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 June 30, 2009 [ ] 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, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12-b 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 July 21, 2009 Common Stock, $1 Par Value 2,547,837 SOUTHWEST GEORGIA FINANCIAL CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009 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 - June 30, 2009 (unaudited) and December 31, 2008 (audited). 2 b. Consolidated statements of income (unaudited) - for the six months and the three months ended June 30, 2009 and 2008. 3 c. Consolidated statements of comprehensive income (unaudited) - for the six months and the three months ended June 30, 2009 and 2008. 4 d. Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2009 and 2008. 5 e. Notes to Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26 ITEM 4(T). CONTROLS AND PROCEDURES 27 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28 ITEM 6. EXHIBITS 29 SIGNATURE 30 -1- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 2009 and December 31, 2008 (Unaudited) (Audited) June 30, December 31, 2009 2008 ASSETS Cash and due from banks $ 6,241,228 $ 7,469,754 Interest-bearing deposits in other banks 3,177,187 29,930 Cash and cash equivalents 9,418,415 7,499,684 Investment securities available for sale, at fair value 78,739,750 83,212,281 Investment securities held to maturity (fair value approximates $10,288,881 and $12,174,105) 10,383,552 12,108,040 Federal Home Loan Bank stock, at cost 1,379,900 1,618,300 Total investment securities 90,503,202 96,938,621 Loans 151,019,052 149,098,935 Less: Unearned income ( 28,816) ( 29,594) Allowance for loan losses ( 2,509,932) ( 2,375,713) Loans, net 148,480,304 146,693,628 Premises and equipment, net 7,405,110 5,783,275 Foreclosed assets, net 2,438,983 210,673 Intangible assets 952,333 1,056,152 Other assets 9,969,064 9,115,295 Total assets $ 269,167,411 $ 267,297,328 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: NOW accounts $ 29,105,600 $ 25,282,470 Money Market 33,252,925 35,700,805 Savings 21,440,060 21,213,082 Certificates of deposit $100,000 and over 29,324,173 28,755,297 Other time accounts 71,291,342 64,216,422 Total interest-bearing deposits 184,414,100 175,168,076 Noninterest-bearing deposits 36,648,231 39,372,928 Total deposits 221,062,331 214,541,004 Federal funds purchased 0 430,000 Short-term borrowed funds 0 15,000,000 Long-term debt 20,000,000 10,000,000 Other liabilities 4,312,807 4,009,802 Total liabilities 245,375,138 243,980,806 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 15,151,708 14,511,867 Accumulated other comprehensive income ( 1,241,008) ( 1,076,918) Treasury stock, at cost 1,745,998 shares for 2008 and 2009 ( 26,113,795) ( 26,113,795) Total stockholders' equity 23,792,273 23,316,522 Total liabilities and stockholders' equity $ 269,167,411 $ 267,297,328 -2- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME For The Three Months For The Six Months Ended June 30, Ended June 30, (Unaudited) (Unaudited) (Unaudited) (Unaudited) 2009 2008 2009 2008 Interest income: Interest and fees on loans $ 2,343,817 $ 2,282,569 $ 4,636,570 $ 4,704,122 Interest on taxable securities available for sale 780,846 965,147 1,619,555 1,407,251 Interest on taxable securities held to maturity 38,777 115,702 93,940 582,784 Interest on tax exempt securities available for sale 115,158 264,753 233,367 499,635 Interest on tax exempt securities held to maturity 59,939 51,314 118,915 102,023 Dividends 0 22,040 0 50,269 Interest on federal funds sold 87 9,843 97 89,659 Interest on deposits in other banks 9,440 82,434 16,153 277,722 Total interest income 3,348,064 3,793,802 6,718,597 7,713,465 Interest expense: Interest on deposits 733,938 1,176,343 1,518,737 2,471,973 Interest on federal funds purchased 0 0 84 0 Interest on other short-term borrowings 0 218,570 122,104 412,650 Interest on long-term debt 175,434 33,564 252,690 144,637 Total interest expense 909,372 1,428,477 1,893,615 3,029,260 Net interest income 2,438,692 2,365,325 4,824,982 4,684,205 Provision for loan losses 60,000 0 245,709 0 Net interest income after provision for loan losses 2,378,692 2,365,325 4,579,273 4,684,205 Noninterest income: Service charges on deposit accounts 453,071 406,882 849,171 804,526 Income from trust services 58,982 65,236 110,415 134,576 Income from retail brokerage services 71,996 94,624 134,955 187,194 Income from insurance services 266,721 265,967 565,265 623,028 Income from mortgage banking services 313,687 612,626 626,981 1,297,941 Net gain on disposition of assets 0 0 0 12,500 Other income 42,864 41,936 137,411 138,931 Total noninterest income 1,207,321 1,487,271 2,424,198 3,198,696 Noninterest expense: Salaries and employee benefits 1,543,320 1,755,930 3,171,458 3,536,391 Occupancy expense 207,827 220,167 418,593 427,240 Equipment expense 164,303 159,161 328,163 323,623 Data processing expense 174,346 141,535 349,865 303,063 Amortization of intangible assets 51,911 51,909 103,819 123,124 Other operating expenses 1,264,777 572,158 1,971,669 1,244,069 Total noninterest expenses 3,406,484 2,900,860 6,343,567 5,957,510 Income before income taxes 179,529 951,736 659,904 1,925,391 Provision for income taxes (79,675) 188,318 20,063 422,854 Net income $ 259,204 $ 763,418 $ 639,841 $ 1,502,537 Earnings per share of common stock: Net income, basic $ 0.10 $ 0.30 $ 0.25 $ 0.59 Net income, diluted $ 0.10 $ 0.30 $ 0.25 $ 0.59 Dividends