10-K/A 1 tenka11.htm FORM 10-K/A

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, 2011

[ ] 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 [X] 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, 2011: $17,660,163 based on 1,964,423 shares at the price of $8.99 per share.

As of March 23, 2012, 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 2012 annual meeting of shareholders, to be filed with the Commission are incorporated by reference into Part III.

EXPLANATORY NOTE:

Southwest Georgia Financial Corporation is filing this Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the United States Securities and Exchange Commission on March 30, 2012. This Amendment No. 1 is being filed for the sole purpose of furnishing the correct image for the performance graph. No other changes have been made to the Form 10-K.

TABLE OF CONTENTS

PART I
	Item 1.	Business
	Item 1A.	Risk Factors
	Item 1B.	Unresolved Staff Comments
	Item 2.	Properties
	Item 3.	Legal Proceedings
	Item 4.	Mine Safety Disclosures

PART II
	Item 5.	Market 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

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. 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 2010. Population characteristics in these counties range from rural to more metropolitan. Our most recent and largest market is Lowndes County with total population of 109,233 and the highest growth rate in our markets at 18.6% 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 29.9, younger than an average median age of 37.2 in the other four counties the bank serves. These counties, Colquitt, Worth, Thomas, and Baker, have an average total population of 28,837 and an average growth rate of (1.0)% during the past ten years. Per capita income in Lowndes County was $20,041, slightly higher than an average of $18,338 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, 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, 2011, the Corporation’s deposit base, totaling $248,910,899, consisted of $56,485,602 in noninterest-bearing demand deposits (22.7% of total deposits), $75,479,574 in interest-bearing demand deposits including money market accounts (30.3% of total deposits), $24,366,536 in savings deposits (9.8% of total

deposits), $59,950,041 in time deposits in amounts less than $100,000 (24.1% of total deposits), and $32,629,146 in time deposits of $100,000 or more (13.1% 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, 2011, consumer installment, real estate (including construction and mortgage loans), and commercial (including financial and agricultural) loans represented approximately 3.0%, 76.8% and 20.2%, 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 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 2011, Bank revenue received from mortgage banking services was $1,477,166 compared with $1,350,625 in 2010. All of this income was from Empire except for $239,625 in 2011 and $240,424 in 2010, 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 as well as an outside third party firm conduct independent loan review adequacy tests and their findings are included annually as part of the 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 122 full-time employees and five part-time employees at December 31, 2011. 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 associations, credit unions and certain governmental agencies. The Bank ranks fourth 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 stockholders.

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, 2011, net assets available from the Bank to pay dividends without prior approval from regulatory authorities totaled $776,123. For 2011, the Corporation’s cash dividend payout to stockholders was $254,784.

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;
	*		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 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 (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.

On December 20, 2011, the Federal Reserve announced its intention to implement substantially all of the Basel III rules. Although the regulatory agencies have not yet published a notice of proposed rulemaking to implement Basel III, they are likely to do so (at least with respect to the Basel III capital framework) during the first half of 2012.

We anticipate that the Basel III capital framework as adopted in the United States will establish substantially higher capital requirements than currently apply for institutions with $50 billion or more in total assets. The application of the Basel III liquidity framework to bank holding companies with less than $50 billion of total assets is less certain.

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, 2011 and 2010, 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. Management believes that the Corporation’s credit processes and procedures meet the risk management standards dictated by this guidance.

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, this law limits these transactions to a percentage of the bank’s capital and requires 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.

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:

	· Created 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;
	· Established 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;
	· Implemented corporate governance revisions, including with regard to executive compensation and proxy access by stockholders, that apply to all companies whose securities are registered with the SEC, not just financial institutions;
	· Changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital;
	· Provided that interchange fees for debit cards will be set by the Federal Reserve under a restrictive “reasonable and proportional cost” per transaction standard. This provision is known as the “Durbin Amendment.” In June 2011, the Federal Reserve adopted regulations for banks with total assets exceeding $10 billion, setting the maximum permissible interchange fee as the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, with an additional adjustment of up to one cent per transaction if the issuer implements certain fraud-prevention standards. At this time it is uncertain whether this new fee structure will impact us;
	· Applied 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;
	· Made 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;
	· Repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; and
	· Required the regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds), with implementation starting as early as July 2012. The statutory provision is commonly called the “Volcker Rule”. In October 2011, regulators proposed rules to implement the Volcker Rule that included an extensive request for comments on the proposal, which were due by February 13, 2012. The proposed rules are highly complex, and many aspects of their application remain uncertain. Based on the proposed rules, we do not currently anticipate that the Volcker Rule will have a material effect on us or the Bank’s operations because neither entity engages in the businesses prohibited by the Volcker Rule.

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.

In 2010, the federal banking agencies issued guidance on incentive compensation policies (the “Incentive Compensation Guidance”) 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 Guidance, 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 (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 like ours 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.

The federal banking agencies have 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:

	· provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks,
	· be compatible with effective internal controls and risk management, and
	· be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors and appropriate policies, procedures and monitoring.

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 our 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 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 reports, proxy, information and registration statements, and other information regarding corporations that file electronically with the SEC through the EDGAR system can be retrieved.

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, Bank, and Empire and their ages, positions, and terms of office as of March 30, 2012, are as follows:

Name (Age)		Principal Position	Officer Since

DeWitt Drew		Chief Executive Officer and President of the	1999
	(55)	Corporation and Bank

John J. Cole, Jr.		Executive Vice President of the Corporation and	1984
	(62)	Chief Operating Officer, Executive Vice President
		and Cashier of the Bank

Jeffery E. Hanson		Chief Banking Officer and Executive Vice President	2011
	(46)	of the Bank

Randall L. (Andy) Webb, Jr.		Chief Credit Officer and Executive Vice President of	1994
	(63)	the Bank

George R. Kirkland		Senior Vice President and Treasurer of the	1991
	(61)	Corporation and Senior Vice President and
		Comptroller of the Bank

Geraldine Ferrone Luff		Senior Vice President of the Bank	1995
	(65)

J. Larry Blanton		Senior Vice President of the Bank	2000
	(65)

Vayden (Sonny) Murphy, Jr.		Senior Vice President of the Bank	2006
	(59)

Danny E. Singley		Senior Vice President of the Bank	2002
	(57)

Jeffrey (Jud) Moritz		Senior Vice President of the Bank	2011
	(35)

David L. Shiver		Senior Vice President of the Bank	2006
	(62)

Charles R. Lemons		President and Chief Executive Officer of Empire	2007
	(60)

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.

