U.S. Securities and Exchange Commission Washington, D. C. 20549 Form 10-K [ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2010 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . Commission file number 1-12053 Southwest Georgia Financial Corporation (Exact Name of Corporation 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) (Zip Code) (Corporation's telephone number, including area code) (229) 985-1120 Securities registered pursuant to Section 12(b) of this Act: Common Stock $1 Par Value NYSE Amex (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] 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 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated file," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-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 Act). Yes [ ] No [X] Aggregate market value of voting stock held by nonaffiliates of the registrant as of June 30, 2010: $19,611,418 based on 1,922,688 shares at the price of $10.20 per share. As of March 23, 2011, 2,547,837 shares of the $1.00 par value Common Stock of Southwest Georgia Financial Corporation were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the 2011 annual meeting of shareholders, to be filed with the Commission are incorporated by reference into Part III. TABLE OF CONTENTS PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings PART II Item 5. Market Price for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules -2- PART I ITEM 1. BUSINESS Southwest Georgia Financial Corporation (the "Corporation") is a Georgia bank holding company organized in 1980, which, in 1981, acquired 100% of the outstanding shares of Southwest Georgia Bank (the "Bank"). The Bank commenced operations as Moultrie National Bank in 1928. Currently, it is a FDIC insured, state-chartered bank. The Corporation's primary business is providing banking services through the Bank to individuals and businesses principally in Colquitt County, Baker County, Thomas County, Worth County, Lowndes County, and the surrounding counties of southwest Georgia. The Bank also operates Empire Financial Services, Inc. ("Empire"), a commercial mortgage banking firm located in Baldwin County. Our new full-service banking center in Valdosta, Georgia opened in June 2010. The Corporation's executive office is located at 201 First Street, S. E., Moultrie, Georgia 31768, and its telephone number is (229) 985-1120. All references herein to the Corporation include Southwest Georgia Financial Corporation, the Bank, and Empire, unless the context indicates a different meaning. General The Corporation is a registered bank holding company. All of the Corporation's activities are currently conducted by the Bank and Empire. The Bank is community-oriented and offers such customary banking services as consumer and commercial checking accounts, NOW accounts, savings accounts, certificates of deposit, lines of credit, VISA business accounts, and money transfers. The Bank finances commercial and consumer transactions, makes secured and unsecured loans, and provides a variety of other banking services. The Bank has a trust and brokerage division that performs corporate, pension, and personal trust services and acts as trustee, executor, and administrator for estates and as administrator or trustee of various types of employee benefit plans for corporations and other organizations. Also, the trust and brokerage area has a securities sales department which offers full-service brokerage through a third party service provider. The Bank operates Southwest Georgia Insurance Services Division, an insurance agency that offers property and casualty insurance, life, health, and disability insurance. Empire, a subsidiary of the Bank, is a commercial mortgage banking firm that offers commercial mortgage banking services. Markets The Corporation conducts banking activities in five counties in southwest and south central Georgia. The latest statistics were recorded in 2008 and 2009. Population characteristics in these counties range from rural to more metropolitan. Our most recent and largest market is Lowndes County with total population of 106,814 and the highest growth rate in our markets at 15.9% during the past ten years. Due primarily to the location of a state university and a large air force base in Lowndes County, this market has a median age estimated at 28.2, slightly younger than an average median age of 37.5 in the other four counties the bank serves. These counties, Colquitt, Worth, Thomas, and Baker, have an average total population of 29,159 and an average growth rate of 2.3% during the past ten years. Per capita income in -3- Lowndes County was $29,884, slightly higher than an average of $29,504 for the rest of the bank's markets. Agriculture plays a major economic role in the bank's markets. Colquitt, Worth, Thomas, Lowndes, and Baker Counties produce a large portion of our state's crops, including cotton, peanuts, and a variety of vegetables. Empire Financial Services, Inc., a subsidiary of the Corporation, is located in Baldwin County in central Georgia. It provides mortgage banking primarily for commercial properties throughout the southeastern United States. Deposits The Bank offers a full range of depository accounts and services to both consumers and businesses. At December 31, 2010, the Corporation's deposit base, totaling $239,531,059, consisted of $38,857,679 in noninterest-bearing demand deposits (16.2% of total deposits), $79,706,809 in interest-bearing demand deposits including money market accounts (33.3% of total deposits), $22,635,415 in savings deposits (9.4% of total deposits), $65,858,838 in time deposits in amounts less than $100,000 (27.5% of total deposits), and $32,472,318 in time deposits of $100,000 or more (13.6% of total deposits). Loans The Bank makes both secured and unsecured loans to individuals, corporations, and other businesses. Both consumer and commercial lending operations include various types of credit for the Bank's customers. Secured loans include first and second real estate mortgage loans. The Bank also makes direct installment loans to consumers on both a secured and unsecured basis. At December 31, 2010, consumer installment, real estate (including construction and mortgage loans), and commercial (including financial and agricultural) loans represented approximately 3.4%, 78.9% and 17.7%, respectively, of the Bank's total loan portfolio. Lending Policy The current lending policy of the Bank is to offer consumer and commercial credit services to individuals and businesses that meet the Bank's credit standards. The Bank provides each lending officer with written guidelines for lending activities. Lending authority is delegated by the Board of Directors of the Bank to loan officers, each of whom is limited in the amount of secured and unsecured loans which can be made to a single borrower or related group of borrowers. The Loan Committee of the Bank's Board of Directors is responsible for approving and monitoring the loan policy and providing guidance and counsel to all lending personnel. It also approves all extensions of credit over $300,000. The Loan Committee is composed of the Chief Executive Officer and President, and other executive officers of the Bank, as well as certain Bank Directors. Servicing and Origination Fees on Loans The Corporation through its subsidiary, Empire, recognizes as income in the current period all loan origination and brokerage fees collected on loans closed for investing participants. Loan servicing fees are based on a percentage of loan interest paid by the borrower and are recognized over the term of the loan as loan payments are received. Empire does not directly -4- 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. In 2010, Bank revenue received from mortgage banking services was $1,350,625 compared with $1,327,193 in 2009. All of this income was from Empire except for $240,424 in 2010 and $109,517 in 2009, which was mortgage banking income from the Bank. Loan Review and Nonperforming Assets The Bank regularly reviews its loan portfolio to determine deficiencies and corrective action to be taken. Loan reviews are prepared by the Bank's loan review officer and presented periodically to the Board's Loan Committee and the Audit Committee. Also, the Bank's external auditors conduct independent loan review adequacy tests and include their findings annually as part of their overall report to the Audit Committee and to the Board of Directors. Certain loans are monitored more often by the loan review officer and the Loan Committee. These loans include non-accruing loans, loans more than 90 days past due, and other loans, regardless of size, that may be considered high risk based on factors defined within the Bank's loan review policy. Asset/Liability Management The Asset/Liability Management Committee ("ALCO") is charged with establishing policies to manage the assets and liabilities of the Bank. Its task is to manage asset growth, net interest margin, liquidity, and capital in order to maximize income and reduce interest rate risk. To meet these objectives while maintaining prudent management of risks, the ALCO directs the Bank's overall acquisition and allocation of funds. At its monthly meetings, the ALCO reviews and discusses the monthly asset and liability funds budget and income and expense budget in relation to the actual composition and flow of funds; the ratio of the amount of rate sensitive assets to the amount of rate sensitive liabilities; the ratio of loan loss reserve to outstanding loans; and other variables, such as expected loan demand, investment opportunities, core deposit growth within specified categories, regulatory changes, monetary policy adjustments, and the overall state of the local, state, and national economy. The Bank's Loan Committee oversees the ALCO. Investment Policy The Bank's investment portfolio policy is to maximize income consistent with liquidity, asset quality, and regulatory constraints. The policy is reviewed periodically by the Board of Directors. Individual transactions, portfolio composition, and performance are reviewed and approved monthly by the Board of Directors. Employees The Bank had 123 full-time employees and four part-time employees at December 31, 2010. The Bank is not a party to any collective bargaining agreement, and the Bank believes that its employee relations are good. Competition The banking business is highly competitive. The Bank and Empire compete with other depository institutions and other financial service organizations, including brokers, finance companies, savings and loan -5- associations, credit unions and certain governmental agencies. The Bank ranks sixth out of twenty-seven banks in a six county region (Baker, Brooks, Colquitt, Lowndes, Thomas, and Worth) in deposit market share. Monetary Policies The results of operations of the Bank are affected by credit policies of monetary authorities, particularly the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The instruments of monetary policy employed by the Federal Reserve include open market operations in U. S. Government securities, changes in the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank. Payment of Dividends The Corporation is a legal entity separate and distinct from the Bank. Most of the revenue of the Corporation results from dividends paid to it by the Bank. There are statutory and regulatory requirements applicable to the payment of dividends by the Bank, as well as by the Corporation to its shareholders. Under the regulations of the Georgia Department of Banking and Finance ("DBF"), dividends may not be declared out of the retained earnings of a state bank without first obtaining the written permission of the DBF, unless such bank meets all the following requirements: (a) total classified assets as of the most recent examination of the bank do not exceed 80% of equity capital (as defined by regulation); (b) the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the net profits after taxes but before dividends for the previous calendar year; and (c) the ratio of equity capital to adjusted assets is not less than 6%. The payment of dividends by the Corporation and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The Federal Deposit Insurance Corporation (the "FDIC") has issued a policy statement providing that insured banks should generally only pay dividends out of current operating earnings. In addition to the formal statutes and regulations, regulatory authorities consider the adequacy of each of the Bank's total capital in relation to its assets, deposits and other such items. Capital adequacy considerations could further limit the availability of dividends to the Bank. At December 31, 2010, net assets available from the Bank to pay dividends without prior approval from regulatory authorities totaled $915,181. For 2010, the Corporation's cash dividend payout to shareholders was $254,784. -6- Supervision and Regulation General. The following is a brief summary of the supervision and regulation of the Corporation and the Bank as financial institutions and is not intended to be a complete discussion of all NYSE Amex (the "Amex"), state or federal rules, statutes and regulations affecting their operations, or that apply generally to business corporations or Amex listed companies. Changes in the rules, statutes and regulations applicable to the Corporation and the Bank can affect the operating environment in substantial and unpredictable ways. The Corporation is a registered bank holding company subject to regulation by the Board of Governors of Federal Reserve under the Bank Holding Corporation Act of 1956, as amended (the "Act"). The Corporation is required to file annual and quarterly financial information with the Federal Reserve and is subject to periodic examination by the Federal Reserve. The Act requires every bank holding company to obtain the Federal Reserve's prior approval before (1) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) it or any of its non-bank subsidiaries may acquire all or substantially all of the assets of a bank; and (3) it may merge or consolidate with any other bank holding company. In addition, a bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of any company engaged in non-banking activities. This prohibition does not apply to activities listed in the Act or found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation or order to be closely related to banking are: * making or servicing loans and certain types of leases; * performing certain data processing services; * acting as fiduciary or investment or financial advisor; * providing brokerage services; * underwriting bank eligible securities; * underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and * making investments in corporations or projects designed primarily to promote community welfare. Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closely related or incidental to banking (as discussed above), the Gramm-Leach-Bliley Act (the "GLB Act") relaxed the previous limitations and permitted bank holding companies to engage in a broader range of financial activities. Specifically, bank holding companies may elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Among the activities that are deemed "financial in nature" include: * lending, exchanging, transferring, investing for others or safeguarding money or securities; * insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto; -7- * providing financial, investment, or economic advisory services, including advising an investment company; * issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and * underwriting, dealing in or making a market in securities. A bank holding company may become a financial holding company under this statute only if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. A bank holding company that falls out of compliance with such requirement may be required to cease engaging in certain activities. Any bank holding company that does not elect to become a financial holding company remains subject to the bank holding company restrictions of the Act. Under this legislation, the Federal Reserve Board serves as the primary "umbrella" regulator of financial holding companies with supervisory authority over each parent company and limited authority over its subsidiaries. The primary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted by the subsidiary. For example, broker-dealer subsidiaries will be regulated largely by securities regulators and insurance subsidiaries will be regulated largely by insurance authorities. The Corporation has no current plans to register as a financial holding company. The Corporation must also register with the DBF and file periodic information with the DBF. As part of such registration, the DBF requires information with respect to the financial condition, operations, management and intercompany relationships of the Corporation and the Bank and related matters. The DBF may also require such other information as is necessary to keep itself informed as to whether the provisions of Georgia law and the regulations and orders issued thereunder by the DBF have been complied with, and the DBF may examine the Corporation and the Bank. The Corporation is an "affiliate" of the Bank under the Federal Reserve Act, which imposes certain restrictions on (1) loans by the Bank to the Corporation, (2) investments in the stock or securities of the Corporation by the Bank, (3) the Bank's taking the stock or securities of an "affiliate" as collateral for loans by the Bank to a borrower, and (4) the purchase of assets from the Corporation by the Bank. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. The Bank is regularly examined by the FDIC. As a state banking association organized under Georgia law, the Bank is subject to the supervision and the regular examination of the DBF. Both the FDIC and DBF must grant prior approval of any merger, consolidation or other corporation reorganization involving the Bank. Capital Adequacy. Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to -8- qualitative judgments by regulators about components, risk weighting and other factors. The Federal Reserve and the FDIC have implemented substantially identical risk-based rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk. Banks and bank holding companies are required to have (1) a minimum level of Total Capital to risk-weighted assets of 8%; and (2) a minimum Tier I Capital to risk-weighted assets of 4%. In addition, the Federal Reserve and the FDIC have established a minimum 3% leverage ratio of Tier I Capital to quarterly average total assets for the most highly-rated banks and bank holding companies. "Tier I Capital" generally consists of common equity excluding unrecognized gains and losses on available for sale securities, plus minority interests in equity accounts of consolidated subsidiaries and certain perpetual preferred stock less certain intangibles. The Federal Reserve and the FDIC will require a bank holding company and a bank, respectively, to maintain a leverage ratio greater than 4% if either is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve. The Federal Reserve and the FDIC use the leverage ratio in tandem with the risk- based ratio to assess the capital adequacy of banks and bank holding companies. The FDIC, the Office of the Comptroller of the Currency (the "OCC") and the Federal Reserve consider interest rate risk in the overall determination of a bank's capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for the risk. The "prompt corrective action" provisions of the Federal Deposit Insurance Act set forth five regulatory zones in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank's financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank's tangible equity to total assets is 2% or below. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, which place financial institutions in the following five categories based upon capitalization ratios: (1) a "well capitalized" institution has a Total risk-based capital ratio of at least 10%, a Tier I risk-based ratio of at least 6% and a leverage ratio of at least 5%; (2) an "adequately capitalized" institution has a Total risk-based capital ratio of at least 8%, a Tier I risk-based ratio of at least 4% and a leverage ratio of at least 4%; (3) an "undercapitalized" institution has a Total risk-based capital ratio of under 8%, a Tier I risk-based ratio of under 4% or a leverage ratio of under 4%; (4) a "significantly undercapitalized" institution has a Total risk-based capital ratio of under 6%, a Tier I risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a "critically undercapitalized" institution has tangible assets to total equity of 2% or less. Institutions in any of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions. The FDIC regulations also establish procedures for "downgrading" an institution to a lower capital category based on supervisory factors other than capital. The federal regulatory authorities' risk-based capital guidelines are based upon the 1988 Capital Accord of the Basel Committee on Banking Supervision -9- (the "Basel Committee"). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply. On December 17, 2009, the Basel Committee issued a set of proposals (the "Capital Proposals") that would significantly revise the definitions of Tier I Capital and Tier II capital, with the most significant changes being to Tier I Capital. Most notably, the Capital Proposals would disqualify certain structured capital instruments, such as trust preferred securities, from Tier I Capital status. The Capital Proposals would also re-emphasize that common equity is the predominant component of Tier I Capital by adding a minimum common equity to risk-weighted assets ratio and requiring that goodwill, general intangibles and certain other items that currently must be deducted from Tier I Capital instead be deducted from common equity as a component of Tier I Capital. The Capital Proposals also leave open the possibility that the Basel Committee will recommend changes to the minimum Tier I Capital and total risk-based capital ratios of 4.0% and 8.0%, respectively. Concurrently with the release of the Capital Proposals, the Basel Committee also released a set of proposals related to liquidity risk exposure (the "Liquidity Proposals," and together with the Capital Proposals, the "2009 Basel Committee Proposals"). The Liquidity Proposals have three key elements, including the implementation of (i) a "liquidity coverage ratio" designed to ensure that a bank maintains an adequate level of unencumbered, high quality assets sufficient to meet the bank's liquidity needs over a 30- day time horizon under an acute liquidity stress scenario, (ii) a "net stable funding ratio" designed to promote more medium and long-term funding of the assets and activities of banks over a one-year time horizon, and (iii) a set of monitoring tools that the Basel Committee indicates should be considered as the minimum types of information that banks should report to supervisors and that supervisors should use in monitoring the liquidity risk profiles of supervised entities. Final provisions to the Basel Committee's proposal are expected to be implemented by December 31, 2012. Ultimate implementation of such proposals in the U.S. will be subject to the discretion of the U.S. bank regulators, and the regulations or guidelines adopted by such agencies may, of course, differ from the 2009 Basel Committee Proposals and other proposals that the Basel Committee may promulgate in the future. To continue to conduct its business as currently conducted, the Corporation and the Bank will need to maintain capital well above the minimum levels. As of December 31, 2010 and 2009, the most recent notifications from the FDIC categorized the Bank as "well capitalized" under current regulations. Commercial Real Estate. In December 2007, the federal banking agencies, including the FDIC, issued a final guidance on concentrations in commercial real estate lending, noting that recent increases in banks' commercial real estate concentrations could create safety and soundness concerns in the event of a significant economic downturn. The guidance mandates certain minimal risk management practices and categorizes banks with defined levels of such concentrations as banks requiring elevated examiner scrutiny. The Bank has a concentration in commercial real estate loans in excess of those defined levels. Management believes that the Corporation's credit processes and procedures meet the risk management standards dictated by this guidance, but it is not yet -10- possible to determine the impact this guidance may have on examiner attitudes with respect to the Bank's real estate concentrations, which attitudes could effectively limit increases in the Bank's loan portfolios and require additional credit administration and management costs associated with those portfolios. Loans. Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital. Transactions with Affiliates. Under federal law, all transactions between and among a state nonmember bank and its affiliates, which include holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. Generally, these requirements limit these transactions to a percentage of the bank's capital and require all of them to be on terms at least as favorable to the bank as transactions with non-affiliates. In addition, a bank may not lend to any affiliate engaged in non-banking activities not permissible for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The FDIC is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a bank. The regulations also set forth various reporting requirements relating to transactions with affiliates. Financial Privacy. In accordance with the GLB Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of governmental policy on financial institutions in recent years has been aimed at combating terrorist financing. This has generally been accomplished by amending existing anti-money laundering laws and regulations. The USA Patriot Act of 2001 (the "USA Patriot Act") has imposed significant new compliance and due diligence obligations, creating new crimes and penalties. The United States Treasury Department ("Treasury") has issued a number of implementing regulations which apply to various requirements of the USA Patriot Act to the Corporation and the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution. -11- The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted on July 21, 2010. The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. The Dodd-Frank Act includes the following provisions that, among other things: * Creates a new Consumer Financial Protection Bureau with power to promulgate and enforce consumer protection laws. Smaller depository institutions, those with $10 billion or less in assets, will be subject to the Consumer Financial Protection Bureau's rule-writing authority, and existing depository institution regulatory agencies will retain examination and enforcement authority for such institutions; * Establishes a Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk; * Implements corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all companies whose securities are registered with the SEC, not just financial institutions; * Changes the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital; * Provides that interchange fees for debit cards will be set by the Federal Reserve under a restrictive "reasonable and proportional cost" per transaction standard; * Applies the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies and require the FDIC and Federal Reserve to seek to make their respective capital requirements for state nonmember banks and bank holding companies countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction; * Makes permanent the $250,000 limit for federal deposit insurance and provides unlimited federal deposit insurance until December 31, 2012 for non-interest bearing transaction accounts at all insured depository institutions; and * Repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us, our customers or the financial industry more generally. Incentive Compensation. On October 22, 2009, the Federal Reserve issued a proposal on incentive compensation policies (the "Incentive Compensation Proposal") intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Incentive Compensation Proposal, which covers all employees that have the ability to materially affect the risk profile of an institution, either individually or as part of a group, is based upon the key principles that a financial institution's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and -12- (iii) be supported by strong corporate governance, including active and effective oversight by the institution's board of directors. The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Corporation, that are not "large, complex banking organizations." These reviews will be tailored to each financial institution based on the scope and complexity of the institution's activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the financial institution's supervisory ratings, which can affect the institution's ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution's safety and soundness and the institution is not taking prompt and effective measures to correct the deficiencies. On February 7, 2011, the issued joint proposed rule-making implementing provisions of the Dodd-Frank Act to prohibit incentive-based compensation plans that expose "covered financial institutions" to inappropriate risks. Covered financial institutions are institutions that have over $1 billion in assets and offer incentive-based compensation programs. The proposed rules would: * Prohibit incentive-based compensation that would encourage inappropriate risks by providing excessive compensation, or that could lead to a material loss for the institution; * Require each covered financial institution to establish and maintain policies and procedures regarding incentive compensation that are commensurate with the size and complexity of the institution; and * Require covered financial institutions with over $50 billion in assets, in addition to the above, to defer at least 50 percent of incentive- based payments to executive officers for a minimum of three years. The scope and content of banking regulators' policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the Corporation's ability to hire, retain and motivate its key employees. Fair Value. The Corporation's impaired loans and foreclosed assets may be measured and carried at "fair value", the determination of which requires management to make assumptions, estimates and judgments. When a loan is considered impaired, a specific valuation allowance is allocated or a partial charge- off is taken, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. In addition, foreclosed assets are carried at the lower of cost or "fair value", less cost to sell, following foreclosure. "Fair value" is defined by accounting principles generally accepted in the United States of America ("GAAP") "as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date." GAAP further defines an "orderly transaction" as "a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions -13- involving such assets; it is not a forced transaction (for example, a forced liquidation or distress sale)." Recently in the Bank's markets there have been very few transactions in the type of assets which represent the vast majority of the Bank's impaired loans and foreclosed properties which reflect "orderly transactions" as so defined. Instead, most transactions in comparable assets have been distressed sales not indicative of "fair value." Accordingly, the determination of fair value in the current environment is difficult and more subjective than it would be in a stable real estate environment. Although management believes its processes for determining the value of these assets are appropriate factors and allow the Corporation to arrive at a fair value, the processes require management judgment and assumptions and the value of such assets at the time they are revalued or divested may be significantly different from management's determination of fair value. Because of this increased subjectivity in fair value determinations, there is greater than usual grounds for differences in opinions, which may result in increased disagreements between management and the Bank's regulators, disagreements which could impair the relationship between the Bank and its regulators. Future Legislation. Various legislation affecting financial institutions and the financial industry is from time to time introduced. Such legislation may change banking statutes and the operating environment of the Corporation and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of the Corporation or any of its subsidiaries. The nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time. Available Information The Corporation is subject to the information requirements of the Securities Exchange Act of 1934, which means that it is required to file certain reports, proxy statements, and other information, all of which are available at the Public Reference Section of the Securities and Exchange Commission at Room 1580, 100 F. Street, N.E., Washington, D.C. 20549. Copies of the reports, proxy statements, and other information may be obtained from the Public Reference Section of the SEC, at prescribed rates, by calling 1-800- SEC-0330. The SEC maintains an Internet website at www.sec.gov where you can access reports, proxy, information and registration statements, and other information regarding corporations that file electronically with the SEC through the EDGAR system. The Corporation's Internet website address is www.sgfc.com. Executive Officers of the Corporation Executive officers are elected by the Board of Directors annually in May and hold office until the following May at the pleasure of the Board of Directors. The principal executive officers of the Corporation and their ages, positions, and terms of office as of March 31, 2011, are as follows: -14- Name (Age) Principal Position Officer Since DeWitt Drew Chief Executive Officer and President 1999 (54) of the Corporation and Bank John J. Cole, Jr. Executive Vice President of the 1984 (61) Corporation and Executive Vice President and Cashier of the Bank C. Wallace Sansbury Executive Vice President of the 1996 (68) Corporation and Bank Jeffery E. Hanson Executive Vice President of the Bank 2011 (45) George R. Kirkland Senior Vice President and Treasurer 1991 (60) of the Corporation and Senior Vice President and Comptroller of the Bank R. L. (Andy) Webb, Jr. Senior Vice President of the Bank 1994 (62) Geraldine Ferrone Luff Senior Vice President of the Bank 1995 (64) J. Larry Blanton Senior Vice President of the Bank 2000 (64) Vayden (Sonny) Murphy, Jr. Senior Vice President of the Bank 2000 (58) Danny E. Singley Senior Vice President of the Bank 2002 (56) Jeffrey (Jud) Moritz Senior Vice President of the Bank 2011 (34) David L. Shiver Senior Vice President of the Bank 2011 (61) Charles R. Lemons President and CEO of Empire 2007 (59) The following is a brief description of the business experience of the principal executive officers of the Corporation, Bank, and Empire. Except as otherwise indicated, each principal executive officer has been engaged in their present or last employment, in the same or similar position, for more than five years. Mr. Drew is a director of Southwest Georgia Financial Corporation and Southwest Georgia Bank and was named President and Chief Executive Officer in May 2002. Previously, he served as President and Chief Operating Officer beginning in 2001 and Executive Vice President in 1999 of Southwest Georgia Financial Corporation and Southwest Georgia Bank. -15- Mr. Cole is a director of Southwest Georgia Financial Corporation and Southwest Georgia Bank and became Executive Vice President and Cashier of the Bank and Executive Vice President of the Corporation in 2002. Previously, he had been Senior Vice President and Cashier of the Bank and Senior Vice President of the Corporation as well as serving other positions since 1984. Mr. Sansbury became Executive Vice President of the Bank and Corporation in December 2006. Previously, he had served as Senior Vice President of the Bank and Corporation since 1996. Mr. Hanson became Executive Vice President of the Bank in 2011. Previously, he was employed by Park Avenue Bank in Valdosta, Georgia, as Valdosta Market President and various other positions since 1994. Mr. Kirkland became Senior Vice President and Treasurer of the Corporation and Senior Vice President and Comptroller of the Bank in 1993. Mr. Webb became Senior Vice President of the Bank in 1997. Previously, he had been Vice President of the Bank since 1994 and, prior to that, Assistant Vice President of the Bank since 1984. Mrs. Luff became Senior Vice President in 2000 and Vice President of the Bank in 1995. Previously, she had been Assistant Vice President of the Bank since 1988. Mr. Blanton became Senior Vice President of the Bank in 2001. Previously, he had served as Vice President of the Bank since 2000 and in various other positions with the Bank since 1999. Mr. Murphy became Senior Vice President of the Bank in 2007 and Vice President of the Bank in 2006. Previously, he had been Assistant Vice President of the Bank since 2000. Mr. Singley became Senior Vice President of the Bank in 2008. Previously, he had been Vice President of the Bank since 2002. Mr. Moritz became Senior Vice President of the Bank in 2011. Previously, he was employed by Park Avenue Bank in Valdosta, Georgia, for five years and Regions Bank for five years. Mr. Shiver became Senior Vice President of the Bank in 2011. Previously, he had been Vice President of the Bank since 2006 and, prior to that, Assistant Vice President of the Bank since 2005. Mr. Lemons became President and CEO of Empire in 2008 and served as Executive Vice President of Empire since 2007. Previously, he was employed by Branch Banking & Trust Co. from 1992 to 2006. -16- Table 1 - Distribution of Assets, Liabilities, and Shareholders' Equity; Interest Rates and Interest Differentials The following tables set forth, for the fiscal years ended December 31, 2010, 2009, and 2008, the daily average balances outstanding for the major categories of earning assets and interest-bearing liabilities and the average interest rate earned or paid thereon. Except for percentages, all data is in thousands of dollars. Year Ended December 31, 2010 Average Balance Interest Rate (Dollars in thousands) ASSETS Cash and due from banks $ 8,652 $ - - % Earning assets: Interest-bearing deposits with banks 23,606 58 0.25% Loans, net (a) (b) (c) 157,516 10,033 6.37% Taxable investment securities held to maturity 69,475 2,412 3.47% Nontaxable investment securities held to maturity (c) 11,671 546 4.68% Nontaxable investment securities available for sale (c) 6,026 374 6.21% Other investment securities 1,651 6 0.36% Total earning assets 269,945 13,429 4.97% Premises and equipment 8,702 Other assets 13,447 Total assets $ 300,746 LIABILITIES AND SHAREHOLDERS' EQUITY Non-interest bearing demand deposits $ 41,844 $ - - % Interest-bearing liabilities: NOW accounts 19,351 16 0.08% Money market deposit accounts 58,455 88 0.15% Savings deposits 22,670 70 0.31% Time deposits 100,347 1,882 1.88% Other borrowings 26,000 835 3.21% Total interest-bearing liabilities 226,823 2,891 1.27% Other liabilities 5,152 Total liabilities 273,819 Common stock 4,294 Surplus 31,702 Retained earnings 17,045 Less treasury stock ( 26,114) Total shareholders' equity 26,927 Total liabilities and shareholders' equity $ 300,746 Net interest income and margin $10,538 3.90% -17- (a) Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are included. (b) Interest income includes loan fees of $487 thousand. (c) Reflects taxable equivalent adjustments using a tax rate of 34 %. Year Ended December 31, 2009 Average Balance Interest Rate (Dollars in thousands) ASSETS Cash and due from banks $ 7,638 $ - - % Earning assets: Interest-bearing deposits with banks 13,045 33 0.25% Loans, net (a) (b) (c) 150,683 9,619 6.38% Taxable investment securities held to maturity 69,701 3,299 4.73% Nontaxable investment securities held to maturity (c) 6,817 391 5.74% Nontaxable investment securities available for sale (c) 9,578 725 7.57% Other investment securities 1,538 5 0.33% Federal funds sold 65 0 0.00% Total earning assets 251,427 14,072 5.60% Premises and equipment 7,089 Other assets 12,008 Total assets $ 278,162 LIABILITIES AND SHAREHOLDERS' EQUITY Non-interest bearing demand deposits $ 38,895 $ - - % Interest-bearing liabilities: NOW accounts 19,700 35 0.18% Money market deposit accounts 46,773 157 0.34% Savings deposits 21,552 109 0.51% Time deposits 99,665 2,584 2.59% Federal funds purchased 146 1 0.69% Other borrowings 23,104 786 3.41% Total interest-bearing liabilities 210,940 3,672 1.74% Other liabilities 4,097 Total liabilities 253,932 Common stock 4,294 Surplus 31,702 Retained earnings 14,348 Less treasury stock ( 26,114) Total shareholders' equity 24,230 Total liabilities and shareholders' equity $ 278,162 Net interest income and margin $10,400 4.14% -18- (a) Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are included. (b) Interest income includes loan fees of $504 thousand. (c) Reflects taxable equivalent adjustments using a tax rate of 34 %. Year Ended December 31, 2008 Average Balance Interest Rate (Dollars in thousands) ASSETS Cash and due from banks $ 7,936 $ - - % Earning assets: Interest-bearing deposits with banks 11,281 290 2.57% Loans, net (a) (b) (c) 132,209 9,605 7.27% Taxable investment securities held to maturity 83,815 4,121 4.92% Nontaxable investment securities held to maturity (c) 5,689 333 5.85% Nontaxable investment securities available for sale (c) 14,234 1,146 8.05% Other investment securities 1,643 64 3.90% Federal funds sold 3,330 90 2.70% Total earning assets 252,201 15,649 6.20% Premises and equipment 6,097 Other assets 9,193 Total assets $ 275,427 LIABILITIES AND SHAREHOLDERS' EQUITY Non-interest bearing demand deposits $ 36,613 $ - - % Interest-bearing liabilities: NOW accounts 20,567 61 0.30% Money market deposit accounts 45,749 365 0.80% Savings deposits 21,936 232 1.06% Time deposits 96,454 3,768 3.91% Federal funds purchased 1,288 23 1.79% Other borrowings 24,917 1,022 4.10% Total interest-bearing liabilities 210,911 5,471 2.59% Other liabilities 2,535 Total liabilities 250,059 Common stock 4,294 Surplus 31,702 Retained earnings 15,481 Less treasury stock ( 26,109) Total shareholders' equity 25,368 Total liabilities and shareholders' equity $ 275,427 Net interest income and margin $10,178 4.04% -19- (a) Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are included. (b) Interest income includes loan fees of $656 thousand. (c) Reflects taxable equivalent adjustments using a tax rate of 34 %. Table 2 - Rate/Volume Analysis The following table sets forth, for the indicated years ended December 31, a summary of the changes in interest paid resulting from changes in volume and changes in rate. The change due to volume is calculated by multiplying the change in volume by the prior year's rate. The change due to rate is calculated by multiplying the change in rate by the prior year's volume. The change attributable to both volume and rate is calculated by multiplying the change in volume by the change in rate. Due To Changes In (a) Increase 2010 2009 (Decrease) Volume Rate (Dollars in thousands) Interest earned on: Interest-bearing deposits with banks $ 58 $ 33 $ 25 $ 26 $( 1) Loans, net (b) 10,033 9,619 414 430 ( 16) Taxable investment securities held to maturity 2,412 3,299 ( 887) ( 11) ( 876) Nontaxable investment securities held to maturity (b) 546 391 155 209 ( 54) Nontaxable investment securities available for sale (b) 374 725 ( 351) (236) ( 115) Other investment securities 6 5 1 0 1 Total interest income 13,429 14,072 ( 643) 418 (1,061) Interest paid on: NOW accounts 16 35 ( 19) ( 1) ( 18) Money market deposit accounts 88 157 ( 69) 56 ( 125) Savings deposits 70 109 ( 39) 6 ( 45) Time deposits 1,882 2,584 ( 702) 18 ( 720) Federal funds purchased 0 1 ( 1) ( 1) 0 Other borrowings 835 786 49 92 ( 43) Total interest expense 2,891 3,672 ( 781) 170 ( 951) Net interest earnings $10,538 $10,400 $ 138 $ 248 $( 110) (a) Volume and rate components are in proportion to the relationship of the absolute dollar amounts of the change in each. (b) Reflects taxable equivalent adjustments using a tax rate of 34 % for 2010 and 2009 in adjusting interest on nontaxable loans and securities to a fully taxable basis. -20- Due To Changes In (a) Increase 2009 2008 (Decrease) Volume Rate (Dollars in thousands) Interest earned on: Interest-bearing deposits with banks $ 33 $ 290 $( 257) $ 54 $( 311) Loans, net (b) 9,619 9,605 14 106 ( 92) Taxable investment securities held to maturity 3,299 4,121 ( 822) (673) ( 149) Nontaxable investment securities held to maturity (b) 391 333 58 65 ( 7) Nontaxable investment securities available for sale (b) 725 1,146 ( 421) (356) ( 65) Other investment securities 5 64 ( 59) ( 4) ( 55) Federal funds sold 0 90 ( 90) ( 44) ( 46) Total interest income 14,072 15,649 (1,577) (852) ( 725) Interest paid on: NOW accounts 35 61 ( 26) ( 3) ( 23) Money market deposit accounts 157 365 ( 208) 8 ( 216) Savings deposits 109 232 ( 123) ( 4) ( 119) Time deposits 2,584 3,768 (1,184) 130 (1,314) Federal funds purchased 1 23 ( 22) ( 13) ( 9) Other borrowings 786 1,022 ( 236) ( 70) ( 166) Total interest expense 3,672 5,471 (1,799) 48 (1,847) Net interest earnings $10,400 $10,178 $ 222 $(900)$ 1,122 (a) Volume and rate components are in proportion to the relationship of the absolute dollar amounts of the change in each. (b) Reflects taxable equivalent adjustments using a tax rate of 34 % for 2009 and 2008 in adjusting interest on nontaxable loans and securities to a fully taxable basis. -21- Table 3 - Investment Portfolio The carrying values of investment securities for the indicated years are presented below: Year Ended December 31, 2010 2009 2008 (Dollars in thousands) Securities held to maturity: U.S. Government Agencies $ 7,000 $ 998 $ 5,996 State and municipal 17,682 9,003 6,112 Residential mortgage-backed 21,573 14,194 0 Total securities held to maturity $ 46,255 $ 24,195 $ 12,108 Securities available for sale: U.S. Government Treasuries $ 10,633 $ 0 $ 0 U.S. Government Agencies 0 0 15,036 State and municipal 5,846 5,945 10,768 Residential mortgage-backed 38,399 50,041 50,011 Corporate notes 0 5,877 7,284 Equity securities 68 145 113 Total securities available for sale $ 54,946 $ 62,008 $ 83,212 At year-end 2010, the total investment portfolio increased to $101,201,367, an increase of $14,997,946 or 17.4%, compared with $86,203,421 at year-end 2009. The majority of this increase was due to purchases of $52,437,029 of U.S. Government Agencies, U.S. Government Treasuries, U.S. Government sponsored residential mortgage-backed securities, and municipal securities. Offsetting these purchases were calls and maturities of $6,595,000 of U.S. Government Agencies and tax-free municipals as well as residential mortgage- backed securities principal paydowns of approximately $12,900,000. Additionally, we sold $11,634,167 of longer-term residential mortgage-backed securities and the remaining $6,222,368 of corporate notes to shorten the duration and reduce credit risk in our portfolio. These sales resulted in a net gain of $534,973. The following table shows the expected maturities of debt securities at December 31, 2010, and the weighted average yields (for nontaxable obligations on a fully taxable basis assuming a 34% tax rate) of such securities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties. Mortgage backed securities amortize in accordance with the terms of the underlying mortgages, including prepayments as a result of refinancings and other early payoffs. -22- MATURITY After One After Five Within But Within But Within After One Year Five Years Ten Years Ten Years Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) Debt Securities: U.S. Government Treasuries $ 0 - % $ 0 - % $10,634 2.48% $ 0 - % U.S. Government Agencies 7,000 1.39% 0 - % 0 - % 0 - % State and municipal 4,550 4.93% 14,692 4.10% 4,285 4.48% 0 - % Residential mortgage backed 0 - % 0 - % 11,193 3.31% 48,779 3.64% Total $11,550 2.78% $14,692 4.10% $26,112 3.16% $48,779 3.64% The calculation of weighted average yields is based on the carrying value and effective yields of each security weighted for the scheduled maturity of each security. At December 31, 2010 and 2009, securities carried at approximately $48,848,556 and $41,314,406, respectively, were pledged to secure public and trust deposits as required by law. At year-end 2010, approximately $8 million was overpledged and could be released if necessary for liquidity needs. In 2010, we pledged securities with a lendable collateral value of $3,882,357 to secure Federal Home Loan Bank advances. In 2009, securities were not pledged to secure our advances. Table 4 - Loan Portfolio The following table sets forth the amount of loans outstanding for the indicated years according to type of loan: Year Ended December 31, 2010 2009 2008 2007 2006 (Dollars in thousands) Commercial, financial and agricultural $ 27,852 $ 25,731 $ 26,375 $ 21,851 $ 20,938 Real estate: Construction loans 16,900 15,597 18,357 11,564 13,238 Commercial mortgage loans 47,649 50,337 43,054 38,038 45,506 Residential loans 51,610 51,314 45,192 31,936 31,942 Agricultural loans 8,428 7,225 8,640 7,258 5,576 Consumer & Other 5,320 10,056 7,481 8,397 8,336 Total loans 157,759 160,260 149,099 119,044 125,536 Less: Unearned income 26 30 29 36 44 Allowance for loan losses 2,755 2,533 2,376 2,399 2,417 Net loans $154,978 $157,697 $146,694 $116,609 $123,075 -23- The following table shows maturities as well as interest sensitivity of the commercial, financial, agricultural, and construction loan portfolio at December 31, 2010. Commercial, Financial Agricultural, and Construction (Dollars in thousands) Distribution of loans which are due: In one year or less $ 17,686 After one year but within five years 23,061 After five years 4,005 Total $ 44,752 The following table shows, for such loans due after one year, the amounts which have predetermined interest rates and the amounts which have floating or adjustable interest rates at December 31, 2010. Loans With Predetermined Loans With Rates Floating Rates Total (Dollars in thousands) Commercial, financial, agricultural and construction $ 17,402 $ 9,664 $ 27,066 The following table presents information concerning outstanding balances of nonperforming loans and foreclosed assets for the indicated years. Nonperforming loans comprise: (a) loans accounted for on a nonaccrual basis ("nonaccrual loans"); (b) loans which are contractually past due 90 days or more as to interest or principal payments and still accruing ("past-due loans"); (c) loans past due 30 days or more for which the terms have been modified to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower ("restructured loans"); and (d) loans now current but where there are serious doubts as to the ability of the borrower to comply with present loan repayment terms ("potential problem loans"). The Corporation's nonaccrual policy is located in Footnote 3. Nonperforming loans Nonaccrual Past-Due Restructured Potential Foreclosed Loans Loans Loans Problem Loans Total Assets (Dollars in thousands) December 31, 2010 $ 186 $ 0 $ 34 $ 830 $1,050 $3,288 December 31, 2009 $1,521 $ 0 $ 62 $ 0 $1,583 $3,832 December 31, 2008 $2,732 $ 0 $ 168 $ 0 $2,900 $ 211 December 31, 2007 $3,222 $ 0 $ 69 $ 49 $3,340 $ 98 December 31, 2006 $2,347 $ 10 $ 19 $ 70 $2,446 $ 0 -24- In 2010, nonaccrual loans decreased due to the settlement of a large agricultural real estate loan that was placed on nonaccrual status in 2009. Items in foreclosed assets include one large $2,845,853 commercial property that remains under construction. Costs of improvements to this property were fully funded in the third quarter of 2009. Also, in foreclosed assets are four residential properties valued at $442,266. Summary of Loan Loss Experience The following table is a summary of average loans outstanding during the reported periods, changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category, and additions to the allowance which have been charged to operating expenses. Year Ended December 31, 2010 2009 2008 2007 2006 (Dollars in thousands) Average loans outstanding $160,356 $153,149 $134,602 $127,267 $119,213 Amount of allowance for loan losses at beginning of period $ 2,533 $ 2,376 $ 2,399 $ 2,417 $ 2,454 Amount of loans charged off during period: Commercial, financial and agricultural 92 227 0 0 0 Real estate: Construction 30 0 0 0 0 Commercial 416 0 785 0 0 Residential 52 147 0 7 0 Agricultural 0 0 0 0 0 Installment 92 54 87 45 60 Total loans charged off 682 428 872 52 60 Amount of recoveries during period: Commercial, financial and agricultural 263 0 0 0 0 Real estate: Commercial 0 0 2 1 0 Residential 0 0 0 0 0 Agricultural 0 0 0 0 0 Installment 41 49 22 33 23 Total loans recovered 304 49 24 34 23 Net loans charged off during period 378 379 848 18 37 Additions to allowance for loan losses charged to operating expense during period 600 536 825 0 0 Amount of allowance for loan losses at end of period $ 2,755 $ 2,533 $ 2,376 $ 2,399 $ 2,417 Ratio of net charge-offs during period to average loans outstanding for the period .24% .25% .63% .01% .03% -25- The allowance is based upon management's analysis of the portfolio under current economic conditions. This analysis includes a study of loss experience, a review of delinquencies, and an estimate of the possibility of loss in view of the risk characteristics of the portfolio. Based on the above factors, management considers the current allowance to be adequate. Allocation of Allowance for Loan Losses Management has allocated the allowance for loan losses within the categories of loans set forth in the table below based on historical experience of net charge-offs. