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, 2018

[ ] 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 001-12053

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 AMERICAN LLC
(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. [X]

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 [X] Smaller reporting company [X] Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

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 and non-voting stock held by nonaffiliates of the registrant as of June 30, 2018: $46,079,479 based on 2,029,933 shares at the price of $22.70 per share.

As of March 22, 2019, 2,545,776 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 2019 annual meeting of shareholders, to be filed with the Commission are incorporated by reference into Part III.

TABLE OF CONTENTS

PART I			PAGE
	Item 1.	Business	3
	Item 1A.	Risk Factors	25
	Item 1B.	Unresolved Staff Comments	32
	Item 2.	Properties	33
	Item 3.	Legal Proceedings	33
	Item 4.	Mine Safety Disclosures	33
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Shareholder Mattersand Issuer Purchases of Equity Securities	33
	Item 6.	Selected Financial Data	35
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	43
	Item 8.	Financial Statements and Supplementary Data	44
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	101
	Item 9A.	Controls and Procedures	101
	Item 9B.	Other Information	102
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	102
	Item 11.	Executive Compensation	102
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	102
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	102
	Item 14.	Principal Accountant Fees and Services	102
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	103
	Item 16.	Form 10-K Summary	105

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. The Bank is a state-chartered bank insured by the Federal Deposit Insurance Corporation (the “FDIC”).

The Corporation’s primary business is providing banking services through the Bank to individuals and businesses principally in the following counties: Colquitt, Baker, Worth, Lowndes, and Tift as well as the surrounding counties of southwest Georgia. Empire Financial Services, Inc. (“Empire”), a provider of commercial mortgage banking services has been wholly owned by the Bank since 2001. In December 2017, the Bank dissolved Empire. The executive office of the Corporation is located at 25 Second Avenue, S. W., Moultrie, Georgia 31768, and its telephone number is (229) 985-1120.

All references herein to the Corporation include Southwest Georgia Financial Corporation and the Bank unless the context indicates a different meaning.

General

The Corporation is a registered bank holding company. The Bank is community-oriented and offers customary banking services such 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 Wealth Strategies 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 Wealth Strategies division has a securities sales department which offers full-service brokerage services through a third party service provider. The Bank’s Southwest Georgia Insurance Services Division offers property and casualty insurance, life, health, and disability insurance

Markets

The Corporation conducts banking activities in five counties in southwest and south central Georgia. Population characteristics in these counties range from rural to more metropolitan. In our most recent market, Tift County, we opened a full service banking center in August 2018. The total population of Tift County is 40,598. Our largest market is Lowndes County with a total population of 115,489 and the highest growth rate in our markets at 13.5% from 2007 to 2017. 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 30.1, younger than an average median age of 39.3 in the other four counties that the Bank primarily serves. These counties, Colquitt, Baker, Worth, and Tift, have an average total population of 27,542 and an average decline in population of (2.5)% from 2007 to 2017. Per capita income is approximately $20,000 in the Bank’s markets. Agriculture plays a major economic role in the Bank’s markets. Colquitt, Baker, Worth, Lowndes, and Tift Counties produce a large portion of our state’s crops, including cotton, peanuts, and a variety of vegetables.

Deposits

The Bank offers a full range of depository accounts and services to both consumers and businesses. At December 31, 2018, the Corporation’s deposit base, totaling $455,639,585, consisted of $103,694,910 in noninterest-bearing demand deposits (22.8% of total deposits), $222,617,030 in interest-bearing demand deposits including money market accounts (48.9% of total deposits), $31,848,588 in savings deposits (7.0% of total deposits), $81,214,376 in time deposits in amounts less than $250,000 (17.7% of total deposits), and $16,264,681 in time deposits of $250,000 or more (3.6% of total deposits).

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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, 2018, consumer installment, real estate (including construction and mortgage loans), and commercial (including financial and agricultural) loans represented approximately 1.3%, 75.2% and 23.5%, 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. The committee approves all individual loan or relationship requests that exceed $800,000. 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.

Loan Review and Nonperforming Assets

The Bank regularly requires a review of its loan portfolio to determine deficiencies and corrective action to be taken. An independent loan review is conducted by an outside third party firm on a semiannual basis with their findings being reported annually 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 reviewed annually by the Audit Committee and the Board of Directors.

Certain loans are monitored more often by the Credit Administration Department and the Loan Committee. These loans include nonaccruing 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 established by the Bank’s Board of Directors and 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 manages the Bank’s overall acquisition and allocation of funds. At its quarterly meetings, the ALCO reviews and discusses the 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 Board of Directors reviews ALCO data quarterly.  

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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 120 full-time employees and two part-time employees at December 31, 2018. 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 competes with other depository institutions and other financial service organizations, including brokers, finance companies, financial technology companies, mutual funds, savings and loan associations, credit unions and certain governmental agencies. Many of these competitors have substantially greater resources than we do and offer services that we do not currently provide. Such competitors may also have greater lending limits than the Bank. In addition, nonbank competitors are generally not subject to the extensive regulations applicable to us. Price (the interest charged on loans and paid on deposits) remains a means of competition within the services industry. Use and advances in technology, such as internet and mobile banking, electronic payment processing channels, and cybersecurity are expected to have a significant impact on the competitive landscape of the financial services industry. The Bank also competes on the basis of service and convenience in providing financial services. The Bank ranks third out of twenty-one banks in a six county region (Colquitt, Baker, Worth, Lowndes, Brooks, and Tift) 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 agency securities, changes in the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank.

Payment of Dividends

The Corporation is a legal entity separate and distinct from the Bank. Most of the revenue of the Corporation results from dividends paid to it by the Bank. There are statutory and regulatory requirements applicable to the payment of dividends by the Bank, as well as by the Corporation to its shareholders.

Under the regulations of the Georgia Department of Banking and Finance (“DBF”), a state bank with positive retained earnings may declare dividends without DBF approval if it 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 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, 2018, net assets available from the Bank to pay dividends without prior approval from regulatory authorities totaled $2,375,242. For 2018, the Corporation’s cash dividend payout to shareholders was $1,196,332. 

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Supervision and Regulation

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 American LLC, state or federal rules, statutes and regulations affecting their operations, or that apply generally to business corporations or companies listed on NYSE American LLC. Changes in the rules, statutes and regulations applicable to the Corporation and the Bank can affect the operating environment in substantial and unpredictable ways.

General. The Corporation is a registered bank holding company subject to regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC 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 BHC 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 BHC 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, acquiring 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.

Under this legislation, the Federal Reserve 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.

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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 concerning compliance with 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 of 1913 (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 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 of and the regular examination of the DBF. Both the FDIC and the DBF must grant prior approval of any merger, consolidation or other corporation reorganization involving the Bank.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted in 2010, and resulted in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. In 2017, both the House of Representatives and the Senate introduced legislation that would repeal or modify provisions of the Dodd-Frank Act and significantly impact financial services regulation. In May 2018, certain provisions of these bills were signed into law as part of the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”) and repealed or modified significant portions of the Dodd-Frank Act. Specifically, the Economic Growth Act delayed implementation of rules related to the Home Mortgage Disclosure Act, reformed and simplified certain Volcker Rule requirements, and raised the threshold for applying enhanced prudential standards to bank holding companies with total consolidated assets equal to or greater than $50 billion to those with total consolidated assets equal to or greater than $250 billion. While recent federal legislation, including the Economic Growth Act, has scaled back portions of the Dodd-Frank Act, uncertainty about the timing and scope of such changes, as well as the cost of complying with a new regulatory regime, remains.

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. “Total capital” is composed of Tier 1 capital and Tier 2 capital. “Tier 1 capital” includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, less goodwill, most intangible assets and certain other assets. “Tier 2 capital” includes, among other things, perpetual preferred stock and related surplus not meeting the Tier 1 capital definition, qualifying mandatorily convertible debt securities, qualifying subordinated debt and allowances for possible loan and lease losses, subject to limitations. 

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 Federal Reserve will require a bank holding company to maintain a leverage ratio well above minimum levels if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve. The FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve will also require banks to maintain capital well above minimum levels.

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In July 2013, the Federal Reserve published the Basel III Capital Rules establishing a new comprehensive capital framework applicable to all depository institutions, bank holding companies with total consolidated assets of a certain threshold, and all savings and loan holding companies except for those that are substantially engaged in insurance underwriting or commercial activities (collectively, “banking organizations”). The rules implement the December 2010 framework proposed by the Basel Committee on Banking Supervision (the “Basel Committee”), known as “Basel III”, for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act.

The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the prior U.S. risk-based capital rules. The Basel III Capital Rules:

• defined the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios;
• addressed risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replaced the prior risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords;
• introduced a new capital measure called “common equity Tier 1” (“CET1”);
• specified that Tier 1 capital consists of CET1 and “additional Tier 1 capital” instruments meeting specified requirements; and
• implemented the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules.

The Basel III Capital Rules became effective for the Bank on January 1, 2015, subject to a phase-in period ending January 1, 2019, but are not applicable to bank holding companies, like the Corporation, with less than $1 billion in total consolidated assets that meet certain criteria.

The Basel III Capital Rules require the Bank to maintain;

• a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”;

• a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6%, plus the 2.5% capital conservation buffer (which is added to the 6% Tier 1 capital ratio effectively resulting in a minimum Tier 1 capital ratio of 8.5%);

• a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8%, plus the 2.5% capital conservation buffer (which is added to the 8% Total capital ratio effectively resulting in a minimum Total capital ratio of 10.5%); and

• a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.

In addition, Section 38 of the Federal Deposit Insurance Act implemented the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “1991 Act”). The prompt corrective action provisions 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. The FDIC is required to resolve a bank when its ratio of tangible equity to total assets reaches 2%. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.

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The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, as revised by the Basel III Capital Rules effective January 1, 2015, 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 1 risk-based ratio of at least 8%, a CET1 risk-based ratio of 6.5% 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 1 risk-based ratio of at least 6%, a CET1 risk-based ratio of 4.5% and a leverage ratio of at least 4%; (3) an “undercapitalized” institution has a Total risk-based capital ratio of under 8%, a Tier 1 risk-based ratio of under 6%, a CET1 risk-based ratio of under 4.5% or a leverage ratio of under 4%; (4) a “significantly undercapitalized” institution has a Total risk-based capital ratio of under 6%, a Tier 1 risk-based ratio of under 4%, a CET1 risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a “critically undercapitalized” institution has a ratio of tangible equity to total assets 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 allow it to “downgrade” an institution to a lower capital category based on supervisory factors other than capital.

As of December 31, 2018, the Bank was “well-capitalized” under current regulations.

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under prior capital standards, the effects of certain accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, certain banking organizations, including the Bank, may make a one-time permanent election to continue to exclude these items. The Bank made this election in the first quarter of 2015 in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Bank’s available-for-sale securities portfolio.

The “capital conservation buffer” is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Consistent with the Dodd-Frank Act, the Basel III Capital Rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250% risk weight. In addition, the Basel III Capital Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

As of December 31, 2018, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

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In November 2017, the federal banking agencies adopted a final rule to extend the regulatory capital treatment applicable during 2017 under the capital rules for certain items, including regulatory capital deductions, risk weights, and certain minority interest limitations. The relief provided under the final rule applies to banking organizations that are not subject to the capital rules’ advanced approaches, such as the Corporation. Specifically, the final rule extends the current regulatory capital treatment of mortgage servicing assets, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, significant investments in the capital of unconsolidated financial institutions in the form of common stock, and common equity tier 1 minority interest, tier 1 minority interest, and total capital minority interest exceeding the capital rules’ minority interest limitations.

In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred to as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of risk-weighted assets (“RWA”), which will be accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; constraining the use of internally modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust capital floor. Leadership of the federal banking agencies who are tasked with implementing Basel IV supported the revisions. Although it is uncertain at this time, we anticipate some, if not all, of the Basel IV accord may be incorporated into the capital requirements framework applicable to the Corporation.

The Economic Growth Act mandated the federal banking regulators, through notice and comment rulemaking, to develop an “off-ramp” exempting certain banking organizations with less than $10.0 billion in consolidated assets and a low-risk profile from generally applicable leverage capital and risk-based capital requirements if such banking organization maintained a leverage ratio to be set by the federal banking regulators (the “Community Bank Leverage Ratio”). The Economic Growth Act requires the federal banking regulators to set the Community Bank Leverage Ratio between 8% and 10%. On November 21, 2018, the federal banking regulators proposed a rule to implement Section 201 of the Economic Growth Act. The proposed rule would set the Community Bank Leverage Ratio at 9%. To date, the proposed rule implementing Section 201 of the Economic Growth Act has not been finalized.

Consumer Protection Laws. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (“CFPB”), and giving it the power to promulgate and enforce federal consumer protection laws. Depository institutions are subject to the CFPB’s rule writing authority, and existing federal bank regulatory agencies retain examination and enforcement authority for such institutions. The CFPB and the Corporation’s existing federal regulator, the FDIC, are focused on the following:

 • risks to consumers and compliance with the federal consumer financial laws;

 • the markets in which firms operate and risks to consumers posed by activities in those markets;

 • depository institutions that offer a wide variety of consumer financial products and services;

 • depository institutions with a more specialized focus; and

 • non-depository companies that offer one or more consumer financial products or services.

The CFPB and FDIC have authority to prevent unfair, deceptive or abusive practices in connection with offering consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits states’ attorneys general to enforce compliance with both state and federal laws and regulations.

Volcker Rule. The Dodd-Frank Act amended the BHC Act to require the federal bank 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). The statutory provision is commonly called the “Volcker Rule”. The Volcker Rule and the final rules adopted by the Federal Reserve thereunder, do not have a material effect on the Corporation and the Bank, as we do not engage in businesses prohibited by the Volcker Rule. In the future, the Corporation may incur costs to adopt additional policies and systems to ensure compliance with the Volcker Rule.

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Commercial Real Estate. The federal bank regulatory agencies, including the FDIC, restrict concentrations in commercial real estate lending and have noted that recent increases in banks’ commercial real estate concentrations have created safety and soundness concerns in the event of a significant economic downturn. The regulatory guidance mandates certain minimal risk management practices and categorizes banks with defined levels of such concentrations as banks requiring elevated examiner scrutiny. Although management believes that the Corporation’s credit processes and procedures meet the risk management standards dictated by this guidance, regulatory outcomes could effectively limit increases in the real estate concentrations in the Bank’s loan portfolio and require additional credit administration and management costs associated with those portfolios.

Source of Strength Doctrine. Federal Reserve regulations and policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this policy, the Corporation is expected to commit resources to support the Bank.

Loans. Inter-agency guidelines adopted by federal bank regulatory agencies mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital.

Transactions with Affiliates. Under federal law, all transactions between and among a state nonmember bank and its affiliates, which include holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. Generally, these requirements limit these transactions to a percentage of the bank’s capital and require all of them to be on terms at least as favorable to the bank as transactions with non-affiliates. In addition, a bank may not lend to any affiliate engaged in non-banking activities not permissible for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The FDIC is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a bank. The regulations also set forth various reporting requirements relating to transactions with affiliates.

Financial Privacy. In accordance with the GLB Act, federal banking regulatory agencies adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated 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 United States Department of the Treasury has issued a number of implementing regulations which apply various requirements of the USA Patriot Act of 2001 to 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.

Incentive Compensation. The federal banking agencies have 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.

-11- 

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions like the Corporation that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the financial institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution’s safety and soundness and the institution is not taking prompt and effective measures to correct the deficiencies.

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 our key employees.

Cybersecurity. Recent cyber-attacks against banks and other financial institutions that resulted in unauthorized access to confidential customer information have prompted the federal bank regulatory agencies to issue extensive guidance on cybersecurity. These agencies are likely to devote more resources to this part of their safety and soundness examination than they may have in the past.  

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 U.S. generally accepted accounting principles (“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).”  Although management believes its processes for determining the value of these assets use 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 in Congress. 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. With the current economic environment, the nature and extent of future legislative and regulatory changes affecting financial institutions is not known at this time.

Available Information

The Corporation’s website where you can find more information is located at www.sgb.bank. We make available free of charge, through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other reports filed or furnished pursuant to Section 13(a) or 15(d) under the Securities Exchange Act of 1934 (the “Exchange Act”). These reports are available as soon as reasonably practicable after those materials are electronically filed with the Securities and Exchange Commission (the “SEC”).

-12- 

Our SEC filings are publicly available at the SEC’s website located at www.sec.gov. You may also read and copy any document we file with the SEC at its Public Reference Facilities at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information about the Public Reference Room operations by calling the SEC at 1-800-SEC-0330. Information provided on our website is not part of this report, and is not incorporated herein by reference unless otherwise specifically referenced as such in this report.

Executive Officers of the Corporation and the Bank

Executive officers are elected by the Board of Directors annually in May and hold office until the following May at the pleasure of the Board of Directors. The principal executive officers of the Corporation and the Bank and their ages, positions, and terms of office as of March 29, 2019, are as follows:

Name (Age)		Principal Position	Executive Officer Since
DeWitt Drew		President and Chief Executive Officer of the	1999
	(62)	Corporation and Bank
Donna S. Lott (43)		Executive Vice President and Chief Administrative Officer of the Corporation and Bank and Cashier of the Bank	2008
Jeffery E. Hanson		Executive Vice President and Chief Banking Officer	2011
	(53)	of the Corporation and Bank
Danny E. Singley		Executive Vice President and Chief Credit Officer of	2002
	(64)	the Bank
Karen T. Boyd		Senior Vice President and Treasurer of the Corporation	2010
	(50)	and Senior Vice President and Controller of the Bank
Jeffrey (Jud) Moritz		Executive Vice President of the Bank and Valdosta	2011
	(42)	Region President
Ross K. Dekle		Executive Vice President of the Bank and Moultrie	2011
	(37)	Region President
Gregory P. Costin		Senior Vice President of the Bank	2012
	(43)
Pamela J. Yeager		Senior Vice President of the Bank	2015
	(50)
Chad J. Carpenter		Senior Vice President of the Bank and Tifton	2015
	(44)	Region President
Leslie W. Green		Senior Vice President of the Bank	2018
	(44)

None of the above officers are related and there are no arrangements or understandings between them and any other person pursuant to which any of them was elected as an officer, other than arrangements or understandings with directors or officers of the Corporation or Bank acting solely in their capacities as such.

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The following is a brief description of the business experience of the principal executive officers of the Corporation and the Bank. 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 the Corporation and the 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 the Corporation and the Bank.

Ms. Lott became Chief Administrative Officer in 2018 and Executive Vice President of the Corporation and the Bank in 2017. She is also Cashier of the Bank. Previously, she served as Senior Vice President of the Bank since 2014. Prior to that, she served as Vice President of the Bank since 2008 and Assistant Vice President of the Bank since 2007.

Mr. Hanson became Executive Vice President of the Corporation in 2012 and Executive Vice President and Chief Banking Officer 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. Singley became Executive Vice President and Chief Credit Officer of the Bank in 2014. Previously, he was appointed President Moultrie Region and Senior Vice President of the Bank in 2011 and served as Senior Vice President of the Bank since 2008. Prior to that, he had been Vice President of the Bank since 2002.

Ms. Boyd became Senior Vice President and Treasurer of the Corporation in 2017. She is also Senior Vice President and Controller of the Bank since 2014. Previously, she served as Vice President of the Bank since 2010 and, prior to that, Assistant Vice President of the Bank since 2007.

Mr. Moritz became Executive Vice President of the Bank in 2018. Previously, he was appointed as Senior Vice President of the Bank and Valdosta Region President in 2011. Prior to that, he was employed by Park Avenue Bank in Valdosta, Georgia, for five years and Regions Bank for five years.

Mr. Dekle became Executive Vice President of the Bank in 2018. Previously, he was appointed Senior Vice President of the Bank and Moultrie Region President in 2014. Prior to that, he served as Vice President of the Bank since 2011 and, prior to that, Assistant Vice President of the Bank since 2007.

Mr. Costin became Senior Vice President of the Bank in 2015. Previously, he served as Vice President of the Bank since 2012 and, prior to that, Assistant Vice President of the Bank since 2011.

Ms. Yeager became Senior Vice President of the Bank in 2015. Previously, she was employed for 11 years with Commercial Banking Company in Valdosta, Georgia. Prior to that, she was employed for 18 years with First State Bank and Trust in Valdosta, Georgia.

Mr. Carpenter became Senior Vice President of the Bank and Tifton Region President in 2015. Previously, he was employed by BB&T in Tifton, Georgia, for 15 years where he most recently held the position of Area President for the communities of Tifton, Valdosta and Douglas.

Ms. Green became Senior Vice President of the Bank in 2018. Previously, she served as Vice President of the Bank since 2017. Prior to that, she was employed for 4 years with Thomas County Federal Savings and Loan in Thomasville, Georgia. 

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

The following tables set forth, for the fiscal years ended December 31, 2018, 2017, and 2016, 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, 2018
	Average Balance			Interest		Rate
ASSETS		(Dollars in thousands)
Cash and due from banks	$	9,944		$	—		—	%
Earning assets:
Interest-bearing deposits with banks		25,951			485		1.87	%
Loans, net (a) (b) (c)		346,761			18,782		5.42	%
Certificates of deposit in other banks		2,019			48		2.38	%
Taxable investment securities            held to maturity and available for sale		54,088			1,363		2.52	%
Nontaxable investment securities            held to maturity (c)		36,364			1,204		3.31	%
Nontaxable investment securities  available for sale (c)		7,375			236		3.20	%
Other investment securities		2,356			144		6.11	%
Total earning assets		474,914		$	22,262		4.69	%
Premises and equipment		13,763
Other assets		11,874
Total assets	$	510,495
LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing demand deposits	$	112,768		$	—		—	%
Interest-bearing liabilities:
Interest bearing business checking		21,334			85		0.40	%
NOW accounts		18,807			70		0.37	%
Money market deposit accounts		147,395			1,030		0.70	%
Savings deposits		32,082			124		0.39	%
Time deposits		87,539			1,075		1.23	%
Federal funds purchased		42			1		2.38	%
Other borrowings		44,654			937		2.10	%
Total interest-bearing liabilities		351,853			3,322		0.94	%
Other liabilities		3,795
Total liabilities		468,416
Common stock		2,823
Surplus		11,075
Retained earnings		32,322
Less treasury stock		(4,141	)
Total shareholders’ equity		42,079
Total liabilities and shareholders’ equity	$	510,495
Net interest income and margin				$	18,940		3.99	%

(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 approximately $1,062 million.
(c)	Reflects taxable equivalent adjustments using a tax rate of 21%.

