SOUTHWEST GEORGIA FINANCIAL CORP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - SOUTHWEST GEORGIA FINANCIAL CORP	Financial_Report.xls
EX-31.1 - SECTION 302 CERTIFICATION BY CEO - SOUTHWEST GEORGIA FINANCIAL CORP	exhibit311q214.htm
EX-32.1 - SECTION 906 CERTIFICATION BY CEO - SOUTHWEST GEORGIA FINANCIAL CORP	exhibit321q214.htm
EX-31.2 - SECTION 302 CERTIFICATION BY CFO - SOUTHWEST GEORGIA FINANCIAL CORP	exhibit312q214.htm
EX-32.2 - SECTION 906 CERTIFICATION BY CFO - SOUTHWEST GEORGIA FINANCIAL CORP	exhibit322q214.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

[ X ]	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2014

[ ]	Transition report under Section 13 or 15(d) of the Exchange Act.
	For the transition period from to __________

Commission file number 1-12053

SOUTHWEST GEORGIA FINANCIAL CORPORATION

(Exact Name Of Small Business Issuer as specified in its Charter)

Georgia		58-1392259
(State Or Other Jurisdiction Of		(I.R.S. Employer
Incorporation Or Organization)		Identification No.)

201 FIRST STREET, S.E., MOULTRIE, GEORGIA 31768

Address Of Principal Executive Offices

(229) 985-1120 _

Registrant's Telephone Number, Including Area Code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X ] No [ ]

Indicate by check mark whether the registrant 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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer [ ]	Non-accelerated filer [ ] (Do not check if smaller reporting company)
Accelerated filer [ ]	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.

Class		Outstanding At June 30, 2014
Common Stock, $1 Par Value		2,547,837

SOUTHWEST GEORGIA FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2014

TABLE OF CONTENTS

				PAGE #
PART I - FINANCIAL INFORMATION

	ITEM 1.		FINANCIAL STATEMENTS

	The following financial statements are provided for Southwest Georgia
	Financial Corporation as required by this Item 1.

		a.	Consolidated balance sheets - June 30, 2014 (unaudited) and
			December 31, 2013 (audited).	2

		b.	Consolidated statements of income (unaudited) – for the six months and
			the three months ended June 30, 2014 and 2013.	3

		c.	Consolidated statements of comprehensive income (unaudited) - for the
			six months and the three months ended June 30, 2014 and 2013.	4

		d.	Consolidated statements of cash flows (unaudited) for the six months
			ended June 30, 2014 and 2013.	5

		e.	Notes to Consolidated Financial Statements	6

	ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF
			FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29

	ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
			MARKET RISK	37

	ITEM 4.		CONTROLS AND PROCEDURES	37

PART II - OTHER INFORMATION

	ITEM 6.		EXHIBITS	38

	SIGNATURE			39

-1-

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2014 and December 31, 2013
	(Unaudited)			(Audited)
	June 30,			December 31,
	2014			2013
ASSETS
Cash and due from banks	$	8,309,899		$	7,074,010
Interest-bearing deposits in other banks		4,910,149			28,296,150
Cash and cash equivalents		13,220,048			35,370,160

Certificates of deposit in other banks		3,430,000			3,430,000

Investment securities available for sale, at fair value		52,690,671			36,460,768
Investment securities held to maturity (fair value
approximates $59,767,895 and $60,019,146)		58,428,702			59,624,039
Federal Home Loan Bank stock, at cost		1,506,000			1,721,000
Total investment securities		112,625,373			97,805,807

Loans		227,298,341			218,713,849
Less: Unearned income		(25,760	)		(25,941	)
Allowance for loan losses		(3,126,754	)		(3,077,561	)
Loans, net		224,145,827			215,610,347

Premises and equipment, net		11,702,547			10,335,878
Foreclosed assets, net		437,736			405,508
Intangible assets		74,219			111,338
Bank owned life insurance		5,029,761			4,980,390
Other assets		4,912,520			5,845,785