paid per share $ - $ 0.14 $ 0.07 $ 0.28 Weighted average shares outstanding 2,547,837 2,548,196 2,547,837 2,548,017 Diluted average shares outstanding 2,547,837 2,556,093 2,547,837 2,556,175 -3- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For The Three Months For The Six Months Ended June 30, Ended June 30, (Unaudited) (Unaudited) (Unaudited) (Unaudited) 2009 2008 2009 2008 Net income 259,204 763,418 639,841 1,502,537 Other comprehensive income, net of tax: Unrealized gain(loss) on securities available for sale, net of tax expense (benefit) of $(231,780) and $(1,134,042) for the quarter $(84,532) and $(1,085,984) for the year (449,925) (2,201,376) (164,090) (2,107,846) Total comprehensive income (190,721) (1,437,958) 475,751 ( 605,309) -4- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For The Six Months Ended June 30, (Unaudited) (Unaudited) 2009 2008 Cash flows from operating activities: Net income $ 639,841 $ 1,502,537 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 245,709 0 Depreciation 362,185 360,457 Net amortization and (accretion) of investment securities ( 43,274) ( 47,072) Amortization of intangibles 103,819 123,124 Net loss(gain) on sale and disposal of assets 0 ( 12,500) Funds held related to mortgage banking activities ( 200,661) ( 156,892) Change in: Other assets ( 769,239) 766,018 Other liabilities 682,015 6,374 Net cash provided by operating activities 1,020,395 2,542,046 Cash flows from investing activities: Proceeds from calls and maturities of securities held to maturity 2,000,000 72,900,000 Proceeds from calls, paydowns and maturities of securities AFS 21,439,221 17,674,309 Purchase of securities held to maturity ( 275,000) ( 260,000) Purchase of securities available for sale (16,934,148) (81,009,264) Net change in loans ( 4,260,694) (13,388,316) Purchase of premises and equipment ( 1,984,020) ( 174,122) Proceeds from sales of other assets 0 102,500 Net cash provided(used) for investing activities ( 14,641) ( 4,154,893) Cash flows from financing activities: Net change in deposits 6,521,326 3,746,686 Decrease in federal funds purchased ( 430,000) 0 Payment of short-term debt and short-term portion of long-term debt ( 5,000,000) (15,000,000) Proceeds from issuance of short-term debt 0 10,000,000 Cash dividends paid ( 178,349) ( 713,394) Payment for common stock 0 ( 63,773) Net cash provided(used) for financing activities 912,977 ( 2,030,481) Increase(decrease) in cash and cash equivalents 1,918,731 ( 3,643,328) Cash and cash equivalents - beginning of period 7,499,684 18,733,968 Cash and cash equivalents - end of period $ 9,418,415 $ 15,090,640 NONCASH ITEMS: Increase in foreclosed properties and decrease in loans $ 2,228,310 $ 0 Unrealized gain(loss) on securities available for sale $( 248,622) $( 3,194,069) Re-class short-term debt to long-term due to unexercised option $ 10,000,000 $ 0 -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 2008 Annual Report on Form 10-K. 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 revenue 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 $250,000. Uninsured deposits aggregate to $586,989 at June 30, 2009. 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 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 -8- 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 collectability 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. Income Taxes The Corporation, the Bank and its' subsidiary 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. -9- 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 On May 28, 2009, the FASB issued SFAS No. 165, "Subsequent Events" (SFAS 165). SFAS 165 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The adoption of SFAS 165, effective June 30, 2009, did not impact the Corporation's financial condition and results of operations. In April 2009, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position No. 157-4 ("Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly"). This Staff position provides guidance in determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what Statement 157 states is the objective of fair value measurement to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. If it is determined that a transaction is not orderly, a reporting entity should place little, if any, weight on that transaction price when estimating fair value. The guidance in the Staff position is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted. The adoption of Staff Position No. 157-4 did not have an impact on our financial position or results of operation. In April 2009, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 111, which amends Topic 5.M. in the Staff Accounting Bulletin Series entitled Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities ("Topic 5.M."). SAB No. 111 maintains the SEC staff's previous views related to equity securities. It also amends Topic 5.M. to exclude debt securities from its scope. SAB No. 111 interpretive responded that the phrase "other than temporary" for equity securities classified as available-for-sale in FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, should not be interpreted to mean "permanent." In April 2009, the FASB issued FASB Staff Position No. 115-2 and FAS No. 124- 2 ("Recognition and Presentation of Other-Than-Temporary Impairments"). This Staff position changes the other-than-temporary impairment guidance for debt securities. Prior to issuance of this Staff position, if a debt security was impaired and