-15- 

	Year Ended December 31, 2017
	Average Balance		Interest		Rate
ASSETS		(Dollars in thousands)
Cash and due from banks	$	8,701	$	—		—	%
Earning assets:
Interest-bearing deposits with banks		18,104		195		1.08	%
Loans, net (a) (b) (c)		314,559		16,345		5.20	%
Certificates of deposit in other banks		1,477		35		2.37	%
Taxable investment securities            held to maturity and available for sale		53,036		1,285		2.42	%
Nontaxable investment securities held to maturity (c)		45,286		1,713		3.78	%
Nontaxable investment securities  available for sale (c)		7,260		287		3.95	%
Other investment securities		2,150		103		4.79	%
Total earning assets		441,872	$	19,963		4.52	%
Premises and equipment		11,835
Other assets		11,035
Total assets	$	473,433
LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing demand deposits	$	130,252	$	—		—	%
Interest-bearing liabilities:
NOW accounts		20,606		40		0.19	%
Money market deposit accounts		129,313		381		0.29	%
Savings deposits		30,448		82		0.27	%
Time deposits		79,832		652		0.82	%
Federal funds purchased		80		1		1.25	%
Other borrowings		38,293		747		1.95	%
Total interest-bearing liabilities		298,572		1,903		0.64	%
Other liabilities		4,157
Total liabilities		432,981
Common stock		4,294
Surplus		31,702
Retained earnings		30,587
Less treasury stock		(26,121)
Total shareholders’ equity		40,462
Total liabilities and shareholders’ equity	$	473,443
Net interest income and margin			$	18,060		4.09	%

(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 approximately $965 thousand.
(c)	Reflects taxable equivalent adjustments using a tax rate of 34%.

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	Year Ended December 31, 2016
	Average Balance			Interest		Rate
ASSETS		(Dollars in thousands)
Cash and due from banks	$	7,479		$	—		—	%
Earning assets:
Interest-bearing deposits with banks		19,759			103		0.52	%
Loans, net (a) (b) (c)		277,908			14,863		5.35	%
Certificates of deposit in other banks		17			0		0.00	%
Taxable investment securitie             held to maturity and available for sale		47,620			1,168		2.45	%
Nontaxable investment securities             held to maturity (c)		51,151			1,888		3.69	%
Nontaxable investment securities   available for sale (c)		3,696			151		4.09	%
Other investment securities		1,941			92		4.74	%
Total earning assets		402,092		$	18,265		4.54	%
Premises and equipment		11,355
Other assets		10,155
Total assets	$	431,081
LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing demand deposits	$	113,122		$	—		—	%
Interest-bearing liabilities:
NOW accounts		17,623			30		0.17	%
Money market deposit accounts		112,434			285		0.25	%
Savings deposits		29,621			50		0.17	%
Time deposits		80,204			570		0.71	%
Federal funds purchased		1			0		0.00	%
Other borrowings		35,861			677		1.89	%
Total interest-bearing liabilities		275,744			1,612		0.58	%
Other liabilities		3,845
Total liabilities		392,711
Common stock		4,294
Surplus		31,702
Retained earnings		28,489
Less treasury stock		(26,115	)
Total shareholders’ equity		38,370
Total liabilities and shareholders’ equity	$	431,081
Net interest income and margin				$	16,653		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 approximately $1,045 million.
(c)	Reflects taxable equivalent adjustments using a tax rate of 34%.

-17- 

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)
	2018		2017		Increase (Decrease)			Volume			Rate
	(Dollars in thousands)
Interest earned on:
Interest-bearing deposits with banks	$	485	$	195	$	290		$	108		$	182
Loans, net (b)		18,782		16,345		2,437			1,723			714
Certificates of deposit in other banks		48		35		13			13			0
Taxable investment securities         held to maturity and available for sale		1,363		1,285		78			26			52
Nontaxable investment securities   held to maturity (b)		1,204		1,713		(509	)		(311	)		(198	)
Nontaxable investment securities available for sale (b)		236		287		(51	)		5			(56	)
Other investment securities		144		103		41			11			30
Total interest income		22,262		19,963		2,299			1,575			724
Interest paid on:
Interest bearing business checking		85		0		85			67			18
NOW accounts		70		40		30			(3	)		33
Money market deposit accounts		1,030		381		649			60			589
Savings deposits		124		82		42			4			38
Time deposits		1,075		652		423			68			355
Federal funds purchased		1		1		0			0			0
Other borrowings		937		747		190			130			60
Total interest expense		3,322		1,903		1,419			326			1,093
Net interest earnings	$	18,940	$	18,060	$	880		$	1,249		$	(369	)

(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 21% for 2018 and 34% for 2017 in adjusting interest on nontaxable loans and securities to a fully taxable basis.

-18- 

								Due To Changes In (a)
	2017		2016		Increase (Decrease)			Volume			Rate
	(Dollars in thousands)
Interest earned on:
Interest-bearing deposits with banks	$	195	$	103	$	92		$	(8	)	$	100
Loans, net (b)		16,345		14,863		1,482			1,889			(407	)
Certificates of deposit in other banks		35		0		35			18			17
Taxable investment securities         held to maturity and available for sale		1,285		1,168		117			131			(14	)
Nontaxable investment securities    held to maturity (b)		1,713		1,888		(175	)		(224	)		49
Nontaxable investment securities  available for sale (b)		287		151		136			141			(5	)
Other investment securities		103		92		11			10			1
Total interest income		19,963		18,265		1,698			1,957			(259	)
Interest paid on:
NOW accounts		40		30		10			6			4
Money market deposit accounts		381		285		96			46			50
Savings deposits		82		50		32			1			31
Time deposits		652		570		82			(3	)		85
Federal funds purchased		1		0		1			0			1
Other borrowings		747		677		70			47			23
Total interest expense		1,903		1,612		291			97			194
Net interest earnings	$	18,060	$	16,653	$	1,407		$	1,860		$	(453	)

(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 2017 and 2016 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,
	2018		2017		2016
	(Dollars in thousands)
Securities held to maturity:
State and municipal	$	30,583	$	41,447	$	50,436
Residential mortgage-backed		6,244		3,144		4,167
Total securities held to maturity	$	36,827	$	44,591	$	54,603
Securities available for sale:
U.S. government treasuries	$	955	$	968	$	962
U.S. government agencies		45,207		43,860		40,985
State and municipal		7,378		7,574		6,453
Residential mortgage-backed		4,774		1,862		2,529
Corporate notes		0		0		2,524
Equity securities		0		100		112
Total securities available for sale	$	58,314	$	54,364	$	53,565

At December 31, 2018, the total investment portfolio decreased to $95,140,650, down $3,813,832, compared with $98,954,482 at December 31, 2017. The decrease in the portfolio resulted in various maturities and calls totaling $11,475,000, sales of $2,879,000, and residential mortgage-backed securities principal paydowns of $1,572,462. The sales were U.S. government agency securities categorized as available for sale. These transactions resulted in a net loss of $165,369. Partially offsetting these maturities, calls, and sales were purchases of $13,399,926 of U.S. government agency securities, residential mortgage-backed securities, and municipal securities. 

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The following table shows the contractual maturities of debt securities at December 31, 2018, and the weighted average yields (for nontaxable obligations on a fully taxable basis assuming a 21% tax rate) of such securities. Mortgage-backed securities amortize in accordance with the terms of the underlying mortgages, including prepayments as a result of refinancing 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:
U.S. government treasuries	$	0		0	%	$	0		0	%	$	955		2.25	%	$	0		0	%
U.S. government agencies		2,125		1.34	%		27,162		2.65	%		15,920		2.30	%		0		0	%
State and municipal		6,483		3.06	%		15,189		3.22	%		11,841		3.23	%		4,447		3.39	%
Residential mortgage-backed		0		0	%		208		3.19	%		3,288		3.18	%		7,523		3.09	%
Total	$	8,608		2.64	%	$	42,559		2.86	%	$	32,004		2.73	%	$	11,970		3.21	%

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, 2018 and 2017, securities carried at approximately $59,182,556 and $71,520,817, respectively, were pledged to secure public and trust deposits as required by law. At December 31, 2018, approximately $4,400,000 was over pledged and could be released if necessary for liquidity needs. At December 31, 2018 and 2017, no securities were pledged to secure our Federal Home Loan Bank 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,
	2018		2017		2016		2015		2014
	(Dollars in thousands)
Commercial, financial and agricultural	$	88,403	$	73,146	$	70,999	$	58,173	$	47,861
Real estate:
Construction loans		24,891		22,287		25,999		19,831		12,257
Commercial mortgage loans		123,477		106,458		91,733		85,777		76,916
Residential loans		103,348		99,160		83,271		67,969		69,305
Agricultural loans		31,562		25,374		16,580		15,620		14,996
Consumer & other		5,086		3,767		3,961		3,435		3,091
Total loans		376,767		330,192		292,543		250,805		224,426
Less:
Unearned interest and discount		17		18		19		19		26
Allowance for loan losses		3,429		3,044		3,124		3,032		3,114
Net loans	$	373,321	$	327,130	$	289,400	$	247,754	$	221,286

The following table shows maturities of the commercial, financial, agricultural, and construction loan portfolio at December 31, 2018.

	Commercial, Financial, Agricultural and Construction
	(Dollars in thousands)
Distribution of loans which are due:
In one year or less	$	32,388
After one year but within five years		57,432
After five years		23,474
Total	$	113,294

-20- 

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, 2018.

		Loans With
		Predetermined		Loans With
		Rates		Floating Rates		Total
		(Dollars in thousands)
Commercial, financial, agricultural and construction	$	77,458	$	3,448	$	80,906

The following table presents information concerning outstanding balances of nonaccrual, past-due, and restructured loans as well as foreclosed assets for the indicated years. Respectively, they are defined as: (a) loans accounted for on a nonaccrual basis (“nonaccruals”); (b) loans which are contractually past due 90 days or more as to interest or principal payments and still accruing (“past-dues”); and (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 (“troubled debt restructured”). The Corporation’s nonaccrual policy is located in Note 3 of the Corporation’s Notes to Consolidated Financial Statements.

			Accruing Loans
	Nonaccrual Loans		90 Days Past-Due		Troubled Debt Restructured		Total		Foreclosed Assets
	(Dollars in thousands)
December 31, 2018	$	1,205	$	0	$	7	$	1,212	$	$128
December 31, 2017	$	1,675	$	0	$	4	$	1,679	$	$759
December 31, 2016	$	246	$	0	$	914	$	1,160	$	$127
December 31, 2015	$	1,546	$	1	$	2,290	$	3,837	$	$82
December 31, 2014	$	786	$	0	$	215	$	1,001	$	$274
December 31, 2013	$	913	$	0	$	256	$	1,169	$	$406

In 2018, nonaccrual loans decreased due to settlement, payment, or restructuring. Items in foreclosed assets includes one commercial real estate property totaling $90,000, and one residential real estate property totaling $37,605.

The Bank performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. All loans risk rated Watch, Other Assets Especially Mentioned (“OAEM”), Substandard or Doubtful are listed on the Bank’s “watchlist.” Management monitors these loans closely and reviews their performance on a regular basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as being Loss are fully charged off. In addition, the Bank maintains a listing of “classified loans”, of which some loans may be potential problem loans, consisting of Substandard and Doubtful loans which totaled $5,781,368 at December 31, 2018. Potential problem loans are loans other than nonaccruals, past-dues and troubled debt restructured loans which management has doubt as to the borrower’s ability to comply with the present loan repayment terms.

Management closely monitors the watchlist for signs of deterioration to mitigate the growth in nonaccrual loans. At December 31, 2018, watchlist loans, inclusive of the “classified loans”, totaled $14,223,035, of which $9,866,653 are not considered impaired. See Note 3 of the Corporation’s Notes to Consolidated Financial Statements for further discussion on classification of potential problem loans.  

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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,
	2018			2017			2016			2015			2014
	(Dollars in thousands)
Average loans outstanding	$	349,938		$	317,724		$	281,006		$	235,939		$	223,295
Amount of allowance for loan losses at beginning of period	$	3,044		$	3,124		$	3,032		$	3,114		$	3,078
Amount of loans charged off during period:
Commercial, financial and agricultural		548			113			103			264			37
Real estate:
Construction		1			0			0			0			121
Commercial		43			169			0			0			0
Residential		7			60			4			33			158
Agricultural		0			94			0			0			0
Consumer & other		7			12			9			22			26
Total loans charged off		606			448			116			319			342
Amount of recoveries during period:
Commercial, financial and agricultural		12			64			28			42			12
Real estate:
Construction		0			0			0			0			0
Commercial		1			0			0			0			0
Residential		0			0			17			22			30
Agricultural		147			0			0			0			0
Consumer & other		2			4			3			32			6
Total loans recovered		162			68			48			96			48
Net loans charged off during period		444			380			68			223			294
Additions to allowance for loan losses charged to operating expense during period		829			300			160			141			330
Amount of allowance for loan losses at end of period	$	3,429		$	3,044		$	3,124		$	3,032		$	3,114
Ratio of net charge-offs during period to average loans outstanding for the period		.13	%		.12	%		.02	%		.09	%		.13	%

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.  

-22- 

 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, 2018					December 31, 2017					December 31, 2016
Category	Allocation		% of Total Loans			Allocation		% of Total Loans			Allocation		% of Total Loans
	(Dollars in thousands)
Commercial, financial and agricultural	$	402		23.5	%	$	324		22.2	%	$	191		24.3	%
Real estate:
Construction		1,043		6.6	%		1,043		6.8	%		1,043		8.9	%
Commercial		1,210		32.8	%		1,057		32.2	%		1,192		31.3	%
Residential		459		27.4	%		416		30.0	%		420		28.5	%
Agricultural		109		8.4	%		12		7.7	%		87		5.7	%
Consumer & other		206		1.3	%		192		1.1	%		191		1.3	%
Total	$	3,429		100.0	%	$	3,044		100.0	%	$	3,124		100.0	%

	December 31, 2015					December 31, 2014
Category	Allocation		% of Total Loans			Allocation		% of Total Loans
	(Dollars in thousands)
Commercial, financial and agricultural	$	145		23.2	%	$	300		21.3	%
Real estate:
Construction		1,043		7.9	%		1,043		5.4	%
Commercial		1,192		34.2	%		1,192		34.3	%
Residential		382		27.1	%		313		30.9	%
Agricultural		86		6.2	%		86		6.7	%
Consumer & other		184		1.4	%		180		1.4	%
Total	$	3,032		100.0	%	$	3,114		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,
	2018		2017		2016
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	112,767	$	130,252	$	113,122
Interest bearing business checking		21,335		—		—
NOW accounts		18,807		20,606		17,623
Money market deposit accounts		147,395		129,313		112,435
Savings		32,082		30,448		29,621
Time deposits		87,539		79,832		80,204
Total interest-bearing deposits		307,158		260,199		239,883
Total average deposits	$	419,925	$	390,451	$	353,005

-23- 

The maturity of certificates of deposit of $100,000 or more as of December 31, 2018, are presented below.

	(Dollars in thousands)
3 months or less	$	7,079
Over 3 months through 6 months		9,189
Over 6 months through 12 months		27,217
Over 12 months		16,018
Total outstanding certificates of deposit of $100,000 or more	$	59,503

Table 6 - Return on Equity and Assets

Certain financial ratios are presented below. 

	Year Ended December 31,
	2018			2017			2016
Return on average assets		0.91	%		0.80	%		0.94	%
Return on average equity		11.04	%		9.41	%		10.51	%
Dividend payout (dividends paid divided by net income)		25.74	%		29.44	%		26.53	%
Average equity to average assets		8.24	%		8.55	%		8.90	%

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of the Corporation and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.  

-24- 

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 any 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 maintain profitability;

·the Corporation’s ability to raise capital;

·the Corporation’s ability to maintain liquidity or access other sources of funding;

·changes in the cost and availability 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 from financial institutions and other financial service providers;

·changes in technology;

·the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations or failures to comply with such laws and regulations;

·changes in regulatory capital and other requirements;

·changes in monetary policy;

·losses due to fraudulent and negligent conduct of customers, third party service providers or employees;

·the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto;

·possible regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators;

·the Corporation’s reliance on third parties to provide key components of our business infrastructure and services required to operate our business;

·acquisitions or dispositions of assets or internal restructuring that may be pursued by the Corporation;

·deteriorating conditions in the stock market, the public debt market and other capital markets;

·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;

·the Corporation’s lack of geographic diversification;

·changes in commodity prices and interest rates;

·the Corporation’s accounting and reporting policies;

·the Corporation’s ability to maintain effective internal controls over financial reporting and disclosure controls and procedure;

·a cybersecurity incident involving the misappropriation, loss or unauthorized disclosure or use of confidential information of our customers; and

·weather, natural disasters and other catastrophic events and other factors discussed in the Corporation’s other filings with the SEC.

The foregoing list of factors is not exclusive, and readers are cautioned not to place undue reliance on any forward-looking statements. 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 SEC. 

-25- 

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.

Weaknesses 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. 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 shareholders.

The Corporation’s ability to raise capital will depend on conditions in the capital markets, which are outside of our control, and on the Corporation’s financial performance. Accordingly, there is no guarantee that the Corporation will be able to borrow funds or successfully raise additional capital at all or on terms that are favorable or otherwise not dilutive to existing shareholders.

Capital resources and liquidity are essential to the Corporation’s businesses and it relies on external sources to finance a significant portion of its operations.

Liquidity is essential to the Corporation’s businesses. We depend on access to a variety of sources of funding to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, and to accommodate the transaction and cash management needs of our customers. Sources of funding available to us, and upon which we rely as regular components of our liquidity and funding management strategy, include traditional and brokered deposits, inter-bank borrowings, Federal Funds purchased, repurchase agreements and Federal Home Loan Bank advances. We may also raise funds from time to time in the form of either short-or long-term borrowings or equity issuances. The Corporation’s capital resources and liquidity could be negatively impacted by disruptions in its ability to access these sources of funding. The cost of brokered and other out-of-market deposits and potential future regulatory limits on the interest rate we pay for brokered deposits could make them unattractive sources of funding. Further, factors that we cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, could impair our ability to access sources of funds. Other financial institutions may be unwilling to extend credit to banks because of concerns about the banking industry and the economy generally and there may not be a viable market for raising short or long-term debt or equity capital. In addition, our ability to raise funding could be impaired if lenders develop a negative perception of our long-term or short-term financial prospects. Such negative perceptions could be developed if the Corporation is downgraded or put on (or remains 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.

-26- 

Among other things, if we fail to remain “well-capitalized” for bank regulatory purposes, because we do not qualify under the minimum capital standards or the FDIC otherwise downgrades our capital category, it could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common stock, and our ability to make acquisitions, and we would not be able to accept brokered deposits without prior FDIC approval. To be “well-capitalized”, a bank must generally maintain a common equity Tier 1 capital ratio of 6.5%, Tier 1 leverage capital ratio of 5%, Tier 1 risk-based capital ratio of 8% and total risk-based capital ratio of 10%. In addition, our regulators may require us to maintain higher capital levels. Our failure to remain “well-capitalized” or to maintain any higher capital requirements imposed on us could negatively affect our business, results of operations and financial condition.

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.

In addition, the Corporation is a legal entity separate and distinct from the Bank and depends on subsidiary service fees and dividends from the Bank to fund its payment of dividends to its shareholders and of interest and principal on its outstanding debt. The Bank is also subject to other laws that authorize regulatory authorities to prohibit or reduce the flow of funds from the Bank to the Corporation. Any inability of the Corporation to pay its obligations, or need to defer the payment of any such obligations, could have a material adverse effect on our business, operations, financial condition, and the value of our common stock.

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 $24.9 million at December 31, 2018, comprising 6.6% 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. As a result, these loans could represent higher risk due to slower sales and reduced cash flow that affect the borrowers’ ability to repay on a timely basis which could result in a sharp increase in our total net charge-offs and require us to significantly increase our allowance for loan losses, any of which could have a material adverse effect on our financial condition or results of operations.

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.

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 75% 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.

-27- 

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.   

The Corporation’s reported financial results depend on the accounting and reporting policies of the Corporation, the application of which requires significant assumptions, estimates and judgments.

The Corporation’s accounting and reporting policies are fundamental to the methods by which we record and report our financial condition and results of operations. The Corporation’s management must make significant assumptions and estimates and exercise significant judgment in selecting and applying many of these accounting and reporting policies so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report the Corporation’s financial condition and results. In some cases, management must select a policy from two or more alternatives, any of which may be reasonable under the circumstances, which may result in the Corporation reporting materially different results than would have been reported under a different alternative.

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 collectability 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, 2018, the Corporation recorded an allowance for possible loan losses of $3.43 million, compared with $3.04 million for the year ended December 31, 2017. If these 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 loan customers, third party service providers and employees.

When the Bank makes 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’s reliance on incorrect or incomplete information could have a material adverse effect on the Corporation’s profitability or financial condition.

-28- 

We rely on third parties to provide key components of our business infrastructure.

Third parties provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third party vendor could also hurt our operations if those difficulties interfere with the vendor's ability to serve us. Furthermore, our vendors could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.

Technology difficulties or failures or cyber security breaches of our network security could have a material adverse effect on the Corporation.

The Corporation depends upon data processing, software, and communication and information exchange on a variety of computing platforms and networks. The computer platforms and network infrastructure we use could be vulnerable to unforeseen hardware and cyber security issues. The Corporation cannot be certain that all of its systems are entirely free from vulnerability to cyber-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 subject us to additional regulatory scrutiny, damage our reputation, result in a loss of customers and expose us 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. Although we have security measures designed to mitigate the possibility of break-ins, breaches and other disruptive problems, including firewalls and penetration testing, there can be no assurance that such security measures will be effective in preventing such problems.

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.

-29- 

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 Chief Executive Officer; Donna S. Lott, Executive Vice President and Chief Administrative Officer`; Jeffery E. Hanson, Executive Vice President and Chief Banking Officer; Danny E. Singley, Executive Vice President and Chief Credit Officer; and Karen T. Boyd, Senior Vice President & Treasurer, 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 other depository institutions and other financial service organizations, including brokers, finance companies, financial technology companies, mutual funds, savings and loan associations, credit unions and certain governmental agencies. The Corporation competes with these other financial institutions 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.

In addition, technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits, which could have a material impact on our financial condition and results of operations.

The Corporation may not have the resources to effectively implement new technology, or we may experience operational challenges when implementing new technology.

The financial services industry is changing rapidly, and to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. In addition to better serving our customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, at least in part, upon our ability to respond to future technological changes and the ability to address the needs of our customers. We address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our products and service offerings. We may experience operational challenges as we implement these new technology enhancements or products, which could result in our not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner. In addition, complications during a conversion of our core technology platform or implementation or upgrade of any software could negatively impact the experiences or satisfaction of our customers, which could cause those customers to terminate their relationship with us or reduce the amount of business that they do with us, either of which could adversely affect our business, financial condition or results of operations.

Many of our larger competitors have substantially greater resources to invest in technological improvements. Third parties upon which we rely for our technology needs may not be able to cost-effectively develop systems that will enable us to keep pace with such developments. As a result, our competitors may be able to offer additional or superior products compared to those that we will be able to provide, which would put us at a competitive disadvantage. We may lose customers seeking new technology-driven products and services to the extent we are unable to provide such products and services. The inability to keep pace with technological change could adversely affect our business, financial condition and results of operations.

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The short-term and long-term impact of the changing regulatory capital requirements is uncertain.

