capital resources of the Corporation are monitored on a periodic basis by state and Federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Bank's liquidity ratios at March 31, 2008, were considered satisfactory. At that date, the Bank's short-term investments were adequate to cover any reasonably anticipated immediate need for funds. Due to the recent 2% quarterly drop in the short-term rate by the Federal Reserve, as expected we have had $79 million of our callable securities to be called in the first quarter of 2008. We have approximately $9 million of callable securities which have not been called. If these investment securities are called by the issuers, we anticipate that we can continue to improve our net interest income and profitability by repositioning our callable securities balance. We expect to reinvest these proceeds from called investment securities in new loans, new investment securities, and to repay debt. We are not aware of any known trends, events, or uncertainties that will have or that are reasonably likely to have a material adverse effect on the Corporation's liquidity or operations. At March 31, 2008, the Corporation's and the Bank's risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. During the three months ended March 31, 2008, total capital increased $412 thousand to $26.9 million. Under a stock repurchase program adopted by the Board in January 2000, the Corporation repurchased 1,800 shares of its common stock during the first three months of 2008 at an average price of $17.75 per share. The share repurchase authorization expired during the quarter and as part of its capital management planning, the Corporation and its Board of Directors elected not to extend the authorization. Also, the Corporation continues to maintain a healthy level of capital adequacy as measured by its equity-to-asset ratio of 9.31% as of March 31, 2008. The Corporation is not aware of any events or trends likely to result in a material change in capital resources other than the effects of normal operations on the retention of net earnings, and paying dividends to -15- shareholders. Also, the Corporation's management is not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have a material effect on the Corporation's capital resources. RESULTS OF OPERATIONS The Corporation'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 interest rates are determined by market forces and economic conditions beyond the control of the Corporation, the ability to generate net interest income is dependent upon the Bank's ability to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable- equivalent net interest income divided by average earning assets. Performance Summary The Corporation's net income after taxes for the three-month period ending March 31, 2008, was $739 thousand compared with a net income of $1.012 million for the same period in 2007, representing a decrease of $273 thousand. The quarterly decrease in net earnings was primarily due to $579 thousand , or 46%, lower revenue from Empire as well as a $19 thousand decrease in service charges on deposit accounts and a $16 thousand decrease in revenue from insurance services compared with last year's quarterly results. On a per share basis, net income for the first quarter was $.29 per diluted share compared with $.39 per diluted share for the same quarter in 2007. The weighted average common diluted shares outstanding for the quarter were 2.556 million, down 2.7% from the previous comparable quarter. This decrease in average quarterly diluted shares was due to the Corporation's last year's stock repurchase program. The Board of Directors elected not to extend the repurchase program after January 2008. We measure our performance on selected key ratios, which are provided for the previous five quarterly periods ended March 31, 2008. 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 2008 2007 2007 2007 2007 Return on average total assets 1.03% ( .99)% 1.09% .85% 1.38% Return on average total equity 10.85% (9.91)% 11.17% 8.92% 14.57% Average shareholders' equity to Average total assets 9.47% 9.95% 9.76% 9.57% 9.45% Net interest margin (tax equivalent) 3.75% 3.36% 3.71% 3.72% 3.68% -16- Comparison of Statements of Income for the Quarter Noninterest income, which continued to be almost one-third of the Corporation's total revenue for the quarter, was $1.712 million for the first quarter, down 26.1% from the same period in 2007. The largest contributor to noninterest income, mortgage banking services, decreased 45.8% to $685 thousand compared with last year's first quarter. The level and timing of recognizing income from the mortgage banking business is dependent on many factors related to originating and closing relatively large commercial mortgage loans, and therefore can fluctuate from quarter to quarter. Currently, the mortgage banking business has a strong pipeline of projects and services a $368 million portfolio of non-recourse loans. Revenue from service charges on deposit accounts decreased 4.6% from the same period a year ago to $398 thousand for the quarter. Revenue from insurance services declined to $357 thousand, a 