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. The amount of the allowance applicable to each category and the percentage of loans in each category to total loans are presented below. December 31, 2010 December 31, 2009 December 31, 2008 % of % of % of Total Total Total Category Allocation Loans Allocation Loans Allocation Loans (Dollars in thousands) Commercial, financial and agricultural $ 134 17.7% $ 123 18.5% $ 115 18.9% Real estate: Construction 1,396 10.7% 1,283 9.7% 1,204 12.3% Commercial 686 30.2% 631 31.4% 592 28.9% Residential 302 32.7% 278 32.1% 260 30.3% Agricultural 0 5.3% 0 4.5% 0 5.8% Installment 237 3.4% 218 3.8% 205 3.8% Total $2,755 100.0% $2,533 100.0% $2,376 100.0% December 31, 2007 December 31, 2006 % of % of Total Total Category Allocation Loans Allocation Loans (Dollars in thousands) Commercial, financial and agricultural $ 116 18.4% $ 117 16.7% Real estate: Construction 1,216 9.7% 1,225 10.5% Commercial 597 32.0% 602 36.2% Residential 263 26.8% 265 25.4% Agricultural 0 6.1% 0 4.4% Installment 207 7.0% 208 6.8% Total $2,399 100.0% $2,417 100.0% The calculation is based upon total loans including unearned interest. Management believes that the portfolio is diversified and, to a large extent, secured without undue concentrations in any specific risk area. Control of loan quality is regularly monitored by management, the loan committee, and is reviewed by the Bank's Board of Directors which meets monthly. Independent external review of the loan portfolio is provided by examinations conducted by regulatory authorities. The amount of additions -26- to the allowance for loan losses charged to operating expense for the periods indicated were based upon many factors, including actual charge-offs and evaluations of current economic conditions in the market area. Management believes the allowance for loan losses is adequate to cover any potential loan losses. Table 5 - Deposits The average amounts of deposits for the last three years are presented below. Year Ended December 31, 2010 2009 2008 (Dollars in thousands) Noninterest-bearing demand deposits $ 41,844 $ 38,895 $ 36,613 NOW accounts 19,351 19,700 20,567 Money market deposit accounts 58,455 46,773 45,749 Savings 22,670 21,552 21,935 Time deposits 100,347 99,665 96,454 Total interest-bearing 200,823 187,690 184,705 Total average deposits $ 242,667 $ 226,585 $ 221,318 The maturity of certificates of deposit of $100,000 or more as of December 31, 2010, are presented below. (Dollars in thousands) 3 months or less $ 8,254 Over 3 months through 6 months 7,240 Over 6 months through 12 months 12,067 Over 12 months 4,911 Total outstanding certificates of deposit of $100,000 or more $ 32,472 Return on Equity and Assets Certain financial ratios are presented below. Year Ended December 31, 2010 2009 2008 Return on average assets 0.62% 0.65% ( .46)% Return on average equity 6.89% 7.48% (5.04)% Dividend payout ratio (dividends paid divided by net income) 13.73% 9.84% NA* Average equity to average assets ratio 8.95% 8.71% 9.21% -27- * Dividend payout ratio cannot be calculated due to net loss. Forward-Looking Statements In addition to historical information, this 2010 Annual 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 banking system, financial markets, and general economic conditions; * the Corporation's ability to raise capital; * the Corporation's ability to maintain liquidity or access other sources of funding; * 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; * the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations; * changes in regulation and monetary policy; * losses due to fraudulent and negligent conduct of customers, service providers or 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; and * 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. ITEM 1A. RISK FACTORS An investment in the Corporation's common stock and the Corporation's financial results are subject to a number of risks. Investors should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K and the documents incorporated by reference. Additional risks and uncertainties, including those generally -28- affecting the industry in which the Corporation operates and risks that management currently deems immaterial, may arise or become material in the future and affect the Corporation's business. * As a bank holding company, adverse conditions in the general business or economic environment could have a material adverse effect on the Corporation's financial condition and results of operation. Continued weakness or adverse changes in business and economic conditions generally or specifically in the markets in which the Corporation operates could adversely impact our business, including causing one or more of the following negative developments: * a decrease in the demand for loans and other products and services offered by the Corporation; * a decrease in the value of the Corporation's loans secured by consumer or commercial real estate; * an impairment of the Corporation's assets, such as its intangible assets, goodwill, or deferred tax assets; or * an increase in the number of customers or other counterparties who default on their loans or other obligations to the Corporation, which could result in a higher level of nonperforming assets, net charge-offs and provision for loan losses. For example, if the Corporation is unable to continue to generate, or demonstrate that it can continue to generate, sufficient taxable income in the near future, then it may not be able to fully realize the benefits of its deferred tax assets and may be required to recognize a valuation allowance, similar to an impairment of those assets, if it is more-likely- than-not that some portion of the Corporation's deferred tax assets will not be realized. Such a development, or one or more other negative developments resulting from adverse conditions in the general business or economic environment, some of which are described above, could have a material adverse effect on the Corporation's financial condition and results of operations. * The Corporation's ability to raise capital could be limited and could affect its liquidity and could be dilutive to existing shareholders. Current conditions in the capital markets are such that traditional sources of capital may not be available to the Corporation on reasonable terms if it needed to raise capital. In such case, there is no guarantee that the Corporation will be able to borrow funds or successfully raise additional capital at all or on terms that are favorable or otherwise not dilutive to existing shareholders. * Liquidity is essential to the Corporation's businesses and it relies on external sources to finance a significant portion of our operations. Liquidity is essential to the Corporation's businesses. The Corporation's capital resources and liquidity could be negatively impacted by disruptions in its ability to access these sources of funding. With increased concerns about bank failures, traditional deposit customers are increasingly concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits from the Corporation's subsidiary bank in an effort to ensure that the amount that they have on deposit is fully insured. In addition, the cost of brokered and other out-of-market deposits and potential future regulatory limits on the interest rate the Corporation -29- may pay for brokered deposits could make them unattractive sources of funding. Factors that the Corporation cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, could impair its ability to raise funding. Other financial institutions may be unwilling to extend credit to banks because of concerns about the banking industry and the economy generally and, given recent downturns in the economy, there may not be a viable market for raising short or long-term debt or equity capital. In addition, the Corporation's ability to raise funding could be impaired if lenders develop a negative perception of its long-term or short-term financial prospects. Such negative perceptions could be developed if the Corporation is downgraded or put on (or remain on) negative watch by the rating agencies, suffers a decline in the level of its business activity or regulatory authorities take significant action against it, among other reasons. If the Corporation is unable to raise funding using the methods described above, it would likely need to finance or liquidate unencumbered assets to meet maturing liabilities. The Corporation may be unable to sell some of its assets, or it may have to sell assets at a discount from market value, either of which could adversely affect its results of operations and financial condition. * The Corporation's construction and land development loans are subject to unique risks that could adversely affect earnings. The Corporation's construction and land development loan portfolio was $16.9 million at December 31, 2010, comprising 10.7% of total loans. Construction and land development loans are often riskier than home equity loans or residential mortgage loans to individuals. In the event of a general economic slowdown, they would represent higher risk due to slower sales and reduced cash flow that could impact the borrowers' ability to repay on a timely basis. In addition, although regulations and regulatory policies affecting banks and financial services companies undergo continuous change and we cannot predict when changes will occur or the ultimate effect of any changes, there has been recent regulatory focus on construction, development and other commercial real estate lending. Recent changes in the federal policies applicable to construction, development or other commercial real estate loans make us subject to substantial limitations with respect to making such loans, increase the costs of making such loans, and require us to have a greater amount of capital to support this kind of lending, all of which could have a material adverse effect on our profitability or financial condition. * Recent performance may not be indicative of future performance. Various factors, such as economic conditions, regulatory and legislative considerations, competition and the ability to find and retain talented people, may impede the Corporation's ability to remain profitable. * A deterioration in asset quality could have an adverse impact on the Corporation. A significant source of risk for the Corporation arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of diverse real and personal property that may be affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in -30- interest rates, changes in monetary and fiscal policies of the federal government, environmental contamination and other external events. In addition, decreases in real estate property values due to the nature of the Bank's loan portfolio, over 78% of which is secured by real estate, could affect the ability of customers to repay their loans. The Bank's loan policies and procedures may not prevent unexpected losses that could have a material adverse effect on the Corporation's business, financial condition, results of operations, or liquidity. * Changes in prevailing interest rates may negatively affect the results of operations of the Corporation and the value of its assets. The Corporation's earnings depend largely on the relationship between the yield on earning assets, primarily loans and investments, and the cost of funds, primarily deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities and the level of nonperforming assets. Fluctuations in interest rates affect the demand of customers for the Corporation's products and services. In addition, interest-bearing liabilities may re-price or mature more slowly or more rapidly or on a different basis than interest-earning assets. Significant fluctuations in interest rates could have a material adverse effect on the Corporation's business, financial condition, results of operations or liquidity. Changes in the level of interest rates may also negatively affect the value of the Corporation's assets and its ability to realize book value from the sale of those assets, all of which ultimately affect earnings. * If the Corporation's allowance for loan losses is not sufficient to cover actual loan losses, earnings would decrease. The Bank's loan customers may not repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to assure repayment. The Bank may experience significant loan losses which would have a material adverse effect on the Corporation's operating results. Management makes various assumptions and judgments about the collectibility of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. The Corporation maintains an allowance for loan losses in an attempt to cover any loan losses inherent in the portfolio. In determining the size of the allowance, management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and nonaccruals, national and local economic conditions and other pertinent information. As a result of these considerations, the Corporation has from time to time increased its allowance for loan losses. For the year ended December 31, 2010, the Corporation recorded an allowance for possible loan losses of $2.75 million, compared with $2.53 million for the year ended December 31, 2009. If those assumptions are incorrect, the allowance may not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio. * The Corporation may be subject to losses due to fraudulent and negligent conduct of the Bank's and Empire's loan customers, third party service providers and employees. -31- When the Bank and Empire make loans to individuals or entities, they rely upon information supplied by borrowers and other third parties, including information contained in the applicant's loan application, property appraisal reports, title information and the borrower's net worth, liquidity and cash flow information. While they attempt to verify information provided through available sources, they cannot be certain all such information is correct or complete. The Bank and Empire's reliance on incorrect or incomplete information could have a material adverse effect on the Corporation's profitability or financial condition. * Technology difficulties or failures could have a material adverse effect on the Corporation. The Corporation depends upon data processing, software, communication and information exchange on a variety of computing platforms and networks. The Corporation cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. The Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and the Corporation could be exposed to claims from customers. Any of these results could have a material adverse effect on the Corporation's business, financial condition, results of operations or liquidity. * The Corporation's business is subject to the success of the local economies and real estate markets in which it operates. The Corporation's banking operations are located in southwest Georgia. Because of the geographic concentration of its operations, the Corporation's success depends largely upon economic conditions in this area, which include volatility in the agricultural market, influx and outflow of major employers in the area, and minimal population growth throughout the region. Deterioration in economic conditions in the communities in which the Corporation operates could adversely affect the quality of the Corporation's loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation's business, financial condition, results of operations or liquidity. The Corporation is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of more diverse economies. * The Corporation may face risks with respect to its ability to execute its business strategy. The financial performance and profitability of the Corporation will depend on its ability to execute its strategic plan and manage its future growth. Moreover, the Corporation's future performance is subject to a number of factors beyond its control, including pending and future federal and state banking legislation, regulatory changes, unforeseen litigation outcomes, inflation, lending and deposit rate changes, interest rate fluctuations, increased competition and economic conditions. Accordingly, these issues could have a material adverse effect on the Corporation's business, financial condition, results of operations or liquidity. * The Corporation depends on its key personnel, and the loss of any of them could adversely affect the Corporation. -32- The Corporation's success depends to a significant extent on the management skills of its existing executive officers and directors, many of whom have held officer and director positions with the Corporation for many years. The loss or unavailability of any of its key personnel, including DeWitt Drew, President and CEO, John J. Cole, Jr., Executive Vice President, C. Wallace Sansbury, Executive Vice President, Jeffery E. Hanson, Executive Vice President, George R. Kirkland, Senior Vice President & Treasurer and Charles R. Lemons, President and CEO of Empire, could have a material adverse effect on the Corporation's business, financial condition, and results of operations or liquidity. * Competition from financial institutions and other financial service providers may adversely affect the Corporation. The banking business is highly competitive, and the Corporation experiences competition in its markets from many other financial institutions. The Corporation competes with these other financial institutions both in attracting deposits and in making loans. Many of its competitors are well- established, larger financial institutions that are able to operate profitably with a narrower net interest margin and have a more diverse revenue base. The Corporation may face a competitive disadvantage as a result of its smaller size, lack of geographic diversification and inability to spread costs across broader markets. There can be no assurance that the Corporation will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation's business, financial condition, results of operations or liquidity. * The Dodd-Frank Act and related regulations may adversely affect our business, financial condition, liquidity or results of operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted on July 21, 2010. The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with the power to promulgate and enforce consumer protection laws. Smaller depository institutions, those with $10 billion or less in assets, will be subject to the Consumer Financial Protection Bureau's rule-writing authority, and existing depository institution regulatory agencies will retain examination and enforcement authority for such institutions. The Dodd-Frank Act also establishes a Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk, makes permanent the $250,000 limit for federal deposit insurance, provides unlimited federal deposit insurance until December 31, 2012 for non-interest bearing transaction accounts at all insured depository institutions and repeals the federal prohibitions on the payment of interest on demand deposits. Among other things, the Dodd-Frank Act includes provisions affecting (1) corporate governance and executive compensation of all companies whose securities are registered with the SEC, (2) FDIC insurance assessments, (3) interchange fees for debit cards, which would be set by the Federal Reserve under a restrictive "reasonable and proportional cost" per transaction standard, (4) minimum capital levels for bank holding companies, subject to a grandfather clause for financial institutions with less than $15 billion in assets, (5) derivative and proprietary trading by financial institutions, and (6) the resolution of large financial institutions. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations may adversely impact us. However, -33- compliance with these new laws and regulations may increase our costs, limit our ability to pursue attractive business opportunities, cause us to modify our strategies and business operations and increase our capital requirements and constraints, any of which may have a material adverse impact on our business, financial condition, liquidity or results of operations. * Changes in government regulation or monetary policy could adversely affect the Corporation. The Corporation and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the Corporation conducts its banking business, undertakes new investments and activities and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit holders of the Corporation's securities. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Corporation's business, financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Corporation, and any unfavorable change in these conditions could have a material adverse effect on the Corporation's business, financial condition, results of operations or liquidity. See Part I, Item 1, "Supervision and Regulation." ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved comments from the Securities and Exchange Commission staff regarding the Corporation's periodic or current reports under the Exchange Act. ITEM 2. PROPERTIES The executive offices of the Corporation and the main banking office of the Bank are located in a 22,000 square foot facility at 201 First Street, S. E., Moultrie, Georgia. The Bank's Operations Center is located at 11 Second Avenue, Moultrie, Georgia. The Trust and Brokerage Division of the Bank is located at 25 Second Avenue, Moultrie, Georgia. The Bank's Administrative Services office is located across the street from the main office at 205 Second Street, S. E., Moultrie, Georgia. This building is also used for training and meeting rooms, record storage, and a drive-thru teller facility. -34- Square Name Address Feet Main Office 201 First Street, SE, Moultrie, GA 31768 22,000 Operations Center 11 Second Avenue, SW, Moultrie, GA 31768 5,000 Trust & Investment Office 25 Second Avenue, SW, Moultrie, GA 31768 11,000 Administrative Services 205 Second Street, SE, Moultrie, GA 31768 15,000 Southwest Georgia Ins. Services 501 South Main Street, Moultrie, GA 31768 5,600 Baker County Bank Highway 91 & 200, Newton, GA 39870 4,400 Bank of Pavo 1102 West Harris Street, Pavo, GA 31778 3,900 Sylvester Banking Company 300 North Main Street, Sylvester, GA 31791 12,000 Empire Financial Services 121 Executive Parkway, Milledgeville, GA 31061 2,700 Valdosta Banking Center 3500 North Valdosta Road, Valdosta, GA 31602 5,800 All the buildings and land, which include parking and drive-thru teller facilities, are owned by the Bank. There are two automated teller machines on the Bank's main office premises, one in each of the Baker County, Thomas County, Worth County and Lowndes County branch offices, and one additional automated teller machine located in Doerun, Georgia. These automated teller machines are linked to the STAR network of automated teller machines. A new full-service banking center in Valdosta, Georgia was opened in June of 2010. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of operations, the Corporation, the Bank and Empire are defendants in various legal proceedings incidental to their business. In the opinion of management, there is no pending or threatened proceeding in which an adverse decision will result in a material adverse change in the consolidated financial condition or results of operations of the Corporation. No material proceedings terminated in the fourth quarter of 2010. PART II ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information The Corporation's common stock trades on the NYSE Amex under the symbol "SGB". The closing price on December 31, 2010, was $10.90. Below is a schedule of the high and low stock prices for each quarter of 2010 and 2009. 2010 For The Quarter Fourth Third Second First High $10.90 $10.75 $12.10 $16.90 Low $ 6.25 $ 8.31 $ 9.00 $ 8.54 -35- 2009 For The Quarter Fourth Third Second First High $10.00 $ 9.25 $ 9.90 $10.84 Low $ 7.42 $ 4.65 $ 7.42 $ 7.25 As of December 31, 2010, there were 511 record holders of the Corporation's common stock. Also, there were approximately 400 additional shareholders who held shares through trusts and brokerage firms. Dividends Cash dividends paid on the Corporation's common stock were $0.10 per share in 2010 and $0.07 per share in 2009. Our dividend policy objective is to pay out a portion of earnings in dividends to our shareholders in a consistent manner over time. However, no assurance can be given that dividends will be declared in the future. The amount and frequency of dividends is determined by the Corporation's Board of Directors after consideration of various factors, which include the Corporation's financial condition and results of operations, investment opportunities available to the Corporation, capital requirements, tax considerations and general economic conditions. The primary source of funds available to the parent company is the payment of dividends by its subsidiary bank. Federal and State banking laws restrict the amount bank of dividends that can be paid without regulatory approval. See Part I, Item 1, "Business - Payment of Dividends." The Corporation and its predecessors have paid cash dividends for the past eighty-two consecutive years. Securities Authorized for Issuance Under Equity Compensation Plans The following table presents information as of December 31, 2010, with respect to shares of common stock of the Corporation that may be issued under the Key Individual Stock Option Plan. No additional option shares can be granted under the Key Individual Stock Option Plan. Number of Securities Number of Securities to be Issued upon Weighted Average Remaining Available for Exercise of Exercise Price of Future Issuance Under Plan Category Outstanding Options Outstanding Options Equity Compensation Plans Equity compensation plans approved by shareholders(1) 13,880 $19.08 0 Equity compensation plans not approved by shareholders(2) 0 0.00 0 Total 13,880 $19.08 0 (1) The Key Individual Stock Option Plan (2) Excludes shares issued under the 401(k) Plan. -36- Sales of Unregistered Securities The Corporation has not sold any unregistered securities in the past three reported periods. Performance Graph The following graph compares the cumulative total shareholder return of the Corporation's Common Stock with The Carson Medlin Company's Independent Bank Index and the NASDAQ Index. The Independent Bank Index is the compilation of the total return to shareholders over the past five years of a group of 23 independent community banks located in the southeastern states of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia. The comparison assumes $100 was invested January 1, 2006, and that all semi-annual and quarterly dividends were reinvested each period. This comparison takes into consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2005. The comparisons in the graph are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the Corporation's Common Stock. 