The Basel III Capital Rules established a common equity Tier 1 minimum capital requirement of 4.5%, a higher minimum Tier 1 capital to risk-weighted assets requirement of 6% and Total capital to risk-weighted assets of 8%. In addition, to be considered “well-capitalized”, the rules include a common equity Tier 1 capital requirement of 6.5% or greater and a higher Tier 1 capital to risk-weighted assets requirement of 8% or greater. Moreover, the rules limit a banking organization’s capital distributions and certain discretionary bonus payments if such banking organization does not hold a “capital conservation buffer” consisting of a 2.5% of common equity Tier 1 capital in addition to the 4.5% minimum common equity Tier 1 requirement and the other amounts necessary to meet the minimum risk-based capital requirements.

The application of the more stringent capital requirements described above could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in additional regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in us modifying our business strategy and could restrict dividends.

We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The federal Bank Secrecy Act, USA Patriot Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal bank regulatory agencies, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. Federal bank regulatory agencies and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, which would negatively impact our business, financial condition and results of operations.

We could be subject to changes in tax laws, regulations and interpretations or challenges to our income tax provision.

We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Any change in enacted tax laws, rules or regulatory or judicial interpretations, any adverse outcome in connection with tax audits in any jurisdiction or any change in the pronouncements relating to accounting for income taxes could adversely affect our effective tax rate, tax payments and results of operations. In addition, changes in enacted tax laws, such as adoption of a lower income tax rate in any of the jurisdictions in which we operate, could impact our ability to obtain the future tax benefits represented by our deferred tax assets.

The Tax Act may have negative effects on our financial performance. For example, the Tax Act enacted limitations on certain deductions which will partially offset the anticipated increase in net earnings from a lower tax rate. In addition, as a result of the lower corporate tax rate, we are required under GAAP to record a tax expense due to remeasurement in the fourth quarter of 2017 with respect to our deferred tax asset amounting to $419 thousand. The impact of the Tax Act may differ from the foregoing, possibly materially, due to changes in interpretations or in assumptions that we have made, guidance or regulations that may be promulgated, and other actions that we may take as a result of the Tax Act. Similarly, the Bank’s customers are likely to experience varying effects from both the individual and business tax provisions of the Tax Act and such effects, whether positive or negative, may have a corresponding impact on our business and the economy as a whole. 

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Changes in monetary policy, laws and regulations or failures to comply with such laws and regulations could adversely affect the Corporation.

Federal monetary policy, particularly as implemented through the Federal Reserve, 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. Further, 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. See Part I, Item 1, “Supervision and Regulation.”

In 2017, both chambers of Congress proposed comprehensive financial regulatory reform bills that would amend the Dodd-Frank Act and that could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In May 2018, certain provisions of these bills were signed into law as part of the Economic Growth Act and repealed or modified significant portions of the Dodd-Frank Act. Specifically, the Economic Growth Act delayed implementation of rules related to the Home Mortgage Disclosure Act, reformed and simplified certain Volcker Rule requirements, and raised the threshold for applying enhanced prudential standards to bank holding companies with total consolidated assets equal to or greater than $50 billion to those with total consolidated assets equal to or greater than $250 billion. While recent federal legislation, including the Economic Growth Act, has scaled back portions of the Dodd-Frank Act, uncertainty about the timing and scope of such changes, as well as the cost of complying with a new regulatory regime, remains and enactment of any other regulatory relief is uncertain and none of which may lead to a meaningful reduction of our regulatory burden and attendant costs. See Part I, Item 1, “Supervision and Regulation.”

Federal and state regulators have the ability to impose or request that we consent to substantial sanctions, restrictions and requirements on the Bank if they determine, upon examination or otherwise, violations of laws, rules or regulations with which we or the Bank must comply, or weaknesses or failures with respect to general standards of safety and soundness. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, cease and desist or consent orders, civil money penalties and termination of deposit insurance and bank closures. Enforcement actions may be taken regardless of the capital level of the institution. In particular, institutions that are not sufficiently capitalized in accordance with regulatory standards may also face capital directives or prompt corrective action. Enforcement actions may require certain corrective steps (including staff additions or changes), impose limits on activities (such as lending, deposit taking, acquisitions or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised, any of which could adversely affect our financial condition and results of operations. Enforcement actions, including the imposition of monetary penalties, may have a material impact on our financial condition or results of operations, and damage to our reputation, and loss of our holding company status. In addition, compliance with any such action could distract management’s attention from our operations, cause us to incur significant expenses, restrict us from engaging in potentially profitable activities, and limit our ability to raise capital. Closure of the Bank would result in a total loss of shareholder investment.

ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved comments from the SEC staff regarding the Corporation’s periodic or current reports under the Exchange Act.

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ITEM 2. PROPERTIES

The executive offices of the Corporation are located in the SGB Wealth Strategies office at 25 Second Avenue S.W. Moultrie, Georgia. The main banking office and operations center of the Bank are located in a 22,000 square foot facility at 201 First Street, S.E., Moultrie, Georgia. The Trust and Brokerage operations are located in the SGB Wealth Strategies office. 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
Old Operations Center	11 Second Avenue, SW, Moultrie, GA  31768	5,000
SGB Wealth Strategies Office	25 Second Avenue, SW, Moultrie, GA  31768	9,400
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 Branch	168 Georgia Highway 91, Newton, GA  39870	4,400
Sylvester Branch	300 North Main Street, Sylvester, GA  31791	12,000
North Valdosta Branch	3500 North Valdosta Road, Valdosta, GA 31602	5,900
Valdosta Commercial Banking Center	3520 North Valdosta Road, Valdosta, GA 31602	10,700
Baytree Branch	1404 Baytree Road, Valdosta, GA 31602	3,000
Tifton Branch	205 East Eighth Street, Tifton, GA 31794	9,000

All of the buildings and land, which include parking and drive-thru teller facilities, are owned by the Bank.  Additionally, we have deployed nine In-Lobby teller machines throughout our footprint and replaced the traditional drive-up automated teller machines (ATM) with ATMs that will take deposits.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of operations, the Corporation and the Bank are defendants in various legal proceedings. Additionally, in the ordinary course of business, the Corporation and the Bank are subject to regulatory examinations and investigations. 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 2018.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Corporation’s common stock trades on the NYSE American LLC under the symbol “SGB”. The closing price on December 31, 2018, was $20.28. As of December 31, 2018, there were 382 record holders of the Corporation’s common stock. Also, there were approximately 625 additional shareholders who held shares through trusts and brokerage firms.

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Dividends

Cash dividends paid on the Corporation’s common stock were $0.47 per share in 2018 and $0.44 per share in 2017. Our dividend policy objective is to pay out a portion of earnings in dividends to our shareholders in a consistent manner over time. However, no assurance can be given that dividends will be declared in the future. The amount and frequency of dividends is determined by the Corporation’s Board of Directors after consideration of various factors, which include the Corporation’s financial condition and results of operations, investment opportunities available to the Corporation, capital requirements, tax considerations and general economic conditions. The primary source of funds available to the parent company is the payment of dividends by its subsidiary bank. Federal and State banking laws restrict the amount 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 ninety consecutive years.

Share Repurchases

The table below summarizes the number of shares of our common stock that were repurchased during the three months ended December 31, 2018 on behalf of the 2013 Omnibus Incentive Plan Restricted Stock Awards.

Month Ended	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Share Purchased as Part of Publicly Announced Plans	[Maximum Number/Approximate Dollar Value] of Shares That May Still Be Purchased under the Plan
October 31, 2018	815	21.7100	815	119,914
November 30, 2018	6,129	22.9529	6,129	113,785
December 31, 2018	6,372	23.1732	6,372	107,413
Total	13,316	22.9823	13,316

Securities Authorized for Issuance Under Equity Compensation Plans

The following table presents information as of December 31, 2018, with respect to shares of common stock of the Corporation that may be issued under the Key Individual Stock Option Plan, the Directors and Executive Officers Stock Purchase Plan, and the 2013 Omnibus Incentive Plan. No additional option shares can be granted under the Key Individual Stock Option Plan. During 2018, 13,316 shares of restricted stock were issued under the 2013 Omnibus Incentive 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 shareholders(1)		0	$	0.00		317,754
Equity compensation plans not approved by shareholders(2)		0		0.00		0
Total		0	$	0.00		317,754

(1) The Key Individual Stock Option Plan, the Directors and Executive Officers Stock Purchase Plan, and the 2013 Omnibus Incentive 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.

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Performance Graph

The following graph compares the cumulative total shareholder return of the Corporation’s common stock with SNL’s Southeast Bank Index, SNL Bank $500M - $1B Index, the S&P 500 Index and the NASDAQ Composite Index. SNL’s Southeast Bank Index is a compilation of the total return to shareholders over the past five years of a group of 74 banks located in the southeastern states of Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia. The SNL Bank $500M - $1B Index is a compilation of the total return to shareholders over the past five years of a group of 36 banks in the United States with assets between $500 million and $1 billion. The comparison assumes $100 was invested January 1, 2013, 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, 2012.

The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of possible future performance of the Corporation’s common stock.

 

			Period Ending
Index	12/31/13		12/31/14		12/31/15		12/31/16		12/31/17		12/31/18
Southwest Georgia Financial Corporation		100.00		127.09		144.90		186.54		228.80		197.50
SNL Bank $500M - $1B Index		100.00		109.71		123.83		167.20		203.98		196.88
SNL Southeast Bank Index		100.00		112.63		110.87		147.18		182.06		150.42
S&P 500 Index		100.00		113.69		115.26		129.05		157.22		150.33
NASDAQ Composite Index		100.00		114.75		122.74		133.62		173.22		168.30

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 trust, retail brokerage and insurance services. In December 2017, the Bank dissolved its commercial mortgage banking services subsidiary, Empire Financial Services. Our primary market area incorporates Colquitt County, where we are headquartered, as well as Baker, Worth, Lowndes, and Tift Counties, each contiguous with Colquitt County, and the surrounding counties of southwest Georgia. We have six full service banking facilities each with a deposit automation teller machine, and nine In-Lobby teller machines throughout the six branches.

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 our markets and geographic expansion will provide us with a competitive advantage. To that end, about seven years ago, we began expanding geographically in Valdosta, Georgia, with two full-service banking centers, and added a commercial banking center in August 2014. Continuing to expand our geographic footprint, a loan production office was opened in the neighboring community of Tifton, Georgia, in January 2016. The loan production office was closed upon completion of a new full-service banking center in Tifton, Georgia, that was opened in August 2018. We 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.

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. 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, fees on customer accounts, and trust and retail brokerage services through our Wealth Strategies division. In 2018, noninterest income, at 16.1% of the Corporation’s total revenue, decreased mostly due to lower income from mortgage banking services when compared with 2017.

Our profitability is also impacted 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.

At the end of 2018, the Corporation’s nonperforming assets decreased to $1.33 million from $2.43 million at December 31, 2017, due to decreases of $470 thousand in nonaccrual loans and a decrease of $631 thousand in foreclosed assets when compared to the end of 2017.  

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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, 2018, 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 Corporation’s 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, 2018, net income was $4.65 million, up $840 thousand from net income of $3.81 million for 2017. The increase in net income is primarily due to the lower income tax rates based on the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) resulting in a $951 thousand decrease to the provision for income taxes. Net interest income for 2018 increased $1.33 million to $18.57 million due primarily to a $2.46 million increase in interest income and fees on loans compared with last year. Growth in net interest income more than offset the $804 thousand increase in noninterest expense due mostly to higher employee, advertising, telephone, and depreciation expenses related to the Tifton and Valdosta expansions. Provision for loan losses increased $530 thousand when compared to 2017, which reflected our strong loan growth. Noninterest income also decreased $106 thousand mainly due to lower income from mortgage banking services. Net income was $1.83 per diluted share for 2018 compared with a net income of $1.49 per diluted share for 2017.

For the year ended December 31, 2017, net income was $3.81 million, down $226 thousand from net income of $4.03 million for 2016. The decline in net income is due to the revaluation of net deferred tax assets based on the enactment of the Tax Act resulting in a $419 thousand impact to provision for income taxes. Absent the deferred tax impairment, net income would have been $4.23 million, or a 4.8% increase compared with the full year 2016. Net interest income for 2017 increased $1.44 million to $17.24 million due primarily to a $1.50 million increase in interest income and fees on loans compared with last year. Growth in net interest income more than offset the $915 thousand increase in noninterest expense due in large part to higher professional fees, migration to a new core processing provider, and investment in personnel. Noninterest income also decreased $147 thousand mainly due to lower income from mortgage banking services. Net income was $1.49 per diluted share for 2017 compared with a net income of $1.58 per diluted share for 2016. Excluding the deferred tax impairment, net income would have been $1.66 per diluted share for 2017.

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

	2018			2017			2016
Return on average total assets		0.91	%		0.80	%		0.94	%
Return on average shareholders’ equity		11.04	%		9.41	%		10.51	%
Average shareholders’ equity to average total assets		8.24	%		8.55	%		8.90	%
Net interest margin (tax equivalent)		3.99	%		4.09	%		4.14	%

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Net Interest Income

Net interest income after provision for loan losses increased $798 thousand, or 4.71%, to $17.74 million for 2018 when compared with 2017. Total interest income increased $2.75 million which more than offset an increase in total interest expense of $1.42 million. The Corporation recognized a $830 thousand provision for loan losses in 2018, a $530 thousand increase compared with $300 thousand in 2017. Interest income and fees on loans increased $2.46 million when compared with 2017 resulting from growth in average loans of $32.2 million. Also, interest income on investment securities decreased by $18 thousand mainly due to a decrease in average investment securities volume of $7.5 million compared with 2017. Interest on deposits in other banks also increased $290 thousand compared with the same period last year. Partially offsetting these increases in net interest income, interest paid on deposits increased $1.23 million to $2.38 million and interest paid on total borrowings increased by $190 thousand when compared with the prior year. The average rate paid on average time deposits of $87.5 million increased 41 basis points when compared with 2017. These rate increases were primarily driven by rising rates in our markets.

Net interest income after provision for loan losses increased $1.30 million, or 8.3%, to $16.94 million for 2017 when compared with 2016. Total interest income increased $1.73 million which more than offset an increase in total interest expense of $290 thousand. The Corporation recognized a $300 thousand provision for loan losses in 2017, a $140 thousand increase compared with $160 thousand in 2016. Interest income and fees on loans increased $1.50 million when compared with 2016 resulting from growth in average loans of $36.7 million. Also, interest income on investment securities increased $104 thousand mainly due to an increase in average investment securities volume of $3.3 million compared with 2016. Interest on deposits in other banks also increased $92 thousand compared with the same period last year. Partially offsetting these increases in net interest income, interest paid on deposits increased $218 thousand to $1.15 million and interest paid on total borrowings increased by $72 thousand when compared with the prior year. The average rate paid on average time deposits of $79.8 million increased 11 basis points when compared with 2016.

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 decreased 10 basis points to 3.99% for 2018 when compared with 2017. The decrease in net interest margin was attributed to a decrease in the tax equivalency adjustment to our tax-free bond portfolio necessitated by lower tax rates as well as increased volume and rate paid on interest bearing liabilities of 33 basis points while the rate earned on earning assets for the year decreased by 17 basis points. Net interest margin was 4.09% for 2017, a 5 basis point decrease from 4.14% in 2016.

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:

	2018						2017						2016
	(Dollars in thousands)
	Amount			% Change			Amount			% Change			Amount		% Change
Service charges on deposit accounts	$	1,015			1.0	%	$	1,005			(7.5	)%	$	1,086		(3.1	)%
Income from trust services		235			7.3			219			4.3			210		(14.3	)
Income from retail brokerage services		399			10.2			362			5.9			342		(18.8	)
Income from insurance services		1,604			5.3			1,523			3.0			1,478		7.7
Income from mortgage banking services		2			(98.7	)		155			(56.2	)		354		11.3
Gain (loss) on the sale or disposition of assets		(80	)		NM			(9	)		NM			38		72.7
Gain (loss) on the sale of securities		(165	)		NM			187			10.7			169		NM
Gain on extinguishment of debt		318			NM			0			NM			0		NM
Other income		879			1.0			870			11.3			782		3.4
Total noninterest income	$	4,207			(2.5	)%	$	4,312			(3.3	)%	$	4,459		4.7	%

*NM = not meaningful

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For 2018, noninterest income was $4.21 million, down from $4.31 million in the same period of 2017. The decrease was primarily attributed to a decline in income from mortgage banking services of $153 thousand compared with 2017. Commercial mortgage banking fees from Empire ceased as the entity was dissolved in late 2017. A loss on the disposition of assets of $80 thousand was recognized in 2018 compared with a loss of $9 thousand in 2017. A loss on the sale of securities of $165 thousand was recognized in 2018 compared with a gain of $187 thousand in 2017. These decreases were offset by increases in income from insurance services, income from retail brokerage services, income from trust services, service charges on deposit accounts, and other income of $80 thousand, $37 thousand, $16 thousand, $10 thousand, and $9 thousand, respectively, when compared with 2017. The Corporation also recognized a $318 thousand gain on the extinguishment of debt in 2018 compared with a $0 gain recognized in 2017.

For 2017, noninterest income was $4.31 million, down from $4.46 million in the same period of 2016. The decrease was primarily attributed to a decline in income from mortgage banking services of $199 thousand compared with 2016. Commercial mortgage banking fees from Empire ceased as the entity was dissolved in late 2017. Service charges on deposit accounts also decreased $81 thousand compared with 2016. A loss on the disposition of assets of $9 thousand was recognized in 2017 compared with a gain of $38 thousand in 2016. These decreases were partially offset by increases in other income, income from insurance services and income from retail brokerage services of $88 thousand, $45 thousand, and $20 thousand, respectively, when compared with 2016. Gain on the sale of securities increased $18 thousand to $187 thousand compared with 2016. Also, income from trust services increased $9 thousand compared with 2016.

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:

	2018					2017					2016
	(Dollars in thousands)
	Amount		% Change			Amount		% Change			Amount		% Change
Salaries and employee benefits	$	9,725		5.1	%	$	9,251		5.5	%	$	8,766		10.8	%
Occupancy expense		1,195		6.3			1,124		(1.4	)		1,140		1.7
Equipment expense		933		9.8			850		(1.3	)		861		(6.7	)
Data processing expense		1,445		(4.5	)		1,513		10.6			1,368		11.8
Amortization of intangible assets		16		0.0			16		0.0			16		0.0
Other operating expenses		3,320		8.0			3,075		11.3			2,763		(2.4	)
Total noninterest expense	$	16,634		5.1	%	$	15,829		6.1	%	$	14,914		6.3	%

Noninterest expense increased $804 thousand to $16.6 million in 2018 compared with the same period in 2017. Salaries and employee benefits increased $474 thousand when compared with 2017 as a result of staffing expansion in the Tifton and Valdosta markets and greater incentive based income. Other operating expense increased $245 thousand compared with 2017 due primarily to higher telephone expense, advertising expense, and employee training expenses also related to expansion in the Tifton and Valdosta markets. Occupancy expense increased $71 thousand and equipment expense increased $83 thousand compared with 2017 primarily due to additional depreciation expense on the new bank building and equipment in Tifton. Data processing expense decreased $68 thousand compared with 2017 largely related to the front-end core processor migration expenses incurred in 2017.

For 2017, noninterest expense increased $915 thousand to $15.83 million compared with the same period in 2016. Salaries and employee benefits increased $485 thousand when compared with 2016 as a result of staffing expansion in the Tifton and Valdosta markets and greater incentive based income. Data processing expense also increased $146 thousand compared with 2016 largely related to the core processor migration as well. Partially offsetting these increases were decreases in occupancy and equipment expense of $16 thousand and $11 thousand, respectively, compared with 2016.

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The efficiency ratio, (noninterest expense divided by total noninterest income plus tax equivalent net interest income), a measure of productivity, increased to 71.9% for 2018 when compared with 70.8% for 2017 and 70.6% for year ending 2016. The efficiency ratio increased slightly during 2018 due to increased operating expenses as we expanded into the Tifton, Georgia market, increased interest expense as we paid higher rates on interest bearing deposit accounts, and the tax equivalent adjustment on tax-free loans and investment securities declined due to the reduction in the corporate income tax rate from 34% to 21%. The improvement in the efficiency ratio for 2017 resulted from the large growth in interest income when compared with 2016.

Income Tax Expense

The Corporation had an expense of $668 thousand for income taxes in 2018 compared with an expense of $1.62 million in 2017 and $1.15 million for the year ending December 31, 2016. These amounts resulted in an effective tax rate of 12.6%, 29.8%, and 22.2%, for 2018, 2017, and 2016, 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 our primary source of income.

Total average assets increased $37.1 million to $510.5 million in 2018 compared with 2017. The increase in total average assets is primarily attributable to an increase in average loans of $32.2 million. Average investment securities decreased by $7.5 million to $100.2 million while interest-bearing deposits with other banks increased by $7.8 million. The Corporation’s earning assets, which include loans, investment securities, certificates of deposit with other banks and interest-bearing deposits with banks, averaged $474.9 million in 2018, a 7.5% increase from $441.9 million in 2017. The average volume for total deposits increased $29.5 million mostly due to an increase in new interest-bearing business account deposits of $21.3 million and time deposit accounts of $7.7 million compared with the prior year. For 2018, average earning assets were comprised of 73% loans, 21% investment securities, and 6% deposit balances with banks. The ratio of average earning assets to average total assets decreased slightly to 93.0% for 2018 compared with 93.3% for 2017.

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 2018, average net loans represented 73% of average earning assets and 68% of average total assets.

The composition of the Corporation’s loan portfolio at December 31, 2018, 2017, and 2016 was as follows:

	2018						2017						2016
	(Dollars in thousands)
Category	Amount			% Change			Amount			% Change			Amount			% Change
Commercial, financial, and agricultural	$	88,403			20.9	%	$	73,146			3.0	%	$	70,999			22.1	%
Real estate:
Construction		24,891			11.7			22,287			(14.3	)		25,999			31.1
Commercial		123,477			16.0			106,458			16.1			91,733			6.9
Residential		103,348			4.2			99,160			19.1			83,271			22.5
Agricultural		31,562			24.4			25,374			53.0			16,580			6.2
Consumer & other		5,086			35.0			3,767			(4.9	)		3,961			15.3
Total loans	$	376,767			14.1		$	330,192			12.9		$	292,543			16.6
Unearned interest and discount		(17	)		(5.6	)		(18	)		5.3			(19	)		0.0
Allowance for loan losses		(3,429	)		12.6			(3,044	)		2.6			(3,124	)		3.0
Net loans	$	373,321			14.1	%	$	327,130			13.0	%	$	289,400			16.8	%

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Total year-end balances of loans increased $46.6 million while average total loans increased $32.2 million in 2018 compared with 2017. Construction, commercial, residential, and agricultural real estate loan categories as well as commercial, financial, agricultural, consumer, and other loans experienced growth in 2018. The ratio of total loans to total deposits at year end decreased to 82.7% in 2018 compared with 83.2% in 2017. The loan portfolio mix at December 31, 2018 consisted of 6.6% loans secured by construction real estate, 32.8% loans secured by commercial real estate, 27.4% of loans secured by residential real estate, and 8.4% of loans secured by agricultural real estate. The loan portfolio also included other commercial, financial, and agricultural purposes of 23.5% and installment loans to individuals for consumer purposes of 1.3%.