4.3% decrease over the first quarter of 2007. The first quarter of each year income from insurance services included contingency fees of $74 thousand for 2008 and $86 thousand for 2007. These quarterly contingency fees are unlikely to reoccur again this year. Income from brokerage services saw a slight increase. Total interest income decreased $73 thousand, or 1.8%, for the three months ended March 31, 2008 compared with the same period in 2007. This decrease was in interest income on investment securities and loans and was partially offset by an increase in interest income on overnight investments of Federal Home Loan Bank balances and Federal funds sold. Due to the quarterly 2% drop in the short-term rate by the Federal Reserve Bank, the Corporation had $79 million of its callable U.S. Government agency securities to be called by the issuers. Most of these funds from the called securities have been or will be reinvested in various higher yielding investment securities. The first quarter drop in interest income on investment securities was due to an average investment securities volume decline of over $30 million that was temporarily invested in short-term funds with lower interest rates. These short-term funds will be reinvested in various investment securities, loans, or to repay debt. Total interest expense decreased $86 thousand, or 5.1%, in the first quarter of 2008 compared with the same period in 2007. Interest on deposits decreased $82 thousand, or 5.9%, during the first quarter of 2008, while interest on total borrowings decreased $4 thousand during the period. Looking ahead, the challenge will be to manage funding costs in a competitive lower rate environment. Our focus on cost discipline, retaining and expanding customer relationships, and identifying acquisition opportunities are central to the core components of our growth strategy. The primary source of revenue for the Corporation is net interest income, which is the difference between total interest income on earning assets and interest expense on interest-bearing sources of funds. Net interest income for the first quarter of 2008 was $2.32 million compared with $2.31 million for the same period in 2007. This increase was mainly due to $82 thousand lower interest paid on deposits. This was partially offset by the increase in interest on short-term overnight investments funded from the proceeds on the called investment securities. The Corporation's net interest margin was 3.75% for the first quarter of 2008, compared with 3.68% for the same period in 2007. Total interest expense was $1.601 million for the first quarter, down $86 thousand from the same period a year ago, due primarily to decreased interest expense on deposits. The average rate paid on interest-bearing time deposits decreased 7 basis points for the quarter compared with the same period a year ago. -17- No provision for loan losses was recorded for the first quarter of 2008 and 2007 due to the quality of the loan portfolio and the adequacy of the allowance for loan losses. Noninterest expense decreased to $3.057 million from $3.199 million for the first quarter of last year. The largest component of noninterest expense, salaries and employee benefits, decreased to $1.8 million for the first quarter compared with $2.0 million in the same period last year. This decrease was mainly the result of reduced performance awards and benefit plan expenses. Amortization of intangible assets decreased $50 thousand when compared with the first quarter of 2007. This decrease in amortization of intangible assets is related to the purchase of the commercial mortgage banking subsidiary which has been fully amortized. When comparing the first quarter other operating expenses to the same period of the prior year, other operating expenses were low in the first quarter of 2007 due to a $75 thousand refund in legal expenses. The increase in equipment expense compared with the first quarter of last year was mainly in equipment repairs and maintenance. The other major categories of noninterest expense were either relatively flat or decreased in the first quarter of 2008 compared with the prior year's first quarter. Comparison of Financial Condition Statements At March 31, 2008, total assets were $289.2 million, a 6.5% increase from December 31, 2007. The majority of the increase in assets was a result of increases in total loans of $6.2 million, $26.3 million in interest bearing deposits in other banks and $7.2 million in Federal funds sold. These increases were partially offset by declines of $21.6 million in investment securities. This decrease in investment securities was due to the $79 million of callable U.S. Government Agency securities which were called by the issuers during the first quarter of 2008. As of March 31, not all the proceeds from these called securities have been reinvested in other securities. The Corporation's loan portfolio of $125 million increased nearly 5.2% from the December 31, 2007, level of $119 million. Some of this loan growth was originated from strong local economic development due to affordability of real estate and abundance of natural resources. The