Mr. Cole is a director of Southwest Georgia Financial Corporation and Southwest Georgia Bank and became Chief Operating Officer, Executive Vice President and Cashier of the Bank in 2011. Previously he was Executive Vice President and Cashier of the Bank and Executive Vice President of the Corporation since 2002. Prior to that, 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. Hanson became Chief Banking Officer and 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. Webb became Chief Credit Officer and Executive Vice President of the Bank in 2011. Previously, he had been Senior Vice President of the Bank since 1997 and Vice President since 1994 and, prior to that, Assistant Vice President of the Bank since 1984.

Mr. Kirkland became Senior Vice President and Treasurer of the Corporation and Senior Vice President and Comptroller of the Bank in 1993.

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 was appointed President Moultrie Region and Senior Vice President of the Bank in 2011. Previously, he served as Senior Vice President of the Bank since 2008 and, prior to that, Vice President of the Bank since 2002.

Mr. Moritz became President Valdosta Region and 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 President Sylvester Region and 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.

Table 1 - Distribution of Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differentials

The following tables set forth, for the fiscal years ended December 31, 2011, 2010, and 2009, 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, 2011
	Average Balance			Interest		Rate
ASSETS	(Dollars in thousands)
Cash and due from banks	$	7,707		$	-		-	%

Earning assets:
Interest-bearing deposits with banks		14,352			35		0.24	%
Loans, net (a) (b) (c)		170,424			10,482		6.15	%
Certificates of deposit in other banks		119			2		1.68	%
Taxable investment securities held to maturity		66,698			1,922		2.88	%
Nontaxable investment securities held to maturity (c)		19,617			878		4.48	%
Nontaxable investment securities available for sale (c)		3,918			242		6.18	%
Other investment securities		1,846			15		0.81	%

Total earning assets		276,974			13,576		4.90	%
Premises and equipment		9,534
Other assets		13,234

Total assets	$	307,449

LIABILITIES AND STOCKHOLDERS’ EQUITY
Non-interest bearing demand deposits	$	52,087		$	-		-	%

Interest-bearing liabilities:
NOW accounts		20,948			13		0.06	%
Money market deposit accounts		58,120			70		0.12	%
Savings deposits		24,149			62		0.26	%
Time deposits		93,708			1,225		1.31	%
Federal funds purchased		309			2		0.65	%
Other borrowings		26,027			823		3.16	%

Total interest-bearing liabilities		223,261			2,195		0.98	%
Other liabilities		4,244

Total liabilities		279,592

Common stock		4,294
Surplus		31,702
Retained earnings		17,975
Less treasury stock		(26,114	)

Total stockholders’ equity		27,857

Total liabilities and stockholders’ equity	$	307,449

Net interest income and margin				$	11,381		4.11	%

(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 $597 thousand.
(c)	Reflects taxable equivalent adjustments using a tax rate of 34 %.

	Year Ended December 31, 2010
	Average Balance			Interest		Rate
ASSETS	(Dollars in thousands)
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 STOCKHOLDERS’ 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 stockholders’ equity		26,927

Total liabilities and stockholders’ equity	$	300,746

Net interest income and margin				$	10,538		3.90	%

(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
ASSETS	(Dollars in thousands)
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 STOCKHOLDERS’ 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 stockholders’ equity		24,230

Total liabilities and stockholders’ equity	$	278,162

Net interest income and margin				$	10,400		4.14	%

(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 %.

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)
	2011		2010		Increase (Decrease)			Volume			Rate
	(Dollars in thousands)
Interest earned on:
Interest-bearing deposits with banks	$	35	$	58	$	(23	)	$	(23	)	$	0
Loans, net (b)		10,482		10,033		449			774			(325	)
Certificates of deposit in other banks		2		0		2			1			1
Taxable investment securities held to maturity		1,922		2,412		(490	)		(93	)		(397	)
Nontaxable investment securities held to maturity (b)		878		546		332			355			(23	)
Nontaxable investment securities available for sale (b)		242		374		(132	)		(130	)		(2	)
Other investment securities		15		6		9			1			8
Total interest income		13,576		13,429		147			885			(738	)

Interest paid on:
NOW accounts		13		16		(3	)		1			(4	)
Money market deposit accounts		70		88		(18	)		0			(18	)
Savings deposits		62		70		(8	)		6			(14	)
Time deposits		1,225		1,882		(657	)		(118	)		(539	)
Federal funds purchased		2		0		2			1			1
Other borrowings		823		835		(12	)		1			(13	)
Total interest expense		2,195		2,891		(696	)		(109	)		(587	)

Net interest earnings	$	11,381	$	10,538	$	843		$	994		$	(151	)

(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 2011 and 2010 in adjusting interest on nontaxable loans and securities to a fully taxable basis.

								Due To Changes In (a)
	2010		2009		Increase (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.

Table 3 - Investment Portfolio

The carrying values of investment securities for the indicated years are presented below:

	Year Ended December 31,
	2011		2010		2009
	(Dollars in thousands)
Securities held to maturity:
U.S. Government Agencies	$	0	$	7,000	$	998
State and municipal		29,919		17,682		9,003
Residential mortgage-backed		22,420		21,573		14,194
Total securities held to maturity	$	52,339	$	46,255	$	24,195

Securities available for sale:
U.S. Government Treasuries	$	0	$	10,633	$	0
State and municipal		2,842		5,846		5,945
Residential mortgage-backed		25,689		38,399		50,041
Corporate notes		0		0		5,877
Equity securities		110		68		145
Total securities available for sale	$	28,641	$	54,946	$	62,008

At year end 2011, the total investment portfolio decreased to $80,979,560, a decrease of $20,221,807 or 20.0%, compared with $101,201,367 at year-end 2010. The majority of this decrease was due to calls and maturities of $13,650,000 of U.S. Government Agencies and municipals as well as residential mortgage-backed securities principal paydowns of approximately $13,500,000. Additionally, we sold $13,504,733 of longer-term residential mortgage-backed securities and $11,273,920 of U.S. Government Treasuries. These sales resulted in a net gain of $381,312. Offsetting these calls, maturities, and sales, we purchased of $30,977,647 of U.S. Government Agencies, U.S. Government sponsored residential mortgage-backed securities, and municipal securities.