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, 2018.

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 non-accruing, past due, and other potentially impaired loans that have been identified as possible problems.

The allowance for loan losses was $3.429 million, or 0.9% of total loans outstanding, as of December 31, 2018. This level represented an $385 thousand increase from the corresponding 2017 year-end amount, which was also .9% of total loans outstanding.

There was a provision for loan losses of $830 thousand in 2018 compared with a provision for loan losses of $300 thousand in 2017. See Part I, Item 1, “Table 4 – Loan Portfolio” 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 for excess liquidity that is not needed for 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 18.1% of our assets. The portfolio includes 48% of U.S. government agency securities, 40% state, county and municipal securities, 12% of U.S. government sponsored pass-thru residential mortgage-backed securities, and 1% of U.S. government treasury securities.

The following table summarizes the contractual maturity of investment securities at their carrying values as of December 31, 2018:

Amounts Maturing In:	Securities Available for Sale		Securities Held to Maturity		Total
	(Dollars in thousands)
One year or less	$	2,125	$	6,483	$	8,608
After one through five years		29,674		12,885		42,559
After five through ten years		20,968		11,035		32,003
After ten years		5,547		6,424		11,971
Total investment securities	$	58,314	$	36,827	$	95,141

-41- 

At December 31, 2018, the total investment portfolio decreased $3.9 million, down to $95.1 million, compared with $99.0 million at December 31, 2017. The decrease was mainly due to calls and maturities of $11.5 million of municipal securities and U.S. government agency securities as well as residential mortgage-backed securities principal paydowns of $1.6 million. Additionally, we sold $2.9 million of available for sale U.S. government agency securities resulting in a net loss of $165 thousand. Partially offsetting these calls, maturities and sales were purchases of $13.4 million of U.S. government agency securities, municipal securities, and residential mortgage-backed securities.

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 decreased $1.1 million at December 31, 2018 compared with December 31, 2017. Nonaccrual loans decreased $470 thousand compared with 2017, and foreclosed assets decreased $630 thousand compared with 2017. Nonperforming assets were approximately $1.3 million, or 0.25% of total assets as of December 31, 2018, compared with $2.4 million, or 0.50% of total assets at December 31, 2017.

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 2018, average deposits increased from $390.5 million in 2017 to $419.9 million. This average deposit growth occurred primarily in new interest-bearing business checking accounts and money market deposits while noninterest-bearing accounts remained flat. As of December 31, 2018, the Corporation’s balance of certificates of deposit of $250,000 or more decreased to $16.3 million from $22.7 million at the end of 2017.

We have used borrowings from the Federal Home Loan Bank to support our residential mortgage lending activities. During 2018, the Corporation borrowed $12 million in fixed rate credit advances, $5 million in daily rate credit, repaid $16.8 million of the fixed-rate and daily rate advances, and made annual installment payments of $6.2 million on five principal reducing credit advances from the Federal Home Loan Bank. The Corporation also and made additional payments of $9.1 million for the early retirement of two principal reducing credit advances from the Federal Home Loan Bank and recognized a gain of $318 thousand. During 2019, we expect to make annual installment payments totaling $3.6 million on principal reducing credit advances and payoff other advances of approximately $8 million. Total long-term advances with the Federal Home Loan Bank were $21.2 million at December 31, 2018. Details on the Federal Home Loan Bank advances are presented in Notes 7 and 8 of the Corporation’s Consolidated Financial Statements.

Liquidity

Liquidity is managed to assume that the Bank 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 Corporation is a separate entity from the Bank and provides for its own liquidity. The Corporation is responsible for the payment of dividends declared for shareholders, and interest and principal on its outstanding debt. Substantially, all of the Corporation’s liquidity is obtained from dividends from the Bank.

-42- 

The Consolidated Statement of Cash Flows details the Corporation’s cash flows from operating, investing, and financing activities. During 2018, operating and financing activities provided cash flows of $48.6 million, while investing activities used $47.2 million resulting in an increase in cash and cash equivalents balances of $1.4 million.

Liability liquidity represents our ability to renew or replace our short-term borrowings and deposits as they mature or are withdrawn. The Bank’s deposit mix includes a significant amount of core deposits. Core deposits are defined as total deposits less time deposits of $250,000 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 96.4% of total deposits on December 31, 2018 and 94.3% of total deposits on December 31, 2017.

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 Bank had $8.6 million of investment securities maturing within one year or less on December 31, 2018, which represented 9.0% of the investment debt securities portfolio. Also, the Bank has $3.5 million of U.S. government agency securities callable at the option of the issuer within one year and approximately $1.9 million of expected annual cash flow in principal reductions from payments of mortgage-backed securities.

During 2018 and 2017, no U.S. government agency securities with call features were called. 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, 2018.

The majority of the Corporation’s outstanding contractual obligations are long-term debt. The remaining contractual are comprised of purchase obligations for data processing services and a rental agreement for our loan production office in Tifton, Georgia. We have no capital lease obligations.

	Payments Due by Period
	(Dollars in thousands)
Contractual Obligations	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Long-term debt	$	21,171	$	0	$	12,314	$	5,857	$	3,000
Operating leases		10		5		5		0		0
Total contractual obligations	$	21,181	$	5	$	12,319	$	5,857	$	3,000

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 and are unconditionally cancelable. 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:	2018		2017
	(Dollars in thousands)
Commitments to extend credit	$	39,418	$	24,706
Standby letters of credit	$	4,343	$	3,135

The Corporation does not have any special purpose entities or off-balance sheet financing payment obligations.

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Capital Resources and Dividends

Our average equity to average assets ratio was 8.24% in 2018 and 8.55% in 2017. At December 31, 2018, we were well in excess of all applicable minimum capital requirements under the guidelines with a common equity Tier 1 capital ratio of 11.97%, Tier I risk-based capital ratio of 11.97%, Total risk-based capital ratio of 12.87%, and a leverage ratio of 8.62%. 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 at December 31, 2018 and 2017 in comparison to both the minimum regulatory guidelines and the minimum for well capitalized:

	Southwest Georgia Financial Corporation						Southwest Georgia Bank
Risk-Based Capital Ratios	2018			2017			2018			2017			Minimum Regulatory Guidelines			Minimum For Well Capitalized
Common Equity Tier 1		11.97	%		12.74	%		11.44	%		12.02	%		4.50	%	≥  6.50%
Tier I capital		11.97	%		12.74	%		11.44	%		12.02	%		6.00	%	≥  8.00%
Total risk-based capital		12.87	%		13.65	%		12.34	%		12.93	%		8.00	%	≥ 10.00%
Leverage		8.62	%		8.79	%		8.24	%		8.29	%		4.00	%	≥  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’s Board of Directors. 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.

-44- 

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 GAAP.

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, 2018. 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 GAAP and include, as necessary, best estimates and judgments by management.

/s/ DeWitt Drew	/s/ Karen T. Boyd
DeWitt Drew	Karen T. Boyd
President and Chief Executive Officer	Senior Vice President and Treasurer
(Principal Executive Officer)	(Principal Financial Officer)

March 29, 2019

   

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SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2018 and 2017

	2018			2017
ASSETS
Cash and due from banks	$	14,050,682		$	11,143,494
Interest-bearing deposits in other banks		21,448,110			22,994,927
Cash and cash equivalents		35,498,792			34,138,421
Certificates of deposit in other banks		2,732,000			1,985,000
Investment securities available for sale, at fair value		58,313,577			54,263,261
Investment securities to be held to maturity (fair value
approximates $37,010,327 and $45,147,800)		36,827,073			44,590,841
Federal Home Loan Bank stock, at cost		1,820,300			2,438,200
Loans, net of allowance for loan losses of $3,428,869 and
$3,043,632		373,321,368			327,129,758
Premises and equipment, net		14,573,974			12,249,518
Bank property held for sale		0			211,500
Foreclosed assets, net		127,605			758,878
Intangible assets		3,907			19,532
Bank owned life insurance		6,779,242			6,553,318
Other assets		4,835,329			4,734,148
Total assets	$	534,833,167		$	489,072,375
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Interest bearing business checking	$	28,070,871		$	0
NOW accounts		35,816,115			25,871,273
Money market		158,730,044			129,040,471
Savings		31,848,588			30,793,864
Certificates of deposit $250,000 and over		16,264,681			22,662,235
Other time accounts		81,214,376			60,969,445
Total interest-bearing deposits		351,944,675			269,337,288
Noninterest-bearing deposits		103,694,910			127,668,471
Total deposits		455,639,585			397,005,759
Short-term borrowed funds		10,457,143			17,971,429
Long-term debt		21,171,429			29,057,143
Other liabilities		3,946,066			3,895,058
Total liabilities		491,214,223			447,929,389
Shareholders’ equity:
Common stock – $1 par value, 5,000,000 shares authorized,
2,545,776 shares and 4,293,835 shares issued for 2018 and 2017		2,545,776			4,293,835
Additional paid-in capital		18,418,995			31,701,533
Retained earnings		24,841,569			33,020,030
Accumulated other comprehensive loss		(2,187,396	)		(1,629,619	)
Treasury stock, at cost, 0 shares for 2018 and 1,752,330 for 2017		(0	)		(26,242,793	)
Total shareholders’ equity		43,618,944			41,142,986
Total liabilities and shareholders’ equity	$	534,833,167		$	489,072,375

See accompanying notes to consolidated financial statements.

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SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

for the years ended December 31, 2018, 2017, and 2016

	2018			2017			2016
Interest income:
Interest and fees on loans	$	18,762,728		$	16,299,091		$	14,796,649
Interest on debt securities:  Taxable		1,363,123			1,286,473			1,170,259
Interest on debt securities:  Tax-exempt		1,090,871			1,228,479			1,253,064
Dividends		144,856			102,360			89,840
Interest on deposits in other banks		484,724			195,032			103,244
Interest on certificates of deposit in other banks		47,870			34,879			52
Total interest income		21,894,172			19,146,314			17,413,108
Interest expense:
Deposits		2,383,524			1,153,609			935,291
Federal funds purchased		1,097			1,068			10
Other short-term borrowings		395,989			224,144			103,567
Long-term debt		541,804			523,344			573,225
Total interest expense		3,322,414			1,902,165			1,612,093
Net interest income		18,571,758			17,244,149			15,801,015
Provision for loan losses		829,500			300,000			160,000
Net interest income after provision
for loan losses		17,742,258			16,944,149			15,641,015
Noninterest income:
Service charges on deposit accounts		1,015,498			1,005,270			1,086,268
Income from trust services		234,649			218,657			209,755
Income from brokerage services		399,278			362,416			342,051
Income from insurance services		1,603,557			1,523,309			1,477,663
Income from mortgage banking services		2,475			155,053			354,627
Net gain (loss) on sale or disposition of assets		(79,529	)		(9,022	)		38,165
Net gain (loss) on sale of securities		(165,369	)		186,610			168,919
Net gain on extinguishment of debt		317,832			0			0
Other income		878,340			870,229			781,811
Total noninterest income		4,206,731			4,312,522			4,459,259
Noninterest expense:
Salaries and employee benefits		9,724,826			9,250,777			8,765,865
Occupancy expense		1,194,552			1,124,028			1,140,600
Equipment expense		933,485			850,376			860,935
Data processing expense		1,445,215			1,513,630			1,367,569
Amortization of intangible assets		15,625			15,625			15,625
Other operating expenses		3,319,751			3,074,843			2,763,227
Total noninterest expenses		16,633,454			15,829,279			14,913,821
Income before income taxes		5,315,535			5,427,392			5,186,453
Provision for income taxes		668,416			1,619,900			1,152,476
Net income	$	4,647,119		$	3,807,492		$	4,033,977
Basic earnings per share:
Net income	$	1.83		$	1.49		$	1.58
Weighted average shares outstanding		2,545,565			2,547,421			2,547,778
Diluted earnings per share:
Net income	$	1.83		$	1.49		$	1.58
Weighted average shares outstanding		2,545,565			2,547,422			2,547,778

See accompanying notes to consolidated financial statements.

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SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

for the years ended December 31, 2018, 2017, and 2016

	2018			2017			2016
Net income	$	4,647,119		$	3,807,492		$	4,033,977
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities
available for sale		(830,815	)		326,684			(704,188	)
Reclassification adjustment for (gain) loss realized
in income on securities available for sale		165,369			(186,610	)		(144,034	)
Unrealized gain (loss) on pension plan benefits		(40,601	)		503,167			(110,306	)
Federal income tax (benefit) expense		(148,270	)		486,869			(325,900	)
Other comprehensive income (loss), net of tax		(557,777	)		156,372			(632,628	)
Total comprehensive income	$	4,089,342		$	3,963,864		$	3,401,349

See accompanying notes to consolidated financial statements.

-48- 

 SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

for the years ended December 31, 2018, 2017, and 2016

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity
Balance at Dec. 31, 2015	$	4,293,835		$	31,701,533		$	27,369,480		$	(1,153,363	)	$	(26,113,795	)	$	36,097,690
Net Income		—			—			4,033,977			—			—			4,033,977
Comprehensive income (loss):
Changes in net gain on securities available for sale		—			—			—			(559,826	)		—			(559,826	)
Changes in net loss on pension plan benefits		—			—			—			(72,802	)		—			(72,802	)
Cash dividend declared $.42 per share		—			—			(1,070,047	)		—			—			(1,070,047	)
Purchase of 400 shares of treasury stock		—			—			—			—			(6,658	)		(6,658	)
Balance at Dec. 31, 2016		4,293,835			31,701,533			30,333,410			(1,785,991	)		(26,120,453	)		38,422,334
Net Income		—			—			3,807,492			—			—			3,807,492
Comprehensive income (loss):
Changes in net gain on securities available for sale		—			—			—			93,675			—			93,675
Changes in net gain on pension plan benefits		—			—			—			62,697			—			62,697
Cash dividend declared $.44 per share		—			—			(1,120,872	)		—			—			(1,120,872	)
Purchase of 5,932 shares of treasury stock		—			—			—			—			(122,340	)		(122,340	)
Balance at Dec. 31, 2017	$	4,293,835		$	31,701,533		$	33,020,030		$	(1,629,619	)	$	(26,242,793	)	$	41,142,986
Adjustment to correct immaterial misstatement of deferred compensation expense and cash surrender value in prior periods								(128,647	)								(128,647	)
Net Income		—			—			4,647,119			—			—			4,647,119
Comprehensive income (loss):
Changes in net gain on securities available for sale		—			—			—			(525,702	)		—			(525,702	)
Changes in net gain on pension plan benefits		—			—			—			(32,075	)		—			(32,075	)
Cash dividend declared $.47 per share		—			—			(1,196,332	)		—			—			(1,196,332	)
Purchase of 13,316 shares of treasury stock														(306,032	)		(306,032	)
Issue of restricted stock awards					(306,032	)								306,032
Stock-based compensation		—			17,627			—			—			—			17,627
Retirement of treasury stock		(1,748,059	)		(12,994,133	)		(11,500,601	)		—			26,242,793			—
Balance at Dec. 31, 2018	$	2,545,776		$	18,418,995		$	24,841,569		$	(2,187,396	)	$	0		$	43,618,944

See accompanying notes to consolidated financial statements.

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SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the years ended December 31, 2018, 2017, and 2016

Cash flows from operating activities:	2018			2017			2016
Net income	$	4,647,119		$	3,807,492		$	4,033,977
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses		829,500			300,000			160,000
Depreciation		1,036,986			881,000			923,578
Net amortization of investment securities		356,101			396,899			309,185
Income on cash surrender value of bank owned life insurance		(147,824	)		(133,398	)		(125,290	)
Amortization of intangibles		15,625			15,625			15,625
Disposal of fixed assets to charitable expense		0			13,045			0
Loss (gain) on sale/writedown of foreclosed assets		(17,974	)		8,892			0
Net loss (gain) on disposal of fixed assets		753			1,594			(36,701	)
Net loss (gain) on sale of securities		165,369			(186,610	)		(168,919	)
Net loss on disposal of bank property held for sale		96,750			0			0
Net gain on extinguishment of debt		(317,832	)		0			0
Stock-based compensation		17,627			0			0
Change in:
Other assets		71,733			489,903			(253,894	)
Other liabilities		(193,157	)		288,505			324,142
Net cash provided by operating activities		6,560,776			5,882,947			5,181,703
Cash flows from investing activities:
Proceeds from calls, paydowns and maturities of securities HTM		12,252,434			10,070,453			5,952,271
Proceeds from calls, paydowns and maturities of securities AFS		795,028			635,818			10,354,337
Proceeds from Federal Home Loan Bank Stock repurchase		1,164,500			705,100			413,700
Proceeds from sale of securities available for sale		2,879,000			5,741,211			11,933,634
Proceeds from sale of securities held to maturity		0			0			576,834
Proceeds from maturity of  certificates of deposit in other banks		0			0			245,000
Purchase of securities held to maturity		(4,637,047	)		(265,000	)		(478,559	)
Purchase of securities available for sale		(8,762,879	)		(7,039,139	)		(25,129,827	)
Purchase of Federal Home Loan Bank Stock		(546,600	)		(1,269,100	)		(418,700	)
Purchase certificates of deposit in other banks		(747,000	)		(1,985,000	)		0
Net change in loans		(47,511,765	)		(38,895,975	)		(41,850,494	)
Purchase bank owned life insurance		0			(1,063,237	)		0
Purchase of premises and equipment		(3,382,015	)		(1,955,067	)		(1,455,043	)
Proceeds from sales of fixed assets and foreclosed assets		1,131,894			233,553			304,825
Proceeds from the sale of bank property held for sale		114,750			0			0
Net cash used by investing activities		(47,249,700	)		(35,086,383	)		(39,552,022	)
Cash flows from financing activities:
Net change in deposits		58,633,827			25,512,772			32,477,143
Payment of short-term portion of long-term debt		(22,971,429	)		(13,447,619	)		(7,590,476	)
Payments for early retirement of long-term debt		(9,110,739	)		0			0
Proceeds from issuance of short-term debt		8,000,000			7,857,143			857,143
Proceeds from issuance of long-term debt		9,000,000			18,142,857			5,142,857
Cash dividends paid		(1,196,332	)		(1,120,872	)		(1,070,047	)
Payments for treasury stock		(306,032	)		(122,340	)		(6,658	)
Net cash provided by financing activities		42,049,295			36,821,941			29,809,962
Increase (decrease) in cash and cash equivalents		1,360,371			7,618,505			(4,560,357	)
Cash and cash equivalents - beginning of period		34,138,421			26,519,916			31,080,273
Cash and cash equivalents - end of period	$	35,498,792		$	34,138,421		$	26,519,916

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

	2018			2017		2016
CASH PAID DURING THE YEAR FOR:
Income taxes	$	365,000		$	895,000	$	964,000
Interest paid	$	3,246,847		$	1,881,924	$	1,600,593
NONCASH ITEMS:
Increase in foreclosed properties and decrease in loans	$	503,655		$	903,842	$	44,963
Unrealized gain (loss) on securities AFS	$	(665,446	)	$	140,074	$	(848,222	)
Unrealized gain (loss) on pension plan benefits	$	(40,601	)	$	503,167	$	(110,306	)
Net reclass between short and long-term debt	$	7,457,143		$	15,114,286	$	7,590,476
Sale of fixed assets through loans	$	13,000		$	0	$	0
Sale of foreclosed properties through loans	$	0		$	38,000	$	0
Property moved from fixed assets to property held for sale	$	0		$	0	$	211,500
Retirement of treasury stock	$	26,242,793		$	0	$	0

See accompanying notes to consolidated financial statements.

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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 (the “Corporation”) and its direct and indirect subsidiaries, including its wholly-owned banking subsidiary, Southwest Georgia Bank (the “Bank”), conform to U.S. generally accepted accounting principles (“GAAP”) 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 the Corporation and its direct and indirect subsidiaries. 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 entity 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. In addition to conventional banking services, the Corporation provides investment planning and management, trust management, and commercial and individual insurance products. Insurance products and advice are provided by the Bank’s Southwest Georgia Insurance Services Division.

The Corporation’s primary business is providing banking services through the Bank to individuals and businesses principally in the counties of Colquitt, Baker, Worth, Lowndes, Tift and the surrounding counties of southwest Georgia. The Bank operates six branch offices in its trade area. Trust and retail brokerage services are offered at an office building located at 25 2nd Avenue SW in Moultrie, and lending services are offered in Valdosta at 3520 North Valdosta Road.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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 (the “FDIC”) up to $250,000. There were uninsured deposits of $61,822 at December 31, 2018.

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Investment Securities

Investment 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 are classified as available for sale and recorded at fair value with unrealized gains and losses (net of tax effect) 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-temporarily impaired 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.

Bank Property Held for Sale

In 2016, the Bank’s former branch in Pavo, Georgia, was transferred from premises to bank property held for sale and depreciation was discontinued. The property was booked at the lower of cost or market value based on the current appraisal of $211,500. On November 30, 2018, the Corporation sold this property and recorded a loss in the amount of $96,750.

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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 collectability of loans and prior loss experience. This evaluation takes into consideration such factors as changes in the nature and volume of the loan portfolios, current economic conditions that may affect the borrowers’ ability to pay, overall portfolio quality, and review of specific problem loans.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based upon changes in economic conditions. Also, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

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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 fair market value less costs to sell 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. There was no valuation allowance for foreclosed asset losses at December 31, 2018. Foreclosed assets totaled $127,605 at December 31, 2018, down from $758,878 at December 31, 2017.

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 will fully amortize in March 2019.

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 direct and indirect 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 Bank owns 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. The beneficial aspects of these life insurance policies are tax-free earnings and a tax-free death benefit, which are realized by the Bank as the owner of the policies. The cash surrender value of these policies is included as an asset on the balance sheet, and any increases in cash surrender value are recorded as noninterest income on the statement of income. At December 31, 2018 and 2017, the policies had a value of $6,779,242 and $6,553,318, respectively, and were 15.5% and 15.9%, respectively, of shareholders’ equity. These values are within regulatory guidelines.

Income Taxes

The Corporation and its direct and indirect 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.

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The Corporation reports income under the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 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, 2016 and subsequent years. 

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) includes all changes in shareholders’ equity during a period, except those resulting from transactions with shareholders. Besides net income, other components of the Corporation’s accumulated other comprehensive income (loss) includes the after tax effect of changes in the net unrealized gain/loss on securities available for sale and the unrealized gain/loss on pension plan benefits.

Trust Department

Trust income is included in the accompanying consolidated financial statements on the cash basis in accordance with established industry practices. Reporting of such fees on the accrual basis would have no material effect on reported income.

Advertising Costs

It is the policy of the Corporation to expense advertising costs as they are incurred. The Corporation does not engage in any direct-response advertising and accordingly has no advertising costs reported as assets on its balance sheet. Costs that were expensed during 2018, 2017, and 2016 were $264,269, $192,016, and $173,595, respectively.

Regulatory Developments

The Corporation and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the federal banking agencies about components, risk weightings and other factors.