Total assets	$	375,578,031		$	373,895,213

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
NOW accounts	$	24,284,690		$	23,088,159
Money Market		96,526,876			89,933,636
Savings		30,225,409			28,791,929
Certificates of deposit $100,000 and over		29,891,735			36,956,313
Other time accounts		46,641,679			49,835,865
Total interest-bearing deposits		227,570,389			228,605,902
Noninterest-bearing deposits		86,247,963			81,828,637
Total deposits		313,818,352			310,434,539

Short-term borrowed funds		8,800,000			11,800,000
Long-term debt		17,200,000			17,200,000
Other liabilities		2,601,877			3,040,683
Total liabilities		342,420,229			342,475,222

Stockholders' equity:
Common stock - $1 par value, 5,000,000 shares
authorized, 4,293,835 shares issued		4,293,835			4,293,835
Capital surplus		31,701,533			31,701,533
Retained earnings		23,956,737			22,926,458
Accumulated other comprehensive loss		(680,508	)		(1,388,040	)
Treasury stock, at cost 1,745,998 shares for 2014
and 2013		(26,113,795	)		(26,113,795	)
Total stockholders' equity		33,157,802			31,419,991

Total liabilities and stockholders' equity	$	375,578,031		$	373,895,213

-2-

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
	For The Three Months					For The Six Months
	Ended June 30,					Ended June 30,
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
Interest income:	2014		2013			2014		2013
Interest and fees on loans	$	3,058,090	$	3,034,357		$	6,007,470	$	5,952,508
Interest on taxable securities available for sale		285,220		155,347			495,541		299,958
Interest on taxable securities held to maturity		84,624		98,119			173,532		203,633
Interest on tax exempt securities		262,949		281,658			526,180		559,389
Dividends		13,524		8,043			24,917		16,322
Interest on deposits in other banks		12,611		13,551			33,837		36,823
Interest on certificates of deposit in other banks		9,370		10,776			18,637		21,427
Total interest income		3,726,388		3,601,851			7,280,114		7,090,060

Interest expense:
Interest on deposits		192,359		215,226			387,845		460,233
Interest on federal funds purchased		1		10			3		12
Interest on other short-term borrowings		37,717		80,217			140,413		93,976
Interest on long-term debt		104,186		109,129			207,227		282,635
Total interest expense		334,263		404,582			735,488		836,856
Net interest income		3,392,125		3,197,269			6,544,626		6,253,204
Provision for loan losses		75,000		105,000			180,000		210,000
Net interest income after provision for loan losses		3,317,125		3,092,269			6,364,626		6,043,204

Noninterest income:
Service charges on deposit accounts		331,356		286,432			655,653		586,183
Income from trust services		57,921		53,321			113,220		103,514
Income from retail brokerage services		98,512		90,618			190,705		166,686
Income from insurance services		347,034		312,268			707,662		671,341
Income from mortgage banking services		210,951		237,061			346,073		497,648
Net gain (loss) on sale or disposition of assets		20,446		(3,059	)		20,446		(56,986	)
Net gain on sale of securities		0		0			154,451		0
Other income		179,608		172,217			399,790		386,227
Total noninterest income		1,245,828		1,148,858			2,588,000		2,354,613

Noninterest expense:
Salaries and employee benefits		2,070,614		2,074,531			4,139,181		4,177,171
Occupancy expense		257,251		253,082			509,523		506,497
Equipment expense		215,405		228,676			432,263		460,695
Data processing expense		284,025		271,627			557,503		548,553
Amortization of intangible assets		3,906		53,925			37,119		107,850
Other operating expenses		799,165		746,323			1,457,018		1,376,585
Total noninterest expenses		3,630,366		3,628,164			7,132,607		7,177,351
Income before income taxes		932,587		612,963			1,820,019		1,220,466
Provision for income taxes		195,739		39,091			382,085		80,788
Net income	$	736,848	$	573,872			1,437,934	$	1,139,678