The following table shows the expected maturities of debt securities at December 31, 2011, 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.

	MATURITY
	Within One Year					After One But Within Five Years					After Five But Within Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Debt Securities:
State and municipal	$	5,345		3.39	%	$	15,445		4.21	%	$	11,173		4.73	%	$	798		5.48	%
Residential mortgage-backed		0		-	%		0		-	%		16,795		2.97	%		31,314		3.03	%

Total	$	5,345		3.39	%	$	15,445		4.21	%	$	27,968		3.67	%	$	32,112		3.09	%

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, 2011 and 2010, securities carried at approximately $40,597,106 and $48,848,556, respectively, were pledged to secure public and trust deposits as required by law. At year-end 2011, approximately $11 million was overpledged and could be released if necessary for liquidity needs. At December 31, 2011, no securities were pledged to secure our Federal Home Loan Bank advances, and in 2010, we pledged securities with a lendable collateral value of $3,882,357 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,
	2011		2010		2009		2008		2007
	(Dollars in thousands)
Commercial, financial and agricultural	$	36,678	$	27,852	$	25,731	$	26,375	$	21,851
Real estate:
Construction loans		13,224		16,900		15,597		18,357		11,564
Commercial mortgage loans		60,599		47,649		50,337		43,054		38,038
Residential loans		59,178		51,610		51,314		45,192		31,936
Agricultural loans		6,283		8,428		7,225		8,640		7,258
Consumer & Other		5,370		5,320		10,056		7,481		8,397
Total loans		181,332		157,759		160,260		149,099		119,044
Less:
Unearned interest and discount		30		26		30		29		36
Allowance for loan losses		3,100		2,755		2,533		2,376		2,399
Net loans	$	178,202	$	154,978	$	157,697	$	146,694	$	116,609

The following table shows maturities of the commercial, financial, agricultural, and construction loan portfolio at December 31, 2011.

	Commercial, Financial, Agricultural and Construction
	(Dollars in thousands)
Distribution of loans which are due:
In one year or less	$	15,566
After one year but within five years		30,595
After five years		3,741

Total	$	49,902

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, 2011.

The following table presents information concerning outstanding balances of nonaccrual, past-due, restructured and potential problem loans as well as foreclosed assets for the indicated years. Respectively, they are defined as: (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.

	Nonaccrual Loans	Past-Due Loans	Restructured Loans	Potential Problem Loans	Total	Foreclosed Assets
	(Dollars in thousands)

December 31, 2011	$1,153	$ 0	$ 0	$ 934	$2,087	$2,358
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

In 2011, nonaccrual loans increased due to additional loans becoming past due. Items in foreclosed assets include one large $1,944,594 residential property. Construction on this property was completed and nearly half of the units have been sold resulting in a decrease in foreclosed assets compared with 2010. Other foreclosed assets are five residential properties valued at $413,100.

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,

	2011			2010			2009			2008			2007
	(Dollars in thousands)

Average loans outstanding	$	173,341		$	160,356		$	153,149		$	134,602		$	127,267

Amount of allowance for loan losses at beginning of period	$	2,755		$	2,533		$	2,376		$	2,399		$	2,417

Amount of loans charged off during period:
Commercial, financial and agricultural		236			92			227			0			0
Real estate:
Construction		0			30			0			0			0
Commercial		445			416			0			785			0
Residential		113			52			147			0			7
Agricultural		0			0			0			0			0
Consumer & other		13			92			54			87			45

Total loans charged off		807			682			428			872			52

Amount of recoveries during period:
Commercial, financial and agricultural		63			263			0			0			0
Real estate:
Construction		0			0			0			0			0
Commercial		74			0			0			2			1
Residential		21			0			0			0			0
Agricultural		0			0			0			0			0
Consumer & other		11			41			49			22			33

Total loans recovered		169			304			49			24			34

Net loans charged off during period		638			378			379			848			18
Additions to allowance for loan losses charged to operating expense during period		983			600			536			825			0

Amount of allowance for loan losses at end of period	$	3,100		$	2,755		$	2,533		$	2,376		$	2,399

Ratio of net charge-offs during period to average loans outstanding for the period		.37	%		.24	%		.25	%		.63	%		.01	%

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, 2011					December 31,2010					December 31, 2009					December 31, 2008					December 31, 2007
Category	Allocation		% of Total Loans			Allocation		% of Total Loans			Allocation		% of Total Loans			Allocation		% of Total Loans			Allocation		% of Total Loans
Commercial, financial and agricultural	$	392		20.2	%	$	134		17.7	%	$	123		18.5	%	$	115		18.9	%	$	116		18.4	%
Real estate:
Construction		1,123		7.3	%		1,396		10.7	%		1,283		9.7	%		1,204		12.3	%		1,216		9.7	%
Commercial		1,047		33.4	%		686		30.2	%		631		31.4	%		592		28.9	%		597		32.0	%
Residential		365		32.6	%		302		32.7	%		278		32.1	%		260		30.3	%		263		26.8	%
Agricultural		0		3.5	%		0		5.3	%		0		4.5	%		0		5.8	%		0		6.1	%
Consumer & other		173		3.0	%		237		3.4	%		218		3.8	%		205		3.8	%		207		7.0	%

Total	$	3,100		100.0	%	$	2,755		100.0	%	$	2,533		100.0	%	$	2,376		100.0	%	$	2,399		100.0	%

The calculation is based upon total loans including unearned interest and discount. 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 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,
	2011		2010		2009
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	52,087	$	41,844	$	38,895

NOW accounts		20,948		19,351		19,700
Money market deposit accounts		58,120		58,455		46,773
Savings		24,149		22,670		21,552
Time deposits		93,708		100,347		99,665

Total interest-bearing		196,925		200,823		187,690

Total average deposits	$	249,012	$	242,667	$	226,585

The maturity of certificates of deposit of $100,000 or more as of December 31, 2011, are presented below.