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Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum Tier 1 leverage, Tier 1 risk-based capital and Total risk-based capital ratios. In July 2013, the Board of Governors of the Federal Reserve System published the Basel III Capital Rules. These rules establish a comprehensive capital framework applicable to all depository institutions, certain bank holding companies with total consolidated assets below a certain threshold and all and savings and loan holding companies except for those that are substantially engaged in insurance underwriting or commercial activities. These rules implement higher minimum capital requirements for banks and certain bank holding companies, include a new common equity Tier 1 capital requirement and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital.

The Basel III Capital Rules became effective for the Bank on January 1, 2015, subject to a phase-in period, but are not applicable to bank holding companies, like the Corporation, with less than $1 billion in total consolidated assets that meet certain criteria.

The minimum capital level requirements applicable to the Bank under the Basel III Capital Rules are: (i) a common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a Total risk-based capital ratio of 8% (unchanged from the rules effective for the year ended December 31, 2014); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital will consist of retained earnings and common stock instruments, subject to certain adjustments.

The Basel III Capital Rules set forth changes in the methods of calculating certain risk-weighted assets, which in turn affect the calculation of risk-based ratios. The new risk weightings are more punitive for assets held by banks that are deemed to be of higher risk. These changes were also effective beginning January 1, 2015.

The Basel III Capital Rules also introduce a “capital conservation buffer”, which is in addition to each capital ratio and is phased-in over a three-year period beginning in January 2016.

As of December 31, 2018, the Bank is considered to be well-capitalized under the Basel III Capital Rules. There have been no conditions or events since December 31, 2018, that management believes has changed the Bank’s status as “well-capitalized.” The capital ratios of the Corporation and Bank are presented in Note 15 of the Corporation’s Notes to Consolidated Financial Statements.

Adoption of New Accounting Standards

In March 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The purpose of this ASU is to codify the SEC's guidance issued in Staff Accounting Bulletin 118. The amendments in this update were effective upon issuance. The adoption of ASU 2018-05 had no material impact on the Corporation’s consolidated financial statements.

In March 2018, FASB issued ASU 2018-04, Investment - Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273. The purpose of this ASU is to codify the SEC's guidance issued in Staff Accounting Bulletin 117. The amendments in this update were effective upon issuance. The adoption of ASU 2018-04 had no material impact on the Corporation’s consolidated financial statements.

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In February 2018, FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10). This Update clarifies certain aspects of the guidance issued in ASU 2016-01 including (i) an entity measuring an equity security using the measurement alternative may make an irrevocable election to change its measurement approach to a fair value method under Topic 820 for that security and any identical or similar investments of the same issuer, (ii) fair value adjustments under the measurement alternative should be as of the date the observable transaction for a similar security occurred, (iii) requiring the remeasurement of the entire value of forward contracts and purchased options when observable transactions occur on the underlying equity securities, (iv) financial liabilities for which the fair value option is elected should follow the guidance in paragraph 825-10-45-5, (v) changes in the fair value of financial liabilities for which the fair value option is elected relating to the instrument-specific credit risk should first be measured in the currency of denomination and then both components of the change in fair value should be remeasured into the reporting entity's functional currency using end-of-period spot rates, and (vi) the prospective transition approach should only be applied for instances in which the measurement alternative is applied. The guidance was effective for interim periods beginning after June 15, 2018 and may be early adopted provided ASU 2016-01 was adopted. The Company adopted the amendments in this ASU effective January 1, 2018. The adoption of ASU 2018-03 had no material impact on the Corporation’s consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. The adoption of ASU 2017-09 had no material impact on the Corporation’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The updated accounting guidance requires changes to the presentation of the components of net periodic benefit cost on the income statement by requiring service cost to be presented with other employee compensation costs and other components of net periodic pension cost to be presented outside of any subtotal of operating income. This ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2017-07 had no material impact on the Corporation’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which provides a new framework for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption will be permitted and should apply it to transactions that have not been reported in financial statements that have been issued or made available for issuance. The adoption of ASU 2017-01 had no material impact on the Corporation’s consolidated financial statements.

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In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Corporation adopted the amendments in this ASU effective January 1, 2018. The adoption of 2016-01 had no material impact on the Corporation’s consolidated financial statements.

In May 2014, the FASB began issuing guidance to change the recognition of revenue from contracts with customers. The last guidance was issued in February 2017. The standards issued during this time are as follows: ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, and ASU 2017-05 Other Income - Gains and losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This new guidance, which does not apply to financial instruments, provides that revenue should be recognized for the transfer of goods and services to customers in an amount equal to the consideration it receives or expects to receive. The guidance also includes expanded disclosure requirements that provide comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Corporation adopted the amendments in this ASU effective January 1, 2018, using the modified retrospective method. Since there was no change to net income upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not necessary. See below for additional information related to revenue generated from contracts with customers.

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Revenue Recognition

On January 1, 2018, the Corporation adopted ASC Topic 606, using the modified retrospective method. Disclosures of revenue from contracts with customers for periods beginning after January 1, 2018, are presented under ASC Topic 606 and have not materially changed from the prior year amounts. Noninterest income, within the scope of this guidance, is recognized as services are transferred to customers in an amount that reflects the considerations expected to be entitled to in exchange for those services. The Corporation's revenue streams that were in scope include service charges on deposit accounts, income from insurance services, income from trust services, Automated Teller Machine (“ATM”) surcharge and other noninterest income.

Services Charges on Deposit Accounts - Service charges on deposit accounts primarily consist of monthly maintenance charges, analysis charges and Non-sufficient funds (“NSF”) charges. The NSF charges and certain service charges are fixed and the performance obligation is typically satisfied at the time of the related transaction. The consideration for analysis charges and monthly maintenance charges are variable as the fee can be reduced if the customer meets certain qualifying metrics. The Corporation's performance obligations are satisfied either at the time of the transaction or over the course of a month.

Income from Insurance Services – Income from insurance services consists primarily of property and casualty insurance, life, health, and disability insurance. Property and casualty, life, health, and disability insurance includes the brokerage of both personal and commercial coverages. The placement of the policy is completion of the Corporation's performance obligation and revenue is recognized at that time. The Corporation's commission is primarily a percentage of the premium.

Income from Trust Services – Income from Trust services consists of revenue generated from services provided for corporate, pension, and personal trusts, trustee services, and administrative services for employee benefit plans. The Corporation’s performance obligation and revenue is recognized once the service has been performed.

ATM Surcharge - ATM surcharge represents revenues earned from certain terminal activity. ATM surcharges primarily consist of charges assessed to our customers for using a non-Bank ATM or a non-Bank customer using our ATM. Such surcharges generally are recognized concurrently with the delivery of services on a daily basis.

Other - Other noninterest income primarily consists of transaction based revenue where the performance obligation is satisfied concurrent with the revenue recognition.

Recent Accounting Pronouncements

In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. On June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. That methodology replaces the probable, incurred loss model for those assets. The amendments in ASU No. 2018-19 align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements and clarify the scope of the guidance in the amendments in Update 2016-13. The amendments also clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The adoption of ASU 2018-19 is not expected to have a material impact on the Corporation’s consolidated financial statements.

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In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 removes the requirements to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, and the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. The ASU adds requirements to disclose the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and the reasons for significant gains and losses related to changes in the benefit obligation for the period. The update also clarifies the requirements to disclose the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets, and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. This update is effective for fiscal years beginning after December 15, 2020. The adoption of ASU 2018-14 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes the requirements for public entities to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The ASU modifies the disclosure requirement for investments in certain entities that calculate net asset value, and clarifies that the measurement uncertainty disclosure is to communicate measurement uncertainties as of the reporting date. The ASU also requires public entities to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This update is effective for fiscal years beginning after December 15, 2019. The adoption of ASU 2018-13 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 provides guidance on accounting for the effects of the Tax Cuts and Jobs Act, which was enacted in December, 2017. The guidance allows reclassification of the tax effects that were stranded in accumulated other comprehensive income as a result of the tax rate change from accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018. The adoption of ASU 2018-02 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium. The premium on individual callable debt securities shall be amortized to the earliest call date. This guidance does not apply to securities for which prepayments are estimated on a large number of similar loans where prepayments are probable and reasonable estimable. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. This update should be adopted on a modified retrospective basis with a cumulative effect adjustment to retained earnings on the date of adoption. The adoption of ASU 2017-08 is not expected to have a material impact on the Corporation’s consolidated financial statements.

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In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Rather, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323), which incorporates into the FASB ASC recent SEC guidance about disclosing, under SEC Staff Accounting Bulletin, Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The effective date varies as each topic addressed in this ASU has its own effective date. The adoption of ASU 2017-03 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is essentially the final rule on use of the so-called CECL model, or current expected credit losses. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies and other organizations. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2016-13 is being reviewed for any material impact on the Corporation’s consolidated financial statements.

In 2016, the FASB issued ASU 2016-02 – Leases (Topic 842). ASU 2016-02 amends the existing standards for lease accounting effectively requiring most leases be carried on the balance sheets of the related lessees by requiring them to recognize a right-of-use asset and a corresponding lease liability. ASU 2016-02 includes qualitative and quantitative disclosure requirements intended to provide greater insight into the nature of an entity’s leasing activities. The standard must be adopted using a modified retrospective transition with a cumulative-effect adjustment to equity as of the beginning of the period in which it is adopted. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods with early adoption permitted. The adoption of ASU No. 2016-02 is being reviewed for any material impact on the Corporation’s consolidated financial statements.

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2. INVESTMENT SECURITIES

Investment securities have been classified in the consolidated balance sheets according to management’s intent. The amortized costs of securities as shown in the consolidated balance sheets and their estimated fair values at December 31 were as follows:

Securities Available For Sale:

December 31, 2018	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
U.S. government treasury securities	$	982,044	$	0	$	27,474	$	954,570
U.S. government agency securities		45,823,595		264,567		881,157		45,207,005
State and municipal securities		7,394,278		30,579		46,922		7,377,935
Residential mortgage-backed securities		4,769,668		21,579		17,180		4,774,067
Total debt securities AFS	$	58,969,585	$	316,725	$	972,733	$	58,313,577

December 31, 2017	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
U.S. government treasury securities	$	979,983	$	0	$	12,213	$	967,770
U.S. government agency securities		43,978,023		580,366		698,299		43,860,090
State and municipal securities		7,482,912		129,231		38,454		7,573,689
Residential mortgage-backed securities		1,812,905		51,651		2,844		1,861,712
Total debt securities AFS	$	54,253,823	$	761,248	$	751,810	$	54,263,261

Securities Held to Maturity:

December 31, 2018	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
State and municipal securities	$	30,582,785	$	208,480	$	67,434	$	30,723,831
Residential mortgage-backed securities		6,244,288		49,490		7,282		6,286,496
Total securities HTM	$	36,827,073	$	257,970	$	74,716	$	37,010,327

December 31, 2017	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
State and municipal securities	$	41,447,092	$	527,632	$	48,083	$	41,926,641
Residential mortgage-backed securities		3,143,749		77,542		132		3,221,159
Total securities HTM	$	44,590,841	$	605,174	$	48,215	$	45,147,800

At December 31, 2018, securities with a carrying value of $59,182,556 and a market value of $58,502,416 were pledged as collateral for public deposits and other purposes as required by law. Of these amounts, approximately $4,400,000 was over pledged and could be released if necessary for liquidity needs. At December 31, 2017, securities with a carrying value of $71,520,817 and a market value of $71,648,073 were pledged as collateral for public deposits and other purposes as required by law.

At December 31, 2018 and 2017, we had both 1 – 4 family and multifamily mortgage loans pledged to secure Federal Home Loan Bank (“FHLB”) advances. The FHLB requires the Bank to hold a minimum investment of stock, based on membership and the level of activity. As of December 31, 2018, this stock investment was $1,820,300.

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There were no investments in obligations of any state or municipal subdivisions which exceeded 10% of the Corporation’s shareholders’ equity at December 31, 2018.

The amortized cost and estimated fair value of debt securities at December 31, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

December 31, 2018
Available for Sale:	Amortized Cost		Estimated Fair Value
Amounts maturing in:
One year or less	$	2,147,059	$	2,124,645
After one through five years		29,691,474		29,674,236
After five through ten years		21,585,776		20,968,318
After ten years		5,545,276		5,546,378
Total debt securities AFS	$	58,969,585	$	58,313,577
Held to Maturity:		Amortized Cost		Estimated Fair Value
Amounts maturing in:
One year or less	$	6,483,464	$	6,497,910
After one through five years		12,885,021		12,961,209
After five through ten years		11,035,146		11,097,382
After ten years		6,423,442		6,453,826
Total debt securities HTM	$	36,827,073	$	37,010,327

The following tables summarize the activity of security sales by intention and year for years ending 2018, 2017, and 2016.

Securities Available For Sale:

December 31,	2018			2017		2016
Proceeds of sales	$	2,879,000		$	5,741,211	$	11,933,634
Gross gains	$	0		$	186,610	$	152,102
Gross losses		(165,369	)		0		(8,068	)
Net gains (losses) on sales of  available for sale securities	$	(165,369	)	$	186,610	$	144,034

Securities Held to Maturity:

December 31,	2018		2017		2016
Amortized cost of securities sold	$	0	$	0	$	551,949
Proceeds from sales		0		0		576,834
Net gains on sales of  held to maturity securities	$	0	$	0	$	24,885

Sales of held to maturity securities during years ended December 31, 2016 included small lots of mortgage-backed securities which were paid down by over 85% of face value.

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Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in continuous loss position, follows:

December 31, 2018	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities Available for Sale
Temporarily impaired debt securities:
U.S. government treasury securities	$	0	$	0	$	27,474	$	954,570
U.S. government agency securities		33,077		6,073,337		848,080		20,015,052
State and municipal securities		3,209		306,792		43,713		1,813,173
Residential mortgage-backed securities		14,199		3,032,237		2,981		129,410
Total debt securities available for sale	$	50,485	$	9,412,366	$	922,248	$	22,912,205
Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities	$	20,209	$	7,359,536	$	47,225	$	2,782,627
Residential mortgage-backed securities		5,671		879,487		1,611		89,464
Total securities held to maturity	$	25,880	$	8,239,023	$	48,836	$	2,872,091

December 31, 2017	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities Available for Sale
Temporarily impaired debt securities:
U.S. government treasury securities	$	12,213	$	967,770	$	0	$	0
U.S. government agency securities		34,083		4,988,630		664,216		18,347,439
State and municipal securities		16,836		975,900		21,618		877,798
Residential mortgage-backed securities		0		0		2,844		188,081
Total debt securities available for sale	$	63,132	$	6,932,300	$	688,678	$	19,413,318
Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities	$	15,954	$	5,521,443	$	32,129	$	1,281,797
Residential mortgage-backed securities		132		146,203		0		0
Total securities held to maturity	$	16,086	$	5,667,646	$	32,129	$	1,281,797

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At December 31, 2018, sixty-six debt securities had unrealized losses with aggregate depreciation of 2.35% from the Corporation’s amortized cost basis. At December 31, 2017, forty-eight debt securities had unrealized losses with aggregate depreciation of 2.35%. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. Management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale. Also, no declines in debt securities are deemed to be other-than-temporary.

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3. LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the Corporation’s loan portfolio at December 31, 2018 and 2017 was as follows:

	2018			2017
Commercial, financial and agricultural loans	$	88,403,215		$	73,146,397
Real estate
Construction loans		24,890,536			22,287,012
Commercial mortgage loans		123,477,369			106,458,342
Residential loans		103,347,898			99,159,607
Agricultural loans		31,561,686			25,373,621
Consumer & other loans		5,086,984			3,766,332
Loans outstanding		376,767,688			330,191,311
Unearned interest and discount		(17,451	)		(17,921	)
Allowance for loan losses		(3,428,869	)		(3,043,632	)
Net loans	$	373,321,368		$	327,129,758

The Corporation’s only significant concentration of credit at December 31, 2018, occurred in real estate loans which totaled approximately $283 million. However, this amount was not concentrated in any specific segment within the market or geographic area.

At December 31, 2018, the lendable collateral value of the 1-4 family and multifamily mortgage loans that were pledged to FHLB to secure outstanding advances was $61,443,772. FHLB has a blanket lien on the 1-4 family and multifamily portfolios, which totaled $120,023,526.

Appraisal Policy

When a loan is first identified as a problem loan, the appraisal is reviewed to determine if the appraised value is still appropriate for the collateral. For the duration that a loan is considered a problem loan, the appraised value of the collateral is monitored on a quarterly basis. If significant changes occur in market conditions or in the condition of the collateral, a new appraisal will be obtained.

Nonaccrual Policy

The Corporation does not accrue interest on any loan (1) that is maintained on a cash basis due to the deteriorated financial condition of the borrower, (2) for which payment in full of principal or interest is not expected, or (3) upon which principal or interest has been past due for ninety days or more unless the loan is well secured and in the process of collection.

A loan subsequently placed on nonaccrual status may be returned to accrual status if (1) all past due interest and principal is paid with expectations of any remaining contractual principal and interest being repaid or (2) the loan becomes well secured and in the process of collection.

Loans placed on nonaccrual status amounted to $1,204,861 and $1,674,656 at December 31, 2018 and 2017, respectively. There were no past due loans over 90 days and still accruing at December 31, 2018 or 2017. The accrual of interest is discontinued when the loan is placed on nonaccrual. Interest income that would have been recorded on these nonaccrual loans in accordance with their original terms totaled $64,015 and $41,496 as of December 31, 2018 and 2017, respectively.

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The following tables present an age analysis of past due loans and nonaccrual loans segregated by class of loans.

	Age Analysis of Past Due Loans As of December 31, 2018
	30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
Commercial, financial and agricultural loans	$	247,397	$	0	$	247,397	$	36,157	$	88,119,661	$	88,403,215
Real estate:
Construction loans		0		0		0		0		24,890,536		24,890,536
Commercial mortgage loans		0		0		0		1,022,550		122,454,819		123,477,369
Residential loans		1,560,913		0		1,560,913		146,154		101,640,831		103,347,898
Agricultural loans		321,319		0		321,319		0		31,240,367		31,561,686
Consumer & other loans		36,654		0		36,654		0		5,050,330		5,086,984
Total loans	$	2,166,283	$	0	$	2,166,283	$	1,204,861	$	373,396,544	$	376,767,688

	Age Analysis of Past Due Loans As of December 31, 2017
	30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
Commercial, financial and agricultural loans	$	364,527	$	0	$	364,527	$	394,455	$	72,387,415	$	73,146,397
Real estate:
Construction loans		198,861		0		198,861		0		22,088,151		22,287,012
Commercial mortgage loans		645,214		0		645,214		757,085		105,056,043		106,458,342
Residential loans		2,023,517		0		2,023,517		518,301		96,617,789		99,159,607
Agricultural loans		0		0		0		0		25,373,621		25,373,621
Consumer & other loans		30,033		0		30,033		4,815		3,731,484		3,766,332
Total loans	$	3,262,152	$	0	$	3,262,152	$	1,674,656	$	325,254,503	$	330,191,311

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

At December 31, 2018 and 2017, impaired loans amounted to $4,356,381 and $4,895,730, respectively. A reserve amount of $518,230 and $331,779, respectively, was recorded in the allowance for loan losses for these impaired loans as of December 31, 2018 and 2017.

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The following tables present impaired loans, segregated by class of loans as of December 31, 2018 and 2017:

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
December 31, 2018	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment
Commercial, financial and agricultural loans	$	184,899	$	87,525	$	568,816	$	656,341	$	276,392	$	370,038	$	52,411
Real estate:
Construction loans		402,234		281,434		0		281,434		0		281,434		25,364
Commercial mortgage loans		1,787,305		1,277,611		333,892		1,611,503		51,854		1,544,299		45,403
Residential loans		1,801,002		1,027,647		752,443		1,780,090		188,368		1,594,390		127,806
Agricultural loans		12,526		12,526		0		12,526		0		12,526		5,530
Consumer & other loans		0		0		14,487		14,487		1,616		14,487		820
Total loans	$	4,187,966	$	2,686,743	$	1,669,638	$	4,356,381	$	518,230	$	3,817,174	$	257,334

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
December 31, 2017	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment
Commercial, financial and agricultural loans	$	459,003	$	208,032	$	250,971	$	459,003	$	44,468	$	169,930	$	10,920
Real estate:
Construction loans		549,599		428,799		0		428,799		0		162,698		24,487
Commercial mortgage loans		1,615,811		1,107,654		339,440		1,447,094		57,403		1,071,663		54,582
Residential loans		2,476,728		316,230		2,079,823		2,396,053		224,916		2,233,562		108,472
Agricultural loans		142,966		142,966		0		142,966		0		142,966		8,198
Consumer & other loans		21,815		846		20,969		21,815		4,992		9,003		521
Total loans	$	5,265,922	$	2,204,527	$	2,691,203	$	4,895,730	$	331,779	$	3,789,822	$	207,180

For the period ending December 31, 2016, the average recorded investment for impaired loans was $8,325,530 and the interest income received during impairment was $192,071.

At December 31, 2018 and 2017, included in impaired loans were $7,458 and $4,243, respectively, of troubled debt restructurings.

Troubled Debt Restructurings

Loans are considered to have been modified in a troubled debt restructuring, or TDR, when due to a borrower’s financial difficulty the Corporation makes certain concessions to the borrower that it would not otherwise consider for new debt with similar risk characteristics. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of the collateral. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time. Not all loan modifications are TDRs. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period.

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Loan modifications are reviewed and recommended by the Corporation’s senior credit officer, who determines whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether the loan is classified as a TDR include:

·Interest rate reductions – Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

·Amortization or maturity date changes – Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

·Principal reductions – Arise when the Corporation charges off a portion of the principal that is not fully collateralized and collectability is uncertain; however, this portion of principal may be recovered in the future under certain circumstances.

The following tables present the amount of troubled debt restructuring by loan class, classified separately as accrual and nonaccrual at December 31, 2018 and 2017, as well as those currently paying under restructured terms and those that have defaulted under restructured terms as of December 31, 2018 and 2017. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 or more days past due.

	December 31, 2018
					Under restructured terms
	Accruing		Non-accruing		#		Current		#		Default
Commercial, financial, and agricultural loans	$	5,570	$	0		1	$	5,570		0	$	0
Real estate:
Construction loans		0		0		0		0		0		0
Commercial mortgage loans		0		0		0		0		0		0
Residential loans		1,888		0		1		1,888		0		0
Agricultural loans		0		0		0		0		0		0
Consumer & other loans		0		0		0		0		0		0
Total TDR’s	$	7,458	$	0		2	$	7,458		0	$	0

	December 31, 2017
					Under restructured terms
	Accruing		Non-accruing		#		Current		#		Default
Commercial, financial, and agricultural loans	$	0	$	0		0	$	0		0	$	0
Real estate:
Construction loans		0		0		0		0		0		0
Commercial mortgage loans		0		0		0		0		0		0
Residential loans		3,397		0		1		3,397		0		0
Agricultural loans		0		0		0		0		0		0
Consumer & other loans		846		0		1		846		0		0
Total TDR’s	$	4,243	$	0		2	$	4,243		0	$	0

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The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and nonaccrual at December 31, 2018 and 2017.