an entity had the ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value, then the impairment loss was not recognized in earnings. The guidance of this Staff position indicates that if an entity does not intend to sell an impaired debt security that the entity should assess whether it is more likely than not that it will be required to sell the security before -10- recovery. If the entity more likely than not, will be required to sell the security before recovery, an other-than-temporary impairment has occurred that would be recognized in earnings. If an entity more likely than not will not be required to sell the debt security, but does not expect to recover its cost, the entity should determine whether a credit loss exists, and if so, the credit loss should be recognized in earnings and the remaining impairment should be recognized in other comprehensive income. The guidance in the Staff position is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted. The adoption of Staff Position No. 115-2 did not have an impact on our financial position or results of operation. In April 2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1 ("Interim Disclosures about Fair Value of Financial Instruments"). Prior to issuing this Staff position, fair values for financial assets and liabilities were only disclosed once a year. The Staff position now requires disclosures of these fair values on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The guidance in the Staff position is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted. This Staff position expands fair value annual disclosure to quarterly periods. The adoption of Staff Position No. 107-1 did not have an impact on our financial position or results of operation. In December 2008, the FASB issued FSP FAS 132(R)-1, "Employer's Disclosures about Postretirement Benefit Plan Assets." This FSP amends SFAS No. 132(R), "Employers' Disclosures about Pensions and Other Postretirement Benefits - An Amendment of FASB Statements No. 87, 88, and 106" to require more detailed disclosures about plan assets of a defined benefit pension or other postretirement plan, including investment strategies; major categories of plan assets; concentrations of risk within plan assets; inputs and valuation techniques used to measure the fair value of plan assets; and the effect of fair-value measurements using significant unobservable inputs on changes in plan assets for the period. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009, with earlier application permitted. We do not expect the adoption of this standard to have an effect on our financial position or results of operations. On November 21, 2008 the FDIC adopted the final rule relating to the Temporary Liquidity Guarantee Program ("TLG Program") which is also a part of EESA. Under the TLG program the FDIC will (1) guarantee certain newly issued senior unsecured debt and (2) provide full FDIC deposit insurance coverage for non-interest bearing transaction accounts, NOW accounts paying less than 0.5 percent interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC insured institutions through December 31, 2009. The Corporation has elected to only participate in the full FDIC deposit insurance coverage program. In response to the current financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act of 2008 ("EESA") was signed into law on October 3, 2008. This law established the Troubled Asset Relief Program ("TARP"). As part of TARP, the Treasury established the Capital Purchase Program ("CPP") to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital Stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. After carefully reviewing and analyzing the terms and conditions of the CPP, the Board of Directors and -11- management of the Corporation believed that, given its present financial condition, participation in the CPP was unnecessary and not in the best interests of the Corporation, its customers or shareholders. In October 2008, the FASB issued FSP No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" (FSP FAS 157-3). This FSP provides additional guidance regarding application of SFAS No. 157, "Fair Value Measurements," in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. FSP FAS 157-3 is effective immediately upon issuance and applies to prior periods for which financial statements have not been issued. We adopted the provisions of FSP FAS 157-3 as of September 30, 2008. The adoption of this standard did not have an impact on our financial position or results of operations. 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 Corporation elected not to apply its provisions. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, expands disclosures about fair value measurements and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data corroborated by independent sources while unobservable inputs reflect market assumptions that are not observable in an active market or are developed internally. These two types of inputs create three valuation hierarchy levels. Level 1 valuations reflect quoted market prices for identical assets or liabilities in active markets. Level 2 valuations reflect quoted market prices for similar assets or liabilities in an active market, quoted market prices for identical or similar assets or liabilities in non-active markets or model-derived valuations in which all significant valuation inputs are observable in active markets. Level 3 valuations reflect valuations in which one or more of the significant valuation inputs are not observable in an active market. This standard applies to other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. Where applicable, this standard codifies related guidance within GAAP. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We adopted the provisions of SFAS 157 as of January 1, 2008. The adoption of this standard did not have an impact on our financial position or results of operations. 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 -12- December 31, 2007. The effect of applying this accounting principle did not have an impact on the Corporation's financial position or results of operation. 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 second quarter of 2009 were $37,343 and $69,898 for the six-month period. NOTE 2 Fair Value Measurements Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board ("FASB") Statement No.157, Fair Value Measurements ("SFAS No. 157"), which provides a framework for measuring fair value under generally accepted accounting principles. SFAS No. 157 applies to all financial statement elements that are being measured and reported on a fair value basis. The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. From time to time, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and foreclosed real estate. Additionally, the Corporation is required to disclose, but not record, the fair value of other financial instruments. -13- Fair Value Hierarchy: Under SFAS No. 157, the Corporation groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. Following is a description of valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value. Cash and Cash Equivalents: For disclosure purposes for cash, due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. Investment Securities Available for Sale: Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds. Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and state, county and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets. Investment Securities Held for Sale: Investment securities held for sale are not recorded at fair value on a recurring basis. For disclosure purposes, fair value measurement is based upon quoted prices, if available. Federal Home Loan Bank Stock: For disclosure purposes the carrying value of other investments approximate fair value. Loans: The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allocation is established within the allowance for loan losses. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as -14- individually impaired, management measures impairment in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loans, ("SFAS No. 114"). The fair value of impaired loans is estimated using one of three methods, including collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with SFAS No. 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the impaired loan as nonrecurring Level 3. For disclosure purposes, the fair value of fixed rate loans which are not considered impaired, 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 unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes. Foreclosed Assets: Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the other real estate as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the other real estate asset as nonrecurring Level 3. Deposits: For disclosure purposes, the fair value of demand deposits, savings accounts, NOW accounts and money market deposits is the amount payable on demand at the reporting date, while the fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using current rates at which comparable certificates would be issued. Federal Funds Purchased: For disclosure purposes the carrying amount for Federal funds purchased is a reasonable estimate of fair value due to the short-term nature of these financial instruments. FHLB Advances: For disclosure purposes the fair value of the FHLB fixed rate borrowing is estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements. Commitments to Extend Credit and Standby Letters of Credit: Because commitments to extend credit and standby letters of credit are made using variable rates and have short maturities, the carrying value and the fair value are immaterial for disclosure. -15- Assets Recorded at Fair Value on a Recurring Basis: The table below presents the recorded amount of assets measured at fair value on a recurring basis as of June 30, 2009. Level 1 Level 2 Level 3 Total Investment securities available for sale $ 188,025 $ 78,551,725 $ 0 $ 78,739,750 Assets Recorded at Fair Value on a Nonrecurring Basis: The Corporation may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of June 30, 2009. Level 1 Level 2 Level 3 Total Foreclosed assets $ 0 $ 2,438,983 $ 0 $ 2,438,983 Nonperforming loans 0 160,691 0 160,691 Total assets at fair value $ 0 $ 2,599,674 $ 0 $ 2,599,674 The carrying amount and estimated fair value of the Corporation's assets and liabilities which are required to be either disclosed or recorded at fair value at June 30, 2009 and December 31, 2008. June 30, 2009 December 31, 2008 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (Dollars in thousands) (Dollars in thousands) Assets: Cash and cash equivalents $ 9,418 $ 9,418 $ 7,500 $ 7,500 Investment securities available for sale 78,740 78,740 83,212 83,212 Investment securities held to maturity 10,384 10,289 12,108 12,174 Federal Home Loan Bank stock 1,380 1,380 1,618 1,618 Loans 148,480 146,568 146,694 147,282 Liabilities: Deposits 221,062 221,894 214,541 215,349 Federal funds purchased 0 0 430 430 FHLB advances 20,000 22,416 25,000 25,817 Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement element. 