Employee Benefits and Retirement Plans

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Employee Benefits and Retirement Plans

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, 2011, 2010, and 2009 is presented below.

	2011			2010			2009
Change in Benefit Obligation
Benefit obligation at beginning of year	$	12,635,261		$	12,248,849		$	12,180,640
Service cost		0			0			0
Interest cost		692,641			718,393			712,894
Amendments		0			0			0
Benefits paid		(883,044	)		(784,304	)		(769,841	)
Other – net		(83,961	)		452,323			125,156
Benefit obligation at end of year	$	12,360,897		$	12,635,261		$	12,248,849
Change in Plan Assets
Fair value of plan assets at beginning of year	$	10,488,437		$	10,334,869		$	9,624,039
Actual return on plan assets		57,388			532,872			1,230,671
Employer contribution		600,000			405,000			250,000
Benefits paid		(883,044	)		(784,304	)		(769,841	)
Fair value of plan assets at end of year	$	10,262,781		$	10,488,437		$	10,334,869

		2011			2010			2009
Funded status	$	(2,098,116	)	$	(2,146,824	)	$	(1,913,980	)
Unrecognized net actuarial (gain)/loss		0			0			0
Unrecognized prior service cost		0			0			0
Pension liability included in other liabilities	$	(2,098,116	)	$	(2,146,824	)	$	(1,913,980	)
Accumulated benefit obligation	$	12,360,897		$	12,635,261		$	12,248,849

Amount recognized in consolidated balance sheet consist of the following:	2011			2010			2009
Accrued Pension	$	2,098,116		$	2,146,824		$	1,913,980
Deferred tax assets	$	713,359		$	729,920		$	650,754
Accumulated other comprehensive income		1,384,757			1,416,904			1,263,226
Total	$	2,098,116		$	2,146,824		$	1,913,980
Components of  Pension Cost		2011			2010			2009
Service cost	$	0		$	0		$	0
Interest cost on benefit obligation		692,641			718,393			712,894
Expected return on plan assets		(814,635	)		(801,070	)		(744,127	)
Other - net		306,007			281,630			373,001
Net periodic pension cost	$	184,013		$	198,953		$	341,768

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

		2011			2010		2009
Net loss (gain)	$	(48,708	)	$	232,844	$	(642,621	)
Prior service costs		0			0		0
Total recognized in other comprehensive income (loss)	$	(48,708	)	$	232,844	$	(642,621	)
Net periodic pension cost		184,013			198,953		341,768
Total recognized in net periodic pension cost and other comprehensive income (loss)	$	135,305		$	431,797	$	(300,853	)

After adopting ASC 960, “Employer’s Accounting for Deferred Benefit Pension Plan and Other Postretirement Plans,” and freezing its pension retirement plan, the Corporation reduced the accrued liability by $48,708 in 2011 and increased the accrued pension liability by $232,844 in 2010. Also, changes were made to other comprehensive income (loss) of $32,147 for 2011 and $(153,677) for 2010 on a pre-tax basis. During 2011, the fair value of the plan assets decreased $225,656.

At December 31, 2011, the plan assets included cash and cash equivalents, certificates of deposits with banks, corporate notes, and equity securities.

Assumptions used to determine the benefit obligation as of December 31, 2011 and 2010 respectively were:

	2011			2010
Weighted-Average Assumptions As of December 31
Discount rate		5.70	%		5.75	%
Rate of compensation increase		N/A			N/A

For the years ended December 31, 2011, 2010, and 2009, the assumptions used to determine net periodic pension costs are as follows:

	2011		2010		2009
Discount rate	5.75	%	6.00	%	6.00	%
Expected return on plan assets	8.00	%	8.00	%	8.00	%
Rate of compensation increase	N/A		N/A		N/A