		(Dollars in thousands)

3 months or less	$	7,298
Over 3 months through 6 months		8,132
Over 6 months through 12 months		10,033
Over 12 months		7,166

Total outstanding certificates of deposit of $100,000 or more	$	32,629

Return on Equity and Assets

Certain financial ratios are presented below.

	Year Ended December 31,
	2011			2010			2009

Return on average assets		0.48	%		0.62	%		0.65	%

Return on average equity		5.25	%		6.89	%		7.48	%

Dividend payout ratio (dividends paid divided by net income)		17.44	%		13.73	%		9.84	%

Average equity to average assets ratio		9.06	%		8.95	%		8.71	%

Forward-Looking Statements

In addition to historical information, this 2011 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 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, affect its liquidity, and could be dilutive to existing stockholders.

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 stockholders.

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 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 $13.2 million at December 31, 2011, comprising 7.3% 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 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 76% 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, 2011, the Corporation recorded an allowance for possible loan losses of $3.10 million, compared with $2.75 million for the year ended December 31, 2010. 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.

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.

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 and COO; Jeffery E. Hanson, Executive Vice President and CBO; Randall L. “Andy” Webb, Executive Vice President and CCO; 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 created 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 established 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, made permanent the $250,000 limit for federal deposit insurance, provided unlimited federal deposit insurance until December 31, 2012 for non-interest bearing transaction accounts at all insured depository institutions and repealed the federal prohibitions on the payment of interest on demand deposits. Among other things, the Dodd-Frank Act included 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, 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.

Name	Address	Square 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. The Bank also rents a space for its mortgage servicing office in Valdosta, Georgia. A new banking center in Valdosta, Georgia is currently under construction and is expected to open in the first quarter of 2012.

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 2011.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET 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, 2011, was $8.45. Below is a schedule of the high and low stock prices for each quarter of 2011 and 2010.

2011
	For the Quarter		Fourth		Third		Second		First

	High	$	8.67	$	9.00	$	13.86	$	14.00

	Low	$	6.80	$	6.43	$	6.90	$	10.75

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

As of December 31, 2011, there were 503 record holders of the Corporation’s common stock. Also, there were approximately 400 additional stockholders who held shares through trusts and brokerage firms.

Dividends

Cash dividends paid on the Corporation’s common stock were $0.10 per share in both 2011 and 2010. Our dividend policy objective is to pay out a portion of earnings in dividends to our stockholders 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-three consecutive years.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table presents information as of December 31, 2011, 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.

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options		Weighted Average Exercise Price of Outstanding Options		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans

Equity compensation plans approved by stockholders⁽¹⁾		10,900	$	20.19		0
Equity compensation plans not approved by stockholders⁽²⁾		0		0.00		0
Total		10,900	$	20.19		0

(1) The Key Individual Stock Option Plan.

(2) Excludes shares issued under the 401(k) Plan.

Sales of Unregistered Securities

The Corporation has not sold any unregistered securities in the past three years.

Performance Graph

The following graph compares the cumulative total stockholder return of the Corporation’s common stock with SNL’s Southeast Bank Index, SNL Bank $250M-$500M Index, and the S&P 500 Index. Our prior year comparisons of Carson Medlin’s Independent Bank Index and the NASDAQ Index are also included. SNL’s Southeast Bank Index is a compilation of the total return to stockholders over the past five years of a group of 92 banks located in the southeastern states of Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia. The SNL Bank $250M-$500M Index is a compilation of the total return to stockholders over the past five years of a group of 28 banks in the United States with assets between $250 million and $500 million. The comparison assumes $100 was invested January 1, 2007, and that all semi-annual and quarterly dividends were reinvested each period. The comparison takes into consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2006.

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.

			Period Ending
Index	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
Southwest Georgia Financial Corporation		100.00		94.72		57.29		49.52		60.55		47.32
S&P 500 Index		100.00		105.49		66.46		84.05		96.71		98.76
SNL Southeast Bank Index		100.00		75.33		30.50		30.62		29.73		17.39
SNL Bank $250M-$500M Index		100.00		81.28		46.42		42.96		48.07		45.15
Independent Bank Index		100.00		76.47		50.24		50.98		53.64		46.36
NASDAQ Composite Index		100.00		110.66		66.42		96.54		114.06		113.16

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

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 15 - 32 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 full-service banking center that was completed and opened in June of 2010 and a mortgage origination office that opened in January 2011, both in Valdosta, Georgia. Continuing our expansion in the Valdosta market, we have almost completed construction on our second banking center and we expect to have the branch open in the first quarter of 2012.

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 2011. 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 2011, noninterest income was more than 28.3% of the Corporation’s total revenue, whereas in 2010 noninterest income accounted for 29.3% of the Corporation’s total revenue.

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 positive results in 2011. 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.

At the end of 2011, the Corporation’s nonperforming assets increased slightly to $3.621 million. This increase is primarily due to a $967 thousand increase in nonaccrual loans compared to the end of 2010. Partially offsetting this increase, foreclosed assets decreased $930 thousand.

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, 2011, 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

For the year ended December 31, 2011, net income was $1.46 million, down $395 thousand from net income of $1.86 million for 2010. The decline in net income was mainly due to an increase in salaries and employee benefits of $746 thousand related to additional staffing in Valdosta, Georgia. Also, losses on the sale or disposition of assets increased $191 thousand and the net gain on sale of securities decreased $154 thousand when compared with 2010. Service charges on deposit accounts decreased $152 thousand compared with the prior year. Offsetting these decreases in net income, net interest income increased $782 thousand primarily as a result of lower interest paid on deposits and increased income from interest and fees on loans. On a per share basis, we had a net income of $0.57 per diluted share for 2011 compared with a net income of $0.73 per diluted share for 2010.

Although net income remained relatively flat for 2010 at $1.86 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 2009. Offsetting this increase was a decrease in other operating expenses primarily due to lower legal expenses 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.