Earnings per share of common stock:
Net income, basic	$	0.28	$	0.23		$	0.56	$	0.45
Net income, diluted	$	0.28	$	0.23		$	0.56	$	0.45
Dividends paid per share	$	0.08	$	0.04		$	0.16	$	0.08
Weighted average shares outstanding		2,547,837		2,547,837			2,547,837		2,547,837
Diluted average shares outstanding		2,547,837		2,547,837			2,547,837		2,547,837

-3-

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)
	2014		2013			2014			2013

Net income	$	736,848	$	573,872		$	1,437,934		$	1,139,678
Other comprehensive income (loss):
Unrealized holding gains (losses) on investment securities available for sale		482,183		(934,003	)		1,226,470			(920,849	)
Reclassification adjustment for gains realized in income		0					(154,451	)
Tax effect		163,943		(317,561	)		364,487			(313,089	)
Total other comprehensive income (loss), net of tax		318,240		(616,442	)		707,532			(607,760	)
Total comprehensive income (loss)	$	1,055,088	$	(42,570	)	$	2,145,466		$	531,918

-4-

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months
	Ended June 30,
	(Unaudited)			(Unaudited)
Cash flows from operating activities:	2014			2013
Net income	$	1,437,934		$	1,139,678
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses		180,000			210,000
Depreciation		448,949			460,555
Net amortization of investment securities		161,713			178,697
Income on cash surrender value of bank owned life insurance		(49,371	)		(85,446	)
Amortization of intangibles		37,119			107,850
Loss (gain) on sale/writedown of foreclosed assets		(20,446	)		102,757
Net gain on sale of securities		(154,451	)		0
Net loss on disposal of other assets		0			229
Change in:
Other assets		568,778			83,388
Other liabilities		(438,806	)		(760,551	)
Net cash provided by operating activities		2,171,419			1,437,157

Cash flows from investing activities:
Proceeds from calls, paydowns and maturities of securities HTM		1,549,154			4,905,714
Proceeds from calls, paydowns and maturities of securities AFS		1,408,252			2,643,598
Proceeds from Federal Home Loan Bank stock repurchase		530,000			0
Proceeds from sale of securities available for sale		198,200			0
Purchase of securities held to maturity		(500,000	)		(7,300,801	)
Purchase of securities available for sale		(16,940,414	)		(13,634,454	)
Purchase of certificates of deposit in other banks		0			(245,000	)
Net change in loans		(8,976,029	)		(15,358,601	)
Purchase of bank owned life insurance		0			(116,000	)
Proceeds from bank owned life insurance		0			68,505
Purchase of premises and equipment		(1,815,617	)		(487,392	)
Proceeds from sales of other assets		248,767			622,595
Net cash used in investing activities		(24,297,687	)		(28,901,836	)

Cash flows from financing activities:
Net change in deposits		3,383,810			4,632,988
Payment of short-term portion of long term debt		(10,000,000	)		0
Proceeds from issuance of short-term debt		7,000,000			0
Cash dividends paid		(407,654	)		(203,827	)
Net cash (used in) provided by financing activities		(23,844	)		4,429,161

Increase (decrease) in cash and cash equivalents		(22,150,112	)		(23,035,518	)
Cash and cash equivalents - beginning of period		35,370,160			36,581,052
Cash and cash equivalents - end of period	$	13,220,048		$	13,545,534

NONCASH ITEMS:
Increase in foreclosed properties and decrease in loans	$	260,548		$	104,330
Unrealized gain (loss) on securities available for sale	$	1,072,019		$	(920,849	)
Adjustment to Directors’ deferred compensation liability	$	0		$	(33,000	)
Net reclass between short and long-term debt	$	0		$	10,000,000

-5-

SOUTHWEST GEORGIA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________

Basis of Presentation

Southwest Georgia Financial Corporation (the “Corporation”), a bank-holding company organized under the laws of Georgia, provides deposit, lending, and other financial services to businesses and individuals primarily in the Southwest region of Georgia. The Corporation and its subsidiaries are subject to regulation by certain federal and state agencies.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and changes in financial position in conformity with generally accepted accounting principles. The interim financial statements furnished reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The interim consolidated financial statements should be read in conjunction with the Corporation’s 2013 Annual Report on Form 10K.