	December 31, 2018								December 31, 2017
	Accruing				Nonaccruing				Accruing				Nonaccruing
	#		Balance		#		Balance		#		Balance		#		Balance
Type of concession:
Payment modification		0	$	0		0	$	0		0	$	0		0	$	0
Rate reduction		0		0		0		0		0		0		0		0
Rate reduction, payment modification		1		1,888		0		0		2		4,243		0		0
Forbearance of interest		1		5,570		0		0		0		0		0		0
Total		2	$	7,458		0	$	0		2	$	4,243		0	$	0

As of December 31, 2018 and 2017, the Corporation had a balance of $7,458 and $4,243, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans as of December 31, 2018, and no charge-offs as of December 31, 2017. The Corporation’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $0 at both December 31, 2018 and 2017. The Corporation had no unfunded commitment to lend to a customer that has a troubled debt restructured loan as of December 31, 2018.

Credit Risk Monitoring and Loan Grading

The Corporation employs several means to monitor the risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loss experience and economic conditions.

Loans are subject to an internal risk-grading system which indicates the risk and acceptability of that loan. The loan grades used by the Corporation are for internal risk identification purposes and do not directly correlate to regulatory classification categories or any financial reporting definitions.

The general characteristics of the risk grades are as follows:

Grade 1 – Exceptional – Loans graded 1 are characterized as having a very high credit quality, exhibit minimum risk to the Corporation and have low administrative cost. These loans are usually secured by highly liquid and marketable collateral and a strong primary and secondary source of repayment is available.

Grade 2 – Above Average – Loans graded 2 are basically sound credits secured by sound assets and/or backed by the financial strength of borrowers of integrity with a history of satisfactory payments of credit obligations.

Grade 3 – Acceptable – Loans graded 3 are secured by sound assets of sufficient value and/or supported by the sufficient financial strength of the borrower. The borrower will have experience in their business area or employed a reasonable amount of time at their current employment. The borrower will have a sound primary source of repayment, and preferably a secondary source, which will allow repayment in a prompt and reasonable period of time.

Grade 4 – Fair – Loans graded 4 are those which exhibit some weakness or downward trend in financial condition and although the repayment history is satisfactory, it requires supervision by bank personnel. The borrower may have little experience in their business area or employed only a short amount of time at their current employment. The loan may be secured by good collateral; however, it may require close supervision as to value and/or quality and may not have sufficient liquidation value to completely cover the loan.  

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Grade 5a – Watch – Loans graded 5a contain a discernible weakness; however, the weakness is not sufficiently pronounced so as to cause concern for the possible loss of interest or principal. Loans in this category may exhibit outward signs of stress, such as slowness in financial disclosures or recent payments. However, such signs are not of long duration or of sufficient severity that default appears imminent. Loans in this category are not so deficient as to cause alarm, but do require close monitoring for further deterioration and possible downgrade.

Grade 5b – Other Assets Especially Mentioned (OAEM) – Loans graded 5b may otherwise be classified more severely except that the loan is well secured by properly margined collateral, it is generally performing in accordance with the original contract or modification thereof and such performance has seasoned for a period of 90 days, or the ultimate collection of all principal and interest is reasonably expected. Loans in this grade are unsupported by sufficient evidence of the borrower’s sound net worth or repayment capacity or may be subject to third party action that would cause concern for future prompt repayment.

Grade 6 – Substandard – Loans graded 6 contain clearly pronounced credit weaknesses that are below acceptable credit standards for the Corporation. Such weaknesses may be due to either collateral deficiencies or inherent financial weakness of the borrower, but in either case represents less than acceptable credit risk. Loans in this grade are unsupported by sufficient evidence of the borrower’s sound net worth, repayment capacity or acceptable collateral.

Grade 7 – Doubtful – Loans graded 7 have such pronounced credit weaknesses that the Corporation is clearly exposed to a significant degree of potential loss of principal or interest. Theses loan generally have a defined weakness which jeopardizes the ultimate repayment of the debt.

Grade 8 – Loss – Loans graded 8 are of such deteriorated credit quality that repayment of principal and interest can no longer be considered. These loans are of such little value that their continuance as an active bank asset is not warranted. As of December 31, 2018, all Grade 8 loans have been charged-off.

The following tables present internal loan grading by class of loans at December 31, 2018 and 2017:

December 31, 2018	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	1,237,602	$	0	$	0	$	22,905	$	0	$	210,045	$	1,470,552
Grade 2- Above Avg.		0		0		0		0		0		43,711		43,711
Grade 3- Acceptable		23,821,846		1,860,003		30,398,565		25,839,646		16,863,356		1,151,239		99,934,655
Grade 4- Fair		58,753,931		22,749,099		88,122,957		73,114,310		14,698,330		3,657,108		261,095,735
Grade 5a- Watch		473,616		0		2,411,710		722,441		0		6,206		3,613,973
Grade 5b- OAEM		3,079,098		0		446,841		1,299,587		0		2,168		4,827,694
Grade 6- Substandard		787,309		281,434		2,097,296		2,349,009		0		16,507		5,531,555
Grade 7- Doubtful		249,813		0		0		0		0		0		249,813
Total loans	$	88,403,215	$	24,890,536	$	123,477,369	$	103,347,898	$	31,561,686	$	5,086,984	$	376,767,688

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December 31, 2017	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	1,371,135	$	0	$	0	$	23,919	$	0	$	325,236	$	1,720,290
Grade 2- Above Avg.		0		0		0		0		0		51,421		51,421
Grade 3- Acceptable		27,024,359		2,085,620		30,090,030		26,304,640		11,071,244		866,455		97,442,348
Grade 4- Fair		42,821,117		19,772,593		70,518,545		68,103,351		13,781,326		2,494,509		217,491,441
Grade 5a- Watch		120,626		0		1,027,581		757,628		39,344		7,572		1,952,751
Grade 5b- OAEM		557,070		0		3,073,051		1,226,841		338,741		1,357		5,197,060
Grade 6- Substandard		945,238		428,799		1,749,135		2,743,228		142,966		19,782		6,029,148
Grade 7- Doubtful		306,852		0		0		0		0		0		306,852
Total loans	$	73,146,397	$	22,287,012	$	106,458,342	$	99,159,607	$	25,373,621	$	3,766,332	$	330,191,311

Allowance for Loan Losses Methodology

The allowance for loan losses (ALL) is determined by a calculation based on segmenting the loans into the following categories: (1) impaired loans and nonaccrual loans, (2) loans with a credit risk rating of 5b, 6, 7 or 8, (3) other outstanding loans, and (4) other commitments to lend. In addition, unallocated general reserves are estimated based on migration and economic analysis of the loan portfolio.

The ALL is calculated by the addition of the estimated loss derived from each of the above categories. The impaired loans and nonaccrual loans are analyzed on an individual basis to determine if the future collateral value is sufficient to support the outstanding debt of the loan. If an estimated loss is calculated, it is included in the estimated ALL until it is charged to the loan loss reserve. The calculation for loan risk graded 5b, 6, 7 or 8, other outstanding loans and other commitments to lend is based on assigning an estimated loss factor based on a twelve quarter rolling historical weighted average net loss rate. The estimated requirement for unallocated general reserves from migration and economic analysis is determined by considering (1) trends in asset quality, (2) level and trends in charge-off experience, (3) macroeconomic trends and conditions, (4) microeconomic trends and conditions and (5) risk profile of lending activities. Within each of these categories, a risk factor percentage from a rating of excessive, high, moderate or low will be determined by management and applied to the loan portfolio. By adding the estimated value from the migration and economic analysis to the estimated reserve from the loan portfolio, a total estimated loss reserves is obtained. This amount is then compared to the actual amount in the loan loss reserve. The calculation of ALL is performed on a monthly basis and is presented to the Loan Committee and the Board of Directors.

Changes in the allowance for loan losses are as follows:

	2018			2017			2016
Balance, January 1	$	3,043,632		$	3,124,611		$	3,032,242
Provision charged to operations		829,500			300,000			160,000
Loans charged off		(606,345	)		(447,747	)		(116,006	)
Recoveries		162,082			66,768			48,375
Balance, December 31	$	3,428,869		$	3,043,632		$	3,124,611

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The following tables detail activity in the ALL by class of loans for the years ended December 31, 2018 and 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

December 31, 2018	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate			Consumer and Other		Total
Allowance for loan losses:
Beginning balance, December 31, 2017	$	324,260	$	1,043,083	$	1,056,595	$	416,474	$	11,560		$	191,660	$	3,043,632
Charge-offs		548,460		783		43,349		6,909		0			6,844		606,345
Recoveries		12,025		0		590		0		147,252			2,215		162,082
Net charge-offs		536,435		783		42,759		6,909		(147,252	)		4,629		444,263
Provisions charged to operations		614,426		727		196,466		49,306		(49,934	)		18,509		829,500
Balance at end of period, December 31, 2018	$	402,251	$	1,043,027	$	1,210,302	$	458,871	$	108,878		$	205,540	$	3,428,869
Ending balance -
Individually evaluated for impairment	$	276,392	$	0	$	51,854	$	188,368	$	0		$	1,616	$	518,230
Collectively evaluated for impairment		125,859		1,043,027		1,158,448		270,503		108,878			203,924		2,910,639
Balance at end of period	$	402,251	$	1,043,027	$	1,210,302	$	458,871	$	108,878		$	205,540	$	3,428,869
Loans :
Ending balance -
Individually evaluated for impairment	$	656,341	$	281,434	$	1,611,503	$	1,929,214	$	12,526		$	14,487	$	4,505,505
Collectively evaluated for impairment		87,746,874		24,609,102		121,865,866		101,418,684		31,549,160			5,072,497		372,262,183
Balance at end of period	$	88,403,215	$	24,890,536	$	123,477,369	$	103,347,898	$	31,561,686		$	5,086,984	$	376,767,688

At December 31, 2018, of the $4,505,505 loans that were individually evaluated for impairment, only $4,356,381 were deemed impaired.

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December 31, 2017	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Allowance for loan losses:
Beginning balance, December 31, 2016	$	191,267	$	1,043,083	$	1,192,098	$	420,189	$	86,656	$	191,318	$	3,124,611
Charge-offs		113,334		0		168,717		59,764		93,503		12,429		447,747
Recoveries		63,486		0		0		0		0		3,282		66,768
Net charge-offs		49,848		0		168,717		59,764		93,503		9,147		380,979
Provisions charged to operations		182,841		0		33,214		56,049		18,407		9,489		300,000
Balance at end of period, December 31, 2017	$	324,260	$	1,043,083	$	1,056,595	$	416,474	$	11,560	$	191,660	$	3,043,632
Ending balance -
Individually evaluated for impairment	$	44,468	$	0	$	57,403	$	224,916	$	0	$	4,992	$	331,779
Collectively evaluated for impairment		279,792		1,043,083		999,192		191,558		11,560		186,668		2,711,853
Balance at end of period	$	324,260	$	1,043,083	$	1,056,595	$	416,474	$	11,560	$	191,660	$	3,043,632
Loans :
Ending balance -
Individually evaluated for impairment	$	459,003	$	428,799	$	4,561,198	$	2,448,531	$	142,966	$	21,815	$	8,062,312
Collectively evaluated for impairment		72,687,394		21,858,213		101,897,144		96,711,076		25,230,655		3,744,517		322,128,999
Balance at end of period	$	73,146,397	$	22,287,012	$	106,458,342	$	99,159,607	$	25,373,621	$	3,766,332	$	330,191,311

At December 31, 2017, of the $8,062,312 loans that were individually evaluated for impairment, only $4,895,730 were deemed impaired.

The following table is a summary of amounts included in the ALL for the impaired loans with specific reserves and the recorded balance of the related loans.

	Year Ended December 31,
	2018		2017		2016
Allowance for loss on impaired loans	$	518,230	$	331,779	$	549,429
Recorded balance of impaired loans	$	4,356,381	$	4,895,730	$	3,560,901

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4. PREMISES AND EQUIPMENT

The amounts reported as bank premises and equipment at December 31, 2018 and 2017, are as follows:

	2018			2017
Land	$	3,842,146		$	3,846,146
Buildings		15,411,518			12,821,154
Furniture and equipment		10,767,592			9,442,378
Construction in process		4,892			1,074,744
		30,026,148			27,184,422
Less accumulated depreciation		(15,452,174	)		(14,934,904	)
Total	$	14,573,974		$	12,249,518

Depreciation of premises and equipment was $1,036,986, $881,000, and $923,578 in 2018, 2017, and 2016, respectively. The Corporation depreciates its long-lived assets on various methods over their estimated productive lives, as more fully described in Note 1, Summary of Significant Accounting Policies.

5. INTANGIBLE ASSETS

The following table lists the Corporation’s account relationship intangible assets at December 31, 2018 and 2017. These assets will fully amortize in March 2019.

	2018		2017
Amortizing intangible assets
Account relationships	$	3,907	$	19,532
Total intangible assets	$	3,907	$	19,532

The intangible assets’ carrying amount, accumulated amortization and amortization expense for December 31, 2018, and the succeeding fiscal year are as follows:

	2018		2019
Amortizing intangible assets
Account relationships
Gross carrying amount	$	125,000	$	125,000
Accumulated amortization		121,093		125,000
Net carrying amount	$	3,907	$	0
Amortization expense	$	15,625	$	3,907

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6. DEPOSITS

At December 31, 2018, the scheduled maturities of certificates of deposit are as follows:

	Amount
2019	$	74,553,918
2020		19,062,966
2021		1,970,720
2022		1,823,345
2023 and thereafter		68,108
Total	$	97,479,057

The amount of overdraft deposits reclassified as loans were $70,003 and $63,887 for the years ended December 31, 2018 and 2017, respectively. At December 31, 2018, there were 47 certificates of deposit totaling $16,264,681 that were at or above the FDIC insurance limit of $250,000.

7. SHORT-TERM BORROWED FUNDS

Federal funds purchased generally mature within one to four days. On December 31, 2018, the Corporation did not have any federal funds purchased. The Corporation had approximately $120,000,000 in unused federal funds and FHLB accommodations at December 31, 2018. The Corporation maintains a line of credit with the Federal Reserve Bank’s Discount Window. The maximum amount that can be borrowed is dependent upon the amount of unpledged securities held by the Corporation as the amount of borrowings must be fully secured.

Other short-term borrowed funds consist of FHLB advances of $10,457,143 with interest at 1.92% as of December 31, 2018, and $17,971,429 with interest at 1.73% as of December 31, 2017. $4.457 million of short-term borrowings are short-term portions of long-term principal reducing Federal Home Loan Bank advances.

Information concerning federal funds purchased and FHLB short-term advances are summarized as follows:

	2018			2017
Average balance during the year	$	17,305,184		$	12,238,066
Average interest rate during the year		2.29	%		1.83	%
Maximum month-end balance during the year	$	20,971,429		$	22,114,286

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8. LONG-TERM DEBT

Long-term debt at December 31, 2018 and 2017, consisted of the following:

	2018		2017
Advance from FHLB with 1.25% fixed rate of interest with annual installment payments maturing September 30, 2020.	$	1,600,000	$	3,200,000
Advance from FHLB with 1.94% fixed rate of interest with annual installment payments maturing December 16, 2022.		2,571,429		3,428,571
Advance from FHLB with 1.42% fixed rate of interest with annual installment payments maturing August 30, 2023.		0		4,285,715
Advance from FHLB with a 1.53% fixed rate of interest maturing January 10, 2019.		0		1,500,000
Advance from FHLB with a 1.60% fixed rate of interest maturing July 10, 2019.		0		1,500,000
Advance from FHLB with a 1.80% fixed rate of interest maturing July 10, 2020.		2,000,000		2,000,000
Advance from FHLB with a 1.93% fixed rate of interest with annual installment payments maturing September 28, 2022.		6,000,000		8,000,000
Advance from FHLB with a 2.34% fixed rate of interest with annual installment payments maturing December 5, 2024.		0		5,142,857
Advance from FHLB with a 3.018% fixed rate of interest maturing Sept. 17, 2021.		3,000,000		0
Advance from FHLB with a 3.192% fixed rate of interest maturing Sept. 20, 2023.		3,000,000		0
Advance from FHLB with a 3.400% fixed rate of interest maturing Sept. 20, 2025.		3,000,000		0
Total long-term debt	$	21,171,429	$	29,057,143

The advances from FHLB are collateralized by the pledging of a combination of 1-4 family residential mortgages and multifamily loans. At December 31, 2018, 1-4 family residential mortgage loans and multifamily loans with a lendable collateral value of $61,443,772 were pledged to secure these advances. At December 31, 2017, 1-4 family residential mortgage loans and multifamily loans with a lendable collateral value of $58,684,267 were pledged to secure these advances. The amount of FHLB Stock held is based on membership and level of FHLB advances. At year end 2018 and 2017, the amount of stock held that is based on membership was $439,600 and $403,000, respectively, and the amount of stock held that is based on the level of FHLB advances was $1,380,700 and $2,035,200, respectively. At December 31, 2018, the Corporation had approximately $96,800,000 of unused lines of credit with the FHLB.

The following are maturities of long-term debt for the next five years. At December 31, 2018, there was no floating rate long-term debt.

Due in:		Fixed Rate Amount
	2019	$	0
	2020		6,457,143
	2021		5,857,143
	2022		2,857,143
	2023		3,000,000
	Later years		3,000,000
	Total long-term debt	$	21,171,429

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 9. EMPLOYEE BENEFITS AND RETIREMENT PLANS

Pension Plan

The Corporation has a noncontributory defined benefit pension plan which covers most employees who have attained the age of 21 years and completed one year of continuous service. The Corporation is providing for the cost of this plan as benefits are accrued based upon actuarial determinations employing the aggregate funding method.

The table of actuarially computed benefit obligations and net assets and the related changes of the Plan at December 31, 2018, 2017, and 2016, is presented below.

	2018			2017			2016
Change in Benefit Obligation
Benefit obligation at beginning of year	$	12,745,058		$	13,149,559		$	13,885,378
Service cost		0			0			0
Interest cost		657,845			712,228			764,323
Amendments		0			0			0
Settlement		(100,395	)		(129,172	)		(841,941	)
Benefits paid		(1,097,859	)		(1,116,643	)		(1,131,148	)
Other – net		(412,047	)		129,086			472,947
Benefit obligation at end of year	$	11,792,602		$	12,745,058		$	13,149,559
Change in Plan Assets
Fair value of plan assets at beginning of year	$	10,672,811		$	10,574,145		$	11,420,270
Actual return on plan assets		(254,803	)		864,481			576,964
Employer contribution		460,000			480,000			550,000
Benefits paid		(1,198,254	)		(1,245,815	)		(1,973,089	)
Fair value of plan assets at end of year	$	9,679,754		$	10,672,811		$	10,574,145

	2018				2017				2016
Funded status		$	(2,112,848	)		$	(2,072,247	)		$	(2,575,414	)
Unrecognized net actuarial (gain)/loss			0				0				0
Unrecognized prior service cost			0				0				0
Pension liability included in other liabilities		$	(2,112,848	)		$	(2,072,247	)		$	(2,575,414	)
Accumulated benefit obligation		$	11,792,602			$	12,745,058			$	13,149,559
Amount recognized in consolidated balance sheet consist of the following:			2018				2017				2016
Accrued Pension		$	2,112,848			$	2,072,247			$	2,575,414
Deferred tax assets		$	443,698			$	435,172			$	875,641
Accumulated other comprehensive income			1,669,150				1,637,075				1,699,773
Total		$	2,112,848			$	2,072,247			$	2,575,414
Components of  Pension Cost			2018				2017				2016
Service cost		$	0			$	0			$	0
Interest cost on benefit obligation			657,845				712,228				764,323
Expected return on plan assets			(721,735	)			(716,622	)			(775,423	)
Other - net			482,679				587,821				657,260
Net periodic pension cost			418,789				583,427				646,160
Partial recognition of loss due to settlement			0				0				426,599
Total		$	418,789			$	583,427			$	1,072,759

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Other changes in plan assets and benefit obligations recognized in comprehensive income:

	2018		2017			2016
Net loss (gain)	$	40,601	$	(503,167	)	$	110,306
Prior service costs		0		0			0
Total recognized in other comprehensive income (loss)		40,601		(503,167	)		110,306
Net periodic pension cost		418,789		583,427			646,160
Partial recognition of loss due to settlement		0		0			426,599
Total recognized in net periodic pension cost and other comprehensive income	$	459,390	$	(80,260	)	$	1,183,065

After adopting ASC Topic 960, Employer’s Accounting for Defined Benefit Pension Plan and Other Postretirement Plans, and freezing its pension retirement plan, the Corporation increased the accrued liability by $40,601 in 2018 and decreased $503,167 in 2017. Also, changes were made to other comprehensive income (loss) of ($32,075) for 2018 and $62,698 for 2017 on a pre-tax basis. During 2018, the fair value of the plan assets decreased $993,057.

At December 31, 2018, the plan assets included cash and cash equivalents, certificates of deposits with banks, U.S. government agency securities, corporate notes, and equity securities.

Assumptions used to determine the benefit obligation as of December 31, 2018 and 2017 respectively were:

	2018			2017
Weighted-Average Assumptions as of December 31
Discount rate		5.70	%		5.70	%
Rate of compensation increase		N/A			N/A

For the years ended December 31, 2018, 2017, and 2016, the assumptions used to determine net periodic pension costs are as follows:

	2018			2017			2016
Discount rate		5.70	%		5.70	%		5.75	%
Expected return on plan assets		7.00	%		7.00	%		7.00	%
Rate of compensation increase		N/A			N/A			N/A

The expected rate of return represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In determining the expected rate of return, the Corporation considers long-term compound annualized returns of historical market data as well as actual returns on the Corporation’s plan assets, and applies adjustments that reflect more recent capital market experience.

The Corporation’s pension plan investment objective is both security and long-term stability, with moderate growth. The investment strategies and policies employed provide for investments, other than “fixed-dollar” investments, to prevent erosion by inflation. Sufficient funds are held in a liquid nature (money market, short-term securities) to allow for the payment of plan benefits and expenses, without subjecting the funds to loss upon liquidation. In an effort to provide a higher return with lower risk, the fund assets are allocated between stocks, fixed income securities, and cash equivalents. All plan investments and transactions are in compliance with ERISA and any other law applicable to employee benefit plans. The targeted investment portfolio is allocated up to 45% in equities, 50% to 90% in fixed-income investments, and up to 20% in cash equivalent investments.

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All the Corporation’s equity investments are in mutual funds with a Morningstar rating of 3 or higher, have at least $300 million in investments, and have been in existence 5 years or more. Fixed income securities include issues of the U.S. government and its agencies and corporate notes. Any corporate note purchased has a rating (by Standard & Poor’s or Moody’s) of “A” or better. The average maturity of the fixed income portion of the portfolio does not exceed 10 years.