We measure our performance on selected key ratios, which are provided for the last three years in the following table:

	2011		2010		2009
Return on average total assets	0.48	%	0.62	%	0.65	%
Return on average stockholders’ equity	5.25	%	6.89	%	7.48	%
Average stockholders’ equity to average total assets	9.06	%	8.95	%	8.71	%
Net interest margin (tax equivalent)	4.11	%	3.90	%	4.14	%

Net Interest Income

Net interest income after provision for loan losses increased $398 thousand, or 4.2%, to $9.93 million for 2011 when compared with 2010. While total interest income increased $88 thousand as well as total interest expense decreased $694 thousand, the increase in net interest income was partially offset by a $384 thousand increase in the provision for loan losses. The Corporation recognized a $984 thousand provision for loan losses in 2011 compared with $600 thousand in 2010. The provision increase was a result of loan growth as well as increased charge-offs compared with the prior year. As a result of the current interest rate environment, interest paid on deposits declined by $684 thousand to $1.4 million at the end of 2011. The average rate paid on average time deposits of $93.7 million decreased 57 basis points when compared with 2010. Interest on total borrowings also declined $10 thousand when compared with the prior year. Interest and fees on loans increased $465 thousand mainly due to an increase in average net loans volume of $12.9 million. Partially offsetting this increase, interest income from investment securities decreased $357 thousand mainly due to $20.2 million lower volume of investment securities compared with 2010.

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 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 increased 21 basis points to 4.11% for 2011 when compared with 2010. Net interest margin was 3.90% for 2010, a 24 basis point decrease from 4.14% in 2009. The increase in net interest margin was mainly impacted by a change in asset mix and much lower deposit costs.

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:

	2011					2010					2009
	(Dollars in thousands)
		Amount		% Change			Amount		% Change			Amount	% Change
Service charges on deposit accounts	$	1,416		(9.7	)%	$	1,567		(11.2	)%	$	1,766	9.8	%
Income from trust services		214		(11.4	)		241		13.7			213	(20.8	)
Income from retail brokerage services		324		7.9			300		12.8			266	(22.0	)
Income from insurance services		1,273		13.2			1,125		5.2			1,069	(3.0	)
Income from mortgage banking services		1,477		9.4			1,351		1.8			1,327	(34.3	)
Provision for foreclosed asset losses		(300	)	(9.1	)		(275	)	(100.0	)		0	0.0
Gain (loss) on the sale or disposition of assets		(160	)	NM			31		100.0			0	(100.0	)
Gain on the sale of securities		381		(28.7	)		535		109.5			255	100.0
Gain (loss) on the impairment of equity securities		(12	)	(100.0	)		0		0.0			0	100.0
Other income		546		6.7			512		9.5			468	10.5

Total noninterest income	$	5,159		(4.2	)%	$	5,387		0.4	%	$	5,364	220.8	%

*NM = not meaningful

For 2011, noninterest income was $5.16 million, down from $5.39 million in the same period of 2010. Net gain on sale of securities decreased $154 thousand to $381 thousand in 2011, and an increase in losses on the disposition of assets of $191 thousand, mainly due to loss on the sale of foreclosed properties, was recognized in 2011. Excluding the gains and losses on sales of securities and other assets, noninterest income increased $129 thousand in 2011. The decline was also a result of decreased service charges on deposit accounts of $152 thousand and a $25 thousand increase in provision for changes in market value of foreclosed properties compared with same period last year. Other increases in income occurred from insurance, retail brokerage, and mortgage banking services which increased $149 thousand, $24 thousand and $127 thousand, respectively, partially offset by a decrease in income from trust services of $28 thousand.

For 2010, noninterest income was $5.39 million, up slightly from $5.36 million in the same period of 2009. The majority of the increase was a result of a $535 thousand gain on the sale of securities compared 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.

These increases were partially offset by 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 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:

	2011				2010				2009
	(Dollars in thousands)
		Amount	% Change			Amount	% Change			Amount	% Change
Salaries and employee benefits	$	7,717	10.7	%	$	6,971	9.6	%	$	6,360	(11.1	)%
Occupancy expense		953	6.9			891	5.3			846	(2.0	)
Equipment expense		812	9.8			739	10.9			667	(3.9	)
Data processing expense		1,039	5.0			989	6.9			926	10.2
Amortization of intangible assets		219	5.6			208	0.0			208	(8.4	)
Other operating expenses		2,596	(3.0	)		2,676	(21.9	)		3,425	30.2

Total noninterest expense	$	13,336	6.9	%	$	12,474	0.3	%	$	12,432	(7.1	)%

Noninterest expense increased $862 thousand to $13.34 million in 2011 compared with the same period last year. The change was mainly due to a $746 thousand year-over-year increase in salary and employee benefits due primarily to Valdosta’s staffing increase. Also in 2011, pension contributions were $195 thousand higher due to

increased pension fund withdrawals and lower returns on the fixed income investment portion of the fund. The cost of providing employee medical insurance has also risen 14% in the past year. Occupancy, equipment, and data processing expense increased $61 thousand, $72 thousand and $50 thousand, respectively, related to the Valdosta market expansion. Also, amortization of intangible assets increased $12 thousand. Other operating expense decreased $80 thousand mostly due to lower FDIC insurance assessments.

For 2010, total noninterest expense increased slightly to $12.47 million compared with $12.43 million in the same period in 2009. This increase was mainly due to higher salary and employee benefits, occupancy, and equipment expenses related to the new Valdosta banking center’s operations. These increases were partially offset by a decrease of $749 thousand, or 21.9%, in other operating expenses due mainly to lower legal expense and insurance assessments to the FDIC compared with 2009.

The efficiency ratio (noninterest expense divided by total noninterest income plus tax equivalent net interest income), a measure of productivity, increased to 80.6% for 2011, from 77.9% for 2010 and 78.5% for 2009. The higher efficiency ratio in 2011 was related to higher overhead in salaries and benefits.

Federal Income Tax Expense

The Corporation had an expense of $287 thousand for federal income taxes in 2011 compared with an expense of $584 thousand in 2010 and $508 thousand for the year ending December 31, 2009. These amounts resulted in an effective tax rate of 16.4%, 23.9%, and 21.9%, for 2011, 2010, and 2009, 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.

Total average assets increased $6.7 million to $307.4 million in 2011 as compared with 2010. The increase in total average assets is primarily attributable to a higher level of average total loans of $13.0 million and an increase in average total investment securities of $3.3 million. The Corporation’s earning assets, which include loans, investment securities, certificates of deposit with other banks and interest-bearing deposits with banks, averaged $277.0 million in 2011, a 2.6% increase from $269.9 million in 2010. While the year-end balance for interest-bearing deposits with banks was more than the previous year, the average volume decreased $9.3 million compared with the prior year. For 2011, average earning assets were comprised of 62% loans, 33% investment securities, and 5% deposit balances with banks. The ratio of average earning assets to average total assets increased slightly to 90.1% for 2011 compared with 89.8% for 2010.