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NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Southwest Georgia Financial Corporation and Subsidiaries (the “Corporation”) conform to generally accepted accounting principles and to general practices within the banking industry. The following is a description of the more significant of those policies.

Principles of Consolidation

The consolidated financial statements include the accounts of Southwest Georgia Financial Corporation and its wholly-owned direct and indirect Subsidiaries, Southwest Georgia Bank (the “Bank”) and Empire Financial Services, Inc. (“Empire”). All significant intercompany accounts and transactions have been eliminated in the consolidation.

Nature of Operations

The Corporation offers comprehensive financial services to consumer, business, and governmental customers through its banking offices in southwest Georgia. Its primary deposit products are money market, NOW, savings and certificates of deposit, and its primary lending products are consumer and commercial mortgage loans. The Corporation provides, in addition to conventional banking services, investment planning and management, trust management, mortgage banking, and commercial and individual insurance products. Insurance products and advice are provided by the Bank’s Southwest Georgia Insurance Services Division. Mortgage banking for primarily commercial properties is provided by Empire, a mortgage banking services subsidiary.

The Corporation’s primary business is providing banking services through the Bank to individuals and businesses principally in Colquitt County, Baker County, Thomas County, Worth County, Lowndes County and the surrounding counties of southwest Georgia. The Bank also operates Empire in Milledgeville, Georgia. Our first full-service banking center in Valdosta, Georgia opened in June 2010 and a mortgage origination office was opened in January 2011 in Valdosta, Georgia. Our second banking center in Valdosta opened in March 2012. A new commercial banking center in Valdosta, Georgia is currently under construction and is expected to open around August of 2014.

Use of Estimates

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

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

-7-

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

Cash and Cash Equivalents and Statement of Cash Flows

For purposes of reporting cash flows, the Corporation considers cash and cash equivalents to include all cash on hand, deposit amounts due from banks, interest-bearing deposits in other banks, and federal funds sold. The Corporation maintains its cash balances in several financial institutions. Accounts at the financial institutions are secured by the Federal Deposit Insurance Corporation up to $250,000. Uninsured deposits aggregate to $314,028 at June 30, 2014.

Investment Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value with unrealized gains and losses reported in other comprehensive income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-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 since 2003, the Corporation used the straight-line method of depreciation. The following estimated useful lives are used for financial statement purposes:

Land improvements	5 – 31 years
Building and improvements	10 – 40 years
Machinery and equipment	5 – 10 years
Computer equipment	3 – 5 years
Office furniture and fixtures	5 – 10 years

All of the Corporation’s leases are operating leases and are not capitalized as assets for financial reporting purposes. Maintenance and repairs are charged to expense and betterments are capitalized.

-8-

Long-lived assets are evaluated regularly for other-than-temporary impairment. If circumstances suggest that their value may be impaired and the write-down would be material, an assessment of recoverability is performed prior to any write-down of the asset. Impairment on intangibles is evaluated at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount should be assessed. Impairment, if any, is recognized through a valuation allowance with a corresponding charge recorded in the income statement.

Loans and Allowances for Loan Losses

Loans are stated at principal amounts outstanding less unearned income and the allowance for loan losses. Interest income is credited to income based on the principal amount outstanding at the respective rate of interest except for interest on certain installment loans made on a discount basis which is recognized in a manner that results in a level-yield on the principal outstanding.

Accrual of interest income is discontinued on loans when, in the opinion of management, collection of such interest income becomes doubtful. Accrual of interest on such loans is resumed when, in management’s judgment, the collection of interest and principal becomes probable.

Fees on loans and costs incurred in origination of most loans are recognized at the time the loan is placed on the books. Because loan fees are not significant, the results on operations are not materially different from the results which would be obtained by accounting for loan fees and costs as amortized over the term of the loan as an adjustment of the yield.