Corporation continues to be conservative in its lending practices in order to maintain a quality loan portfolio. Loans, a major use of funds, represent 43.3% of total assets. Investment securities and short-term investments which include Federal funds sold and interest-bearing deposits in other banks represent 49.4% of total assets. Investment securities decreased $21.6 million and short-term investments increased $33.5 million since December 31, 2007. This resulted in an overall increase in investments of $11.9 million. This first quarter decline in investment securities was due to not reinvesting all of the $79 million of called securities back into securities as of March 31. Deposits decreased to $229.4 million at the end of the first quarter of 2008, down $6.8 million from the same period in 2007 and up $12.6 million from the end of 2007. The bulk of the first quarter deposit growth was in public funds and in certificates of deposit. At March 31, 2008, total deposits represented 79.3% of total assets. -18- The following table shows the major contractual obligations for the Corporation. Long-term debt consists of the following: March 31, December 31, March 31, 2008 2007 2007 Advance from Federal Home Loan Bank with a 2.85% fixed rate of interest maturing March 11, 2013. (convertible to a variable rate at option of Federal Home Loan Bank on March 11, 2008). 0 0 5,000,000 Advance from Federal Home Loan Bank with a 3.85% fixed rate of interest maturing April 30, 2014, (convertible to a variable rate at option of Federal Home Loan Bank on April 30, 2009). 10,000,000 10,000,000 10,000,000 Advance from Federal Home Loan Bank with a 5.24% fixed rate of interest maturing February 6, 2009. 0 5,000,000 5,000,000 Advance from Federal Home Loan Bank with a 5.21% fixed rate of interest due in annual installments maturing December 17, 2008. 0 0 228,571 Total long-term debt $10,000,000 $15,000,000 $20,228,571 The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated monthly based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that management believes require attention. Other factors used in determining the adequacy of the reserve are management's judgment about factors affecting loan quality and their assumptions about the local and national economy. The allowance for loan losses was 1.92% of total loans outstanding at March 31, 2008, compared with 2.02% of loans outstanding at December 31, 2007. Non-performing assets as a percentage of total assets were 1.15% compared with .83% last year's first quarter. The increase in non-performing assets was centered on one large fully secured commercial real estate loan in our nonaccrual loans category. Management considers the allowance for loan losses as of March 31, 2008, adequate to cover potential losses in the loan portfolio. Off-Balance Sheet Arrangements In the normal course of business, we are a party to financial instruments with off-balance-sheet risk to meet the financing needs of our customers and reduce risk exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit in the form of loans or -19- through letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. Since many of the commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, the contractual or notional amounts do not represent future cash requirements. Financial instruments whose contract amounts March 31, March 31, represent credit risk (dollars in thousands): 2008 2007 Commitments to extend credit $ 17,334 $ 19,271 Standby letters of credit and financial guarantees $ 10 $ 36 The Corporation does not have any special purpose entities or off-balance sheet financing arrangements. -20- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation's primary market risk lies within its exposure to interest rate movement. The Corporation has no foreign currency exchange rate risk, commodity price risk, or any other material market risk. The Corporation has no trading investment portfolio. As a result, it does not hold any market risk-sensitive instruments, which would be subject to a trading environment characterized by volatile short-term movements in interest rates. Also, the Corporation has no interest rate swaps, or other derivative instruments, that are either designated and effective as hedges or modify the interest rate characteristics of specified assets or liabilities. The Corporation's primary source of earnings, net interest income, can fluctuate with significant interest rate movements. To lessen the impact of these movements, the Corporation seeks to maximize net interest income while remaining within prudent ranges of risk by practicing sound interest rate sensitivity management. The Corporation attempts to accomplish this objective by structuring the balance sheet so differences in repricing opportunities between assets and liabilities are minimized. Interest rate sensitivity refers to the responsiveness of earning assets and interest- bearing liabilities to changes in market interest rates. The Corporation's interest rate risk management is carried out by the Asset/Liability Management Committee operating under policies and guidelines established by Management. The principal