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 2011, average net loans represented 62% of average earning assets and 55% of average total assets.

The composition of the Corporation’s loan portfolio at December 31, 2011, 2010, and 2009 was as follows:

	2011					2010					2009
	(Dollars in thousands)
Category		Amount		% Change			Amount		% Change			Amount		% Change

Commercial, financial, and agricultural	$	36,678		31.7	%	$	27,852		8.2	%	$	25,731		(2.4	)%
Real estate:
Construction		13,224		(21.8	)%		16,900		8.4	%		15,597		(15.0	)%
Commercial		60,599		27.2	%		47,649		(5.3	)%		50,337		16.9	%
Residential		59,178		14.7	%		51,610		0.6	%		51,314		13.6	%
Agricultural		6,283		(25.5	)%		8,428		16.7	%		7,225		(16.4	)%
Consumer & other		5,370		0.9	%		5,320		(47.1	)%		10,056		34.4	%
Total loans	$	181,332		14.9	%	$	157,759		(1.6	)%	$	160,260		7.5	%
Unearned interest and discount		(30	)	(15.4	)%		(26	)	13.3	%		(30	)	(3.5	)%
Allowance for loan losses		(3,100	)	(12.5	)%		(2,755	)	(8.8	)%		(2,533	)	(6.6	)%
Net loans	$	178,202		15.0	%	$	154,978		(1.7	)%	$	157,697		7.5	%

Total year-end balances of loans increased $23.6 million while average total loans increased $13.0 million in 2011 compared with 2010. Increases in commercial and residential real estate loans as well as commercial, financial, and agricultural loans offset declines in construction and agricultural real estate loan categories. The ratio of total loans to total deposits at year end increased to 72.9% in 2011 compared with 65.9% in 2010. The loan portfolio mix at year-end 2011 consisted of 7.3% loans secured by construction real estate, 33.4% loans secured by commercial real estate, 32.6% of loans secured by residential real estate, and 3.5% of loans secured by agricultural real estate. The loan portfolio also included other commercial, financial, and agricultural purposes of 20.2% and installment loans to individuals for consumer purposes of 3.0%.

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, 2011.

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 $3.100 million, or 1.7% of total loans outstanding, as of December 31, 2011. This level represented a $345 thousand increase from the corresponding 2010 year-end amount which was 1.8% of total loans outstanding. We increased the allowance for loan losses in response to the market and economic environment.

There was a provision for loan losses of $984 thousand in 2011 compared with a provision for loan losses of $600 thousand in 2010. 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 26% of our assets and consist largely of 59% U.S. Government sponsored pass-thru residential mortgage-backed securities. Also, the portfolio includes 41% state, county and municipal securities.

The following table summarizes the contractual maturity of investment securities at their carrying values as of December 31, 2011:

Amounts Maturing In:		Securities Available for Sale		Securities Held to Maturity		Total
		(Dollars in thousands)
One year or less	$	1,487	$	3,348	$	4,835
After one through five years		1,354		9,995		11,349
After five through ten years		10,308		15,068		25,376
After ten years		15,381		23,928		39,309
Equity securities		111		0		111
Total investment securities	$	28,641	$	52,339	$	80,980

At year end 2011, the total investment portfolio decreased to $81.0 million, a decrease of $20.2 million, or 20.0%, compared with $101.2 million at year-end 2010. The majority of this decrease was due to calls and maturities of $13.7 million of U.S. Government Agencies and municipals as well as residential mortgage-backed securities principal paydowns of approximately $13.5 million. Additionally, we sold $13.5 million of longer-term residential mortgage-backed securities and $11.3 million of U.S. Government Treasuries. These sales resulted in a net gain of $381 thousand. Offsetting these calls, maturities, and sales, we purchased $31.0 million of U.S. Government Agencies, U.S. Government sponsored residential mortgage-backed securities, and municipal securities. The average investment portfolio increased $3.0 million to $90.2 million in 2011 from $87.2 million in 2010.

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.

Nonperforming Assets

Nonperforming assets are defined as nonaccrual loans, loans that are 90 days past due and still accruing, other-than-temporarily impaired preferred stock, and property acquired by foreclosure. The level of nonperforming assets increased $79 thousand at year-end 2011 compared with year-end 2010. This increase was primarily due to a larger amount of nonaccrual loans. Nonaccrual loans increased due to additional loans becoming past due compared with the previous year. Partially offsetting the increase in nonaccrual loans, foreclosed assets decreased $930 thousand. Nonperforming assets were approximately $3.621 million, or 1.18% of total assets as of December 31, 2011, compared with $3.542 million, or 1.19% of total assets at year-end 2010.

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 2011, average deposits increased compared with 2010, from $242.7 million to $249.0 million. This average deposit growth occurred primarily in noninterest-bearing deposits. As of December 31, 2011, the Corporation’s certificates of deposit of $100,000 or more increased slightly to $32.6 million from $32.5 million at the end of 2010.

We have used borrowings from the Federal Home Loan Bank to support our residential mortgage lending activities. During 2011, the Corporation repaid $2 million of the fixed-rate advances from the Federal Home Loan Bank. During 2012, we expect to pay $2 million of the fixed-rate advances. Total long-term advances with the Federal Home Loan Bank were $22 million at December 31, 2011. 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 Loan 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 2011, operating and financing activities provided cash flows of $11.7 million, while investing activities used $6.7 million resulting in an increase in cash and cash equivalents balances of $5.0 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. 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 86.9% of total deposits on December 31, 2011, compared with 86.4% in 2010.

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 $4.8 million investment securities maturing within one year or less on December 31, 2011, which represented 6% of the investment debt securities portfolio. Also, the Corporation has approximately $510 thousand of state and municipal securities callable at the option of the issuer within one year and approximately $10.4 million of expected annual cash flow in principal reductions from payments of mortgage-backed securities.

Due to the current interest rate environment, $8.4 million of our callable securities were called in 2011 and $5.6 million were called in 2010. 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, 2011.