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. -16- Fair value estimates included herein are based on existing on- and off- balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like 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. 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 conditions in the financial markets and economic conditions generally; * the Corporation's ability to raise capital; * the Corporation's liquidity; * 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. -17- Overview The Corporation is a full-service community bank holding company headquartered in Moultrie, Georgia. The community of Moultrie has been served by the Bank 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, and the surrounding counties of southwest Georgia. We have four full service banking facilities, a loan production office, and six automated teller machines. Our strategy is to: * maintain the diversity of our revenue, including 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 either through de-novo branching or acquisitions into areas proximate to our current market area. 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 and established a loan production office in Valdosta, Georgia, in the first quarter of 2008. We have established leadership in place in Valdosta and have purchased a permanent site for a branch bank. We are soon to break ground and begin the construction phase of our branch bank building. 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. For example, after reaching a high of 5.25%, the Federal Reserve Bank decreased the overnight borrowing rate for banks by 5% to a range of 0% to .25% from September 2007 to December 2008. The Federal funds rate remained at this low level during the entire first half of 2009. 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. 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. Noninterest income was 50% of second quarter 2009 net interest income and 27% of second quarter 2009 total revenue. -18- We continually focus on asset quality and realized improvement with non- performing assets declining from the previous year. At June 30, 2009, the majority in non-performing assets was one large loan placed on interest nonaccrual in late 2007. This loan was partially charged-off during the fourth quarter of 2008 and was moved to other real estate owned in the second quarter of 2009. Since mid-2007, and particularly during the past year, the financial markets and economic conditions generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in home prices and the values of subprime mortgages, but spread to all commercial and residential mortgages as property prices declined rapidly and to nearly all asset classes. The effect of the market and economic downturn also spread to other areas of the credit markets and severely affected the availability of liquidity. The magnitude of these declines led to a crisis of confidence in the financial sector as a result of concerns about the capital base and viability of certain financial institutions. During this period, interbank lending and commercial paper borrowing fell sharply, precipitating a credit freeze for both institutional and individual borrowers. Unemployment has also increased significantly. 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 operations. We believe that the allowance for loan losses as of June 30, 2009 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. -19- 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 June 30, 2009, 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 5% drop in the short-term rate by the Federal Reserve since September 2007, the majority of our callable securities were called by the issuer in 2008. We had $86 million of our callable securities called during the first half of last year. We have reinvested these proceeds from called investment securities in new loans, new investment securities, and for repayment of our debt obligations. 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 June 30, 2009, the Corporation's and the Bank's risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. During the six months ended June 30, 2009, total capital increased $476 thousand to $23.8 million and decreased $1.3 million from the same period last year due to reporting some losses and making dividend payments. The stock repurchase program, adopted by the Board in January 2000, expired during the first quarter of last year. As part of its capital management planning, the Corporation and its Board of Directors elected not to extend the authorization of the stock repurchase program. Also, the Corporation continues to maintain a healthy level of capital adequacy as measured by its equity-to-asset ratio of 8.84% as of June 30, 2009. 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. 