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

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collection of the principal is unlikely. The allowance is an amount which management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on evaluation of the 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.

-9-

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

Foreclosed Assets

In accordance with policy guidelines and regulations, properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. A valuation allowance is established to record market value changes in foreclosed assets. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. No additional provisions were added in the first six months of 2014. As of June 30, 2014, the valuation allowance for foreclosed asset losses was $0 due to the final sale of the related foreclosed properties.

Intangible Assets

Intangible assets are amortized over a determined useful life using the straight-line basis. These assets are evaluated annually as to the recoverability of the carrying value. The remaining intangibles have a remaining life of less than one to six years.

Credit Related Financial Instruments

In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Retirement Plans

The Corporation and its subsidiaries have post-retirement plans covering substantially all employees. The Corporation makes annual contributions to the plans in amounts not exceeding the regulatory requirements.

Bank Owned Life Insurance

The Corporation’s subsidiary bank has bank owned life insurance policies on a group of employees. Banking laws and regulations allow the Bank to purchase life insurance policies on certain employees in order to help offset the Bank’s overall employee compensation costs. 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 June 30, 2014 and December 31, 2013, the policies had a value of $5,029,761 and $4,980,390, respectively, and were 15.17% and 15.85%, respectively, of stockholders’ equity. These values are within regulatory guidelines.

Income Taxes

The Corporation and its subsidiaries file a consolidated income tax return. Each subsidiary computes its income tax expense as if it filed an individual return except that it does not receive any portion of the surtax allocation. Any benefits or disadvantages of the consolidation are absorbed by the parent company. Each subsidiary pays its allocation of federal income taxes to the parent company or receives payment from the parent company to the extent that tax benefits are realized.

-10-

The Corporation reports income under Accounting Standards Codification Topic 740, Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefit associated with certain temporary differences and tax credits will be realized.

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

The Corporation recognizes penalties related to income tax matters in income tax expense. The Corporation is subject to U.S. federal and Georgia state income tax audit for returns for the tax period ending December 31, 2011 and subsequent years.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) includes all changes in stockholders’ equity during a period, except those resulting from transactions with stockholders. 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.

Servicing and Origination Fees on Loans

The Corporation from the Bank’s subsidiary, Empire, recognizes as income in the current period all loan origination and brokerage fees collected on loans originated and closed for investing participants. Empire provides commercial mortgage banking services and was servicing approximately $121 million in non-recourse commercial mortgages at June 30, 2014. Loan servicing fees are based on a percentage of loan interest paid by the borrower and recognized over the term of the loan as loan payments are received. Empire does not directly fund any mortgages and acts as a service-oriented broker for participating mortgage lenders. Fees charged for continuing servicing fees are comparable with market rates charged in the industry. Based on these facts and after a thorough analysis and evaluation of deferred mortgage servicing costs as defined under ASC Topic 860, Transfers and Servicing, unrecognized mortgage servicing assets are considered insignificant and immaterial to be recognized. Late charges assessed on past due payments are recognized as income by the Corporation when collected.

Advertising Costs

It is the policy of the Corporation to expense advertising costs as they are incurred. The Corporation does not engage in any direct-response advertising and accordingly has no advertising costs reported as assets on its balance sheet. Costs expensed were $29,725 and $73,217 for the three and six month periods ended June 30, 2014.

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Recent Market and Regulatory Developments

The financial services industry is continuing to face unprecedented challenges in the face of the current national and global economic environment. The global and U.S. economies continue to experience significantly reduced business activity. While recently showing signs of improvement, dramatic declines in the housing market during the past several years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital; to merge with larger and stronger institutions; and, in some cases, to fail. The Corporation is fortunate that the markets it serves have been impacted to a lesser extent than many areas around the country.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted. The Dodd-Frank Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope affecting many aspects of bank and financial market regulation. The Dodd-Frank Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Dodd-Frank Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Corporation become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Dodd-Frank Act also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000.