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
Contractual Obligations (Dollars in thousands)	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Long-term debt	$	22,000	$	0	$	12,000	$	0	$	10,000
Operating leases		71		27		35		9		0
Total contractual obligations	$	22,071	$	27	$	12,035	$	9	$	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 expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements.

Financial instruments whose contract amounts represent credit risk:	2011		2010
	(Dollars in thousands)
Commitments to extend credit	$	16,734	$	10,616
Standby letters of credit	$	45	$	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 9.06% in 2011 and 8.95% in 2010. 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 stockholders’ equity (Tier I capital) or its equivalent. Also, the regulations require a financial institution to maintain a 3% leverage ratio. At year-end 2011, we were well in excess of the minimum requirements under the guidelines with a total risk-based capital ratio of 16.71%, a Tier I risk-based capital ratio of 15.45%, and a leverage ratio of 9.47%. 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 2011 and 2010 in comparison to both the minimum regulatory guidelines and the minimum for well capitalized:

Risk Based Capital Ratios	Dec. 31, 2011		Dec. 31, 2010		Minimum Regulatory Guidelines		Minimum For Well Capitalized

Tier I capital	15.45	%	16.49	%	4.00	%	6.00	%
Total risk-based capital	16.71	%	17.74	%	8.00	%	10.00	%
Leverage	9.47	%	9.01	%	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 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.

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, 2011. 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 30, 2012

SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2011 and 2010

	2011			2010

ASSETS

Cash and due from banks	$	6,552,358		$	5,111,869
Interest-bearing deposits in other banks		14,498,048			10,958,766
Cash and cash equivalents		21,050,406			16,070,635

Certificates of deposit in other banks		980,000			0
Investment securities available for sale, at fair value		28,640,832			54,945,921
Investment securities to be held to maturity (fair value
approximates $54,158,523 and $46,570,196)		52,338,728			46,255,446
Federal Home Loan Bank stock, at cost		1,786,500			1,649,900
Loans, net of allowance for loan losses of $3,100,000 and
$2,754,614		178,202,314			154,978,016
Premises and equipment, net		9,942,429			9,221,341
Foreclosed assets, net		2,357,695			3,288,121
Intangible assets		546,519			640,876
Bank owned life insurance		4,593,385			3,029,314
Other assets		5,211,208			6,324,361

Total assets	$	305,650,016		$	296,403,931


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Deposits:
NOW accounts	$	29,841,315		$	29,238,582
Money market		45,638,259			50,468,227
Savings		24,366,536			22,635,415
Certificates of deposit $100,000 and over		32,629,146			32,472,318
Other time accounts		59,950,041			65,858,838

Total interest-bearing deposits		192,425,297			200,673,380
Noninterest-bearing deposits		56,485,602			38,857,679

Total deposits		248,910,899			239,531,059

Short-term borrowed funds		2,000,000			2,000,000
Long-term debt		22,000,000			24,000,000
Other liabilities		4,188,232			4,097,279

Total liabilities		277,099,131			269,628,338

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		19,132,249			17,925,895
Accumulated other comprehensive income (loss)		(462,937	)		(1,031,875	)
Treasury stock, at cost 1,745,998 shares for 2011
and 2010		(26,113,795	)		(26,113,795	)

Total stockholders’ equity		28,550,885			26,775,593

Total liabilities and stockholders’ equity	$	305,650,016		$	296,403,931

See accompanying notes to consolidated financial statements.

SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

for the years ended December 31, 2011, 2010, and 2009

		2011			2010			2009
Interest income:
Interest and fees on loans	$	10,408,472		$	9,943,649		$	9,523,822
Interest on debt securities: Taxable		1,922,523			2,412,444			3,299,150
Interest on debt securities: Tax-exempt		721,358			597,242			735,987
Dividends		14,632			5,404			4,564
Interest on deposits in other banks		35,277			57,805			32,949
Interest on certificates of deposit in other banks		1,858			0			0
Interest on other short-term investments		0			0			97
Total interest income		13,104,120			13,016,544			13,596,569

Interest expense:
Deposits		1,369,745			2,053,646			2,884,601
Federal funds purchased		1,810			3			994
Other short-term borrowings		41,677			111,452			169,286
Long-term debt		781,581			724,012			617,302
Total interest expense		2,194,813			2,889,113			3,672,183

Net interest income		10,909,307			10,127,431			9,924,386

Provision for loan losses		983,667			600,000			535,709
Net interest income after provision
for loan losses		9,925,640			9,527,431			9,388,677

Noninterest income:
Service charges on deposit accounts		1,415,379			1,567,424			1,765,854
Income from trust services		214,016			241,583			212,445
Income from brokerage services		324,018			300,210			266,137
Income from insurance services		1,273,320			1,124,612			1,069,301
Income from mortgage banking services		1,477,166			1,350,625			1,327,193
Provision for foreclosed asset losses		(300,000	)		(275,000	)		0
Net gain (loss) on sale or disposition of assets		(160,182	)		30,852			349
Net gain on sale of securities		381,312			534,973			255,324
Net loss on the impairment of equity securities		(12,265	)		0			0
Other income		545,997			511,638			467,356
Total noninterest income		5,158,761			5,386,917			5,363,959

Noninterest expense:
Salaries and employee benefits		7,716,684			6,970,460			6,359,949
Occupancy expense		952,668			891,291			846,383
Equipment expense		811,701			739,223			666,779
Data processing expense		1,039,252			989,413			925,814
Amortization of intangible assets		219,357			207,638			207,638
Other operating expenses		2,596,398			2,676,372			3,425,138
Total noninterest expenses		13,336,060			12,474,397			12,431,701

Income before income taxes		1,748,341			2,439,951			2,320,935
Provision for income taxes		287,203			583,735			508,339
Net income	$	1,461,138		$	1,856,216		$	1,812,596

Basic earnings per share:
Net income	$	0.57		$	0.73		$	0.71
Weighted average shares outstanding		2,547,837			2,547,837			2,547,837
Diluted earnings per share:
Net income	$	0.57		$	0.73		$	0.71
Weighted average shares outstanding		2,547,865			2,547,894			2,547,837

See accompanying notes to consolidated financial statements.

SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

for the years ended December 31, 2011, 2010, and 2009

	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
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 (loss) on securities available for sale		—		—		—			(23,267	)		—			(23,267	)
Changes in net gain 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 (loss) on securities available for sale		—		—		—			(202,142	)		—			(202,142	)
Changes in net (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
Net Income		—		—		1,461,138			—			—			1,461,138
Comprehensive income (loss):
Changes in net gain on securities available for sale		—		—		—			536,791			—			536,791
Changes in net gain on pension plan benefits		—		—		—			32,147			—			32,147
Total comprehensive income															2,030,076
Cash dividend declared $.10 per share		—		—		(254,784	)		—			—			(254,784	)
Balance at Dec. 31, 2011	$	4,293,835	$	31,701,533	$	19,132,249		$	(462,937	)	$	(26,113,795	)	$	28,550,885

See accompanying notes to consolidated financial statements.

SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the years ended December 31, 2011, 2010, and 2009


Cash flows from operating activities:		2011			2010			2009
Net income	$	1,461,138		$	1,856,216		$	1,812,596
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses		983,667			600,000			535,709
Provision for foreclosed asset losses		300,000			275,000			0
Depreciation		829,868			782,739			719,527
Net amortization and (accretion) of investment securities		375,206			307,134			(26,809	)
Income on cash surrender value of bank owned life insurance		(164,069	)		(128,128	)		(69,195	)
Amortization of intangibles		219,357			207,638			207,638
Loss on sale/writedown of foreclosed assets		166,605			121,021			(349	)
Net loss on the impairment of equity securities		12,265			0			0
Net gain on sale of securities		(381,312	)		(534,973	)		(255,324	)
Net gain on disposal of other assets		(2,820	)		(95,874	)		0
Change in:
Funds held related to mortgage banking activities		14,197			(184,678	)		796,800
Other assets		668,061			794,322			(749,812	)
Other liabilities		125,464			1,851			61,630
Net cash provided by operating activities		4,607,627			4,002,268			3,032,411

Cash flows from investing activities:
Proceeds from calls, paydowns and maturities of securities HTM		15,831,690			10,230,355			5,000,000
Proceeds from calls, paydowns and maturities of securities AFS		11,641,799			9,261,755			30,502,563
Proceeds from sale of securities available for sale		24,846,529			17,856,535			9,849,289
Purchase of securities held to maturity		(22,193,213	)		(32,538,827	)		(17,100,452	)
Purchase of securities available for sale		(9,234,434	)		(19,898,202	)		(18,894,586	)
Purchase of certificates of deposit in other banks		(980,000	)		0			0
Net change in loans		(24,968,385	)		1,456,440			(13,733,137	)
Purchase bank owned life insurance		(1,400,002	)		0			0
Expenditures for improvements to other real estate owned		(42,401	)		(119,120	)		(1,427,679	)
Purchase of premises and equipment		(1,553,137	)		(2,243,328	)		(2,713,333	)
Proceeds from sales of other assets		1,298,642			921,078			0
Net cash provided for investing activities		(6,752,912	)		(15,073,314	)		(8,517,335	)

Cash flows from financing activities:
Net change in deposits		9,379,840			4,100,048			20,890,006
Increase (decrease) in federal funds purchased		0			0			(430,000	)
Payment of short-term debt		(2,000,000	)		0			(5,000,000	)
Proceeds from issuance of long-term debt		0			0			6,000,000
Cash dividends paid		(254,784	)		(254,784	)		(178,349	)
Net cash provided for financing activities		7,125,056			3,845,264			21,281,657

Increase(decrease) in cash and cash equivalents		4,979,771			(7,225,782	)		15,796,733
Cash and cash equivalents - beginning of period		16,070,635			23,296,417			7,499,684
Cash and cash equivalents - end of period	$	21,050,406		$	16,070,635		$	23,296,417

Cash paid during the year for:
Income taxes	$	0		$	572,710		$	0
Interest paid	$	2,274,698		$	2,992,228		$	3,746,676

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

		2011		2010			2009
NONCASH ITEMS:
Increase in foreclosed properties and decrease in loans	$	760,420	$	662,941		$	2,193,311
Unrealized gain(loss) on securities AFS	$	813,321	$	(306,275	)	$	(35,212	)
Unrealized gain(loss) on pension plan benefits	$	48,708	$	(232,844	)	$	642,621
Net reclass between short and long-term debt	$	0	$	(3,000,000	)	$	5,000,000

See accompanying notes to consolidated financial statements.

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 money market, NOW, 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 in Milledgeville, Georgia. Our first full-service banking center in Valdosta, Georgia opened in June 2010 and a mortgage origination office was opened in January 2011 in Valdosta, Georgia. Construction is almost complete on our second banking center in Valdosta and the new branch is expected to open in the first quarter of 2012.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with these evaluations, management obtains independent appraisals for significant properties.

A substantial portion of the Corporation’s loans are secured by real estate located primarily in Georgia. Accordingly, the ultimate collection of these loans is susceptible to changes in the real estate market conditions of this market area.

Cash and Cash Equivalents and Statement of Cash Flows

For purposes of reporting cash flows, the Corporation considers cash and cash equivalents to include all cash on hand, deposit amounts due from banks, interest-bearing deposits in other banks, and federal funds sold. The Corporation maintains its cash balances in several financial institutions. Accounts at the financial institutions are secured by the Federal Deposit Insurance Corporation up to $250,000. Uninsured deposits aggregate to $297,061 at December 31, 2011.

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 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.

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, 2011, the valuation allowance for foreclosed asset losses was $575,000.

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 eight 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.

Bank Owned Life Insurance

The Corporation’s subsidiary bank has bank owned life insurance policies 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. At December 31, 2011 and 2010, the policies had a value of $4,593,385 and $3,029,314, respectively, and were 16.1% and 11.3%, respectively, of stockholders’ equity. These values are within regulatory guidelines.

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 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 will recognize a tax position as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with an examination being presumed to occur. The amount recognized is the largest amount of a tax benefit that is greater than fifty percent likely of being realized on examination. No benefit is recorded for tax positions that do not meet the more than likely than not test.

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 and subsequent years.

The Internal Revenue Service (“IRS”) completed an audit of the Corporation

Loans With

Predetermined

Loans With

Floating Rates

(Dollars in thousands)

Commercial, financial,

agricultural and construction