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 June 30, 2009, was $259 thousand compared with a net income of $764 thousand for the same period in 2008, representing an decrease of $505 thousand. Lower net income was primarily due to a $693 thousand increase in operating expenses compared with the second quarter of 2008, as well as a 48.9%, or $299 thousand, decline in commercial mortgage banking revenue. On a per share basis, net income for the second quarter decreased 67% to $.10 per diluted share compared with $.30 per diluted share for the same quarter in 2008. The weighted average common diluted shares outstanding for the quarter were 2.548 million, down eight thousand shares from second quarter last year. The decrease in average quarterly diluted shares was due to the expiration of some stock options during 2008 and a decrease in stock price. -20- For the first six months of 2009, net income was $640 thousand compared with net income of $1.503 million for the same period in 2008. Earnings per diluted share for the first six months of 2009 were $0.25, down 57.6% compared with earnings per diluted share of $0.59 for the same period in 2008. Decreased net income was due to a $246 thousand increase in loan loss provision, higher deposit insurance costs, higher legal expenses, and a measurable decline in mortgage banking revenue. We measure our performance on selected key ratios, which are provided for the previous five quarterly periods ended June 30, 2009. 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 2009 2009 2008 2008 2008 Return on average total assets 0.38% 0.56% (0.17)% ( 3.99)% 1.10% Return on average total equity 4.37% 6.48% (2.02)% (42.53)% 11.43% Average shareholders' equity to Average total assets 8.66% 8.62% 8.61% 9.37% 9.60% Net interest margin (tax equivalent) 4.12% 4.07% 4.26% 4.19% 3.97% Comparison of Statements of Income for the Quarter Noninterest income, which was 26.5% of the Corporation's total revenue for the quarter, was $1.207 million for the second quarter, down 18.8% from the same period in 2008. Mortgage banking services revenue, which is a large contributor to noninterest income, decreased $299 thousand, or 48.8%, from last year's second quarter as the credit crisis has made the mortgage funding environment challenging and has restricted loan opportunities. Regardless of the economic situation, the mortgage banking business has a strong pipeline of projects and also services a $384 million portfolio of non-recourse loans. Trust services and retail brokerage services revenue decreased $6 thousand, or 9.6%, and $23 thousand, or 23.9%, respectively, in the second quarter of 2009. These decreases were partially offset by a slight increase in revenue from insurance services, and an increase in service charges on deposit accounts of $46 thousand, or 11.4%, compared with last year's second quarter. A recent change in our service charge rate structure on deposit accounts influenced the increase. Total interest income decreased $446 thousand, or 11.8%, for the three months ended June 30, 2009 compared with the same period in 2008. Interest on deposits in other banks and Federal funds sold decreased $83 thousand, and interest on investment securities decreased $402 thousand. Lower interest on investment securities was mainly due to a $25 million decline in average securities compared with the same period last year. These decreases were partially offset by an increase in interest and fees on loans of $61 thousand. Despite a significantly lower interest rate environment, interest and fees on loans increased because of a higher average loan volume of $20 million compared with the second quarter of 2008. Total interest expense decreased $519 thousand, or 36.3%, in the second quarter of 2009 compared with the same period in 2008. Interest on deposits decreased $442 thousand, or 37.6%, during the second quarter of 2009 reflecting lower interest rates compared with the second quarter of 2008. The average rate paid on average time deposits has decreased 145 basis points since June 30, 2008. Interest on total borrowings decreased $77 thousand, or 30.4%, compared with the same quarter in 2008. -21- 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 improved to $2.439 million for the second quarter of 2009 compared with $2.365 million in net interest income in the 2008 second quarter as lower levels and costs of borrowings as well as lower costs of deposits more than offset the decline in interest income. Net interest income after provision for loan losses for the second quarter of 2009 was $2.379 million compared with $2.365 million for the same period in 2008. The provision for loan losses increased to $60 thousand compared with no provision for loan losses during last year's second quarter. The Corporation's net interest margin was 4.12% for the second quarter of 2009, compared with 3.97% for the same period in 2008. This improvement in margin was impacted by increased loan volume and low funding costs. Total noninterest expense increased 17.4% to $3.406 million from $2.900 million for the second quarter of last year. The increase was primarily due to a $693 thousand increase in other operating expenses when compared with the prior year's second quarter. That increase was primarily the result of $520 thousand in higher legal expenses and a $196 thousand increase in Federal Deposit Insurance Corporation ('FDIC') insurance assessment, including a $122 thousand special charge. Higher legal expenses were related to an insurance claim for restitution of payments made to some participating banks of Empire Financial Services, the Company's commercial mortgage banking subsidiary. Data processing expense increased $33 thousand to $174 thousand for the second quarter of 2009. These increases were partially offset by a decline in salaries and employee benefits of $213 thousand, or 12.1%. This decrease was mainly due to a reduction in performance awards