2005 2006 2007 2008 2009 2010 SOUTHWEST GEORGIA FINANCIAL CORP. 100 90 86 52 45 55 INDEPENDENT BANK INDEX 100 112 90 77 88 87 NASDAQ INDEX 100 116 122 77 97 112 ITEM 6. SELECTED FINANCIAL DATA Not applicable. -37- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For further information about the Corporation, see selected statistical information on pages 17 - 37 of this report on Form 10-K. 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 five full service banking facilities and seven 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 expanded geographically with a new full-service banking center in Valdosta, Georgia that was completed and opened in June of 2010. 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 and the interest paid on interest-bearing liabilities. The Corporation's earning assets are primarily loans, securities, and short-term interest-bearing deposits with banks and the interest-bearing liabilities are principally customer deposits and borrowings. Net interest income is highly sensitive to fluctuations in interest rates. For example, after the overnight borrowing rate for banks reached 5.25% in September of 2007, the Federal Reserve Bank began decreasing it by 5% to a range of 0% to 0.25%. This historically low interest rate level has remained unchanged for the period from October 2008 through December 2010. To address interest rate fluctuations, we manage our balance sheet in an effort to diminish the impact should interest rates suddenly change. Broadening our revenue sources helps to reduce the risk and exposure of our financial results to the impact of changes in interest rates, which are 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, and trust and retail brokerage services. In 2010, noninterest income was more than 28.0% of the Corporation's total revenue, whereas in 2009 noninterest income accounted for 27.0% of the Corporation's total revenue. -38- Our profitability is impacted also by operating expenses such as salaries, employee benefits, occupancy, and income taxes. Our lending activities are significantly influenced by regional and local factors such as 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. The economic downturn continues to challenge our region; however, our strength and stability in the market and our focused efforts enabled us to achieve solid results in 2010. We continued to invest in our people and communities, fully aware of the near-term impact that would have on earnings. Although the economy is slowly recovering, regulatory burdens continue to outpace growth opportunities. Despite those challenges, we will continue to focus on our customers and believe that our strategic positioning, strong balance sheet and capital levels position us to sustain our franchise, capture market share and build customer loyalty. Although the economy remains sluggish, the Corporation's nonperforming assets decreased to $3.542 million at the end of 2010. This decrease is primarily due to the settlement of a $1.283 million loan that was placed on nonaccrual status in 2009. 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 have on the Corporation's results of operations. We believe that the allowance for loan losses as of December 31, 2010, is adequate; however, under adverse 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 would have resulted in material estimates and assumptions changes. 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. Results of Operations Performance Summary Although net income remained relatively flat for 2010 at $1.8 million when compared to 2009, there were some significant variations. Net interest income increased $203 thousand primarily as a result of lower interest paid on deposits. Net gain on the sale of securities increased $280 thousand when compared to 2009. Offsetting this increase was a decrease in service charges on deposit accounts of $198 thousand as well as a $275 thousand provision for market value losses of foreclosed assets. Salaries and employee benefits increased $611 thousand due to increased staff at the Valdosta banking center as well as increased contributions to the employee retirement plans compared with the prior year. Offsetting this increase was a decrease in other operating expenses primarily due to lower legal expenses -39- of $857 thousand. On a per share basis, we had a net income of $0.73 per diluted share for 2010 compared with a net income of $0.71 per diluted share for 2009. Net income for 2009 was $1.8 million, an increase of approximately $3.1 million when compared with a net loss of $1.3 million in 2008. This increase in net income is largely attributable to lower salary and employee benefits of $792 thousand and higher net interest income resulting primarily from lower interest paid on interest-bearing liabilities. Net interest income was partially offset by a loan loss provision of $536 thousand in 2009. Net income in 2008 was impacted by a $4.11 million non-cash loss related to the impairment of equity securities, a $979 thousand loss at the Corporation's mortgage banking subsidiary and a 2008 fourth quarter charge- off of $785 thousand and related loan loss provision of $825 thousand. On a per share basis, we had a net income of $0.71 per diluted share for 2009 compared with a net loss of $0.50 per diluted share for 2008. We measure our performance on selected key ratios, which are provided for the last three years in the following table: 2010 2009 2008 Return on average total assets 0.62% 0.65% (.46)% Return on average shareholders' equity 6.89% 7.48% (5.04)% Average shareholders' equity to average total assets 8.95% 8.71% 9.21 % Net interest margin (tax equivalent) 3.90% 4.14% 4.04 % Net Interest Income Net interest income after provision for loan losses increased $139 thousand, or 1.5%, to $9.53 million for 2010 when compared with 2009. The overall decrease of $783 thousand in total interest expense more than offset the $580 thousand decrease in total interest income. The Corporation recognized a $600 thousand provision for loan losses in 2010 compared with $536 thousand in 2009. As a result of the current interest rate environment, interest paid on deposits declined by $831 thousand to $2.1 million at the end of 2010. This decline was partially offset by a $48 thousand increase in interest on borrowings. The average rate paid on average time deposits of $100.3 million decreased 71 basis points when compared with 2009. Interest income from investment securities decreased by $1.02 million mainly due to selling higher yielding mortgage-backed securities and corporate notes and reinvesting the proceeds into lower yielding investments. These sales reflected the repositioning of our investment portfolio to shorten the duration and reduce both credit and interest rate risk. Offsetting this decline was an increase in interest on deposits in other banks of $25 thousand. When compared with 2009, interest and fees on loans increased by $420 thousand mainly due to an increase in average loans volume of $6.8 million. Net interest income after the provision for loan losses increased $614 thousand, or 7.0%, to $9.39 million for 2009 as compared with 2008. Reduced interest paid on deposits and borrowings of $1.54 million and $258 thousand, respectively, due to a lower interest rate environment more than offset the $1.47 million decline in total interest income. The Corporation recognized a $536 thousand provision for loan losses in 2009, compared with a provision -40- for loan losses of $825 thousand in 2008. The average rate paid on average time deposits of $99.7 million decreased 132 basis points compared with 2008. Interest income from investment securities decreased by $1.15 million due to a lower average volume of securities of $17.7 million, and interest on deposits in other banks also decreased by $257 thousand. Interest and fees on loans increased by $20 thousand to $9.52 million. Net Interest Margin Net interest margin, which is the net return on earning assets, is a key performance ratio for evaluating net interest income. It is computed by dividing net interest income by average total earning assets. Net interest margin declined 24 basis points to 3.90% for 2010 when compared with 2009. Net interest margin was 4.14% for 2009, a 10 basis point increase from 4.04% in 2008. The decline in net interest margin was mainly impacted from securities which were either called, matured, or sold and reinvested into lower yielding securities or overnight balances carried at the Federal Reserve Bank. Partially offsetting this decline in net interest margin were both the decrease in the cost of interest-bearing deposits and the impact from growth in average loans and deposits compared with the prior year. Noninterest Income Noninterest income is an important contributor to net earnings. The following table summarizes the changes in noninterest income during the past three years: 2010 2009 2008 (Dollars in thousands) Amount % Change Amount % Change Amount % Change Service charges on deposit accounts $1,567 (11.2)% $1,766 9.8% $1,608 (7.4)% Income from trust services 241 13.7 213 (20.8) 269 ( 5.9) Income from retail brokerage services 300 12.8 266 (22.0) 341 ( 1.5) Income from insurance services 1,125 5.2 1,069 ( 3.0) 1,102 ( 4.2) Income from mortgage banking services 1,351 1.8 1,327 (34.3) 2,021 (28.2) Gain (loss) on the sale or disposition of assets 31 100.0 0 (100.0) 13 NM Provision for foreclosed asset losses (275) (100.0) 0 0.0 0 (100.0) Gain (loss) on the sale of securities 535 109.5 255 100.0 0 0.0 Gain (loss) on the impairment of equity securities 0 0.0 0 100.0 (4,105)(100.0) Other income 214 (6.0) 228 0.8 226 (2.6) Total noninterest income $5,089 (0.7)% $5,124 247.4% $1,475 (78.0)% *NM = not meaningful For 2010, noninterest income was $5.09 million, down slightly from $5.12 million in the same period of 2009. The majority of the decline was a result of a $275 thousand provision for changes in market value of foreclosed properties and a decrease in service charges on deposit accounts of $198 thousand compared with same period last year. These decreases were partially offset by a $535 thousand gain on the sale of securities compared -41- with a $255 thousand gain in 2009. Other increases in income occurred from insurance, trust, retail brokerage, and mortgage banking services which increased $56 thousand, $28 thousand, $34 thousand and $24 thousand, respectively. For 2009, noninterest income was $5.12 million compared with $1.48 million for 2008. Excluding the 2008 loss on the impairment of equity securities of $4.11 million, 2009 year-to-date noninterest income was down $456 thousand when compared with the same period last year. The decline primarily resulted from a drop in mortgage banking services revenue of $694 thousand, or 34.3%. Other contributing factors included income from trust services and retail brokerage services which decreased $56 thousand and $75 thousand, respectively. These decreases were partially offset by an increase in service charges on deposit account of $158 thousand and the $255 thousand gain on the sale of securities in 2009. Noninterest Expense Noninterest expense includes all expenses of the Corporation other than interest expense, provision for loan losses and income tax expense. The following table summarizes the changes in the noninterest expenses for the past three years: 2010 2009 2008 (Dollars in thousands) Amount % Change Amount % Change Amount % Change Salaries and employee benefits $ 6,971 9.6% $ 6,360 (11.1)% $ 7,152 2.0 % Occupancy expense 891 5.3 846 (2.0) 863 2.7 Equipment expense 739 10.9 667 (3.9) 694 7.1 Data processing expense 692 0.8 686 6.7 643 (6.3) Amortization of intangible assets 208 0.0 208 (8.4) 227 (51.4) Losses related to mortgage banking services 0 0.0 0 (100.0) 979 (38.3) Other operating expenses 2,676 (21.9) 3,425 30.2 2,631 11.3 Total noninterest expense $12,177 (0.1)% $12,192 (7.6)% $13,189 (3.0)% Total noninterest expense decreased slightly to $12.18 million in 2010 compared with $12.19 million in the same period last year. A decrease of $749 thousand, or 21.9%, in other operating expenses was mainly due to lower legal expense and insurance assessments to the FDIC compared with 2009. This decline was partially offset by increases to salary and employee benefits, occupancy, and equipment expenses related to the new Valdosta banking center's operations. Total noninterest expense decreased $1.0 million to $12.2 million in 2009 compared with the same period of the prior year, primarily due to a mortgage banking services loss of $979 thousand that was recognized in 2008. Salary and employee benefits declined $792 thousand in 2009. Occupancy and equipment expense decreased by $17 thousand and $27 thousand, respectively. Offsetting these decreases were other operating expenses which were higher due to increased legal and FDIC insurance fees of $675 thousand and $416 thousand, respectively. The increased legal fees resulted from the mortgage banking service's associated insurance claim. The FDIC increased the quarterly assessments by $294 thousand, plus a special assessment of $122 thousand. -42- The efficiency ratio (noninterest expense divided by total noninterest income plus tax equivalent net interest income), a measure of productivity, decreased slightly to 77.9% for 2010, from 78.5% for 2009 and 113.2% for 2008. The higher efficiency ratio in 2008 was primarily due to the loss related to mortgage banking services and lower revenue as a result of the non-cash impairment loss recognized on equity securities. Excluding these items, the adjusted efficiency ratio for 2008 would have been lower at 77.3% compared with 113.2%. Federal Income Tax Expense The Corporation had an expense of $584 thousand for federal income taxes in 2010 compared with an expense of $508 thousand in 2009 and a benefit of $1.66 million for the year ending December 31, 2008. These amounts resulted in an effective tax rate of 23.9%, 21.9%, and (56.4)%, for 2010, 2009, and 2008, respectively. See Note 10 of the Corporation's Notes to Consolidated Financial Statements for further details of tax expense. Uses and Sources of Funds The Corporation, primarily through the Bank, acts as a financial intermediary. As such, our financial condition should be considered in terms of how we manage our sources and uses of funds. Our primary sources of funds are deposits and borrowings. We invest our funds in assets, and our earning assets are what provide us income. During 2010, total average assets increased $22.6 million, or 8.1%, to $300.7 million, as compared with 2009. The increase in total average assets is primarily attributable to a higher level of investments in average interest-bearing deposits with banks of $10.6 million, and an increase in average total loans of $7.2 million. The Corporation's earning assets, which include loans, investment securities and deposits with banks, averaged $269.9 million in 2010, a 7.4% increase from $251.4 million in 2009. While year-end balances for both loans and interest-bearing deposits with banks were less than the previous year, their average volume continues to increase compared with the prior year averages. For 2010, average earning assets were comprised of 58% loans, 33% investment securities, and 9% deposit balances with banks. The ratio of average earning assets to average total assets decreased slightly to 89.8% for 2010 compared with 90.4% for 2009. Loans Loans are one of the Corporation's largest earning assets and uses of funds. Because of the importance of loans, most of the other assets and liabilities are managed to accommodate the needs of the loan portfolio. During 2010, average net loans represented 58% of average earning assets and 52% of average total assets. The composition of the Corporation's loan portfolio at December 31, 2010, 2009, and 2008 was as follows: -43- 2010 2009 2008 (Dollars in thousands) Category Amount % Change Amount % Change Amount % Change Commercial, financial, and agricultural $ 27,852 8.2 % $ 25,731 (2.4) % $ 26,375 20.7 % Real estate: Construction 16,900 8.4 % 15,597 (15.0)% 18,357 58.7 % Commercial 47,649 (5.3)% 50,337 16.9 % 43,054 13.2 % Residential 51,610 0.6 % 51,314 13.6 % 45,192 41.5 % Agricultural 8,428 16.7 % 7,225 (16.4)% 8,640 19.0 % Installment 5,320 (47.1)% 10,056 34.4 % 7,481 (10.9)% Total loans $157,759 (1.6)% $160,260 7.5 % $149,099 25.3 % Unearned income (26) 13.3 % (30) (3.5)% (29) 19.4 % Allowance for loan losses (2,755) (8.8)% (2,533) (6.6)% (2,376) 1.0 % Net loans $154,978 (1.7)% $157,697 7.5 % $146,694 25.3 % Total year-end balances of loans decreased $2.5 million while average total loans increased $7.2 million in 2010 compared with 2009. Increases in construction and agricultural real estate loans as well as commercial, financial, and agricultural loans were not sufficient to offset declines in other loan categories. The ratio of total loans to total deposits at year end decreased to 65.9% in 2010 compared with 68.1% in 2009. The loan portfolio mix at year end 2010 consisted of 10.7% loans secured by construction real estate, 30.2% loans secured by commercial real estate, 32.7% of loans secured by residential real estate, and 5.3% of loans secured by agricultural real estate. The loan portfolio also included other commercial, financial, and agricultural purposes of 17.7% and installment loans to individuals for consumer purposes of 3.4%. Allowance and Provision for Possible Loan Losses The allowance for loan losses represents our estimate of the amount required for probable loan losses in the Corporation's loan portfolio. Loans, or portions thereof, which are considered to be uncollectible are charged against this allowance and any subsequent recoveries are credited to the allowance. There can be no assurance that the Corporation will not sustain losses in future periods which could be substantial in relation to the size of the allowance for loan losses at December 31, 2010. We have a loan review program in place which provides for the regular examination and evaluation of the risk elements within the loan portfolio. The adequacy of the allowance for loan losses is regularly evaluated based on the review of all significant loans with particular emphasis on nonaccruing, past due, and other potentially impaired loans that have been identified as possible problems. The allowance for loan losses was $2.755 million, or 1.8% of total loans outstanding, as of December 31, 2010. This level represented a $222 thousand increase from the corresponding 2009 year-end amount which was 1.6% of total loans outstanding. We increased the allowance for loan losses in response to the market and economic environment. -44- There was a provision for loan losses of $600 thousand in 2010 compared with a provision for loan losses of $536 thousand in 2009. See Part I, Item 1, "Table 4 - Loan Portfolio" of the Guide 3 for details of the changes in the allowance for loan losses. Investment Securities The investment portfolio serves several important functions for the Corporation. Investments in securities are used as a source of income to complement loan demand and to satisfy pledging requirements in the most profitable way possible. The investment portfolio is a source of liquidity when loan demand exceeds funding availability, and is a vehicle for adjusting balance sheet sensitivity to cushion against adverse rate movements. Our investment policy attempts to provide adequate liquidity by maintaining a portfolio with significant cash flow for reinvestment. The Corporation's investment securities represent 34% of our assets and consist largely of 59% U.S. Government sponsored pass-thru residential mortgage- backed securities. Also, the portfolio includes 23% state, county and municipal securities, 11% U.S. Treasury notes, and 7% of U.S. Government Agency notes. The following table summarizes the contractual maturity of investment securities at their carrying values as of December 31, 2010: Amounts Maturing In: Securities Securities (Dollars in thousands) Available for Sale Held to Maturity Total One year or less $ 2,111 $ 2,202 $ 4,313 After one through five years 3,060 17,371 20,431 After five through ten years 17,703 7,295 24,998 After ten years 32,004 19,387 51,391 Equity securities 68 0 68 Total investment securities $54,946 $46,255 $101,201 At year-end 2010, the total investment portfolio increased to $101.2 million, an increase of $15.0 million or 17.4%, compared with $86.2 million at year-end 2009. The majority of this increase was due to purchases of $52.4 million of U.S. Government Agencies, U.S. Government Treasuries, U.S. Government sponsored residential mortgage-backed securities, and municipal securities. Offsetting these purchases were calls and maturities of $6.6 million of U.S. Government Agencies and tax-free municipals as well as residential mortgage-backed securities principal paydowns of approximately $12.9 million. Additionally, we sold $11.6 million of longer-term residential mortgage-backed securities and the remaining $6.2 million of corporate notes to shorten the duration and reduce credit risk in our portfolio. These sales resulted in a net gain of $535 thousand. The average total investment portfolio increased $1.1 million to $87.2 million in 2010 compared with $86.1 million for 2009. We will continue to actively manage the size, components, and maturity structure of the investment securities portfolio. Future investment strategies will continue to be based on profit objectives, economic conditions, interest rate risk objectives, and balance sheet liquidity demands. -45- Nonperforming Assets Nonperforming assets are defined as nonaccrual loans, loans that are 90 days past due and still accruing, renegotiated loans, potential problem loans, other-than-temporarily impaired preferred stock, and property acquired by foreclosure. The level of nonperforming assets decreased $1.9 million at year-end 2010 compared with year-end 2009. This decrease was primarily due to the sale of foreclosed properties as well as the settlement of a large nonaccrual loan in 2010. Nonperforming assets were approximately $3.542 million, or 1.19% of total assets as of December 31, 2010, compared with $5.484 million, or 1.88% of total assets at year-end 2009. Deposits and Other Interest-Bearing Liabilities Our primary source of funds is deposits. The Corporation offers a variety of deposit accounts having a wide range of interest rates and terms. We rely primarily on competitive pricing policies and customer service to attract and retain these deposits. In 2010, average deposits increased compared with 2009, from $226.6 million to $242.7 million. This average deposit growth occurred primarily in money market and noninterest-bearing deposits. As of December 31, 2010, the Corporation had a total of $32.5 million in certificates of deposit of $100,000 or more. This was a 7.6% increase from the $30.2 million total in 2009. We have used borrowings from the Federal Home Loan Bank to support our residential mortgage lending activities. During 2010, the Corporation did not borrow or repay any advances from the Federal Home Loan Bank. During 2011, the Corporation expects to repay $2 million of the fixed-rate advances. Total long-term advances with the Federal Home Loan Bank were $24 million at December 31, 2010. Two of these advances totaling $10 million have convertible options by the issuer to convert the rates to a 3-month LIBOR. The Corporation intends to pay off these advances at the conversion dates. Details on the Federal Home Bank advances are presented in Notes 7 and 8 to the financial statements. Liquidity Liquidity is managed to assume that the Corporation can meet the cash flow requirements of customers who may be either depositors wanting to withdraw their funds or borrowers needing funds to meet their credit needs. Many factors affect the ability to accomplish liquidity objectives successfully. Those factors include the economic environment, our asset/liability mix and our overall reputation and credit standing in the marketplace. In the ordinary course of business, our cash flows are generated from deposits, interest and fee income, loan repayments and the maturity or sale of other earning assets. The Consolidated Statement of Cash Flows details the Corporation's cash flows from operating, investing, and financing activities. During 2010, operating and financing activities provided cash flows of $7.9 million, while investing activities used $15.1 million resulting in a decrease in cash and cash equivalents balances of $7.2 million. Liability liquidity represents our ability to renew or replace our short- term borrowings and deposits as they mature or are withdrawn. The Corporation's deposit mix includes a significant amount of core deposits. -46- Core deposits are defined as total deposits less time deposits of $100,000 or more. These funds are relatively