Recent Accounting Pronouncements

Accounting Standards Update (ASU) 2014-04 – Receivables – Troubled Debt Restructurings by Creditors (“ASU 2014-04”). ASU 2014-04 clarifies when a creditor should reclassify mortgage loans collateralized by residential real estate from loans to other real estate owned. It defines when an in-substance repossession or foreclosure has occurred and when a creditor is considered to have received physical possession of residential real estate collateralizing a mortgage loan. ASU 2014-04 is effective for fiscal years beginning after December 31, 2014, and early adoption is permitted. It can either be applied prospectively or using a modified retrospective transition method. The Corporation does not expect the impact of this guidance to be material to the Corporation’s financial position, results of operations, or disclosures.

NOTE 2

Fair Value Measurements

Effective January 1, 2008, the Corporation adopted ASC 820, which provides a framework for measuring fair value under GAAP. ASC 820 applies to all financial statement elements that are being measured and reported on a fair value basis.

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

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Fair Value Hierarchy:

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

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

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

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

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

Cash and Cash Equivalents:

For disclosure purposes for cash, due from banks, federal funds sold and 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. 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 approximates fair value.

Loans:

The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allocation is established within the allowance for loan losses. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, Accounting by Creditors for Impairment of a Loan, (ASC 310). The fair value of impaired loans is estimated using one of three methods, including collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of

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collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the impaired loan as nonrecurring Level 3.

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

Foreclosed Assets:

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

Deposits:

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

Federal Funds Purchased:

For disclosure purposes, the carrying amount for Federal funds purchased is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

FHLB Advances:

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

Commitments to Extend Credit and Standby Letters of Credit:

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

Assets Recorded at Fair Value on a Recurring Basis:

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The table below presents the recorded amount of assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013.

June 30, 2014	Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. Government Agency securities	$	0	$	41,564,412	$	0	$	41,564,412
State and municipal securities		0		858,423		0		858,423
Residential mortgage-backed securities		0		7,769,831		0		7,769,831
Corporate notes		0		2,498,005		0		2,498,005
Total	$	0	$	52,690,671	$	0	$	52,690,671

December 31, 2013	Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. Government Agency securities	$	0	$	23,580,234	$	0	$	23,580,234
State and municipal securities		0		1,440,379		0		1,440,379
Residential mortgage-backed securities		0		8,795,491		0		8,795,491
Corporate notes		0		2,469,515		0		2,469,515
Equity securities		175,149		0		0		175,149
Total	$	175,149	$	36,285,619	$	0	$	36,460,768

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 June 30, 2014 and December 31, 2013.

June 30, 2014	Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	437,736	$	437,736
Impaired loans		0		0		4,428,210		4,428,210
Total assets at fair value	$	0	$	0	$	4,865,946	$	4,865,946

December 31, 2013	Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	405,508	$	405,508
Impaired loans		0		0		2,528,057		2,528,057
Total assets at fair value	$	0	$	0	$	2,933,565	$	2,933,565

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.

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 June 30, 2014, and December 31, 2013, are as follows:

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			Estimated Fair Value
June 30, 2014	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	13,220	$	13,220	$	0	$	0	$	13,220
Certificates of deposit in other banks		3,430		3,430		0		0		3,430
Investment securities available for sale		52,691		0		52,691		0		52,691
Investment securities held to maturity		58,429		0		59,768		0		59,768
Federal Home Loan Bank stock		1,506		0		1,506		0		1,506
Loans, net		224,146		0		218,406		4,428		222,834
Liabilities:
Deposits		313,818		0		314,122		0		314,122
FHLB advances		26,000		0		26,357		0		26,357

			Estimated Fair Value
December 31, 2013	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	35,370	$	35,370	$	0	$	0	$	35,370
Certificates of deposit in other banks		3,430		3,430		0		0		3,430
Investment securities available for sale		36,461		175		36,286		0		36,461
Investment securities held to maturity		59,624		0		60,019		0		60,019
Federal Home Loan Bank stock		1,721		0		1,721		0		1,721
Loans, net		215,610		0		213,977		2,528		216,505
Liabilities:
Deposits		310,435		0		310,658		0		310,658
FHLB advances		29,000		0		29,572		0		29,572

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.