Pension Asset Allocation and Fair Value Measurement as of December 31

	2018							2017
	Fair Value		Level 1		%			Fair Value		Level 1		%
Investment at fair value as determined by quoted market price:
Equity	$	3,482,765	$	3,482,765		36	%	$	4,302,437	$	4,302,437		40	%
Fixed income		1,096,033		1,096,033		11	%		1,351,048		1,351,048		13	%
Total	$	4,578,798	$	4,578,798		47	%	$	5,653,485	$	5,653,485		53	%
Investment at estimated fair value:
Certificates of deposit	$	4,521,110	$	4,521,110		47	%	$	4,283,144	$	4,283,144		40	%
Cash and cash equivalent		579,846		579,846		6	%		736,182		736,182		7	%
Total	$	5,100,956	$	5,100,956		53	%	$	5,019,326	$	5,019,326		47	%
Total	$	9,679,754	$	9,679,754		100	%	$	10,672,811	$	10,672,811		100	%

All of the pension plan’s investments were reported as Level 1 assets and received Level 1 fair value measurement.

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels: Level 1 inputs consist of unadjusted quoted prices in active markets for identical assets and have the highest priority, and Level 3 inputs have the lowest priority. These levels are:

Level 1 - The fair values of mutual funds, preferred stock, corporate notes, and U.S. government agency securities were based on quoted market prices. Money market funds and certificates of deposit were reported at fair value.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that were not active, and model-based valuation techniques for which all significant assumptions were observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Estimated Contributions

The Corporation expects to contribute $400,000 to its pension plan in 2019.

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Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service and decrements as appropriate, are expected to be paid for fiscal years beginning:

2019	1,159,000
2020	1,127,000
2021	1,097,000
2022	1,113,000
2023	1,075,000
Years 2024 – 2028	4,744,000

The estimated amortization amount for 2019 is a net loss of $580,843, no prior service cost or credit, and no net transition asset or obligation.

Southwest Georgia Bank 401(K) Plan

In place of the Corporation’s frozen defined benefit pension retirement plan, the Corporation offers its employees a 401(K) Plan. This 401(K) plan is a qualified defined contribution plan as provided for under Section 401(K) of the Internal Revenue Code. This plan is a “safe–harbor” plan meaning that the Corporation will match contributions dollar for dollar for the first four percent of salary participants defer into the plan. The plan does allow for discretionary match in excess of the four percent and that the participants are allowed to defer the maximum amount of salary. The Corporation matched the employee participants for the first four percent of salary contributing to the plan $219,006, $204,565, and $186,253 for the years ended December 31, 2018, 2017, and 2016, respectively.

Employee Stock Ownership Plan

The Corporation has a nondiscriminatory Employee Stock Ownership Plan and Trust (the “ESOP”) administered by a trustee. The plan was established to purchase and hold Southwest Georgia Financial Corporation stock for all eligible employees. Contributions to the plan are made solely by the Corporation and are at the discretion of the Board of Directors. The annual amount of the contribution is determined by taking into consideration the financial conditions, profitability, and fiscal requirements of the Corporation. There were contributions of $475,000, $425,000, and $400,000 for the years ended December 31, 2018, 2017, and 2016, respectively. Contributions to eligible participants are based on percentage of annual compensation. As of December 31, 2018, the ESOP holds 252,248 shares of the Corporation’s outstanding common stock. There were 223,203 released shares allocated to the participants. The 29,045 unreleased shares are pledged as collateral for a $640,000 debt incurred from repurchasing participants’ shares. Dividends paid by the Corporation on ESOP shares are allocated to the participants based on shares held. ESOP shares are included in the Corporation’s outstanding shares and earnings per share computation.

Directors’ Deferred Compensation Plan

The Corporation has a voluntary deferred compensation plan for the Board of Directors administered by an insurance company (the “Directors’ Deferred Compensation Plan”). The plan stipulates that if a director participates in the Plan for four years, the Corporation will pay the director future monthly income for ten years beginning at normal retirement age, and the Corporation will make specified monthly payments to the director’s beneficiaries in the event of his or her death prior to the completion of such payments. The plan is funded by life insurance policies with the Corporation as the named beneficiary. This plan is closed to new director enrollment and participation.

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Directors and Executive Officers Stock Purchase Plan

The Corporation has adopted a stock purchase plan for the executive officers and directors of Southwest Georgia Financial Corporation. Under the plan, participants may elect to contribute up to $900 monthly of salary or directors’ fees and receive corporate common stock with an aggregate value of two times their contribution. The expense incurred during 2018, 2017, and 2016 on the part of the Corporation totaled $248,800, $265,900, and $290,573, respectively.

Dividend Reinvestment and Share Purchase Plan

The Corporation maintains a dividend reinvestment and share purchase plan. The purpose of the plan is to provide shareholders of record of the Corporation’s common stock, who elect to participate in the plan, with a simple and convenient method of investing cash dividends and voluntary cash contributions in shares of the common stock without payment of any brokerage commissions or other charges. Eligible participants may purchase common stock through automatic reinvestment of common stock dividends on all or partial shares and make additional voluntary cash payments of not less than $5 nor more than $5,000 per month.

The participant’s price of common stock purchased with dividends or voluntary cash payments will be the average price of all shares purchased in the open market, or if issued from unissued shares or treasury stock the price will be the average of the high and low sales prices of the stock on the NYSE American LLC on the dividend payable date or other purchase date. During the years ended December 31, 2018, 2017, and 2016, shares issued through the plan were 5,726, 5,286, and 6,955, respectively, at an average price of $22.63, $21.18, and $15.92, per share, respectively. These numbers of shares and average price per share are not adjusted by stock dividends.

Equity Incentive Award

The Corporation has a 2013 Omnibus Incentive Plan (the “Incentive Plan”) that was approved by our shareholders at the Corporation’s 2014 Annual Meeting. The Incentive Plan was established to attract, retain and motivate the Corporation’s employees, consultants, advisors and directors, to promote the success of our business by linking their personal interests to those of our shareholders and to encourage stock ownership on the part of management. Under the Incentive Plan, the Corporation may issue a maximum aggregate amount of 125,000 shares of common stock pursuant to (i) stock options, which includes incentive stock options and non-qualified stock options, (ii) stock appreciation rights, (iii) restricted stock awards, (iv) restricted stock units, (v) incentive awards, (vi) other stock-based awards and (vii) dividend equivalents. The Corporation may also grant cash-based awards under the Incentive Plan. During 2018, the Corporation granted 13,316 shares of restricted stock awards of which none are vested. The Corporation granted 4,271 shares of restricted stock awards during 2017 of which 854 are vested.

The following table summarizes the movements in the Corporation’s outstanding restricted stock awards: 

	Number of Shares		Amount
Non-vested balance, December 31, 2016	0		$	0
Granted	4,271			88,153
Vested	0			0
Non-vested balance, December 31, 2017	4,271		$	88,153
Granted	13,316			306,032
Vested	(854	)		(17,627	)
Non-vested balance, December 31, 2018	16,733		$	376,558

Awards are being amortized to expense over the five-year vesting period. 

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10. INCOME TAXES

Components of income tax expense for 2018, 2017, and 2016 are as follows:

	2018		2017		2016
Current expense	$	28,779	$	1,101,902	$	1,163,230
Deferred taxes (benefit)		639,637		517,998		(10,754	)
Total income taxes	$	668,416	$	1,619,900	$	1,152,476

The reasons for the difference between the federal income taxes in the consolidated statements of income and the amount and percentage computed by the applying the combine statutory federal and state income tax rate to income taxes are as follows:

	2018						2017						2016
	Amount			%			Amount			%			Amount			%
Taxes at statutory income tax rate	$	1,116,262			21.0		$	1,845,313			34.0		$	1,763,394			34.0
Reductions in taxes resulting from exempt income		(272,486	)		(5.1	)		(524,347	)		(9.7	)		(547,556	)		(10.6	)
Other timing differences		(175,360	)		(3.3	)		298,934			5.5			(63,362	)		(1.2	)
Total income taxes	$	668,416			12.6		$	1,619,900			29.8		$	1,152,476			22.2

The sources of timing differences for tax reporting purposes and the related deferred taxes recognized in 2018, 2017, and 2016 are summarized as follows:

	2018			2017			2016
Nonqualified retirement plan	$	0		$	0		$	0
Intangible asset amortization		0			172,816			0
Deferred gain on covered transaction		5,004			9,352			498
Nonaccrual loan interest		8,369			(6,896	)		32,157
Recognition of AMT tax credit carryforward		332,776			0			0
Foreclosed assets expenses		41,530			(42,075	)		(3,413	)
Bad debt expense in excess of tax		(80,902	)		423,203			(31,405	)
Realized impairment gain on equity securities		0			0			0
Accretion of discounted bonds		16,805			14,772			33,187
Gain on disposition of discounted bonds		(4,188	)		(28,215	)		(23,059	)
Book and tax depreciation difference		357,266			(24,959	)		(18,719	)
Other timing differences		(37,023	)		0			0
Total deferred taxes	$	639,637		$	517,998		$	(10,754	)

ASC 740, Income Taxes, requires organizations to recognize the effect of a change in tax rates at the date of enactment by adjusting its deferred tax liabilities and assets to the new tax rate. With the Jobs and Tax Cut Act of 2017 being signed into law in December 2017, our deferred taxes were revalued resulting in additional income tax expense of $419,359 at December 31, 2017, leaving $98,639 as the actual current period timing difference.  

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	December 31
	2018		2017
Deferred tax assets:
Nonaccrual loan interest	$	474	$	8,843
Deferred gain on covered transaction		9,300		14,304
Alternative minimum tax		0		332,776
Foreclosed assets expenses		10,163		51,693
Intangible asset amortization		125,883		125,883
Bad debt expense in excess of tax		720,063		639,161
Realized loss on other-than-temporarily impaired equity securities		214,353		214,353
Deferred directors compensation		133,057		104,561
Capital loss carryforward		32,878		32,878
Pension plan		443,698		435,172
Unrealized losses on securities available for sale		137,761		0
Total deferred tax assets		1,827,630		1,959,624
Deferred tax liabilities:
Accretion on bonds and gain on discounted bonds		68,307		55,690
Book and tax depreciation difference		575,899		218,634
Unrealized gains on securities available for sale		0		1,982
Total deferred tax liabilities		644,206		276,306
Net deferred tax assets	$	1,183,424	$	1,683,318

11. RELATED PARTY TRANSACTIONS

The ESOP held 252,248 shares of the Corporation’s stock as of December 31, 2018, of which 29,045 shares have been pledged to secure the ESOP’s debt to the Corporation. In the normal course of business, the Bank has made loans at prevailing interest rates and terms to directors and executive officers of the Corporation and its subsidiaries, and to their affiliates. The aggregate indebtedness to the Bank of these related parties approximated $1,567,000 and $1,079,000 at December 31, 2018 and 2017, respectively. During 2018, approximately $811,000 of such loans were made, and repayments totaled approximately $323,000. None of these above mentioned loans were restructured, nor were any related party loans charged off during 2018 or 2017. Also, during 2018 and 2017, directors and executive officers had approximately $2,015,000 and $2,072,000, respectively, in deposits with the Bank.

12. COMMITMENTS, CONTINGENT LIABILITIES, AND FINANCIAL INSTRUMENTS WITH

OFF-BALANCE SHEET RISK

In the normal course of business, various claims and lawsuits may arise against the Corporation. Management, after reviewing with counsel all actions and proceedings, considers that the aggregate liability or loss, if any, will not be material.

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own risk exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit in the form of loans or through letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of the instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. 

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Commitments to extend credit are contractual obligations to lend to a customer as long as all established contractual conditions are satisfied. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by a customer.

Standby letters of credit and financial guarantees are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Standby letters of credit and financial guarantees are generally terminated through the performance of a specified condition or through the lapse of time.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual or notional amounts of these instruments. As these off-balance sheet financial instruments have essentially the same credit risk involved in extending loans, the Corporation generally uses the same credit and collateral policies in making these commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, the contractual or notional amounts do not represent future cash requirements.

The contractual or notional amounts of financial instruments having credit risk in excess of that reported in the Consolidated Balance Sheets are as follows:

	Dec. 31, 2018		Dec. 31, 2017
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	39,418,110	$	24,706,357
Standby letters of credit and financial guarantees	$	4,342,849	$	3,134,849

The Corporation has no lease obligations that require capitalization. The rental agreement for the loan production office in Tifton, Georgia ended July 31, 2018. The Corporation’s remaining lease is an operating lease for postage services, which expires December 2020.

The following table shows scheduled future cash payments under this obligation as of December 31, 2018.

	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Operating leases	$	10,296	$	5,148	$	5,148	$	0	$	0

Rental expenses were $9,100, $15,600, and $15,600 for the years ended December 31, 2018, 2017, and 2016, respectively.

13. FAIR VALUE MEASUREMENTS AND DISCLOSURES

The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  Securities available for sale are recorded at fair value on a recurring basis.  From time to time, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and foreclosed real estate. Additionally, the Corporation is required to disclose, but not record, the fair value of other financial instruments.

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Fair Value Hierarchy:

Under ASC Topic 820, the Corporation groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

Level 1	Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3	Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.

Cash and Cash Equivalents:

For disclosure purposes for cash and due from banks, interest bearing deposits in other banks and federal funds sold, the carrying amount is a reasonable estimate of fair value.

Certificates of Deposit in Other Banks:

For disclosure purposes for certificates of deposit in other banks, the carrying amount is a reasonable estimate of fair value.

Investment Securities Available for Sale:

Investment securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and state, county and municipal bonds.  Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Investment Securities Held to Maturity:

Investment securities held to maturity are not recorded at fair value on a recurring basis. For disclosure purposes, fair value measurement is based upon quoted prices, if available.

Federal Home Loan Bank Stock:

For disclosure purposes, the carrying value of other investments approximate fair value.

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Loans:

The Corporation does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired and a specific allocation is established within the allowance for loan losses.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, Accounting by Creditors for Impairment of a Loan.  The fair value of impaired loans is estimated using one of three methods, including collateral value, market value of similar debt, and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the impaired loan as nonrecurring Level 3.

For disclosure purposes, the fair value of fixed rate loans which are not considered impaired, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes.

Foreclosed Assets:

Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate assets are carried at the lower of carrying value or fair value.  Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the other real estate as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the other real estate asset as nonrecurring Level 3.

Bank Owned Life Insurance:

For disclosure purposes, for cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value.

Deposits:

For disclosure purposes, the fair value of demand deposits, savings accounts, NOW accounts and money market deposits is the amount payable on demand at the reporting date, while the fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using current rates at which comparable certificates would be issued.

FHLB Advances:

For disclosure purposes, the fair value of the FHLB fixed rate borrowing is estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements.

Commitments to Extend Credit and Standby Letters of Credit:

Because commitments to extend credit and standby letters of credit are made using variable rates and have short maturities, the carrying value and the fair value are immaterial for disclosure. 

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Assets Recorded at Fair Value on a Recurring Basis:

The table below presents the recorded amount of assets measured at fair value on a recurring basis as of December 31, 2018 and 2017.

December 31, 2018	Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. government treasury securities	$	954,570	$	0	$	0	$	954,570
U.S. government agency securities		0		45,207,005		0		45,207,005
State and municipal securities		0		7,377,935		0		7,377,935
Residential mortgage-backed securities		0		4,774,067		0		4,774,067
Total	$	954,570	$	57,359,007	$	0	$	58,313,577

December 31, 2017	Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. government treasury securities	$	967,770	$	0	$	0	$	967,770
U.S. government agency securities		0		43,860,090		0		43,860,090
State and municipal securities		0		7,573,689		0		7,573,689
Residential mortgage-backed securities		0		1,861,712		0		1,861,712
Total	$	967,770	$	53,295,491	$	0	$	54,263,261

Assets Recorded at Fair Value on a Nonrecurring Basis:

The Corporation may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below as of December 31, 2018 and 2017.

December 31, 2018	Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	127,605	$	127,605
Impaired loans		0		0		3,838,151		3,838,151
Total assets at fair value	$	0	$	0	$	3,965,756	$	3,965,756
December 31, 2017		Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	758,878	$	758,878
Impaired loans		0		0		4,563,951		4,563,951
Total assets at fair value	$	0	$	0	$	5,322,829	$	5,322,829

Foreclosed properties that are included above as measured at fair value on a nonrecurring basis are those properties that resulted from a loan that had been foreclosed and charged down or have been written down subsequent to foreclosure. Foreclosed properties are generally recorded at the appraised value less estimated selling costs in the range of 15 – 20%. Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have been either partially charged off or have specific reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to a range of 80 – 85% of appraised value which considers the estimated costs to sell. Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows.

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The carrying amount and estimated fair values of the Corporation’s assets and liabilities which are required to be either disclosed or recorded at fair value at December 31, 2018 and 2017, are as follows:

			Estimated Fair Value
December 31, 2018	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	35,499	$	35,499	$	0	$	0	$	35,499
Certificates of deposit in other banks		2,732		2,732		0		0		2,732
Investment securities available for sale		58,314		955		57,359		0		58,314
Investment securities held to maturity		36,827		0		37,010		0		37,010
Federal Home Loan Bank stock		1,820		0		1,820		0		1,820
Loans, net		373,321		0		362,373		3,838		366,211
Bank owned life insurance		6,779		0		6,779		0		6,779
Liabilities:
Deposits		455,640		0		456,245		0		456,245
Federal Home Loan Bank advances		31,629		0		31,591		0		31,591

			Estimated Fair Value
December 31, 2017	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	34,138	$	34,138	$	0	$	0	$	34,138
Certificates of deposit in other banks		1,985		1,985		0		0		1,985
Investment securities available for sale		54,364		968		53,396		0		54,364
Investment securities held to maturity		44,591		0		45,148		0		45,148
Federal Home Loan Bank stock		2,438		0		2,438		0		2,438
Loans, net		327,130		0		320,684		4,564		325,248
Bank owned life insurance		6,553		0		6,553		0		6,553
Liabilities:
Deposits		397,006		0		397,331		0		397,331
Federal Home Loan Bank advances		47,029		0		46,658		0		46,658

Limitations:

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement element. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

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14. SUPPLEMENTAL FINANCIAL DATA

Components of other income and other operating expense in excess of one percent of gross revenue for the respective periods are as follows:

	Years Ended December 31
	2018		2017		2016
Income:
Bank card interchange fees	$	576,359	$	600,619	$	506,506
Expense:
Other professional fees	$	287,273	$	317,147	$	202,267
Advertising & public relations	$	264,269	$	192,016	$	173,595
Director & board committee fees	$	241,523	$	278,821	$	328,919
FDIC insurance assessment	$	233,878	$	247,963	$	201,605
Administrative expense – employee benefit plans	$	209,399	$	207,620	$	231,311
Telephone expense	$	284,586	$	180,559	$	155,393

15. SHAREHOLDERS’ EQUITY / REGULATORY MATTERS

Dividends paid by the Bank subsidiary are the primary source of funds available to the parent company for payment of dividends to its shareholders and other needs. Banking regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. At December 31, 2018, approximately $2,375,242 of the Bank’s net assets were available for payment of dividends without prior approval from the regulatory authorities.

The Federal Reserve Board requires that banks maintain reserves based on their average deposits in the form of vault cash and average deposit balances at the Federal Reserve Banks. For the year ended December 31, 2018, the Bank had a total reserve requirement of $5,504,000.

The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by such agencies that, if undertaken, could have a direct material effect on the Corporation’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total, Common Equity Tier I, and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). As of December 31, 2018 and 2017, the Corporation met all capital adequacy requirements.

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As of December 31, 2018, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum Total risk-based, Common Equity Tier I risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following tables. Under the Basel III rules, the Bank must hold a capital conservation buffer above the minimum regulatory risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2018 is 1.875%. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Corporation’s and the Bank’s actual capital amounts and ratios as of December 31, 2018 and 2017, are also presented in the table.

As a result of regulatory limitations at December 31, 2018, approximately $39,122,012 of the parent company’s investments in net assets of the subsidiary bank of $41,497,254, as shown in the accompanying condensed balance sheets in Note 16, was restricted from transfer by the subsidiary bank to the parent company in the form of cash dividends.

The Corporation’s and the Bank’s ratios under the above rules at December 31, 2018 and 2017, are set forth in the following tables.

As of December 31, 2018	Actual					For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio		Amount		Ratio
Southwest Georgia Financial Corporation
Common equity Tier 1 (to risk-
risk- weighted assets)	$	45,802,434		11.97	%	$	17,217,892		>4.50%		N/A*		N/A*
Total capital (to risk-
weighted assets)	$	49,231,303		12.87	%	$	30,609,586		>8.00%		N/A*		N/A*
Tier I capital (to risk-
weighted assets)	$	45,802,434		11.97	%	$	22,957,189		>6.00%		N/A*		N/A*
Leverage (tier I capital
to average assets)	$	45,802,434		8.62	%	$	21,265,996		>4.00%		N/A*		N/A*
Southwest Georgia Bank
Common equity Tier 1 (to risk-
risk- weighted assets)	$	43,680,743		11.44	%	$	17,180,290		>4.50%	$	24,815,974		>   6.50%
Total capital (to risk-
weighted assets)	$	47,109,612		12.34	%	$	30,542,738		>8.00%	$	38,178,422		>10.00%
Tier I capital (to risk-
weighted assets)	$	43,680,743		11.44	%	$	22,907,053		>6.00%	$	30,542,738		>   8.00%
Leverage (tier I capital
to average assets)	$	43,680,743		8.24	%	$	21,206,909		>4.00%	$	26,508,636		>   5.00%

*N/A - As of December 31, 2017, the Corporation met the definition under the Basel III Capital Rules of a small bank holding company and, therefore, was exempt from consolidated risk-based and leverage capital adequacy guidelines for bank holding companies.

-91- 

As of December 31, 2017	Actual		For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount	Ratio	Amount	Ratio	Amount	Ratio
Southwest Georgia Financial Corporation
Common equity Tier 1 (to risk-
risk- weighted assets)	$42,756,979	12.74%	$15,098,672	> 4.50%	N/A*	N/A*
Total capital (to risk-
weighted assets)	$45,800,611	13.65%	$26,842,084	> 8.00%	N/A*	N/A*
Tier I capital (to risk-
weighted assets)	$42,756,979	12.74%	$20,131,563	> 6.00%	N/A*	N/A*
Leverage (tier I capital
to average assets)	$42,756,979	8.79%	$19,467,338	> 4.00%	N/A*	N/A*
Southwest Georgia Bank
Common equity Tier 1 (to risk-
risk- weighted assets)	$40,247,187	12.02%	$15,069,727	> 4.50%	$21,767,383	>   6.50%
Total capital (to risk-
weighted assets)	$43,290,819	12.93%	$26,790,625	> 8.00%	$33,488,282	> 10.00%
Tier I capital (to risk-
weighted assets)	$40,247,187	12.02%	$20,092,969	> 6.00%	$26,790,625	>   8.00%
Leverage (tier I capital
to average assets)	$40,247,187	8.29%	$19,418,765	> 4.00%	$24,273,457	>   5.00%

*N/A - As of December 31, 2017, the Corporation met the definition under the Basel III Capital Rules of a small bank holding company and, therefore, was exempt from consolidated risk-based and leverage capital adequacy guidelines for bank holding companies.