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

The Corporation’s pension plan investment objective is both security and long-term stability, with moderate growth. The investment strategies and policies employed provide for investments, other than “fixed-dollar” investments, to prevent erosion by inflation. Sufficient funds are held in a liquid nature (money market, short-term securities) to allow for the payment of plan benefits and expenses, without subjecting the funds to loss upon liquidation. In an effort to provide a higher return with lower risk, the fund assets are allocated between stocks, fixed income securities, and cash equivalents. All plan investments and transactions are in compliance with ERISA and any other law applicable to employee benefit plans. The targeted investment portfolio is allocated up to 30% in equities, 50% to 90% in fixed-income investments, and up to 20% in cash equivalents investments. All the Corporation’s equity investments are in mutual funds with a Morningstar rating of 3 or higher, have at least $300 million in investments, and have been in existence 5 years or more. Fixed income securities include issues of the U.S. Government and its agencies and corporate notes. Any corporate note purchased has a rating (by Standard & Poor’s or Moody’s) of “A” or better. The average maturity of the fixed income portion of the portfolio does not exceed 10 years.

Pension Asset Allocation and Fair Value Measurement as of December 31

	2011							2010
	Fair Value		Level 1		%			Fair Value		Level 1		%
Investment at fair value as determined by quoted market price:
Equity	$	2,452,986	$	2,452,986		24	%	$	2,829,460	$	2,829,460		27	%
Fixed income		0		0		—			0		0		—
Total	$	2,452,986	$	2,452,986		24	%	$	2,829,460	$	2,829,460		27	%
Investment as estimated fair value:
Certificates of deposit	$	5,858,190	$	5,858,190		57	%	$	4,650,000	$	4,650,000		44	%
Cash and cash equivalent		1,951,605		1,951,605		19	%		3,008,977		3,008,977		29	%
Total	$	7,809,795	$	7,809,795		76	%	$	7,658,977	$	7,658,977		73	%
Total	$	10,262,781	$	10,262,781		100	%	$	10,488,437	$	10,488,437		100	%

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

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

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

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

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

Estimated Contributions

The Corporation expects to contribute $600,000 to its pension plan in 2012.

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:

2012	$	949,000
2013		928,000
2014		962,000
2015		1,077,000
2016		1,068,000
Years 2017 – 2021	$	4,892,000

The estimated amortization amounts for the next fiscal year are: Net loss of $361,705, no prior service cost or credit, and no net transition asset or obligation.

Southwest Georgia Bank 401(K) Plan

In place of the Corporation’s frozen defined pension retirement plan, the Corporation is offering the employees a 401(K) Plan effective January 1, 2007. This 401(K) plan is a qualified defined contribution plan as provided for under Section 401(K) of the Internal Revenue Code. This plan is a “safe–harbor” plan meaning that the Corporation will match contributions dollar for dollar for the first four percent of salary participants defer into the plan. The plan does allow for discretionary match in excess of the four percent and that the participants are allowed to defer the maximum amount of salary. During 2011, the Corporation matched the employee participants for the first four percent of salary contributing $180,717 to the plan and $180,091 in 2010.

Employee Stock Ownership Plan

The Corporation has a nondiscriminatory Employee Stock Ownership Plan and Trust (ESOP) administered by a trustee. The plan was established to purchase and hold Southwest Georgia Financial Corporation stock for all eligible employees. Contributions to the plan are made solely by the Corporation and are at the discretion of the Board of Directors. The annual amount of the contribution is determined by taking into consideration the financial conditions, profitability, and fiscal requirements of the Corporation. There were $100,000 of contributions in 2011 and $75,000 of contributions in 2010. Contributions to eligible participants are based on percentage of annual compensation. As of December 31, 2011, the ESOP holds 294,302 shares of the Corporation’s outstanding common stock. All 277,282 released shares are allocated to the participants. The 17,020 unreleased shares are pledged as collateral for a $157,500 long-term debt incurred from repurchasing participants’ shares. Dividends paid by the Corporation on ESOP shares are allocated to the participants based on shares held. ESOP shares are included in the Corporation’s outstanding shares and earnings per share computation.