and benefit plan expenses. Comparison of Statements of Income for the Six-month Period For the first six months of 2009, noninterest income was $2.424 million, down 24.2% from the same period in 2008. The majority of the decline was a result of lower mortgage banking services revenue which decreased $671 thousand, or 51.7%, from the same period last year. Income from insurance services decreased $58 thousand, or 9.3%, when compared with the six-month period in 2008. Revenue from trust services and income from retail brokerage services decreased $24 thousand and $52 thousand, respectively when compared with the same period in 2008. These decreases in revenue were partially offset by an increase in service charges on deposit accounts of $45 thousand, or 5.6%, when compared with the same period last year as a change in service charge rate structure on deposit accounts was implemented during the second quarter. Total interest income for the first six months of 2009 decreased $995 thousand when compared with the same period in 2008. This decrease in the six-month period of 2009 was primarily due to a $526 thousand decrease in interest on investment securities due to a $21 million average lower volume of securities. Interest on Federal funds sold and deposits in other banks decreased $351 thousand compared with the first half of 2008. This decrease is related to the lower interest rate environment. During the first half of 2009, the Federal Reserve Bank maintained short-term interest rates at a range of 0% to 0.25% after decreasing 5% since third quarter 2007. Total interest expense for the six-month period ended June 30, 2009 decreased $1.136 million, or 37.5%, compared with the same period in 2008. The decrease in interest expense was primarily related to lower interest paid on interest-bearing deposits of $953 thousand, or 38.6%, compared with the -22- second quarter of 2008 reflecting lower interest rates. Interest on borrowings decreased $182 thousand, or 32.6%, for the first six months of 2009 compared with the same period last year. Net interest income for the first six months of 2009 was 3% higher at $4.825 million compared with $4.684 million for the same period in 2008, mainly as a result of lower interest paid on deposits and borrowings. Net interest income after provision for loan losses was $4.579 million for the first half of 2009 compared with $4.684 for the same period in 2008. A provision for loan losses of $246 thousand was recognized in the first six months of 2009 mostly due to charge-offs recognized in the first quarter of 2009. Importantly, net interest margin was 4.10% for the first six months of 2009, an improvement of 24 basis points from the same period a year ago. Noninterest expense increased $386 thousand for the first six months of 2009 compared with the same period last year, due primarily to a $728 thousand, or 58.5%, increase in other operating expenses. The increase in other operating expenses was primarily a result of $733 thousand in increased legal expense and higher insurance fees to the FDIC of $254 thousand. This increase was partially offset by a decrease in salary and employee benefits of $365 thousand. Data processing expense increased $47 thousand when compared with the first half of 2008, while amortization of intangible assets decreased $19 thousand. The intangible assets related to the purchase of the commercial mortgage banking subsidiary were fully amortized in 2008. Comparison of Financial Condition Statements At June 30, 2009, total assets were $269.2 million, up $1.9 million from December 31, 2008. Some of the increases in assets were a result of a $2.2 million increase in foreclosed assets and a $1.6 million increase in premises and equipment. Premises and equipment increased due to the $1.6 million purchase of land in Valdosta, Georgia that will be the site of a new bank branch in 2009. These increases were partially offset by a decline of $6.4 million in investment securities. This decrease in investment securities was due to the maturing or calling of $18.1 million of U.S. Government Agency and municipal securities, most of which were called by the issuers during the first half of 2009 as well as $5.1 million in principal payments from mortgage-backed securities. The proceeds from these called investment securities were reinvested in $16.2 million in new securities. The Corporation's loan portfolio of $151.0 million remained relatively flat from the December 31, 2008, level of $149.1 million. Total loans have grown 14.1% since June 30, 2008 due to stronger demand in our local market and the addition of our loan production office in Valdosta, Georgia. 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 56.1% of total assets. Investment securities and short-term investments which include Federal funds sold and interest-bearing deposits in other banks represent 34.8% of total assets. Investment securities decreased $6.4 million and short-term investments increased $3.1 million since December 31, 2008. This resulted in an overall decrease in investments of $3.3 million. Deposits increased to $221.1 million at the end of the second quarter of 2009, up $6.5 million from the end of 2008. The bulk of the deposit growth was in NOW accounts and in certificates of deposit. At June 30, 2009, total deposits represented 82.1% of total assets. -23- The following table shows the major contractual obligations for the Corporation. Long-term debt consists of the following: June 30, December 31, June 30, 2009 2008 2008 Advance from Federal Home Loan Bank with a 3.39% fixed rate of interest maturing August 20, 2018. (convertible to a variable rate at option of Federal Home Loan Bank on August 22, 2011). 