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16. PARENT COMPANY FINANCIAL DATA

Southwest Georgia Financial Corporation’s condensed balance sheets as of December 31, 2018 and 2017, and its related condensed statements of operations and cash flows for the years ended are as follows:

Condensed Balance Sheets

as of December 31, 2018 and 2017

(Dollars in thousands)

	2018			2017
ASSETS
Cash	$	776		$	1,694
Investment in consolidated wholly-owned bank subsidiary, at equity		41,497			38,633
Loans		640			105
Other assets		708			711
Total assets	$	43,621		$	41,143
LIABILITIES AND SHAREHOLDERS’ EQUITY
Total liabilities	$	2		$	0
Shareholders’ equity:
Common stock, $1 par value, 5,000,000 shares authorized,
2,545,776 shares and 4,293,835 shares issued for 2018 & 2017		2,546			4,294
Additional paid-in capital		18,419			31,701
Retained earnings		24,841			33,020
Accumulated other comprehensive loss		(2,187	)		(1,629	)
Treasury stock, at cost, 0 for 2018
and 1,752,330 for 2017		(0	)		(26,243	)
Total shareholders’ equity		43,619			41,143
Total liabilities and shareholders’ equity	$	43,621		$	41,143

-93- 

16. PARENT COMPANY FINANCIAL DATA (continued)

Condensed Statements of Income and Expense

for the years ended December 31, 2018, 2017, and 2016

(Dollars in thousands)

	2018			2017			2016
Income:
Dividend received from bank subsidiary	$	1,200		$	2,000		$	0
Interest income		45			26			23
Total income		1,245			2,026			23
Expenses:
Other		189			172			178
Income before income taxes and equity in
Undistributed income of bank subsidiary		1,056			1,854			(155	)
Income tax benefit – allocated from
consolidated return		40			88			91
Income before equity in undistributed
income of subsidiary		1,096			1,942			(64	)
Equity in undistributed income of subsidiary		3,551			1,865			4,098
Net income		4,647			3,807			4,034
Retained earnings – beginning of year		33,020			30,334			27,370
Adjustment to correct immaterial misstatement of investment in bank subsidiary in prior periods		(129	)		0			0
Cash dividend declared		(1,196	)		(1,121	)		(1,070	)
Retirement of treasury stock		(11,501	)		0			0
Retained earnings – end of year	$	24,841		$	33,020		$	30,334

-94- 

16. PARENT COMPANY FINANCIAL DATA (continued)

Condensed Statements of Cash Flows

for the years ended December 31, 2018, 2017, and 2016

(Dollars in thousands)

	2018			2017			2016
Cash flow from operating activities:
Net income	$	4,647		$	3,807		$	4,034
Adjustments to reconcile net income to net
cash used by operating activities:
Equity in undistributed earnings of subsidiary		(3,551	)		(1,865	)		(4,098	)
Changes in:
Other assets		21			(25	)		(16	)
Other liabilities		2			0			0
Net cash provided (used) for operating activities		1,119			1,917			(80	)
Cash flow from investing activities:
Net change in loans		(535	)		80			178
Net cash provided (used) for investing activities		(535	)		80			178
Cash flow from financing activities:
Cash dividend paid to shareholders		(1,196	)		(1,121	)		(1,070	)
Payment to repurchase common stock		(306	)		(122	)		(7	)
Net cash used for financing activities		(1,502	)		(1,243	)		(1,077	)
Increase (decrease) in cash		(918	)		754			(979	)
Cash – beginning of year		1,694			940			1,919
Cash – end of year	$	776		$	1,694		$	940

17. EARNINGS PER SHARE

Earnings per share are based on the weighted average number of common shares outstanding during the year.

	December 31,
	2018		2017		2016
Net income	$	4,647,119	$	3,807,492	$	4,033,977
Net income available to common shareholders	$	4,647,119	$	3,807,492	$	4,033,977
Average number of common shares outstanding		2,545,565		2,547,421		2,547,778
Effect of dilutive restricted stock		0		1		0
Average number of common shares outstanding used to calculate diluted earnings per common share		2,545,565		2,547,422		2,547,778
Earnings per share - basic	$	1.83	$	1.49	$	1.58
Earnings per share - diluted	$	1.83	$	1.49	$	1.58

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18. QUARTERLY DATA

SOUTHWEST GEORGIA FINANCIAL CORPORATION

QUARTERLY DATA

(UNAUDITED)

(Dollars in thousands)

	For the Year 2018
	Fourth		Third		Second		First
Interest and dividend income	$	5,900	$	5,640	$	5,292	$	5,062
Interest expense		1,116		867		725		614
Net interest income		4,784		4,773		4,567		4,448
Provision for loan losses		226		249		140		215
Net interest income after provision for loan losses		4,558		4,524		4,427		4,233
Noninterest income		1,175		978		1,060		994
Noninterest expenses		4,357		4,149		4,132		3,996
Income before income taxes		1,376		1,353		1,355		1,231
Provision for income taxes		253		209		207		(1	)
Net income	$	1,123	$	1,144	$	1,148	$	1,232
Earnings per share of common stock:
Basic	$	.44	$	.45	$	.45	$	.48
Diluted	$	.44	$	.45	$	.45	$	.48

	For the Year 2017
	Fourth		Third		Second		First
Interest and dividend income	$	5,018	$	4,859	$	4,767	$	4,502
Interest expense		559		472		435		436
Net interest income		4,459		4,387		4,332		4,066
Provision for loan losses		75		75		75		75
Net interest income after provision for loan losses		4,384		4,312		4,257		3,991
Noninterest income		960		969		1,100		1,283
Noninterest expenses		3,892		4,068		3,968		3,901
Income before income taxes		1,452		1,213		1,389		1,373
Provision for income taxes		735		261		316		308
Net income	$	717	$	952	$	1,073	$	1,065
Earnings per share of common stock:
Basic	$	.28	$	.37	$	.42	$	.42
Diluted	$	.28	$	.37	$	.42	$	.42

-96- 

19. SEGMENT REPORTING

The Corporation operations are divided into four reportable business segments: The Retail and Commercial Banking Services, Insurance Services, Wealth Strategies Services, and Financial Management Services. These operating segments have been identified primarily based on the Corporation’s organizational structure.

The Retail and Commercial Banking Services segment serves consumer and commercial customers by offering a variety of loan and deposit products, and other traditional banking services.

The Insurance Services segment offers clients a full spectrum of commercial and personal lines insurance products including life, health, property, and casualty insurance.

The Wealth Strategies Services segment provides personal trust administration, estate settlement, investment management, employee retirement benefit services, and the Individual Retirement Account (IRA) administration. Also, this segment offers full-service retail brokerage which includes the sale of retail investment products including stocks, bonds, mutual funds, and annuities.

The Financial Management Services segment is responsible for the management of the investment securities portfolio. It also is responsible for managing financial risks, including liquidity and interest rate risk.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Corporation evaluates performance based on profit or loss from operations after income taxes not including nonrecurring gains or losses.

The Corporation’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technology and marketing strategies.

The Corporation allocates capital and funds used or funds provided for each reportable business segment. Also, each segment is credited or charged for the cost of funds provided or used. These credits and charges are reflected as net intersegment interest income (expense) in the table below. The Corporation does allocate income taxes to the segments. Other revenue represents noninterest income, exclusive of the net gain (loss) on disposition of assets and expenses associated with administrative activities which are not allocated to the segments. Those expenses include audit, compliance, investor relations, marketing, personnel, and other executive or parent company expenditures.

The Corporation does not have operating segments other than those reported. Parent Company and the Administrative Offices financial information is included in the “Other” category, and is deemed to represent an overhead function rather than an operating segment. The Administrative Offices include audit, marketing, information technology, personnel, and the executive office.

The Corporation does not have a single external customer from which it derives 10% or more of its revenue and operates in one geographical area. 

-97- 

Information about reportable business segments, and reconciliation of such information to the consolidated financial statements for the years ended December 31, 2018, 2017, and 2016, are as follows: 

Segment Reporting
For the year ended December 31, 2018
	Retail and Commercial Banking			Insurance Services			Wealth Strategies			Financial Management			Inter-segment Elimination			Other			Totals
Net Interest Income (expense)
external customers	$	16,334		$	—		$	—		$	2,193		$	—		$	45		$	18,572
Net intersegment interest
income (expense)		1,818			20			(7	)		(1,831	)		—			—			—
Net interest income		18,152			20			(7	)		362			—			45			18,572
Provision for Loan Losses		830			—			—			—			—			—			830
Noninterest Income (expense)
external customers		1,765			1,604			665			259			—			(86	)		4,207
Intersegment noninterest
Income (expense)		(20	)		20			31			—			(31	)		—			—
Total Noninterest Income		1,745			1,624			696			259			(31	)		(86	)		4,207
Noninterest Expenses:
Depreciation		845			37			18			56			—			81			1,037
Amortization of intangibles		—			16			—			—			—			—			16
Other Noninterest expenses		10,974			1,158			624			752			—			2,073			15,581
Total Noninterest expenses		11,819			1,211			642			808			—			2,154			16,634
Pre-tax income		7,248			433			47			(187	)		(31	)		(2,195	)		5,315
Provision for Income Taxes		1,184			68			3			(210	)		—			(377	)		668
Net Income	$	6,064		$	365		$	44		$	23		$	(31	)	$	(1,818	)	$	4,647
Assets	$	628,222		$	1,971		$	267		$	132,033		$	(229,108	)	$	1,448		$	534,833
Expenditures of Fixed Assets	$	3,321		$	2		$	8		$	57		$	—		$	—		$	3,388
Amounts included in the “Other” column are as follows:
					Other
Net interest Income:
Parent Company				$	45
Noninterest Income:
Executive office miscellaneous income					(86	)
Noninterest Expenses:
Parent Company corporate expenses					188
Executive office expenses not allocated     to segments					1,966
Provision for Income taxes:
Parent Company income taxes (benefit)					(40	)
Executive office income taxes not allocated to segments					(337	)
Net Income:				$	(1,818	)
Segment assets:
Parent Company assets,       after intercompany elimination				$	1,448

-98- 

Segment Reporting
For the year ended December 31, 2017
	Retail and Commercial Banking			Insurance Services			Wealth Strategies			Financial Management			Inter-segment Elimination			Other			Totals
Net Interest Income (expense)
external customers	$	15,119		$	—		$	—		$	2,099		$	—		$	26		$	17,244
Net intersegment interest
income (expense)		1,817			16			(6	)		(1,827	)		—			—			—
Net interest income		16,936			16			(6	)		272			—			26			17,244
Provision for Loan Losses		300			—			—			—			—			—			300
Noninterest Income (expense)
external customers		2,099			1,525			612			75			—			1			4,312
Intersegment noninterest
Income (expense)		(16	)		16			32			—			(32	)		—			—
Total Noninterest Income		2,083			1,541			644			75			(32	)		1			4,312
Noninterest Expenses:
Depreciation		685			33			24			56			—			83			881
Amortization of intangibles		—			16			—			—			—			—			16
Other Noninterest expenses		10,328			1,119			592			780			—			2,113			14,932
Total Noninterest expenses		11,013			1,168			616			836			—			2,196			15,829
Pre-tax income		7,706			389			22			(489	)		(32	)		(2,169	)		5,427
Provision for Income Taxes		1,784			86			(2	)		306			—			(554	)		1,620
Net Income	$	5,922		$	303		$	24		$	(795	)	$	(32	)	$	(1,615	)	$	3,807
Assets	$	567,723		$	1,687		$	177		$	138,598		$	(219,840	)	$	727		$	489,072
Expenditures of Fixed Assets	$	1,888		$	48		$	2		$	17		$	—		$	—		$	1,955
Amounts included in the “Other” column are as follows:
					Other
Net interest Income:
Parent Company				$	26
Noninterest Income:
Executive office miscellaneous income					1
Noninterest Expenses:
Parent Company corporate expenses					172
Executive office expenses not allocated     to segments					2,024
Provision for Income taxes:
Parent Company income taxes (benefit)					(88	)
Executive office income taxes not   allocated to segments					(466	)
Net Income:				$	(1,615	)
Segment assets:
Parent Company assets,       after intercompany elimination				$	727

-99- 

Segment Reporting
For the year ended December 31, 2016
	Retail and Commercial Banking			Insurance Services			Wealth Strategies			Financial Management			Inter-segment Elimination			Other			Totals
Net Interest Income (expense)
external customers	$	13,837		$	—		$	—		$	1,940		$	—		$	24		$	15,801
Net intersegment interest
income (expense)		1,671			11			(6	)		(1,676	)		—			—			—
Net interest income		15,508			11			(6	)		264			—			24			15,801
Provision for Loan Losses		160			—			—			—			—			—			160
Noninterest Income (expense)
external customers		2,316			1,477			584			80			—			2			4,459
Intersegment noninterest
Income (expense)		(11	)		11			32			—			(32	)		—			—
Total Noninterest Income		2,305			1,488			616			80			(32	)		2			4,459
Noninterest Expenses:
Depreciation		738			30			23			57			—			76			924
Amortization of intangibles		—			16			—			—			—			—			16
Other Noninterest expenses		9,260			1,184			585			737			—			2,208			13,974
Total Noninterest expenses		9,998			1,230			608			794			—			2,284			14,914
Pre-tax income		7,655			269			2			(450	)		(32	)		(2,258	)		5,186
Provision for Income Taxes		1,794			61			(7	)		(107	)		—			(589	)		1,152
Net Income	$	5,861		$	208		$	9		$	(343	)	$	(32	)	$	(1,669	)	$	4,034
Assets	$	507,538		$	1,414		$	199		$	148,099		$	(209,619	)	$	870		$	448,501
Expenditures of Fixed Assets	$	1,409		$	15		$	11		$	20		$	—		$	—		$	1,455
Amounts included in the “Other” column are as follows:
					Other
Net interest Income:
Parent Company				$	24
Noninterest Income:
Executive office miscellaneous income					2
Noninterest Expenses:
Parent Company corporate expenses					178
Executive office expenses not allocated     to segments					2,106
Provision for Income taxes:
Parent Company income taxes (benefit)					(91	)
Executive office income taxes not     allocated to segments					(498	)
Net Income:				$	(1,669	)
Segment assets:
Parent Company assets,        after intercompany elimination				$	870

-100- 

20. ADJUSTMENT TO RETAINED EARNINGS

During year-end processing for 2018, the Corporation discovered that its Directors’ Deferred Compensation Plan accrual and the income related to the Cash Surrender Value of related policies to fund the plan had not been calculated properly for a number of years. Once discovered, the proper calculations were made and confirmed. The net effect on prior periods presented was determined to be immaterial and was therefore charged to 2018 Retained Earnings without restating prior periods. See the Consolidated Statements of Changes in Shareholders' Equity for the treatment of the correction. After this adjustment, the 2018 Consolidated Balance Sheets reflect the net present value of payments due under this plan and the 2018 Consolidated Statements of Income reflect the correct current year expense associated with changes in the net present value of payments due under this plan. 

21. SUBSEQUENT EVENTS

The Corporation performed an evaluation of subsequent events through March 29, 2019, the date upon which the Corporation’s financial statements were available for issue. The Corporation has not evaluated subsequent events after this date.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The Corporation did not change accountants nor have any disagreements with its accountants on any matters of accounting practices or principles or financial statement disclosure.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Corporation’s management, including the Chief Executive Officer and Principal Financial Officer, supervised and participated in an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures (as defined in federal securities rules) as of December 31, 2018. Based on, and as of the date of, that evaluation, the Corporation’s Chief Executive Officer and Principal Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the Corporation’s disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by the Corporation under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Management’s Annual Report on Internal Control over Financial Reporting

The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2018, is included in Item 8 of this Annual Report on Form 10-K under the heading “Management’s Report on Internal Controls Over Financial Reporting.”

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Changes in Internal Control Over Financial Reporting

No changes were made to the Corporation’s internal control over financial reporting during the last fiscal quarter that materially affected or could reasonably likely to materially affect the Corporation’s internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information contained under the heading “Information About Nominees For Director” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 28, 2019, to be filed with the SEC on or around April 18, 2019 , is incorporated herein by reference. Certain other information relating to the Executive Officers of the Corporation appears in Item 1 hereof under the heading “Executive Officers of the Corporation and the Bank.”

ITEM 11. EXECUTIVE COMPENSATION

The information contained under the heading “Executive Compensation” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 28, 2019, to be filed with the SEC on or around April 18, 2019, is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information contained under the heading “Voting Securities and Principal Holders” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 28, 2019, to be filed with the SEC on or around April 18, 2019, and the information contained in Item 5 hereof under the heading “Securities Authorized for Issuance Under Equity Compensation Plans,” is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information contained under the heading “Certain Relationships and Related Party Transactions” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 28, 2019, to be filed with the SEC on or around April 18, 2019, is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information contained under the heading “Information Concerning the Corporation’s Accountants” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 28, 2019, to be filed with the SEC on or around April 18, 2019, is incorporated herein by reference. 

-102- 

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)		Financial Statements
	The following consolidated financial statements and supplementary information for the fiscal years ended
	December 31, 2018, 2017, and 2016 are included in Part II, Item 8 herein:
	(i)	Report of Independent Auditors
	(ii)	Consolidated Balance Sheets – December 31, 2018 and 2017
	(iii)	Consolidated Statements of Income – Years ended December 31, 2018, 2017, and 2016
	(iv)	Consolidated Statements of Comprehensive Income – Years ended December 31, 2018, 2017, and
		2016
	(v)	Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2018,
		2017, and 2016
	(vi)	Consolidated Statements of Cash Flows – Years ended December 31, 2018, 2017, and 2016
	(vii)	Notes to Consolidated Financial Statements – December 31, 2018
(b)		Financial Statement Schedules
	All applicable financial statement schedules required have been included in the Notes to the Consolidated
	Financial Statements.
(c)		Exhibits:

The exhibits filed as part of this registration statement are as follows:

Exhibit Number	Description Of Exhibit
3.1	Articles of Incorporation of Southwest Georgia Financial Corporation, as amended and restated (included as Exhibit 3.1 to the Corporation’s Form 10-KSB for the year ended December 31, 1996, previously filed with the SEC and incorporated herein by reference).
3.2	Bylaws of the Corporation, as amended.
10.1	Form of Directors’ Deferred Compensation Plan of the Corporation (included as Exhibit 10.3 to the Corporation’s Form S-18 dated January 23, 1990, previously filed with the SEC and incorporated herein by reference).*
10.2	Directors and Executive Officers Stock Purchase Plan of the Corporation dated August 22, 2012 (included as Exhibit 4 to the Corporation’s Form S-8 dated October 11, 2012, previously filed with the SEC and incorporated herein by reference).*
10.3	Amendment No. 1 to Directors and Executive Officers Stock Purchase Plan of the Corporation dated March 23, 2016 (included as Exhibit 10.3 to the Corporation’s Form 10-K for the year ended December 31, 2016, previously filed with the SEC and incorporated herein by reference).*

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10.4	Supplemental Retirement Plan of the Corporation dated December 21, 1994 and Trust under the Corporation’s Supplemental Retirement Plan dated December 21, 1994 (included as Exhibit 10.11 to the Corporation’s Form 10-KSB for the year ended December 31, 1994, previously filed with the SEC and incorporated herein by reference).*
10.5	Amendment No. 1 to the Trust under the Corporation’s Supplemental Retirement Plan, as amended (included as Exhibit 10.6b to the Corporation’s Form 10-K for the year ended December 31, 1997, previously filed with the SEC and incorporated herein by reference).*
10.6	Dividend Reinvestment and Share Purchase Plan of the Corporation, as amended and restated by Amendment No. 1 (included as Exhibit 99 to the Corporation’s Form S-3DPOS dated September 30, 1998, previously filed with the SEC and incorporated herein by reference).
10.7	Employment Agreement of DeWitt Drew (included as Exhibit 10.11 to the Corporation’s Form S-4 dated January 6, 2004, previously filed with the SEC and incorporated herein by reference).*
10.8	2013 Omnibus Incentive Plan of the Corporation (included as Appendix I to the Corporation’s Proxy Statement dated April 17, 2014, previously filed with the SEC and incorporated herein by reference).*
10.9	Employee Stock Ownership Plan and Trust of the Corporation, as amended and restated effective as of January 1, 2014 (included as Exhibit 10.10 to the Corporation’s Form 10-K for the year ended December 31, 2016, previously filed with the SEC and incorporated herein by reference).*
10.10	Southwest Georgia Bank 401(k) Plan, as restated effective as of January 1, 2015 (included as Exhibit 10.11 to the Corporation’s Form 10-K for the year ended December 31, 2016, previously filed with the SEC and incorporated herein by reference).*
10.11	Pension Retirement Plan of the Corporation, as amended and restated effective as of January 1, 2015; amended effective as of December 1, 2016 (included as Exhibit 10.12 to the Corporation’s Form 10-K for the year ended December 31, 2016, previously filed with the SEC and incorporated herein by reference).*
10.12	Form of Restricted Stock Award Agreement (included as Exhibit 10.12 to the Corporation’s Form 10-K for the year ended December 31, 2017, previously filed with the SEC and incorporated herein by reference).*
14	Code of Ethical Conduct dated February 27, 2008 (included as Exhibit 14 to the Corporation’s Form 8-K dated February 27, 2008, previously filed with the SEC and incorporated herein by reference).
21	Subsidiaries of the Corporation
23.1	Consent of TJS Deemer Dana, LLP
31.1	Section 302 Certification of Periodic Financial Report by Chief Executive Officer.
31.2	Section 302 Certification of Periodic Financial Report by Principal Financial Officer.
32.1	Section 906 Certification of Periodic Financial Report by Chief Executive Officer.

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32.2	Section 906 Certification of Periodic Financial Report by Principal Financial Officer.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.

ITEM 16. FORM 10-K SUMMARY

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Southwest Georgia Financial Corporation
	(Corporation)
Date: March 29, 2019	By:	/s/ DeWitt Drew
		DEWITT DREW
		President and Chief Executive Officer
Date: March 29, 2019		/s/ Karen T. Boyd
		KAREN T. BOYD
		Senior Vice President and Treasurer

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Corporation and in the capacities and on the dates indicated.

/s/ Roy Reeves	Date:  March 29, 2019
ROY REEVES Chairman
/s/ Cecil H. Barber	Date:  March 29, 2019
CECIL H. BARBER Vice Chairman
/s/ Richard L. Moss	Date:  March 29, 2019
RICHARD L. MOSS Director
/s/ John J. Cole, Jr.	Date:  March 29, 2019
JOHN J. COLE, JR. Director
/s/ Johnny R. Slocumb	Date:  March 29, 2019
JOHNNY R. SLOCUMB Director
/s/ M. Lane Wear	Date:  March 29, 2019
M. LANE WEAR Director
/s/ Marcus R. Wells	Date:  March 29, 2019
MARCUS R. WELLS Director

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Exhibit Index

Exhibit Number	Description of Exhibit
3.2	Bylaws of the Corporation, as amended.
21	Subsidiaries of the Corporation
23.1	Consent of TJS Deemer Dana, LLP
31.1	Section 302 Certification of Periodic Financial Report by Chief Executive Officer.
31.2	Section 302 Certification of Periodic Financial Report by Principal Financial Officer.
32.1	Section 906 Certification of Periodic Financial Report by Chief Executive Officer.
32.2	Section 906 Certification of Periodic Financial Report by Principal Financial Officer.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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