stable because they are generally accounts of individual customers who are concerned not only with rates paid, but with the value of the services they receive, such as efficient operations performed by helpful personnel. Total core deposits were 86.4% of total deposits on December 31, 2010, compared with 87.2% in 2009. Asset liquidity is provided through ordinary business activity, such as cash received from interest and fee payments as well as from maturing loans and investments. Additional sources include marketable securities and short- term investments that are easily converted into cash without significant loss. The Corporation had $4.3 million investment securities maturing within one year or less on December 31, 2010, which represented 4% of the investment debt securities portfolio. Also, the Corporation has approximately $7.2 million of U.S. Government Agency and state and municipal securities callable at the option of the issuer within one year and approximately $12.9 million of expected annual cash flow in principal reductions from payments of mortgage-backed securities. Due to the current interest rate environment, $5.6 million of our callable securities were called in 2010 and $19.7 million were called in 2009. We have reinvested these proceeds from called investment securities in new loans and new investment securities. We are not aware of any other 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. Contractual Obligations The chart below shows the Corporation's contractual obligations and its scheduled future cash payments under those obligations as of December 31, 2010. The majority of the Corporation's outstanding contractual obligations are long-term debt. The remaining contractual obligations are comprised of purchase obligations for data processing services and a rental agreement for our mortgage servicing office. We have no capital lease obligations. Payments Due by Period Less Contractual Obligations than 1 1-3 4-5 After 5 (Dollars in thousands) Total Year Years Years Years Long-term debt $24,000 $ 0 $14,000 $ 0 $10,000 Operating leases 31 25 6 0 0 Total contractual obligations $24,031 $ 25 $14,006 $ 0 $10,000 Off-Balance Sheet Arrangements We are a party to financial instruments with off-balance-sheet risk which arise in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or 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 -47- expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. Financial instruments whose contract amounts represent credit risk (Dollars in thousands): 2010 2009 Commitments to extend credit $ 10,616 $ 12,961 Standby letters of credit $ 10 $ 10 The Corporation does not have any special purpose entities or off-balance sheet financing payment obligations. Capital Resources and Dividends Our average equity to average assets ratio was 8.95% in 2010 and 8.71% in 2009. The Federal Reserve Board and the FDIC have issued rules regarding risk-based capital requirements for U.S. banks and bank holding companies. Overall, these guidelines define the components of capital, require higher levels of capital for higher risk assets and lower levels of capital for lower risk assets, and include certain off-balance sheet items in the calculation of capital requirements. The risk-based capital regulations require banks to maintain an 8% total risk-based ratio, of which 4% must consist primarily of tangible common shareholders' equity (Tier I capital) or its equivalent. Also, the regulations require a financial institution to maintain a 3% leverage ratio. At year-end 2010, we were well in excess of the minimum requirements under the guidelines with a total risk-based capital ratio of 17.74%, a Tier I risk-based capital ratio of 16.49%, and a leverage ratio of 9.01%. To continue to conduct its business as currently conducted, the Corporation and the Bank will need to maintain capital well above the minimum levels. The following table presents the risk-based capital and leverage ratios for year-end 2010 and 2009 in comparison to both the minimum regulatory guidelines and the minimum for well capitalized: Minimum Minimum Dec. 31, Dec. 31, Regulatory For Well Risk Based Capital Ratios 2010 2009 Guidelines Capitalized Tier I capital 16.49% 14.90% 4.00% 6.00% Total risk-based capital 17.74% 16.15% 8.00% 10.00% Leverage 9.01% 8.83% 3.00% 5.00% Interest Rate Sensitivity The Corporation's most important element of asset/liability management is the monitoring of its sensitivity and exposure to interest rate movements which is the Corporation's primary market risk. We have no foreign currency exchange rate risk, commodity price risk, or any other material market risk. The Corporation has no trading investment portfolio, nor do we have any interest rate swaps or other derivative instruments. Our primary source of earnings, net interest income, can fluctuate with significant interest rate movements. To lessen the impact of these -48- movements, we seek to maximize net interest income while remaining within prudent ranges of risk by practicing sound interest rate sensitivity management. We attempt to accomplish this objective by structuring the balance sheet so that the 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 which operates under policies and guidelines established by the Bank. 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 also maintains an investment portfolio which receives monthly cash flows from mortgage-backed securities principal payments, and staggered maturities and provides flexibility over time in managing exposure to changes in interest rates. Any imbalances in the repricing opportunities at any point in time constitute a financial institution's interest rate sensitivity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is filed herewith. -49- Management's Report on Internal Control over Financial Reporting Management of the Corporation is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Corporation conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the above framework, management of the Corporation has concluded the Corporation maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rule 13a-15(f), as of December 31, 2010. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is also responsible for the preparation and fair presentation of the consolidated financial statements and other financial information contained in this report. The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles and include, as necessary, best estimates and judgments by management. /s/ DeWitt Drew /s/ George R. Kirkland DeWitt Drew George R. Kirkland President and Senior Vice President and Chief Executive Officer Treasurer March 31, 2011 -50- Thigpen, Jones, Seaton & Co., P.C. CERTIFIED PUBLIC ACCOUNTANTS BUSINESS CONSULTANTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Directors and Stockholders of Southwest Georgia Financial Corporation We have audited the consolidated balance sheets of Southwest Georgia Financial Corporation and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southwest Georgia Financial Corporation and Subsidiaries as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. /s/ Thigpen, Jones, Seaton & Co., P.C. Dublin, Georgia March 17, 2011 1004 Hillcrest Parkway*Dublin, Georgia 31021 Tel 478-272-2030*Fax 478-272-3318*www.tjscpa.com -51- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2010 and 2009 2010 2009 ASSETS Cash and due from banks $ 5,111,869 $ 10,049,545 Interest-bearing deposits in other banks 10,958,766 13,246,872 Cash and cash equivalents 16,070,635 23,296,417 Investment securities available for sale, at fair value 54,945,921 62,008,044 Investment securities to be held to maturity (fair value approximates $46,570,196 and $24,177,393) 46,255,446 24,195,377 Federal Home Loan Bank stock, at cost 1,649,900 1,649,900 Loans, net of allowance for loan losses of $2,754,614 and $2,532,856 154,978,016 157,697,397 Premises and equipment, net 9,221,341 7,777,080 Foreclosed assets, net 3,288,121 3,831,663 Intangible assets 640,876 848,514 Other assets 9,353,675 9,703,862 Total assets $ 296,403,931 $ 291,008,254 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: NOW accounts $ 29,238,582 $ 25,074,884 Money market 50,468,227 45,694,205 Savings 22,635,415 21,364,824 Certificates of deposit $100,000 and over 32,472,318 30,190,008 Other time accounts 65,858,838 72,085,244 Total interest-bearing deposits 200,673,380 194,409,165 Noninterest-bearing deposits 38,857,679 41,021,846 Total deposits 239,531,059 235,431,011 Short-term borrowed funds 2,000,000 5,000,000 Long-term debt 24,000,000 21,000,000 Other liabilities 4,097,279 4,047,262 Total liabilities 269,628,338 265,478,273 Stockholders' equity: Common stock - $1 par value, 5,000,000 shares authorized, 4,293,835 shares issued 4,293,835 4,293,835 Additional paid-in capital 31,701,533 31,701,533 Retained earnings 17,925,895 16,324,463 Accumulated other comprehensive income (loss) ( 1,031,875) ( 676,055) Treasury stock, at cost 1,745,998 shares for 2009 and 2010 ( 26,113,795) ( 26,113,795) Total stockholders' equity 26,775,593 25,529,981 Total liabilities and stockholders' equity $ 296,403,931 $ 291,008,254 See accompanying notes to consolidated financial statements. -52- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME for the years ended December 31, 2010, 2009, and 2008 2010 2009 2008 Interest income: Interest and fees on loans $ 9,943,649 $ 9,523,822 $ 9,504,120 Interest on debt securities: Taxable 2,412,444 3,299,150 4,122,439 Interest on debt securities: Tax-exempt 597,242 735,987 1,001,078 Dividends 5,404 4,564 62,602 Interest on deposits in other banks 57,805 32,949 290,448 Interest on other short-term investments 0 97 89,663 Total interest income 13,016,544 13,596,569 15,070,350 Interest expense: Deposits 2,053,646 2,884,601 4,425,598 Federal funds purchased 3 994 22,513 Other short-term borrowings 111,452 169,286 768,750 Long-term debt 724,012 617,302 252,791 Total interest expense 2,889,113 3,672,183 5,469,652 Net interest income 10,127,431 9,924,386 9,600,698 Provision for loan losses 600,000 535,709 825,454 Net interest income after provision for loan losses 9,527,431 9,388,677 8,775,244 Noninterest income: Service charges on deposit accounts 1,567,424 1,765,854 1,608,243 Income from trust services 241,583 212,445 269,319 Income from brokerage services 300,210 266,137 341,466 Income from insurance services 1,124,612 1,069,301 1,101,690 Income from mortgage banking services 1,350,625 1,327,193 2,020,988 Provision for foreclosed asset losses (275,000) 0 0 Net gain on sale or disposition of assets 30,852 349 12,500 Net gain on sale of securities 534,973 255,324 0 Net loss on the impairment of equity securities 0 0 (4,104,901) Other income 213,963 227,691 225,544 Total noninterest income 5,089,242 5,124,294 1,474,849 Noninterest expense: Salaries and employee benefits 6,970,460 6,359,949 7,152,574 Occupancy expense 891,291 846,383 862,590 Equipment expense 739,223 666,779 693,762 Data processing expense 691,738 686,149 642,682 Amortization of intangible assets 207,638 207,638 226,943 Losses related to mortgage banking 0 0 978,513 Other operating expenses 2,676,372 3,425,138 2,631,061 Total noninterest expenses 12,176,722 12,192,036 13,188,125 Income (loss) before income taxes 2,439,951 2,320,935 (2,938,032) Provision (benefit) for income taxes 583,735 508,339 (1,659,458) Net income (loss) $ 1,856,216 $ 1,812,596 $(1,278,574) -53- Basic earnings per share: Net income (loss) $ 0.73 $ 0.71 $ (0.50) Weighted average shares outstanding 2,547,837 2,547,837 2,547,926 Diluted earnings per share: Net income (loss) $ 0.73 $ 0.71 $ (0.50) Weighted average shares outstanding 2,547,894 2,547,837 2,552,486 See accompanying notes to consolidated financial statements. SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY for the years ended December 31, 2010, 2009, and 2008 Accumulated Additional Other Total Common Paid-In Retained Comprehensive Treasury Stockholders' Stock Capital Earnings Income (Loss) Stock Equity Balance at Dec. 31, 2007 $4,293,835 $31,701,533 $17,038,881 $ (466,235) $(26,050,022) $26,517,992 Net Income (loss) - - (1,278,574) - - (1,278,574) Comprehensive income (loss): Changes in net gain(loss) on securities available for sale - - - 374,129 - 374,129 Changes in net gain(loss) on pension plan benefits - - - (984,812) - (984,812) Total comprehensive (loss) (1,889,257) Common stock acquired through purchase program - - - - (63,773) (63,773) Cash dividend declared $.49 per share - - (1,248,440) - - (1,248,440) Balance at Dec. 31, 2008 4,293,835 31,701,533 14,511,867 (1,076,918) (26,113,795) 23,316,522 Net Income - - 1,812,596 - - 1,812,596 Comprehensive income (loss): Changes in net gain(loss) on securities available for sale - - - (23,267) - (23,267) Changes in net gain(loss) on pension plan benefits - - - 424,130 - 424,130 Total comprehensive income 2,213,459 Balance at Dec. 31, 2009 4,293,835 31,701,533 16,324,463 (676,055) (26,113,795) 25,529,981 Net Income - - 1,856,216 - - 1,856,216 Comprehensive income (loss): Changes in net gain(loss) on securities available for sale - - - (202,142) - (202,142) Changes in net gain(loss) on pension plan benefits - - - (153,678) - (153,678) Total comprehensive income 1,500,396 Cash dividend declared $.10 per share - - (254,784) - - (254,784) Balance at Dec. 31, 2010 $4,293,835 $31,701,533 $17,925,895 $(1,031,875) $(26,113,795) $26,775,593 See accompanying notes to consolidated financial statements. -54- SOUTHWEST GEORGIA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 2010, 2009, and 2008 2010 2009 2008 Cash flows from operating activities: Net income (loss) $ 1,856,216 $ 1,812,596 $( 1,278,574) Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 600,000 535,709 825,454 Provision for foreclosed asset losses 275,000 0 0 Depreciation 782,739 719,527 758,785 Net amortization and (accretion) of investment securities 307,134 ( 26,809) ( 88,492) Amortization of intangibles 207,638 207,638 226,943 Loss on sale/writedown of foreclosed assets 121,021 ( 349) ( 12,500) Net loss on the impairment of equity securities 0 0 4,104,901 Net gain on sale of securities ( 534,973) ( 255,324) 0 Net gain on disposal of other assets ( 95,874) 0 0 Funds held related to mortgage banking activities ( 184,678) 796,800 ( 164,399) Changes in: Other assets 666,194 ( 819,007) ( 1,221,312) Other liabilities 1,851 61,630 ( 366,726) Net cash provided by operating activities 4,002,268 3,032,411 2,784,080 Cash flows from investing activities: Proceeds from calls, paydowns, and maturities of securities HTM 10,230,355 5,000,000 77,000,000 Proceeds from calls, paydowns, and maturities of securities AFS 9,261,755 30,502,563 26,014,709 Proceeds from sale of securities available for sale 17,856,535 9,849,289 0 Purchase of securities held to maturity (32,538,827) (17,100,452) ( 877,133) Purchase of securities available for sale (19,898,202) (18,894,586) (81,459,264) Net change in loans 1,456,440 (13,733,137) (31,120,695) Expenditures for improvements to other real estate owned ( 119,120) ( 1,427,679) 0 Purchase of premises and equipment ( 2,243,328) ( 2,713,333) ( 251,401) Proceeds from sales of other assets 921,078 0 102,500 Net cash provided (used) for investing activities (15,073,314) ( 8,517,335) (10,591,284) Cash flows from financing activities: Net change in deposits 4,100,048 20,890,006 ( 2,251,686) Increase (decrease) in federal funds purchased 0 ( 430,000) 430,000 Payment of short-term debt and short-term portion of long-term debt 0 ( 5,000,000) (20,114,286) Proceeds from issuance of short-term debt 0 0 10,000,000 Proceeds from issuance of long-term debt 0 6,000,000 10,000,000 Cash dividends paid ( 254,784) ( 178,349) ( 1,427,335) Payment for common treasury stock 0 0 ( 63,773) Net cash provided (used) for financing activities 3,845,264 21,281,657 ( 3,427,080) Increase (decrease) in cash and cash equivalents ( 7,225,782) 15,796,733 (11,234,284) Cash and cash equivalents - beginning of year 23,296,417 7,499,684 18,733,968 Cash and cash equivalents - end of year $ 16,070,635 $ 23,296,417 $ 7,499,684 -55- Cash paid during the year for: Income taxes $ 572,710 $ 0 $ 0 Interest paid $ 2,992,228 $ 3,746,676 $ 5,633,283 See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS, continued 2010 2009 2008 NONCASH ITEMS: Increase in foreclosed properties and decrease in loans $ 662,941 $ 2,193,311 $ 210,673 Unrealized gain(loss) on securities AFS $( 306,275) $( 35,212) $ 566,821 Unrealized gain(loss) on pension plan benefits $( 232,844) $ 642,621 $( 1,492,140) Net reclass between short and long-term debt $( 3,000,000) $ 5,000,000 $ 0 See accompanying notes to consolidated financial statements. -56- SOUTHWEST GEORGIA FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Corporation's primary business is providing banking services through the Bank to individuals and businesses principally in Colquitt County, Baker County, Thomas County, Worth County, Lowndes County and the surrounding counties of southwest Georgia. The Bank also operates Empire Financial Services, Inc. in Milledgeville, Georgia. Our new full-service banking center in Valdosta, Georgia opened in June 2010. 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. -57- 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 $207,793 at December 31, 2010. 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 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 after 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 -58- 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 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. -59- 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 In accordance with policy guidelines and regulations, 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. A valuation allowance is established to record market value changes in foreclosed assets. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. As of December 31, 2010, the valuation allowance for foreclosed asset losses was $275,000. Intangible Assets Intangible assets are amortized over a determined useful life using the straight-line basis. These assets are evaluated annually as to the recoverability of the carrying value. The remaining intangibles have a remaining life of two to four years. 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 post-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 and its subsidiaries file a consolidated income tax return. Each subsidiary computes its income tax expense as if it filed an individual return except that it does not receive any portion of the surtax allocation. Any benefits or disadvantages of the consolidation are absorbed by the parent company. Each subsidiary pays its allocation of federal income taxes to the parent company or receives payment from the parent company to the extent that tax benefits are realized. The Corporation reports income under Accounting Standards Codification Topic 740, Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities -60- using enacted tax rates in effect for the year in which the differences are expected to reverse. 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. The Corporation adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109 ("FIN 48"), as of June 30, 2006. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The adoption had no effect on the Corporation's financial statement for the year ending December 31, 2010. The Corporation recognizes penalties related to income tax matters in income tax expense. The Corporation is subject to U.S. federal and Georgia state income tax audit for returns for the tax period ending December 31, 2010. The Internal Revenue Service (IRS) completed an audit of the Corporation's tax returns in May 2010 for periods ending December 31, 2009, 2008, and 2007. Adjustments from the examiner and payments to the IRS approximated $337,000. The result of the audit did not have a material impact on the Corporation's financial statements. Thus, no FIN 48 liability was recorded for additional tax, interest or penalties. We are aware of no additional material uncertain tax positions which would require a FIN 48 liability to be recorded for the current year. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) includes all changes in stockholders' equity during a period, except those resulting from transactions with shareholders. Besides net income, other components of the Corporation's accumulated other comprehensive income (loss) includes the after tax effect of changes in the net unrealized gain/loss on securities available for sale and the unrealized gain/loss on pension plan benefits. The following table presents the components of accumulated other comprehensive income (loss) as of December 31, 2010 and 2009. 2010 2009 Unrealized gain (loss) on AFS securities: Gross $ 583,377 $ 889,652 Tax ( 198,348) ( 302,481) Net 385,029 587,171 Unrealized gain (loss) on pension plan benefits: Gross (2,146,824) (1,913,980) Tax 729,920 650,754 Net (1,416,904) (1,263,226) Total accumulated other comprehensive income (loss) $ (1,031,875) $( 676,055) -61- 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. Empire provides commercial mortgage banking services and was servicing approximately $322 million in non-recourse commercial mortgages at year-end 2010. 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 ASC 860, unrecognized mortgage servicing assets are considered 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 that were expensed during 2010, 2009, and 2008 were $177,402, $148,478, and $186,301, respectively. Recent Market and Regulatory Developments The financial services industry is facing unprecedented challenges in the face of the current national and global economic crisis. The global and U.S. economies are experiencing significantly reduced business activity. Dramatic declines in the housing market during the past two years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital; to merge with larger and stronger institutions; and, in some cases, to fail. The Corporation is fortunate that the markets it serves have been impacted to a lesser extent than many areas around the country. On May 22, 2009, the FDIC announced a special assessment on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The special assessment is five basis points of each FDIC-insured depository institution's assets minus Tier 1 capital, as of June 30, 2009. The Corporation recorded a pre-tax charge of approximately $122 thousand in the second quarter of 2009 in connection with the special assessment. -62- On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. As a result, the Corporation is carrying a prepaid asset of $1.0 million as of September 30, 2010. The Corporation's quarterly risk- based deposit insurance assessments will be paid from this amount until the amount is exhausted or until December 30, 2014, when any amount remaining would be returned to the Corporation. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (The Act) became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Corporation become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. On November 9, 2010, the FDIC adopted the final rule that provides temporary unlimited coverage for noninterest-bearing transaction accounts at all FDIC- insured depository institutions (IDIs) in anticipation of the expiration of the TAGP on December 31, 2010. The separate coverage for noninterest-bearing transaction accounts becomes effective on December 31, 2010, and terminates on December 31, 2012. Unlike the TAGP, The Act definition of noninterest- bearing transaction accounts does not include either low-interest Negotiable Order of Withdrawal (NOW) accounts or Interest on Lawyer Trust Accounts (IOLTAs). The final rule includes notice and disclosure requirements that IDIs must implement by December 31, 2010. Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") was effective for the Corporation's financial statements for periods ending after September 15, 2009. On July 1, 2009, the ASC became the single source of authoritative non-governmental U.S. generally accepted accounting principles ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. This guidance was effective for financial statements issued for interim and annual periods ending after September 15, 2009, and did not have a material impact on our financial position or results of operations. In January 2011, the FASB issued Accounting Standards Update ("ASU") 2011-01 which temporarily defers the effective date in ASU 2010-20 for disclosure about troubled debt restructuring by creditors to coincide with the -63- effective date of the proposed guidance clarifying what constitutes a troubled debt restructuring. The adoption of this disclosure-only guidance is not expected to have an effect on the Corporation's financial statements. In December 2010, the FASB issued ASU 2010-29 "Business Combinations (Topic 805)-Disclosures of Supplementary Pro Forma Information for Business Combinations." The amendments in this update affect any public entity as defined in Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in the update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after December 15, 2010. The Corporation did not have any material business combination(s) for the periods presented. The adoption of this update did not have an effect on the Corporation's financial statements. In December 2010, the FASB issued ASU 2010-28 "Intangibles - Goodwill and Other (Topic 350)-When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts." The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. For public entities, the amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Corporation does not have any reporting units with zero or negative carrying amounts, therefore the adoption of this update did not have an effect on the Corporation's financial statements. In July 2010, the FASB issued ASU 2010-20 "Receivables (Topic 310)- Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses," which added disclosure requirements concerning the credit quality of an entity's allowance for loan losses and financing receivables. The new disclosures that relate to information as of the end of the reporting period is effective as of December 31, 2010, whereas the disclosures related to activity that occurred during the reporting periods is effective January 1, 2011.Management has determined the adoption of the guidance will not have a material effect on the Corporation's financial position or results of operations. In February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements." ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SEC's reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events. ASU 2010-09 is effective immediately. The adoption of the new guidance did not have a material impact on the Corporation's consolidated financial statements. In January 2010, the FASB issued ASU 2010-04, "Accounting for Various Topics - Technical Corrections to SEC Paragraphs." ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, -64- issuance of financial statements - subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The adoption of the new guidance did not have a material impact on the Corporation's consolidated financial statements. In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements." ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers' disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Corporation's consolidated financial statements. In April 2009, the FASB issued ASC Topic 820 "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" which provides guidance in determining fair values when there is no active market or where the price inputs being used represent distressed sales. ASC 820 reaffirms 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 reiterates 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 ASC is effective for interim and annual periods ending after September 15, 2009 with early adoption permitted. The adoption of ASC 820 did not have an impact on our financial position or results of operation. In April 2009, FASB issued ASC Topic "Investments - Debt and Equity Securities Recognition and Presentation of Other-Than-Temporary Impairments" which amends the other-than-temporary impairment guidance under GAAP for debt securities to make the guidance more operational and improve the presentation and disclosure in the financial statements. ASC 320 maintains the SEC staff's previous views related to equity securities. It also amends Topic 5.M. to exclude debt securities from its scope. ASC 320 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." Prior to issuance of this ASC, 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 ASC 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 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 -65- 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 ASC is effective for interim and annual periods ending after September 15, 2009, with early adoption permitted. The adoption of ASC 320 did not have an impact on our financial position or results of operation. In April 2009, the FASB issued ASC Topic 825 "Disclosures about Fair Value of Financial Instruments." Prior to issuing this ASC, fair values for financial assets and liabilities were only disclosed once a year. The ASC 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 ASC became effective for interim and annual periods ending after September 15, 2009, with early adoption permitted. The adoption of ASC 825 did not have an impact on our financial position or results of operation. In December 2008, the FASB issued ASC Topic 715, "Compensation - Retirement Benefits" which 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. ASC 715 is effective for fiscal years ending after December 15, 2009, with earlier application permitted. The adoption of this standard did not have and impact on our financial position or results of operations. 2. INVESTMENT SECURITIES Debt and equity securities have been classified in the consolidated balance sheets according to management's intent. The amortized cost of securities as shown in the consolidated balance sheets and their estimated fair values at December 31 were as follows: Securities Available For Sale: Amortized Unrealized Unrealized Estimated December 31, 2010 Cost Gains Losses Fair Value U.S. Government Treasury securities $11,061,282 $ 0 $ 427,752 $10,633,530 State and municipal securities 5,655,242 190,509 0 5,845,751 Residential mortgage-backed securities 37,423,357 1,090,228 114,746 38,398,839 Total debt securities AFS 54,139,881 1,280,737 542,498 54,878,120 Equity securities 222,664 0 154,863 67,801 Total securities AFS $54,362,545 $1,280,737 $ 697,361 $54,945,921 -66- Amortized Unrealized Unrealized Estimated December 31, 2009 Cost Gains Losses Fair Value State and municipal securities $ 5,658,609 $ 286,208 $ 0 $ 5,944,817 Residential mortgage-backed securities 49,004,308 1,178,765 142,534 50,040,539 Corporate notes 6,220,813 113,275 456,901 5,877,187 Equity securities 234,664 0 89,163 145,501 Total securities AFS $61,118,394 $1,578,248 $ 688,598 $62,008,044 Securities Held to Maturity: Amortized Unrealized Unrealized Estimated December 31, 2010 Cost Gains Losses Fair Value U.S. Government Agency securities $ 6,999,651 $ 13,189 $ 5,080 $ 7,007,760 State and municipal securities 17,682,419 252,077 138,934 17,795,562 Residential mortgage-backed securities 21,573,376 276,011 82,513 21,766,874 Total securities HTM $46,255,446 $ 541,277 $ 226,527 $46,570,196 Amortized Unrealized Unrealized Estimated December 31, 2009 Cost Gains Losses Fair Value U.S. Government Agency securities $ 998,003 $ 39,497 $ 0 $ 1,037,500 State and municipal securities 9,003,644 198,009 40,896 9,160,757 Residential mortgage-backed securities 14,193,730 0 214,594 13,979,136 Total securities HTM $24,195,377 $ 237,506 $ 255,490 $24,177,393 At December 31, 2010, securities with a carrying value of $48,848,556 and a market value of $50,021,511 were pledged as collateral for public deposits, Federal Home Loan Bank Advances and other purposes as required by law. Of these amounts, approximately $8,000,000 was overpledged and could be released if necessary for liquidity needs. At December 31, 2009, securities with a carrying value of $41,314,406 and a market value of $42,148,819 were pledged for public deposits. In 2010, we pledged a combination of securities and 1-4 family mortgage loans to secure Federal Home Loan Bank advances. We only pledged 1-4 family mortgage loans in 2009. The Federal Home Loan Bank requires the Bank to hold a minimum investment of stock, based on membership and the level of activity. As of December 31, 2010, this stock investment was $1,649,900. There were no investments in obligations of any state or municipal subdivisions which exceeded 10% of the Corporation's stockholders' equity at December 31, 2010. The amortized cost and estimated fair value of securities at December 31, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. -67- Amortized Estimated Available for Sale: Cost Fair Value Amounts maturing in: One year or less $ 2,100,000 $ 2,111,077 After one through five years 2,884,000 3,059,695 After five through ten years 17,930,126 17,703,426 After ten years 31,225,755 32,003,922 Total debt securities AFS $ 54,139,881 $ 54,878,120 Equity securities 222,664 67,801 Total securities AFS $ 54,362,545 $ 54,945,921 Amortized Estimated Held to Maturity: Cost Fair Value Amounts maturing in: One year or less $ 2,202,331 $ 2,209,084 After one through five years 17,370,642 17,545,679 After five through ten years 7,295,444 7,331,588 After ten years 19,387,029 19,483,845 Total securities HTM $ 46,255,446 $ 46,570,196 For the years ended December 31, 2010, 2009, and 2008, proceeds from sales of securities available for sale amounted to $17,856,535, $9,849,289, and $0, respectively. Gross realized gains (losses) amounted to $534,973, $255,324, and $(4,104,901), respectively. The gain in 2010 was due to the sale of $11,634,167 of longer-term residential mortgage-backed securities to shorten the duration of our earning assets. Also, the remaining $6,222,368 of corporate notes were sold in 2010 to reduce credit risk in the portfolio. The gain in 2009 was mainly due to selling a portion of our longer-term residential mortgage-backed securities, and the loss during 2008 was due to the impairment of equity securities. Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in continuous loss position, follows: -68- December 31, 2010 Less Than Twelve Months Twelve Months or More Gross Gross Unrealized Fair Unrealized Fair Losses Value Losses Value Securities Available for Sale Temporarily impaired debt securities: U.S. Government Treasury securities $427,752 $10,633,530 $ 0 $ 0 State and municipal securities 0 0 0 0 Residential mortgage-backed securities 114,746 6,443,200 0 0 Total debt securities AFS 542,498 17,076,730 0 0 Temporarily impaired equity securities 0 0 12,208 57 Other-than-temporarily impaired equity securities 0 0 142,655 67,744 Total securities available for sale $542,498 $17,076,730 $154,863 $ 67,801 Securities Held to Maturity Temporarily impaired debt securities: U.S. Government Agency $ 5,080 $ 1,994,920 $ 0 $ 0 State and municipal securities 138,934 6,795,789 0 0 Residential mortgage-backed securities 82,513 3,819,645 0 0 Total securities held to maturity $226,527 $12,610,354 $ 0 $ 0 December 31, 2009 Less Than Twelve Months Twelve Months or More Gross Gross Unrealized Fair Unrealized Fair Losses Value Losses Value Securities Available for Sale Temporarily impaired debt securities: U.S. Government Agency $ 0 $ 0 $ 0 $ 0 State and municipal securities 0 0 0 0 Residential mortgage-backed securities 142,534 13,564,481 0 0 Corporate notes 0 0 456,901 2,758,627 Total debt securities AFS 142,534 13,564,481 456,901 2,758,627 Temporarily impaired equity securities 0 0 9,544 14,721 Other-than-temporarily impaired equity securities 0 0 79,619 130,780 Total securities available for sale $142,534 $13,564,481 $546,064 $2,904,128 Securities Held to Maturity Temporarily impaired debt securities: State and municipal securities $ 13,022 $ 1,784,816 $ 27,874 $ 557,125 Residential mortgage-backed securities 214,594 13,979,136 0 0 Total securities held to maturity $227,616 $15,763,952 $ 27,874 $ 557,125 Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. -69- As of December 31, 2010, the Corporation's other-than-temporarily impaired equity securities were two issues of Fannie Mae and Freddie Mac preferred stock of $210,399 of amortized cost, unrealized loss of $142,655 recognized in accumulated other comprehensive income and fair value of $67,744. Also, as of December 31, 2009, these same two issues of Fannie Mae and Freddie Mac preferred stock were deemed other-than-temporarily impaired. Previously in 2008, the Corporation took a charge against earnings of $4,104,901 for the impairment of these preferred stock issues. At December 31, 2010, the debt securities with unrealized losses have depreciated 2.5% from the Corporation's amortized cost basis. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. Management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available- for-sale. Also, no declines in debt securities are deemed to be other-than- temporary. 3. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the Corporation's loan portfolio at December 31, 2010 and 2009 was as follows: 2010 2009 Commercial, financial and agricultural loans $ 27,851,844 $ 25,731,119 Real estate: Construction loans 16,900,325 15,597,473 Commercial mortgage loans 47,649,217 50,337,020 Residential loans 51,609,504 51,313,706 Agricultural loans 8,428,009 7,225,105 Deposit account overdrafts 127,189 86,257 Consumer loans 5,192,416 9,969,346 Loans Outstanding 157,758,504 160,260,026 Unearned discount ( 25,874) ( 29,773) Allowance for loan losses ( 2,754,614) ( 2,532,856) Net loans $ 154,978,016 $ 157,697,397 The Corporation's only significant concentration of credit at December 31, 2010, occurred in real estate loans which totaled approximately $125 million. However, this amount was not concentrated in any specific segment within the market or geographic area. Beginning in 2009, certain 1-4 family mortgage loans were pledged to Federal Home Loan Bank to secure outstanding advances. At December 31, 2010, $22,329,118 loans were pledged in this capacity. Appraisal Policy When a loan is first identified as a problem loan, the appraisal is reviewed to determine if the appraised value is still appropriate for the collateral. For the duration that a loan is considered a problem loan, the appraised -70- value of the collateral is monitored on a quarterly basis. If significant changes occur in market conditions or in the condition of the collateral, a new appraisal will be obtained. Nonaccrual Policy The Corporation does not accrue interest on any loan (1) that is maintained on a cash basis due to the deteriorated financial condition of the borrower, (2) for which payment in full of principal or interest is not expected, or (3) upon which principal or interest has been past due for ninety days or more unless the loan is well secured and in the process of collection. A loan subsequently placed on nonaccrual status may be returned to accrual status if (1) all past due interest and principal is paid with expectations of any remaining contractual principal and interest being repaid or (2) the loan becomes well secured and in the process of collection. Loans placed on nonaccrual status amounted to $186,331 and $1,521,319 at December 31, 2010 and 2009, respectively. There were no past due loans over ninety days and still accruing at December 31, 2010 or 2009. The accrual of interest is discontinued when the loan is placed on nonaccrual. Interest income that would have been recorded on these nonaccrual loans in accordance with their original terms totaled $4,365 and $116,781 as of year-end 2010 and 2009, respectively. In 2010, a settlement was made of a $1,282,905 loan placed on interest nonaccrual in 2009. The following table presents an age analysis of past due loans and nonaccrual loans segregated by class of loans. We do not have any accruing loans that are 90 days or more past due. Age Analysis of Past Due Loans As of December 31, 2010 30-89 Greater Total Days than 90 Past Due Nonaccrual Current Total Past Due Days Loans Loans Loans Loans Commercial, financial and agricultural loans $ 884,206 $ 0 $ 884,206 $ 50,134 $ 26,917,504 $ 27,851,844 Real estate: Construction loans 630,574 0 630,574 132,600 16,137,151 16,900,325 Commercial mortgage loans 539,006 0 539,006 0 47,110,211 47,649,217 Residential loans 750,474 0 750,474 0 50,859,030 51,609,504 Agricultural loans 42,977 0 42,977 0 8,385,032 8,428,009 Consumer & other loans 163,448 0 163,448 3,597 5,152,560 5,319,605 Total loans $3,010,685 $ 0 $3,010,685 $186,331 $154,561,488 $157,758,504 Impaired Loans 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 -71- 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 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. At December 31, 2010 and 2009, impaired loans amounted to $4,083,365 and $1,756,997 respectively. Included in the allowance for loan losses was $0 related to impaired loans at December 31, 2010 and 2009. All of the Corporation's impaired loans were partially charged-off to their fair value determined primarily using the loans' collateral fair value. Therefore, no reserve amount was recorded in the allowance for loan losses for these impaired loans as of December 31, 2010 and 2009. For the years ended December 31, 2010, 2009, and 2008, the average recorded investment in impaired loans was $21,552, $464,075 and $1,244,833, respectively. Interest income was recognized for cash payments received on loans while they were impaired of $0, $7,853 and $0 for 2010, 2009, and 2008, respectively. The following table presents impaired loans, segregated by class of loans as of December 31, 2010: Recorded Unpaid Investment Average Principal with Related Recorded Balance Allowance Allowance Investment Commercial, financial and agricultural loans $ 0 $ 0 $ 0 $ 8,219 Real estate: Construction loans 0 0 0 0 Commercial mortgage loans 4,083,365 4,083,365 0 11,188 Residential loans 0 0 0 0 Agricultural loans 0 0 0 0 Consumer & other loans 0 0 0 2,145 Total loans $4,083,365 $4,083,365 $ 0 $ 21,552 Credit Risk Monitoring and Loan Grading The Corporation employs several means to monitor the risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loss experience and economic conditions. -72- Loans are subject to an internal risk grading system which indicates the risk and acceptability of that loan. The loan grades used by the Corporation are for internal risk identification purposes and do not directly correlate to regulatory classification categories or any financial reporting definitions. The general characteristics of the risk grades are as follows: Grade 1 - Exceptional - Loans graded 1 are characterized as having a very high credit quality, exhibit minimum risk to the Corporation and have low administrative cost. These loans are usually secured by highly liquid and marketable collateral and a strong primary and secondary source of repayment is available. Grade 2 - Above Average - Loans graded 2 are basically sound credits secured by sound assets and/or backed by the financial strength of borrowers of integrity with a history of satisfactory payments of credit obligations. Grade 3 - Acceptable - Loans graded 3 are secured by sound assets of sufficient value and/or supported by the sufficient financial strength of the borrower. The borrower will have experience in their business area or employed a reasonable amount of time at their current employment. The borrower will have a sound primary source of repayment, and preferably a secondary source, which will allow repayment in a prompt and reasonable period of time. Grade 4 - Fair - Loans graded 4 are those which exhibit some weakness or downward trend in financial condition and although the repayment history is satisfactory, it requires supervision by bank personnel. The borrower may have little experience in their business area or employed only a short amount of time at their current employment. The loan may be secured by good collateral; however, it may require close supervision as to value and/or quality and may not have sufficient liquidation value to completely cover the loan. Grade 5 - Other Assets Especially Mentioned - Loans graded 5 contain a discernible weakness; however, the weakness is not sufficiently pronounced so as to cause concern for the possible loss of interest or principal. Loans in this grade are considered to have greater than normal credit risk and are not adequately supported by sufficient readily marketable collateral, financial statements reflecting adequate financial strength and/or earnings and/or a totally satisfactory record of repayment by the borrower. Grade 6 - Substandard - Loans graded 6 contain clearly pronounced credit weaknesses that are below acceptable credit standards for the Corporation. Such weaknesses may be due to either collateral deficiencies or inherent financial weakness of the borrower, but in either case represents less than acceptable credit risk. Loans in this grade are unsupported by sufficient evidence of the borrower's sound net worth, repayment capacity or acceptable collateral. Grade 7 - Doubtful - Loans graded 7 have such a pronounced credit weaknesses that the Corporation is clearly exposed to a significant degree of potential loss of principal or interest. Theses loan generally have a defined weakness which jeopardizes the ultimate repayment of the debt. -73- Grade 8 - Loss - Loans graded 8 are of such deteriorated credit quality that repayment of principal and interest can no longer be considered. These loans are of such little value that their continuance as an active bank asset is not warranted. As of December 31, 2010, all Grade 8 loans have been charged-off. The following table presents internal loan grading by class of loans as of December 31, 2010: 1 2 3 4 Commercial, financial and agricultural loans $ 639,037 $ 233,676 $ 23,381,333 $ 2,588,046 Real estate: Construction loans 0 1,219,334 6,279,010 1,736,377 Commercial mortgage loans 0 15,452 26,141,530 15,585,436 Residential loans 31,302 201,392 41,660,063 6,381,326 Agricultural loans 0 1,543,230 4,205,128 600,511 Consumer & other loans 597,814 26,170 4,192,218 302,817 Total loans $ 1,268,153 $3,239,254 $105,859,282 $ 27,194,513 5 6 7 Total Commercial, financial and agricultural loans $ 540,327 $ 469,425 $ 0 $ 27,851,844 Real estate: Construction loans 7,389,772 275,832 0 16,900,325 Commercial mortgage loans 1,079,662 4,827,137 0 47,649,217 Residential loans 1,542,667 1,717,434 75,320 51,609,504 Agricultural loans 124,610 1,954,530 0 8,428,009 Consumer & other loans 141,612 52,092 6,882 5,319,605 Total loans $10,818,650 $9,296,450 $ 82,202 $157,758,504 Allowance for Loan Losses Methodology The allowance for loan losses (ALLL) is determined by a calculation based on segmenting the loans into the following categories: (1) impaired loans and nonaccrual loans, (2) loans with a credit risk rating of 5, 6, 7 or 8, (3) other outstanding loans, and (4) other commitments to lend. In addition, unallocated general reserves are estimated based on migration and economic analysis of the loan portfolio. The ALLL is calculated by the addition of the estimated loss derived from each of the above categories. The impaired loans and nonaccrual loans over $50,000 are analyzed on an individual basis to determine if the future collateral value is sufficient to support the outstanding debt of the loan. If an estimated loss is calculated, it is included in the estimated ALLL until it is charged to the loan loss reserve. The calculation for loan risk graded 5, 6, 7, or 8, other outstanding loans and other commitments to lend is based on assigning an estimated loss factor based on a twelve quarter rolling historical net loss rate. The estimated requirement for unallocated general reserves from migration and economic analysis is determined by considering (1) trends in asset quality, (2) level and trends in charge-off -74- experience, (3) macro economic trends and conditions, (4) micro economic trends and conditions and (5) risk profile of lending activities. Within each of these categories, a high risk factor percentage and a low risk factor percentage from a rating of excessive, high, moderate or low will be determined by management and applied to the loan portfolio. This results in a high and low range of the estimated reserves required. By adding the estimated high and low value from the migration and economic analysis to the estimated reserve from the loan portfolio, a high and low range of total estimated loss reserves is obtained. This amount is then compared to the actual amount in the loan loss reserve. The calculation of ALLL is performed on a monthly basis and is presented to the Loan Committee and the Board of Directors. Changes in the allowance for loan losses are as follows: 2010 2009 2008 Balance, January 1 $ 2,532,856 $ 2,375,713 $ 2,399,115 Provision charged to operations 600,000 535,709 825,454 Loans charged off ( 682,485) ( 427,841) ( 873,115) Recoveries 304,243 49,275 24,259 Balance, December 31 $ 2,754,614 $ 2,532,856 $ 2,375,713 -75- The following table details activity in the ALLL by class of loans for the year ended December 31, 2010. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Commercial, Financial, Construction Commercial Residential Agricultural Consumer and Real Real Real Real and Agricultural Estate Estate Estate Estate Other Total Allowance for loan losses: Beginning balance $ 122,844 $ 1,283,398 $ 630,681 $ 277,601 $ 0 $ 218,332 $ 2,532,856 Charge-offs 91,642 30,312 416,635 52,773 0 91,123 682,485 Recoveries 263,399 0 0 0 0 40,844 304,243 Net charge-offs (171,757) 30,312 416,635 52,773 0 50,279 378,242 Provisions charged to operations (160,965) 142,636 471,948 77,074 0 69,307 600,000 Balance at end of year 133,636 1,395,722 685,994 301,902 0 237,360 2,754,614 Ending balances: Individually evaluated for impairment 0 0 0 0 0 0 0 Collectively evaluated for impairment 133,636 1,395,722 685,994 301,902 0 237,360 2,754,614 Balance at end of year 133,636 1,395,722 685,994 301,902 0 237,360 2,754,614 Loans - Ending balances: Individually evaluated for impairment 352,591 6,637,983 9,127,008 1,452,726 1,954,531 0 19,524,839 Collectively evaluated for impairment 27,499,253 10,262,342 38,522,209 50,156,778 6,473,478 5,319,605 138,233,665 Balance at end of year $27,851,844 $16,900,325 $47,649,217 $51,609,504 $8,428,009 $5,319,605 $157,758,504 The following table is a summary of amounts included in the ALLL for the impaired loans with specific reserves and the recorded balance of the related loans. Year Ended December 31, 2010 2009 2008 Allowance for loss on impaired loans $ 0 $ 0 $ 0 Recorded balance of impaired loans $ 4,083,365 $ 1,756,997 $ 2,428,095 Transfers from Loans Transfers from loans to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statements of cash flow. Such transfers totaled $662,941, $2,193,311 and $210,673 million for the years ended December 31, 2010, 2009, and 2008, respectively. -76- 4. PREMISES AND EQUIPMENT The amounts reported as bank premises and equipment at December 31, 2010 and 2009 are as follows: 2010 2009 Land $ 2,866,634 $ 2,866,634 Building 9,872,214 7,922,977 Furniture and equipment 7,628,479 6,698,338 Construction in process 0 727,578 20,367,327 18,215,527 Less accumulated depreciation (11,145,986) (10,438,447) Total $ 9,221,341 $ 7,777,080 Depreciation of premises and equipment was $782,739, $719,527, and $758,785 in 2010, 2009, and 2008, respectively. The Corporation depreciates its long-lived assets on various methods over their estimated productive lives, as more fully described in Note 1, Summary of Significant Accounting Policies. In June of 2010, we opened our new full-service banking center in Valdosta, Georgia. 5. INTANGIBLE ASSETS The following table lists the Corporation's intangible assets at December 31, 2010 and 2009. Core deposit premiums have 3-4 years of remaining amortization, and accounts receivables have 2-3 years remaining amortization. 2010 2009 Amortizing intangible assets Core deposit premiums $ 573,046 $ 754,788 Accounts receivable 67,830 93,726 Total intangible assets $ 640,876 $ 848,514 The intangible assets' carrying amount, accumulated amortization and amortization expense for December 31, 2010 and the five succeeding fiscal years are as follows: -77- 2010 2011 2012 2013 2014 2015 Amortizing intangible assets Core deposit premiums Gross carrying amount $1,892,540 $1,892,540 $1,892,540 $1,892,540 $1,892,540 $1,892,540 Accumulated amortization 1,319,494 1,501,236 1,682,978 1,864,720 1,892,540 1,892,540 Net carrying amount 573,046 391,304 209,562 27,820 0 0 Amortization expense 181,742 181,742 181,742 181,742 27,820 0 Accounts receivable Gross carrying amount 388,447 388,447 388,447 388,447 388,447 388,447 Accumulated amortization 320,617 346,513 368,628 386,961 388,447 388,447 Net carrying amount 67,830 41,934 19,819 1,486 0 0 Amortization expense 25,896 25,896 22,115 18,333 1,486 0 Total intangible assets Gross carrying amount 2,280,987 2,280,987 2,280,987 2,280,987 2,280,987 2,280,987 Accumulated amortization 1,640,111 1,847,749 2,051,606 2,251,681 2,280,987 2,280,987 Net carrying amount 640,876 433,238 229,381 29,306 0 0 Amortization expense $ 207,638 $ 207,638 $ 203,857 $ 200,075 $ 29,306 $ 0 6. DEPOSITS At December 31, 2010, the scheduled maturities of certificates of deposit are as follows: Amount 2011 $ 82,439,489 2012 14,130,809 2013 1,151,115 2014 559,954 2015 and thereafter 49,789 Total $ 98,331,156 The amount of overdraft deposits reclassified as loans were $127,180 and $86,687 for the years ended December 31, 2010 and 2009, respectively. 