NOTE 3

Investment Securities

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities as shown in the consolidated balance sheets and their estimated fair values at June 30, 2014, and December 31, 2013, were as follows:

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Securities Available For Sale:

June 30, 2014	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

U.S. Government Agency securities	$	41,480,003	$	504,049	$	419,640	$	41,564,412
State and municipal securities		883,677		0		25,254		858,423
Residential mortgage-backed securities		7,373,772		406,216		10,157		7,769,831
Corporate notes		2,495,520		2,860		375		2,498,005
Total securities AFS	$	52,232,972	$	913,125	$	455,426	$	52,690,671

December 31, 2013	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

U.S. Government Agency securities	$	24,544,975	$	0	$	964,741	$	23,580,234
State and municipal securities		1,531,693		2,219		93,533		1,440,379
Residential mortgage-backed securities		8,459,377		378,150		42,036		8,795,491
Corporate notes		2,495,294		0		25,779		2,469,515
Total debt securities AFS		37,031,339		380,369		1,126,089		36,285,619
Equity securities		43,749		131,400		0		175,149

Total securities AFS	$	37,075,088	$	511,769	$	1,126,089	$	36,460,768

Securities Held to Maturity:

June 30, 2014	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

State and municipal securities	$	48,715,867	$	973,975	$	57,037	$	49,632,805
Residential mortgage-backed securities		9,712,835		422,255		0		10,135,090

Total securities HTM	$	58,428,702	$	1,396,230	$	57,037	$	59,767,895

December 31, 2013	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

State and municipal securities	$	48,701,733	$	491,808	$	433,078	$	48,760,463
Residential mortgage-backed securities		10,922,306		348,198		11,821		11,258,683

Total securities HTM	$	59,624,039	$	840,006	$	444,899	$	60,019,146

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:

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June 30, 2014	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 Agency securities	$	0	$	0	$	419,640	$	19,632,303
State and municipal securities		0		0		25,254		858,423
Residential mortgage-backed securities		0		0		10,157		660,930
Corporate notes		0		0		375		499,625
Total securities available for sale	$	0	$	0	$	455,426	$	21,651,281

Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities	$	2,604	$	2,284,718	$	54,433	$	6,285,373
Residential mortgage-backed securities		0		0		0		0
Total securities held to maturity	$	2,604	$	2,284,718	$	54,433	$	6,285,373

December 31, 2013	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 Agency securities	$	902,051	$	22,642,924	$	62,690	$	937,310
State and municipal securities		0		0		93,533		793,161
Residential mortgage-backed securities		42,036		690,106		0		0
Corporate notes		25,779		2,469,515		0		0
Total debt securities AFS		969,866		25,802,545		156,223		1,730,471
Temporarily impaired equity securities		0		0		0		0
Other-than-temporarily impaired equity securities		0		0		0		0
Total securities available for sale	$	969,866	$	25,802,545	$	156,223	$	1,730,471

Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities	$	412,787	$	22,496,117	$	20,291	$	2,359,232
Residential mortgage-backed securities		11,821		1,368,200		0		0
Total securities held to maturity	$	424,608	$	23,864,317	$	20,291	$	2,359,232

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 June 30, 2014, the debt securities with unrealized losses have depreciated 1.6% from the Corporation’s amortized cost basis. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. Management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale. Also, no declines in debt securities are deemed to be other-than-temporary.