5,000,000 5,000,000 0 Advance from Federal Home Loan Bank with a 3.85% fixed rate of interest maturing April 30, 2014. 10,000,000 0 0 Advance from Federal Home Loan Bank with a 2.78% fixed rate of interest maturing September 10, 2018. (convertible to a variable rate at option of Federal Home Loan Bank on September 10, 2010). 5,000,000 5,000,000 0 Total long-term debt $20,000,000 $10,000,000 $ 0 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 1.66% of total loans outstanding at June 30, 2009, compared with 1.59% of loans outstanding at December 31, 2008 and 1.80% at June 30, 2008. Nonperforming assets totaled $2.6 million at June 30, 2009, or 0.97% of total assets, compared with $3.2 million in nonperforming assets, or 1.19% of total assets at June 30, 2008. The decrease in non-performing assets was primarily related to the partial charge-off of one large commercial real estate loan in our nonaccrual loans category in the fourth quarter of 2008. This loan was moved to other real estate owned in the second quarter or 2009 due to foreclosure of the project. Management considers the allowance for loan losses as of June 30, 2009, 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 through letters of credit. The instruments involve, to varying degrees, -24- 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 represent credit risk (dollars in thousands): June 30, June 30, 2009 2008 Commitments to extend credit $ 12,259 $ 20,718 Standby letters of credit and financial guarantees $ 10 $ 10 The Corporation does not have any special purpose entities or off-balance sheet financing arrangements. Capital Resources and Dividends At June 30, 2009, the Corporation's and the Bank's risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. Our total risk based capital ratio now stands at 15.87%, which is more than 58 percent in excess of the regulatory standard for a "well- capitalized" bank. Southwest Georgia Financial Corporation's and Southwest Georgia Bank's risk based capital ratios are shown in the following table. SOUTHWEST GEORGIA FINANCIAL CORPORATION Risk Based Capital Ratios Southwest Georgia Financial Corporation Regulatory Guidelines For Well Minimum Risk Based Capital Ratios June 30, 2009 Capitalized Guidelines Tier 1 capital 14.62% 6.00% 4.00% Total risk based capital 15.87% 10.00% 8.00% Tier 1 leverage ratio 8.79% 5.00% 3.00% Southwest Georgia Bank Regulatory Guidelines For Well Minimum Risk Based Capital Ratios June 30, 2009 Capitalized Guidelines Tier 1 capital 14.03% 6.00% 4.00% Total risk based capital 15.29% 10.00% 8.00% Tier 1 leverage ratio 8.41% 5.00% 3.00% In March of 2009, the Corporation suspended its quarterly cash dividend. This decision enables the Corporation to have financial flexibility by retaining equity necessary to support efforts to capture greater market share and expand outside of its historic footprint. Conditions will be evaluated quarterly, and when the economic environment stabilizes, the Corporation will return to the more regular dividend payout schedule to which our shareholders have become accustomed. -25- 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 both 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 June 30, 2009, the Corporation's one-year cumulative rate-sensitive assets represented 112% of the cumulative rate-sensitive liabilities compared with 92% 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 asset-sensitive at the one year gap position compared with our liability sensitivity in the second quarter of the previous year. These changes in assets and liabilities occurred in: (1) decrease in short-term investments, and a (2) decrease in money market deposit type of accounts. This asset sensitive position will create potential higher earnings for the Corporation -26- in a rising interest rate environment. All interest rates and yields do not 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, 2008 was included in Item 8 of the 10K form, dated December 31, 2008, under the heading "Management's Report on Internal Controls Over Financial Reporting". The annual report form 10K, dated December 31, 2008, 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. -27- PART II. - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of the shareholders of the Corporation was held on May 26, 2009. Total shares eligible to vote amounted to 2,547,837. A total of 1,804,537 shares (70.83%) were represented by shareholders in attendance or by proxy. The following directors were elected to serve one year until the next annual meeting. Director Votes For Votes Withheld Cecil H. Barber 1,794,897 9,640 John J. Cole, Jr. 1,795,661 8,876 DeWitt Drew 1,745,118 59,419 Michael J. McLean 1,794,897 9,640 Richard L. Moss 1,795,661 8,876 Roy H. Reeves 1,790,381 14,156 Johnny R. Slocumb 1,795,661 8,876 Marcus R. Wells 1,794,897 9,640 Lane M. Wear 1,795,661 8,876 Director Emeritus: John H. Clark Robert M. Duggan E. J. McLean, Jr. Violet K. Weaver C. Broughton Williams, Jr. -28- 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. -29- 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: _____________________________________ GEORGE R. KIRKLAND SENIOR VICE-PRESIDENT AND TREASURER (FINANCIAL AND ACCOUNTING OFFICER) Date: August 14, 2009 -30-