7. SHORT-TERM BORROWED FUNDS Federal funds purchased generally mature within one to four days. On December 31, 2010, the Corporation did not have any federal funds purchased. The Corporation had approximately $65,500,000 in unused federal funds accommodations at year-end 2010. Other short-term borrowed funds consist of Federal Home Loan Bank advances of $2,000,000 with interest at 1.57% as of December 31, 2010 and $5,000,000 with interest at 2.78% as of December 31, 2009. The Corporation maintains a line of credit with the Federal Reserve Bank's Discount Window. The maximum amount that can be borrowed is dependent upon the amount of unpledged securities held by the Corporation as the amount of borrowings must be fully secured. -78- Information concerning federal funds purchased and Federal Home Loan Bank short-term advances are summarized as follows: 2010 2009 Average balance during the year $ 4,336,986 $ 5,455,334 Average interest rate during the year 2.54% 3.12% Maximum month-end balance during the year $ 7,000,000 $15,000,000 8. LONG-TERM DEBT Long-term debt at December 31, 2010 and 2009 consisted of the following: 2010 2009 Advance from Federal Home Loan Bank with a 1.57% fixed rate of interest maturing July 25, 2011. (transferred to short-term borrowings) $ 0 $ 2,000,000 Advance from Federal Home Loan Bank with a 2.23% fixed rate of interest maturing July 30, 2012. 2,000,000 2,000,000 Advance from Federal Home Loan Bank with a 2.79% fixed rate of interest maturing July 29, 2013. 2,000,000 2,000,000 Advance from Federal Home Loan Bank with a 3.85% fixed rate of interest maturing April 30, 2014. 10,000,000 10,000,000 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 Advance from Federal Home Loan Bank with a 2.78% fixed rate of interest maturing September 10, 2018. (convertible to a variable rate at quarterly options of Federal Home Loan Bank). (transferred from short-term borrowings after the first convertible date) 5,000,000 0 Total long-term debt $24,000,000 $21,000,000 The advances from Federal Home Loan Bank are collateralized by the pledging a combination of 1-4 family residential mortgages and investment securities. At December 31, 2010, 1-4 family residential mortgage loans with a lendable collateral value of $22,329,118 and investment securities with a carrying value of $3,882,357 were pledged to secure these advances. In 2009, the advances were secured by 1-4 family residential mortgage loans only with a lendable collateral value of $30,736,243. At December 31, 2010, the Corporation had approximately $51,490,000 of unused lines of credit with the Federal Home Loan Bank. The following are maturities of long-term debt for the next five years. At December 31, 2010, there was no floating rate long-term debt; however, two of these advances have convertible call features. Two advances totaling -79- $10,000,000 have convertible options by the issuer to convert the rates to a 3-month LIBOR. The Bank intends to pay off these advances at the conversion dates. The Bank has the ability to hold this debt until conversion and the means of repayment. Due in: Fixed Rate Amount 2011 $ 0 2012 2,000,000 2013 2,000,000 2014 10,000,000 2015 0 Later Years 10,000,000 Total long-term debt $24,000,000 9. EMPLOYEE BENEFITS AND RETIREMENT PLANS Pension Plan The Corporation has a noncontributory defined benefit pension plan which covers most employees who have attained the age of 21 years and completed one year of continuous service. The Corporation is providing for the cost of this plan as benefits are accrued based upon actuarial determinations employing the aggregate funding method. The table of actuarially computed benefit obligations and net assets and the related changes of the Plan at December 31, 2010, 2009, and 2008 is presented below. 2010 2009 2008 Change in Benefit Obligation Benefit obligation at beginning of year $12,248,849 $12,180,640 $12,112,843 Service cost 0 0 0 Interest cost 718,393 712,894 719,314 Amendments 0 0 0 Benefits paid (784,304) (769,841) (719,618) Other - net 452,323 125,156 68,101 Benefit obligation at end of year $12,635,261 $12,248,849 $12,180,640 Change in Plan Assets Fair value of plan assets at beginning of year $10,334,869 $ 9,624,039 $11,048,382 Actual return on plan assets 532,872 1,230,671 (1,250,812) Employer contribution 405,000 250,000 546,087 Benefits paid (784,304) (769,841) (719,618) Fair value of plan assets at end of year $10,488,437 $10,334,869 $ 9,624,039 -80- 2010 2009 2008 Funded status $(2,146,824) $(1,913,980) $(2,556,601) Unrecognized net actuarial (gain)/loss 0 0 0 Unrecognized prior service cost 0 0 0 Pension liability included in other liabilities $(2,146,824) $(1,913,980) $(2,556,601) Accumulated benefit obligation $12,635,261 $12,248,849 $12,180,640 Amount recognized in consolidated balance sheet consist of the following: 2010 2009 2008 Accrued Pension $ 2,146,824 $ 1,913,980 $ 2,556,601 Deferred tax assets $ 729,920 $ 650,754 $ 869,245 Accumulated other comprehensive income 1,416,904 1,263,226 1,687,356 Total $ 2,146,824 $ 1,913,980 $ 2,556,601 Components of Pension Cost 2010 2009 2008 Service cost $ 0 $ 0 $ 0 Interest cost on benefit obligation 718,393 712,894 719,314 Expected return on plan assets (801,070) (744,127) (859,318) Other - net 281,630 373,001 135,169 Net periodic pension cost $ 198,953 $ 341,768 $ (4,835) Other changes in plan assets and benefit obligations recognized in comprehensive income: 2010 2009 2008 Net loss (gain) $ 232,844 $ (642,621) $ 1,492,140 Prior service costs 0 0 0 Total recognized in other comprehensive income (loss) $ 232,844 $ (642,621) $ 1,492,140 Net periodic pension cost 198,953 341,768 (4,835) Total recognized in net periodic pension cost and other comprehensive income (loss) $ 431,797 $ (300,853) $ 1,487,305 In years 2009 and 2008, the years after adopting ASC 960, "Employer's Accounting for Deferred Benefit Pension Plan and Other Postretirement Plans," and freezing its pension retirement plan, the Corporation recorded an additional accrued liability of $232,844 in 2010 and reduced the accrued pension liability by $642,621 in 2009. Also, changes were made to other comprehensive income (loss) of $(153,677) for 2010 and $424,130 for 2009 on a pre-tax basis. During 2010, the fair value of the plan assets increased $153,568. At December 31, 2010, the plan assets included cash and cash equivalents, U.S. Treasury bonds and notes, U.S. Government Agency securities, and equity securities. Assumptions used to determine the benefit obligation as of December 31, 2010 and 2009 respectively were: -81- 2010 2009 Weighted-Average Assumptions As of December 31 Discount rate 5.75% 6.00% Rate of compensation increase N/A N/A For the years ended December 31, 2010, 2009, and 2008, the assumptions used to determine net periodic pension costs are as follows: 2010 2009 2008 Discount rate 6.00% 6.00% 6.25% Expected return on plan assets 8.00% 8.00% 8.00% Rate of compensation increase N/A N/A N/A The expected rate of return represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In determining the expected rate of return, the Corporation considers long-term compound annualized returns of historical market data as well as actual returns on the Corporation's plan assets, and applies adjustments that reflect more recent capital market experience. The Corporation's pension plan investment objective is both security and long-term stability, with moderate growth. The investment strategies and policies employed provide for investments, other than "fixed-dollar" investments, to prevent erosion by inflation. Sufficient funds are held in a liquid nature (money market, short-term securities) to allow for the payment of plan benefits and expenses, without subjecting the funds to loss upon liquidation. In an effort to provide a higher return with lower risk, the fund assets are allocated between stocks, fixed income securities, and cash equivalents. All plan investments and transactions are in compliance with ERISA and any other law applicable to employee benefit plans. The targeted investment portfolio is allocated up to 30% in equities, 50% to 90% in fixed-income investments, and up to 20% in cash equivalents investments. All the Corporation's equity investments are in mutual funds with a Morningstar rating of 3 or higher, have at least $300 million in investments, and have been in existence 5 years or more. Fixed income securities include issues of the U.S. Government and its agencies and corporate notes. Any corporate note purchased has a rating (by Standard & Poor's or Moody's) of "A" or better. The average maturity of the fixed income portion of the portfolio does not exceed 10 years. -82- Pension Asset Allocation and Fair Value Measurement as of December 31 2010 2009 Fair Value Level 1 % Fair Value Level 1 % Investment at fair value as determined by quoted market price: Equity $ 2,829,460 $ 2,829,460 27% $ 2,515,661 $ 2,515,661 24% Fixed income 0 0 - 2,722,899 2,722,899 26% Total $ 2,829,460 $ 2,829,460 27% $ 5,238,560 $ 5,238,560 50% Investment as estimated fair value: Certificates of deposit $ 4,650,000 $ 4,650,000 44% $ 3,050,000 $ 3,050,000 30% Cash and cash equivalent 3,008,977 3,008,977 29% 2,046,309 2,046,309 20% Total $ 7,658,977 $ 7,658,977 73% $ 5,096,309 $ 5,096,309 50% Total $10,488,437 $10,488,437 100% $10,334,869 $10,334,869 100% All of the pension plan's investments were reported as level 1 assets and received level 1 fair value measurement. Under ASC 820, Fair Value Measurements, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels: Level 1 inputs consist of unadjusted quoted prices in active markets for identical assets and have the highest priority, and Level 3 inputs have the lowest priority. These levels are: Level 1 - The fair values of mutual funds, preferred stock, corporate notes, and U.S. Government securities were based on quoted market prices. Money market funds and certificates of deposit were reported at fair value. Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that were not active, and model-based valuation techniques for which all significant assumptions were 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. Estimated Contributions The Corporation expects to contribute $500,000 to its pension plan in 2011. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service and decrements as appropriate, are expected to be paid for fiscal years beginning: -83- 2011 $ 902,000 2012 946,000 2013 927,000 2014 963,000 2015 1,064,000 Years 2016 - 2020 $ 5,055,000 The estimated amortization amounts for the next fiscal year are: Net loss of $306,353, no prior service cost or credit, and no net transition asset or obligation. Southwest Georgia Bank 401(K) Plan In place of the Corporation's frozen defined pension retirement plan, the Corporation is offering the employees a 401(K) Plan effective January 1, 2007. This 401(K) plan is a qualified defined contribution plan as provided for under Section 401(K) of the Internal Revenue Code. This plan is a "safe-harbor" plan meaning that the Corporation will match contributions dollar for dollar for the first four percent of salary participants defer into the plan. The plan does allow for discretionary match in excess of the four percent and that the participants are allowed to defer the maximum amount of salary. During 2010, the Corporation matched the employee participants for the first four percent of salary contributing $180,091 to the plan and $173,673 in 2009. Employee Stock Ownership Plan The Corporation has a nondiscriminatory Employee Stock Ownership Plan and Trust (ESOP) administered by a trustee. The plan was established to purchase and hold Southwest Georgia Financial Corporation stock for all eligible employees. Contributions to the plan are made solely by the Corporation and are at the discretion of the Board of Directors. The annual amount of the contribution is determined by taking into consideration the financial conditions, profitability, and fiscal requirements of the Corporation. There were $75,000 of contributions in 2010 and no contributions in 2009. Contributions to eligible participants are based on percentage of annual compensation. As of December 31, 2010, the ESOP holds 316,232 shares of the Corporation's outstanding common stock. All 304,998 released shares are allocated to the participants. The 11,234 unreleased shares are pledged as collateral for a $101,462 long-term debt incurred from repurchasing participants' shares. Dividends paid by the Corporation on ESOP shares are allocated to the participants based on shares held. ESOP shares are included in the Corporation's outstanding shares and earnings per share computation. Directors Deferred Compensation Plan The Corporation has a voluntary deferred compensation plan for the Board of Directors administered by an insurance company. The plan stipulates that if a director participates in the Plan for four years, the Corporation will pay the director future monthly income for ten years beginning at normal retirement age, and the Corporation will make specified monthly payments to the director's beneficiaries in the event of his or her death prior to the completion of such payments. The plan is funded by life insurance policies -84- with the Corporation as the named beneficiary. This plan is closed to new director enrollment and participation. Directors and Executive Officers Stock Purchase Plan The Corporation has adopted a stock purchase plan for the executive officers and directors of Southwest Georgia Financial Corporation. Under the plan, participants may elect to contribute up to $500 monthly of salary or directors' fees and receive corporate common stock with an aggregate value of 1.5 times their contribution. The expense incurred during 2010, 2009, and 2008 on the part of the Corporation totaled $69,800, $71,900, and $74,630, respectively. Stock Option Plan Effective March 19, 1997, the Corporation established a Key Individual Stock Option Plan which provides for the issuance of options to key employees and directors of the Corporation. In April 1997, the Plan was approved by the Corporation's shareholders, and was effective for the duration of ten years. In April of 2007, the Plan concluded as related to granting new stock options. Under the Plan, the exercise price of each option equals the market price of the Corporation's stock on the grant date for a term of ten years. All of these stock options are fully vested. The fair value of each stock option grant is estimated on the grant date using an option-pricing model using weighted-average assumptions. The fair value of each option was expensed over its vesting period. A maximum of 196,680 shares of common stock were authorized for issuance with respect to options granted under the Plan. The Plan provided for the grant of incentive stock options and nonqualified stock options to key employees of the Corporation. The Plan is administered by the Personnel Committee of the Board of Directors. The following table sets forth the number of stock options granted, the average fair value of options granted, and the weighted-average assumptions used to determine the fair value of the stock options granted. 2010 2009 2008 Number of stock options granted 0 0 0 Average fair value of stock options granted 0 0 0 Number of option shares exercisable 13,880 25,100 37,552 Average price of stock options exercisable $ 19.08 $ 16.21 $ 15.59 A summary of the status of the Corporation's Plan as of December 31, 2010, 2009 and 2008, and the changes in stock options during the years are presented below: -85- No. of Shares Average Price Outstanding at December 31, 2007 107,165 $ 18.02 Granted 0 0 Expired (69,613) 19.33 Exercised 0 0 Outstanding at December 31, 2008 37,552 $ 15.59 Granted 0 0 Expired (12,452) 14.35 Exercised 0 0 Outstanding at December 31, 2009 25,100 $ 16.21 Granted 0 0 Expired (11,220) 12.66 Exercised 0 0 Outstanding at December 31, 2010 13,880 $ 19.08 The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 2010. Outstanding Stock Options Exercisable Stock Options Weighted Average Weighted Weighted Exercise Number Remaining Average Number Average Price Outstanding Contractual Exercise Exercisable Exercise Range at 12/31/10 Life Price at 12/31/10 Price $11 to $12 1,320 1.6 Years $ 11.93 1,320 $ 11.93 $13 to $14 660 2.0 Years 13.64 660 13.64 $19 to $20 8,600 5.2 Years 19.65 8,600 19.65 $21 to $23 3,300 5.5 Years 21.52 3,300 21.52 $11 to $23 13,880 $ 19.08 13,880 $ 19.08 Dividend Reinvestment and Share Purchase Plan In 1997, the Corporation's Board of Directors approved a dividend reinvestment and share purchase plan. Also, the Board amended this plan on September 16, 1998. The purpose of the plan is to provide shareholders of record of the Corporation's common stock, who elect to participate in the Plan, with a simple and convenient method of investing cash dividends and voluntary cash contributions in shares of the common stock without payment of any brokerage commissions or other charges. Eligible participants may purchase common stock through automatic reinvestment of common stock dividends on all or partial shares and make additional voluntary cash payments of not less than $5 nor more than $5,000 per month. The participant's price of common stock purchased with dividends or voluntary cash payments will be the average price of all shares purchased in the open market, or if issued from unissued shares or treasury stock the price will be the average of the high and low sales prices of the stock on the NYSE Amex on the dividend payable date or other purchase date. During the years ended December 31, 2010, 2009, and 2008, shares issued through the plan were 3,098, 3,525, and 12,140, respectively, at an average price of $13.55, -86- $9.08, and $16.43, per share, respectively. These numbers of shares and average price per share are not adjusted by stock dividends. 10. INCOME TAXES Components of income tax expense for 2010, 2009, and 2008 are as follows: 2010 2009 2008 Current expense (benefit) $ 885,689 $(172,776) $( 37,033) Deferred taxes (benefit) (301,954) 681,115 (1,622,425) Total income taxes $ 583,735 $ 508,339 $(1,659,458) The reasons for the difference between the federal income taxes in the consolidated statements of income and the amount and percentage computed by the applying the combine statutory federal and state income tax rate to income taxes are as follows: 2010 2009 2008 Amount % Amount % Amount % Taxes at statutory income tax rate $ 829,584 34.0 $ 789,118 34.0 $( 998,931) (34.0) Reductions in taxes resulting from exempt income (258,179) (10.6) (296,863) (12.8) ( 353,732) (12.0) Other timing differences 12,330 0.5 16,084 0.7 ( 306,795) (10.4) Total income taxes $ 583,735 23.9 $ 508,339 21.9 $(1,659,458) (56.4) The sources of timing differences for tax reporting purposes and the related deferred taxes recognized in 2010, 2009, and 2008 are summarized as follows: 2010 2009 2008 Nonaccrual loan interest $( 2,657) $ 0 $ 0 Foreclosed assets expenses (115,613) 0 0 Intangible asset amortization (298,699) 0 0 Bad debt expense in excess of tax ( 75,398) ( 53,429) 7,956 Realized impairment (loss) gain on equity securities ( 65,520) 436,800 (1,641,960) Nonqualified retirement plan contribution / payments 9,347 9,348 9,348 Deferred compensation 0 340,000 0 Accretion of discounted bonds 25,943 39,905 34,800 Gain on disposition of discounted bonds ( 36,213) ( 27,110) ( 31,017) Book and tax depreciation difference 256,856 ( 64,399) ( 1,552) Total deferred taxes $(301,954) $ 681,115 $(1,622,425) -87- December 31 2010 2009 Deferred tax assets: Nonaccrual loan interest $ 2,657 $ 0 Foreclosed assets expenses 115,613 0 Intangible asset amortization 298,699 0 Bad debt expense in excess of tax 588,811 513,413 Realized loss on OTTI equity securities 1,270,680 1,205,160 Nonqualified retirement plan (7,228) 2,121 Pension plan 729,920 650,754 Total deferred tax assets 2,999,152 2,371,448 Deferred tax liabilities: Accretion on bonds and gain on discounted bonds 26,009 36,279 Book and tax depreciation difference 294,809 39,396 Unrealized gain on securities available for sale 198,349 302,482 Total deferred tax liabilities 519,167 378,157 Net deferred tax assets $2,479,985 $1,993,291 11. RELATED PARTY TRANSACTIONS The Employee Stock Ownership Plan and Trust of Southwest Georgia Financial Corporation presently holds 316,232 shares of the Corporation's stock of which 11,234 shares have been pledged. In the normal course of business, the Corporation's banking subsidiary has made loans at prevailing interest rates and terms to directors and executive officers of the Corporation and its subsidiaries, and to their affiliates. The aggregate indebtedness to the Bank of these related parties approximated $3,332,000 and $2,626,000 at December 31, 2010 and 2009, respectively. During 2010, approximately $1,011,000 of such loans were made, and repayments totaled approximately $500,000. None of these above mentioned loans were restructured, nor were any related party loans charged off during 2010 or 2009. Also, during 2010 and 2009, directors and executive officers had approximately $2,348,000 and $2,508,000, respectively, in deposits with the Bank. 12. COMMITMENTS, CONTINGENT LIABILITIES, AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, various claims and lawsuits may arise against the Corporation. Management, after reviewing with counsel all actions and proceedings, considers that the aggregate liability or loss, if any, will not be material. The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own 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, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of the instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. -88- Commitments to extend credit are contractual obligations to lend to a customer as long as all established contractual conditions are satisfied. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by a customer. Standby letters of credit and financial guarantees are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Standby letters of credit and financial guarantees are generally terminated through the performance of a specified condition or through the lapse of time. The Corporation's exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual or notional amounts of these instruments. As these off-balance sheet financial instruments have essentially the same credit risk involved in extending loans, the Corporation generally uses the same credit and collateral policies in making these commitments and conditional obligations as it does for on-balance sheet instruments. 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. The contractual or notional amounts of financial instruments having credit risk in excess of that reported in the Consolidated Balance Sheets are as follows: Dec. 31, 2010 Dec. 31, 2009 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 10,616,046 $ 12,961,316 Standby letters of credit and financial guarantees $ 10,000 $ 10,000 The Corporation's operating leases are comprised of purchase obligations for data processing services, and a rental agreement for our mortgage servicing office in Valdosta, Georgia. We have no capital lease obligations. The following table shows scheduled future cash payments under those obligations as of December 31, 2010. Payments Due by Period Less than 1 1-3 4-5 After 5 Total Year Years Years Years Operating leases $ 31,793 $ 25,360 $ 6,433 $ 0 $ 0 Rental expenses were $12,000, $ 28,812, and $38,442 for the years ended December 31, 2010, 2009, and 2008, respectively. 13. FAIR VALUE MEASUREMENTS AND DISCLOSURES Effective January 1, 2008, the Corporation adopted ASC 820, which provides a framework for measuring fair value under generally accepted accounting -89- principles. ASC 820 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. Fair Value Hierarchy: Under ASC 820, 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 to Maturity: Investment securities held to maturity are not recorded at fair value on a recurring basis. For disclosure purposes, fair value measurement is based upon quoted prices, if available. -90- 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 individually impaired, management measures impairment in accordance with ASC 310, Accounting by Creditors for Impairment of a Loans, (ASC 310). 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 ASC 820, 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. -91- 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. 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 December 31, 2010. Level 1 Level 2 Level 3 Total Investment securities available for sale $ 67,801 $ 54,878,120 $ 0 $ 54,945,921 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 December 31, 2010. Level 1 Level 2 Level 3 Total Foreclosed assets $ 0 $ 3,288,121 $ 0 $ 3,288,121 Impaired loans 0 4,083,365 0 4,083,365 Total assets at fair value $ 0 $ 7,371,486 $ 0 $ 7,371,486 -92- The carrying amount and estimated fair values of the Corporation's assets and liabilities which are required to be either disclosed or recorded at fair value at December 31, 2010 and 2009 are as follows: December 31, 2010 December 31, 2009 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (Dollars in thousands) (Dollars in thousands) Assets: Cash and cash equivalents $ 16,071 $ 16,071 $ 23,296 $ 23,296 Investment securities available for sale 54,946 54,946 62,008 62,008 Investment securities held to maturity 46,255 46,570 24,195 24,177 Federal Home Loan Bank stock 1,650 1,650 1,650 1,650 Loans $154,978 $153,293 $157,697 $155,579 Liabilities: Deposits $239,531 $240,009 $235,431 $235,859 Federal funds purchased 0 0 0 0 FHLB advances $ 26,000 $ 27,678 $ 26,000 $ 28,430 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. 