objective of asset/liability management is to manage the levels of interest-sensitive assets and liabilities to minimize net interest income fluctuations in times of fluctuating market interest rates. To effectively measure and manage interest rate risk, the Corporation uses computer simulations that determine the impact on net interest income of numerous interest rate scenarios, balance sheet trends and strategies. These simulations cover the following financial instruments: short-term financial instruments, investment securities, loans, deposits, and borrowings. These simulations incorporate assumptions about balance sheet dynamics, such as loan and deposit growth and pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Simulations are run under various interest rate scenarios to determine the impact on net income and capital. From these computer simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. The Corporation maintains an investment portfolio that staggers maturities and provides flexibility over time in managing exposure to changes in interest rates. At any point in time, any imbalances in the repricing opportunities constitute a financial institution's interest rate sensitivity. The Corporation uses a number of tools to measure interest rate risk. One of the indicators for the Corporation's interest rate sensitivity position is the measurement of the difference between its rate-sensitive assets and rate- sensitive liabilities, referred to as the "gap." A gap analysis displays the earliest possible repricing opportunity for each asset and liability category based upon contractual maturities and repricing. As of March 31, 2008, the Corporation's one-year cumulative rate-sensitive assets represented 123% of the cumulative rate-sensitive liabilities compared with 102% at prior year end and 83% at the same period a year ago. This level of cumulative gap is a result of the Corporation's management of its exposure to interest rate risk. We are more asset-sensitive at the one year gap position compared with being liability-sensitive in the previous year. These changes in assets and liabilities occurred in: (1) increase in investment securities that will mature or have the potential of being called within one year, (2) increase in short-term investments, and (3) decrease in money market deposit type of accounts. This asset sensitive position will increase the Corporation's exposure to falling interest rates. All interest rates and yields do not -21- adjust at the same velocity; therefore, the interest rate sensitivity gap is only a general indicator of the potential effects of interest rate changes on net interest income. The Corporation's asset and liability mix is monitored ensuring the effects of interest rate movements in either direction are not significant over time. ITEM 4(T). CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Corporation's management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of the effectiveness of its disclosure controls and procedures (as defined in federal securities rules) as of the end of the period covered by this report. Based on, and as of the date of, that evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the Securities and Exchange Commission's rules and forms and that the Corporation's disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by the Corporation under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Management's Annual Report on Internal Control over Financial Reporting The Corporation's management is responsible for establishing and maintaining adequate internal control over financial reporting. Management's assessment of the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2007 was included in Item 8 of the 10K form, dated December 31, 2007, under the heading "Management's Report on Internal Controls Over Financial Reporting". The annual report form 10K, dated December 31, 2007, does not include an attestation report of the Corporation's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Corporation's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits the Corporation to provide only management's report in the annual report. Changes in Internal Control over Financial Reporting No changes were made to the Corporation's internal control over financial reporting during this quarter that materially affected or could reasonably likely to materially affect the Corporation's internal controls over financial reporting. -22- PART II. - OTHER INFORMATION ITEM 6. EXHIBITS Exhibit 31.1 Section 302 Certification of Periodic Financial Report by Chief Executive Officer. Exhibit 31.2 Section 302 Certification of Periodic Financial Report by Chief Financial Officer. Exhibit 32.1 Section 906 Certification of Periodic Financial Report by Chief Executive Officer. Exhibit 32.2 Section 906 Certification of Periodic Financial Report by Chief Financial Officer. -23- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHWEST GEORGIA FINANCIAL CORPORATION BY: /s/George R. Kirkland ---------------------------------- GEORGE R. KIRKLAND SENIOR VICE-PRESIDENT AND TREASURER (FINANCIAL AND ACCOUNTING OFFICER) Date: May 12, 2008 -24-