Directors Deferred Compensation Plan

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

Directors and Executive Officers Stock Purchase Plan

The Corporation has adopted a stock purchase plan for the executive officers and directors of Southwest Georgia Financial Corporation. Under the plan, participants may elect to contribute up to $500 monthly of salary or directors’ fees and receive corporate common stock with an aggregate value of 1.5 times their contribution. The expense incurred during 2011, 2010, and 2009 on the part of the Corporation totaled $74,625, $69,800, and $71,900, respectively.

Stock Option Plan

Effective March 19, 1997, the Corporation established a Key Individual Stock Option Plan which provides for the issuance of options to key employees and directors of the Corporation. In April 1997, the Plan was approved by the Corporation’s stockholders, and was effective for the duration of ten years. In April of 2007, the Plan concluded as related to granting new stock options. Under the Plan, the exercise price of each option equals the market price of the Corporation’s stock on the grant date for a term of ten years. All of these stock options are fully vested. The fair value of each stock option grant is estimated on the grant date using an option-pricing model using weighted-average assumptions. The fair value of each option was expensed over its vesting period. A maximum of 196,680 shares of common stock were authorized for issuance with respect to options granted under the Plan. The Plan provided for the grant of incentive stock options and nonqualified stock options to key employees of the Corporation. The Plan is administered by the Personnel Committee of the Board of Directors.

The following table sets forth the number of stock options granted, the average fair value of options granted, and the weighted-average assumptions used to determine the fair value of the stock options granted.

		2011		2010		2009
Number of stock options granted		0		0		0
Average fair value of stock options granted		0		0		0
Number of option shares exercisable		10,900		13,880		25,100
Average price of stock options exercisable	$	20.19	$	19.08	$	16.21

A summary of the status of the Corporation’s Plan as of December 31, 2011, 2010 and 2009, and the changes in stock options during the years are presented below:

	No. of Shares			Average Price
Outstanding at December 31, 2008		37,552		$	15.59
Granted		0			0
Expired		(12,452	)		14.35
Exercised		0			0
Outstanding at December 31, 2009		25,100		$	16.21
Granted		0			0
Expired		(11,220	)		12.66
Exercised		0			0
Outstanding at December 31, 2010		13,880		$	19.08
Granted		0			0
Expired		(2,980	)		15.00
Exercised		0			0
Outstanding at December 31, 2011		10,900		$	20.19

The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 2011.

	Outstanding Stock Options					Exercisable Stock Options
Exercise Price Range		Number Outstanding At 12/31/11	Weighted- Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable At 12/31/11		Weighted Average Exercise Price
$19 to $20		7,600	4.0 Years		19.61		7,600		19.61
$21 to $23		3,300	4.5 Years		21.52		3,300		21.52
$19 to $23		10,900		$	20.19		10,900	$	20.19

Dividend Reinvestment and Share Purchase Plan

In 1997, the Corporation’s Board of Directors approved a dividend reinvestment and share purchase plan. Also, the Board amended this plan on September 16, 1998. The purpose of the plan is to provide stockholders of record of the Corporation’s common stock, who elect to participate in the Plan, with a simple and convenient method of investing cash dividends and voluntary cash contributions in shares of the common stock without payment of any brokerage commissions or other charges. Eligible participants may purchase common stock through automatic reinvestment of common stock dividends on all or partial shares and make additional voluntary cash payments of not less than $5 nor more than $5,000 per month. The participant’s price of common stock purchased with dividends or voluntary cash payments will be the average price of all shares purchased in the open market, or if issued from unissued shares or treasury stock the price will be the average of the high and low sales prices of the stock on the NYSE Amex on the dividend payable date or other purchase date. During the years ended December 31, 2011, 2010, and 2009, shares issued through the plan were 4,059, 3,098, and 3,525, respectively, at an average price of $12.50, $13.55, and $9.08, per share, respectively. These numbers of shares and average price per share are not adjusted by stock dividends.