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. 14. SUPPLEMENTAL FINANCIAL DATA Components of other operating expense in excess of one percent of gross revenue for the respective periods are as follows: Years Ended December 31 2010 2009 2008 Other professional fees $195,477 $200,662 $316,682 Directors & board committee fees $195,216 $237,153 $246,152 Legal fees $ 99,120 $956,363 $281,580 FDIC insurance assessment $389,647 $447,579 $ 31,210 -93- 15. STOCKHOLDERS' EQUITY / REGULATORY MATTERS Dividends paid by the Bank subsidiary are the primary source of funds available to the parent company for payment of dividends to its shareholders and other needs. Banking regulations limit the amount of dividends that may be paid without prior approval of the Bank's regulatory agency. At December 31, 2010, approximately $915,181 of the Bank's net assets were available for payment of dividends without prior approval from the regulatory authorities. The Federal Reserve Board requires that banks maintain reserves based on their average deposits in the form of vault cash and average deposit balances at the Federal Reserve Banks. For the year ended December 31, 2010, the Bank's reserve requirements were none, due to the Company's deposit reclassification which started in the fourth quarter of 2007. The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2010 and 2009, the Corporation and the Bank meets all capital adequacy requirements to which they are subject. As of December 31, 2010, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank's category. The Corporation's and the Bank's actual capital amounts and ratios as of December 31, 2010 and 2009 are also presented in the table. As a result of regulatory limitations at December 31, 2010, approximately $24,315,958 of the parent company's investments in net assets of the subsidiary bank of $25,231,139, as shown in the accompanying condensed balance sheets in Note 16, was restricted from transfer by the subsidiary bank to the parent company in the form of cash dividends. The Corporation's ratios under the above rules at December 31, 2010 and 2009 are set forth in the following table. The Corporation's leverage ratio at December 31, 2010 was 9.01%. -94- To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2010: Total capital (to risk- weighted assets) $29,136,097 17.74% $13,137,564 > 8.00% $16,421,956 > 10.00% Tier I capital (to risk- weighted assets) $27,080,497 16.49% $ 6,568,782 > 4.00% $ 9,853,173 > 6.00% Leverage (Tier I capital to average assets) $27,080,497 9.01% $ 9,021,424 > 3.00% $15,035,707 > 5.00% As of December 31, 2009: Total capital (to risk- weighted assets) $27,418,200 16.15% $13,586,000 > 8.00% $16,982,500 > 10.00% Tier I capital (to risk- weighted assets) $25,298,678 14.90% $ 6,793,000 > 4.00% $10,189,500 > 6.00% Leverage (Tier I capital to average assets) $25,298,678 8.83% $ 8,594,979 > 3.00% $14,324,964 > 5.00% -95- 16. PARENT COMPANY FINANCIAL DATA Southwest Georgia Financial Corporation's condensed balance sheets as of December 31, 2010 and 2009, and its related condensed statements of operations and cash flows for the years ended are as follows: Condensed Balance Sheets as of December 31, 2010 and 2009 (Dollars in thousands) 2010 2009 ASSETS Cash $ 1,005 $ 628 Investment in consolidated wholly-owned bank subsidiary, at equity 25,231 24,123 Investment securities available for sale 0 3 Loans 101 129 Other assets 439 647 Total assets $ 26,776 $ 25,530 LIABILITIES AND STOCKHOLDERS' EQUITY Dividends payable $ 0 $ 0 Other liabilities 0 0 Total liabilities 0 0 Stockholders' equity: Common stock, $1 par value, 5,000,000 shares authorized, 4,293,835 shares for 2010 and 2009 issued 4,294 4,294 Additional paid-in capital 31,701 31,701 Retained earnings 17,926 16,325 Accumulated other comprehensive income ( 1,031) ( 676) Treasury stock, at cost, 1,745,998 for 2010 and 2009 (26,114) (26,114) Total stockholders' equity 26,776 25,530 Total liabilities and stockholders' equity $ 26,776 $ 25,530 -96- 16. PARENT COMPANY FINANCIAL DATA (continued) Condensed Statements of Income and Expense for the years ended December 31, 2010, 2009, and 2008 (Dollars in thousands) 2010 2009 2008 Income: Dividend received from bank subsidiary $ 368 $ 577 $ 1,374 Interest income 6 7 23 Other 94 0 1 Total income 468 584 1,398 Expenses: Other 94 135 163 Income before income taxes and equity in Undistributed income of bank subsidiary 374 449 1,235 Income tax expense (benefit) - allocated from consolidated return ( 20) ( 50) ( 60) Income before equity in undistributed income of subsidiary 394 499 1,295 Equity in undistributed income (loss) of subsidiary 1,462 1,314 ( 2,574) Net income (loss) 1,856 1,813 ( 1,279) Retained earnings - beginning of year 16,325 14,512 17,039 Cash dividend declared ( 255) 0 ( 1,248) Retained earnings - end of year $ 17,926 $ 16,325 $ 14,512 -97- 16. PARENT COMPANY FINANCIAL DATA (continued) Condensed Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008 (Dollars in thousands) 2010 2009 2008 Cash flow from operating activities: Net income (loss) $ 1,856 $ 1,813 $(1,279) Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity (deficit) in undistributed earnings of Subsidiary (1,462) (1,314) 2,574 Changes in: Other assets 210 ( 2) ( 44) Other liabilities 0 0 27 Net cash provided for operating activities 604 497 1,278 Cash flow from investing activities: Net change in loans 28 ( 54) ( 32) Net cash provided (used) for investing activities 28 ( 54) ( 32) Cash flow from financing activities: Cash dividend paid to stockholders ( 255) ( 178) (1,427) Purchase of treasury stock 0 0 ( 64) Net cash provided (used) for financing activities ( 255) ( 178) (1,491) Increase (decrease) in cash 377 265 ( 245) Cash - beginning of year 628 363 608 Cash - end of year $ 1,005 $ 628 $ 363 -98- 17. EARNINGS PER SHARE Earnings per share are based on the weighted average number of common shares outstanding during the year. Year Ended December 31, 2010 Weighted Per Average Share Income Shares Amount Basic earnings per share: Net income $ 1,856,216 2,547,837 $ 0.73 Diluted earnings per share: Net income $ 1,856,216 2,547,894 $ 0.73 Year Ended December 31, 2009 Weighted Per Average Share Income Shares Amount Basic earnings per share: Net income $ 1,812,596 2,547,837 $ 0.71 Diluted earnings per share: Net income $ 1,812,596 2,547,837 $ 0.71 Year Ended December 31, 2008 Weighted Per Average Share Income Shares Amount Basic earnings per share: Net income (loss) $(1,278,574) 2,547,926 $(0.50) Diluted earnings per share: Net income (loss) $(1,278,574) 2,552,486 $(0.50) -99- 18. QUARTERLY DATA SOUTHWEST GEORGIA FINANCIAL CORPORATION QUARTERLY DATA (UNAUDITED) (Dollars in thousands) For the Year 2010 Fourth Third Second First Interest and dividend income $ 3,180 $ 3,173 $ 3,378 $ 3,285 Interest expense 653 706 743 787 Net interest income 2,527 2,467 2,635 2,498 Provision for loan losses 150 150 150 150 Net interest income after provision for loan losses 2,377 2,317 2,485 2,348 Noninterest income 1,152 1,012 1,774 1,151 Noninterest expenses 3,154 3,072 3,013 2,938 Income (loss) before income taxes 375 257 1,246 561 Provision(benefit) for income taxes 71 18 340 154 Net income (loss) $ 304 $ 239 $ 906 $ 407 Earnings (loss) per share of common stock: Basic $ .12 $ .09 $ .36 $ .16 Diluted $ .12 $ .09 $ .36 $ .16 For the Year 2009 Fourth Third Second First Interest and dividend income $ 3,476 $ 3,403 $ 3,348 $ 3,371 Interest expense 867 912 909 984 Net interest income 2,609 2,491 2,439 2,387 Provision for loan losses 150 140 60 186 Net interest income after provision for loan losses 2,459 2,351 2,379 2,201 Noninterest income 1,406 1,294 1,207 1,217 Noninterest expenses 2,828 3,020 3,406 2,937 Income (loss) before income taxes 1,037 625 180 481 Provision(benefit) for income taxes 331 158 (79) 100 Net income (loss) $ 706 $ 467 $ 259 $ 381 Earnings (loss) per share of common stock: Basic $ .28 $ .18 $ .10 $ .15 Diluted $ .28 $ .18 $ .10 $ .15 19. SEGMENT REPORTING The Corporation operations are divided into five reportable business segments: The Retail and Commercial Banking Services, Commercial Mortgage Banking Services, Insurance Services, Trust and Retail Brokerage Services, and Financial Management Services. These operating segments have been identified primarily based on the Corporation's organizational structure. -100- The Retail and Commercial Banking Services segment serves consumer and commercial customers by offering a variety of loan and deposit products, and other traditional banking services. The Commercial Mortgage Banking Services segment originates and services commercial mortgage loans on properties that are located throughout the southeastern United States. This segment does not directly fund any mortgages and acts primarily as a servicer and broker for participating mortgage lenders. The Insurance Services segment offers clients a full spectrum of commercial and personal lines insurance products including life, health, property, and casualty insurance. The Trust and Retail Brokerage Services segment provides personal trust administration, estate settlement, investment management, employee retirement benefit services, and the Individual Retirement Account (IRA) administration. Also, this segment offers full-service retail brokerage which includes the sale of retail investment products including stocks, bonds, mutual funds, and annuities. The Financial Management Services segment is responsible for the management of the investment securities portfolio. It also is responsible for managing financial risks, including liquidity and interest rate risk. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Corporation evaluates performance based on profit or loss from operations after income taxes not including nonrecurring gains or losses. The Corporation's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technology and marketing strategies. The Corporation allocates capital and funds used or funds provided for each reportable business segment. Also, each segment is credited or charged for the cost of funds provided or used. These credits and charges are reflected as net intersegment interest income (expense) in the table below. The Corporation does allocate income taxes to the segments. Other revenue represents noninterest income, exclusive of the net gain (loss) on disposition of assets and expenses associated with administrative activities which are not allocated to the segments. Those expenses include audit, compliance, investor relations, marketing, personnel, and other executive or parent company expenditures. The Corporation does not have operating segments other than those reported. Parent Company and the Administrative Offices financial information is included in the "Other" category, and is deemed to represent an overhead function rather than an operating segment. The Administrative Offices include audit, marketing, personnel, and the executive office. The Corporation does not have a single external customer from which it derives 10% or more of its revenue and operates in one geographical area. Information about reportable business segments, and reconciliation of such information to the consolidated financial statements for the years ended December 31, 2010, 2009, and 2008, are as follows: -101- Segment Reporting For the year ended December 31, 2010 Trust and Retail and Commercial Retail Commercial Mortgage Insurance Brokerage Financial Inter-segment Banking Banking Services Services Management Elimination Other Totals (Dollars in Thousands) Net Interest Income (expense) external customers $ 7,894 (12) 2,240 6 $ 10,128 Net intersegment interest income (expense) 2,208 0 6 4 (2,218) Net Interest Income 10,102 (12) 6 4 22 0 6 10,128 Provision for Loan Losses 600 600 Noninterest Income (expense) external customers 1,609 1,124 1,114 541 604 0 97 5,089 Intersegment noninterest income (expense) 6 (12) 6 38 0 (38) Total Noninterest Income 1,615 1,112 1,120 579 604 (38) 97 5,089 Noninterest Expenses: Depreciation 537 43 22 17 47 117 783 Amortization of intangibles 182 0 8 18 0 0 208 Other Noninterest expenses 6,469 904 907 611 533 0 1,762 11,186 Total Noninterest expenses 7,188 947 937 646 580 0 1,879 12,177 Pre-tax Income 3,929 153 189 (63) 46 (38) (1,776) 2,440 Provision for Income Taxes 773 58 45 (8) 61 (345) 584 Net Income $ 3,156 95 144 (55) (15) (38) (1,431) $ 1,856 Assets $382,365 1,273 1,186 372 123,178 (212,510) 540 $296,404 Expenditures for Fixed Assets $ 2,200 16 13 5 9 $ 2,243 Amounts included in the "Other" column are as follows: Other Net interest Income: Parent Company $ 6 Noninterest Income: Executive office miscellaneous income 97 Noninterest Expenses: Parent Company corporate expenses 94 Executive office expenses not allocated to segments 1,785 Provison for Income taxes: Parent Company income taxes (benefit) (20) Executive office income taxes not allocated to segments (325) Net Income: $( 1,431) Segment assets: Parent Company assets, after intercompany elimination $ 540 -102- Segment Reporting For the year ended December 31, 2009 Trust and Retail and Commercial Retail Commercial Mortgage Insurance Brokerage Financial Inter-segment Banking Banking Services Services Management Elimination Other Totals (Dollars in Thousands) Net Interest Income (expense) external customers $ 6,675 (43) 1 0 3,285 7 $ 9,925 Net intersegment interest income (expense) 3,363 0 6 6 (3,375) Net Interest Income 10,038 (43) 7 6 (90) 0 7 9,925 Provision for Loan Losses 536 536 Noninterest Income (expense) external customers 1,996 1,261 1,055 479 333 0 0 5,124 Intersegment noninterest income (expense) 36 (43) 7 38 0 (38) Total Noninterest Income 2,032 1,218 1,062 517 333 (38) 0 5,124 Noninterest Expenses: Depreciation 478 58 21 22 49 92 720 Amortization of intangibles 183 0 7 18 0 0 208 Noninterest Income (expense) Other Noninterest expenses 6,047 1,640 858 557 504 0 1,658 11,264 Total Noninterest expenses 6,708 1,698 886 597 553 0 1,750 12,192 Pre-tax Income 4,826 (523) 183 (74) (310) (38) (1,743) 2,321 Provision for Income Taxes 1,201 (199) 46 (15) (71) (454) 508 Net Income $ 3,625 (324) 137 (59) (239) (38) (1,289) $ 1,813 Assets $376,688 2,336 1,036 385 110,101 (200,317) 779 $291,008 Expenditures for Fixed Assets $ 2,640 69 35 1 2 $ 2,747 Amounts included in the "Other" column are as follows: Other Net interest Income: Parent Company $ 7 Noninterest Income: Executive office miscellaneous income 0 Noninterest Expenses: Parent Company corporate expenses 135 Executive office expenses not allocated to segments 1,615 Provison for Income taxes: Parent Company income taxes (benefit) (50) Executive office income taxes not allocated to segments (404) Net Income: $ (1,289) Segment assets: Parent Company assets, after intercomany elimination $ 779 -103- Segment Reporting For the year ended December 31, 2008 Trust and Retail and Commercial Retail Commercial Mortgage Insurance Brokerage Financial Inter-segment Banking Banking Services Services Management Elimination Other Totals (Dollars in Thousands) Net Interest Income (expense) external customers $ 5,127 (85) 7 0 4,527 24 $ 9,600 Net intersegment interest income (expense) 4,663 (29) (13) 6 (4,627) Net Interest Incme 9,790 (114) (6) 6 (100) 0 24 9,600 Provision for Loan Losses 825 825 Noninterest Income (expense) external customers 1,682 2,106 1,096 611 (4,020) 0 0 1,475 Intersegment noninterest income (expense) 120 (114) (6) 38 (38) Total Noninterest Income 1,802 1,992 1,090 649 (4,020) (38) 0 1,475 Noninterest Expenses: Depreciation 501 67 21 21 38 111 759 Amortization of intangibles 182 20 32 18 (25) 227 Noninterest Income (expense) Other Noninterest expenses 5,991 2,714 874 585 537 0 1,502 12,203 Total Noninterest expenses 6,674 2,801 927 624 575 (25) 1,613 13,189 Pre-tax Income 4,093 (923) 157 31 (4,695) (13) (1,589) (2,939) Provision for Income Taxes 794 (351) 30 5 (1,765) (373) (1,660) Net Income $ 3,299 (572) 127 26 (2,930) (13) (1,216) $ (1,279) Assets $340,363 1,463 853 428 105,529 (182,765) 1,426 $267,297 Expenditures for Fixed Assets $ 204 15 14 12 7 $ 252 Amounts included in the "Other" column are as follows: Other Net interest Income: Parent Company $ 24 Noninterest Income: Executive office miscellaneous income 0 Noninterest Expenses: Parent Company corporate expenses 162 Executive office expenses not allocated to segments 1,450 Provison for Income taxes: Parent Company income taxes (benefit) (59) Executive office income taxes not allocated to segments (313) Net Income: $ (1,216) Segment assets: Parent Company assets, after intercomany elimination $ 1,426 -104- 20. SUBSEQUENT EVENTS The Corporation's subsidiary bank is in the process of purchasing approximately $1,400,000 of additional Bank Owned Life Insurance (BOLI) on a group of employees. Banking laws and regulations allow the Bank to purchase life insurance policies on certain employees in order to help offset the Bank's overall employee compensation costs. Along with the existing BOLI, the Bank's total amount is approximately $4,023,000 which is 15% of stockholders' equity and within regulatory guidelines. The Bank has agreed to purchase land for $425,000 in Valdosta, Georgia to construct another branch bank facility. This purchase transaction is pending based upon approval from the regulators. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the past three years, the Corporation did not change accountants nor have any disagreements with its accountants on any matters of accounting practices or principles or financial statement disclosure. ITEM 9A. 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 the Corporation's disclosure controls and procedures (as defined in federal securities rules) as of December 31, 2010. 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, 2010 is included in Item 8 of this Report under the heading "Management's Report on Internal Controls Over Financial Reporting." Changes in Internal Control Over Financial Reporting No changes were made to the Corporation's internal control over financial reporting during the last fiscal quarter that materially affected or could reasonably likely to materially affect the Corporation's internal controls over financial reporting. -105- ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information contained under the heading "Information About Nominees For Director" and "Compliance with Section 16(a) of the Exchange Act" in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation's annual meeting of shareholders to be held on May 24, 2011, to be filed with the Commission, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained under the heading "Executive Compensation" in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation's annual meeting of shareholders to be held on May 24, 2011, to be filed with the Commission, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information contained under the heading "Voting Securities and Principal Holders" and "Equity Compensation Plan Information" in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation's annual meeting of shareholders to be held on May 24, 2011, to be filed with the Commission, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information contained under the heading "Certain Relationships and Related Transactions" in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation's annual meeting of shareholders to be held on May 24, 2011, to be filed with the Commission, is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information contained under the heading "Information Concerning the Company's Accountants" in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation's annual meeting of shareholders to be held on May 24, 2011, to be filed with the Commission, is incorporated herein by reference. -106- PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1). Financial Statements The following consolidated financial statements and supplementary information for the fiscal years ended December 31, 2010, 2009, and 2008 are included in Part II, Item 8 herein: (i) Report of Independent Auditors (ii) Consolidated Balance Sheets - December 31, 2010 and 2009 (iii) Consolidated Statements of Income - Years ended December 31, 2010, 2009, and 2008 (iv) Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2010, 2009, and 2008 (v) Consolidated Statements of Cash Flows - Years ended December 31, 2010, 2009, and 2008 (vi) Notes to Consolidated Financial Statements - December 31, 2010 (a)(2). Financial Statement Schedules All applicable financial statement schedules required have been included in the Notes to the Consolidated Financial Statements. (b)(3). Exhibits: The exhibits filed as part of this registration statement are as follows: Exhibit Number Description Of Exhibit 3.1 Articles of Incorporation of Southwest Georgia Financial Corporation, as amended and restated (included as Exhibit 3.1 to the Corporation's Form 10-KSB dated December 31, 1996, previously filed with the commission and incorporated herein by reference). 3.2 Bylaws of the Corporation as amended (included as Exhibit 3.2 to the Corporation's Form 10-KSB dated December 31, 1995, previously filed with the Commission and incorporated herein by reference). 10.1 Pension Retirement Plan of the Corporation, as amended and restated effective as of January 1, 2009. (included as Exhibit 10.1 to the Corporation's Form 10-K dated December 31, 2009, previously filed with the Commission and incorporated herein by reference).* 10.2 Form of Directors' Deferred Compensation Plan of the Corporation (included as Exhibit 10.3 to the Corporation's Form S-18 dated January 23, 1990, previously filed with the Commission and incorporated herein by reference).* -107- 10.3 Directors' and Executive Officers' Stock Purchase Plan of the Corporation dated March 18, 1992 (included as Exhibit 10.7 to the Corporation's Form 10-KSB dated December 31, 1992, previously filed with the Commission and incorporated herein by reference).* 10.4 Supplemental Retirement Plan of the Corporation dated December 21, 1994 (included as Exhibit 10.11 to the Corporation's Form 10-KSB dated December 31, 1994, previously filed with the Commission and incorporated herein by reference).* 10.5 Trust under the Corporation's Supplemental Retirement Plan, as amended (included as Exhibit 10.6b to the Corporation's Form 10-K dated December 31, 1997, previously filed with the Commission and incorporated herein by reference).* 10.6 Employee Stock Ownership Plan and Trust of the Corporation as amended and restated effective as of January 1, 2009 (included as Exhibit 10.6 to the Corporation's Form 10-K dated December 31, 2009, previously filed with the Commission and incorporated herein by reference). * 10.7 Dividend Reinvestment and Share Purchases Plan of the Corporation as amended and restated by Amendment No. 1 (included as Exhibit 99 to the Corporation's Form S-3DPOS dated September 30, 1998, previously filed with the Commission and incorporated herein by reference). 10.8 Key Individual Stock Option Plan of the Corporation dated March 19, 1997 (included as Exhibit 10.9 to the Corporation's Form 10-K dated December 31, 1997, previously filed with the Commission and incorporated herein by reference).* 10.9 Employment Agreement of DeWitt Drew (included as Exhibit 10.11 to the Corporation's Form S-4 dated January 6, 2004, previously filed with the Commission and incorporated herein by reference).* 10.11 Southwest Georgia Bank 401(K) Plan as adopted by the Board of Directors on November 15, 2006 (included as Exhibit 10.17 to the Corporation's Form 10-K dated December 31, 2006, previously filed with the Commission and incorporated herein by reference). * 10.12 Form of Employment Agreement by and between Charles R. Lemons and Empire (included as Exhibit 10.12 to the Corporation's Form 10-K dated December 31, 2008, previously filed with the Commission and incorporated herein by reference).* 10.13 Guarantee of Empire's financial performance obligation by the Bank as it relates to Charles R. Lemons Employment Agreement. (included as Exhibit 10.13 to the Corporation's Form 10-K dated December 31, 2009, previously filed with the Commission and incorporated herein by reference).* -108- 14 Code of Ethical Conduct dated February 27, 2008 (included as Exhibit 14 to the Corporation's Form 8-K dated February 27, 2008, previously filed with the Commission and incorporated herein by reference). 21 Subsidiaries of the Corporation (included as Exhibit 21 to the Corporation's Form 10-K dated December 31, 2002, previously filed with the Commission, incorporated herein by reference). 23.1 Consent of Thigpen, Jones, Seaton & Co., P.C. 31.1 Section 302 Certification of Periodic Financial Report by Chief Executive Officer. 31.2 Section 302 Certification of Periodic Financial Report by Chief Financial Officer. 32.1 Section 906 Certification of Periodic Financial Report by Chief Executive Officer. 32.2 Section 906 Certification of Periodic Financial Report by Chief Financial Officer. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Southwest Georgia Financial Corporation (Corporation) Date: March 31, 2011 By: /s/ DeWitt Drew DEWITT DREW President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Corporation and in the capacities and on the dates indicated. /s/ DeWitt Drew Date: March 31, 2011 DEWITT DREW President and Chief Executive Officer [Principal Executive Officer] /s/ George R. Kirkland Date: March 31, 2011 GEORGE R. KIRKLAND Senior Vice-President and Treasurer [Principal Financial and Accounting Officer] -109- /s/ Michael J. McLean Date: March 31, 2011 MICHAEL J. MCLEAN Chairman /s/ Richard L. Moss Date: March 31, 2011 RICHARD L. MOSS Vice Chairman /s/ Cecil H. Barber Date: March 31, 2011 CECIL H. BARBER Director /s/ John J. Cole, Jr. Date: March 31, 2011 JOHN J. COLE, JR. Director /s/ Roy Reeves Date: March 31, 2011 ROY REEVES Director /s/ Johnny R. Slocumb Date: March 31, 2011 JOHNNY R. SLOCUMB Director /s/ M. Lane Wear Date: March 31, 2011 M. LANE WEAR Director /s/ Marcus R. Wells Date: March 31, 2011 MARCUS R. WELLS Director Exhibit Index Exhibit Number Description of Exhibit 23.1 Consent of Thigpen, Jones, Seaton & Co., P.C. 31.1 Section 302 Certification of Periodic Financial Report by Chief Executive Officer. 31.2 Section 302 Certification of Periodic Financial Report by Chief Financial Officer. 32.1 Section 906 Certification of Periodic Financial Report by Chief Executive Officer. 32.2 Section 906 Certification of Periodic Financial Report by Chief Financial Officer. -110-