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NOTE 4

Loans and Allowance for Loan Losses

The composition of the Corporation’s loan portfolio and the percentage of loans in each category to total loans at June 30, 2014 and December 31, 2013, were as follows:


	June 30, 2014					December 31, 2013

Commercial, financial and agricultural loans	$	46,828,060		20.6	%	$	43,674,774		20.0	%
Real estate:
Construction loans		15,315,160		6.7	%		15,858,863		7.2	%
Commercial mortgage loans		81,544,240		35.9	%		78,722,646		36.0	%
Residential loans		66,785,389		29.4	%		64,382,656		29.4	%
Agricultural loans		13,631,032		6.0	%		12,605,851		5.8	%
Consumer & other loans		3,194,460		1.4	%		3,469,059		1.6	%

Loans outstanding		227,298,341		100.0	%		218,713,849		100.0	%

Unearned interest and discount		(25,760	)				(25,941	)
Allowance for loan losses		(3,126,754	)				(3,077,561	)
Net loans	$	224,145,827				$	215,610,347

The Corporation’s only significant concentration of credit at June 30, 2014, occurred in real estate loans which totaled $177,275,821. However, this amount was not concentrated in any specific segment within the market or geographic area.

Beginning in 2009, certain 1-4 family mortgage loans were pledged to Federal Home Loan Bank to secure outstanding advances. At June 30, 2014, $35,263,098 loans were pledged in this capacity.

The following table shows maturities as well as interest sensitivity of the commercial, financial, agricultural, and construction loan portfolio at June 30, 2014.

	Commercial, Financial, Agricultural and Construction

Distribution of loans which are due:
In one year or less	$	14,759,764
After one year but within five years		44,547,544
After five years		2,835,912

Total	$	62,143,220

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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 June 30, 2014.

	Loans With
	Predetermined		Loans With
	Rates		Floating Rates	Total
Commercial, financial,
agricultural and construction	$	43,481,796	$ 3,901,660	$	47,838,456

The following table presents information concerning outstanding balances of nonaccrual and accruing loans for 30 days past-due, troubled debt restructured and other potential problem loans as well as foreclosed assets for the indicated period.

			Accruing Loans
	Nonaccrual Loans		90 Days Past-Due		Troubled Debt Restructured		Potential Problem		Total		Foreclosed Assets

June 30, 2014	$	1,006,183	$	0	$	237,793	$	2,081,950	$	3,325,926	$	437,736
December 31, 2013	$	912,785	$	0	$	255,699	$	672,255	$	1,840,739	$	405,508

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 $1,006,183 and $912,785 at June 30, 2014, and December 31, 2013, respectively. There were no past due loans over ninety days and still accruing at June 30, 2014, or December 31, 2013. 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 $17,631 for June 30, 2014, and $6,195 for December 31, 2013.

The following tables present an age analysis of past due loans and nonaccrual loans segregated by class of loans. We do not have any accruing loans that are 90 days or more past due.

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	Age Analysis of Past Due Loans As of June 30, 2014
	30-89 Days Past Due		Greater than 90 Days		Total Accruing Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans

Commercial, financial and agricultural loans	$	145,041	$	0	$	145,041	$	30,021	$	46,652,998	$	46,828,060
Real estate:
Construction loans		79,317		0		79,317		0		15,235,843		15,315,160
Commercial mortgage loans		430,564		0		430,564		949,434		80,164,242		81,544,240
Residential loans		901,140		0		901,140		0		65,884,249		66,785,389
Agricultural loans		37,862		0		37,862		0		13,593,170		13,631,032
Consumer & other loans		74,179		0		74,179		26,728		3,093,553		3,194,460

Total loans	$	1,668,103	$	0	$	1,668,103	$	1,006,183	$	224,624,055	$	227,298,341

	Age Analysis of Past Due Loans As of December 31, 2013
	30-89 Days Past Due		Greater than 90 Days		Total Accruing Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans

Commercial, financial and agricultural loans	$	171,713	$	0	$	171,713	$	36,893	$	43,466,168	$	43,674,774
Real estate:
Construction loans		3,383,103		0		3,383,103		215,804		12,259,956		15,858,863
Commercial mortgage loans		199,323		0		199,323		484,222		78,039,101		78,722,646
Residential loans		2,959,263		0		2,959,263		167,614		61,255,779		64,382,656
Agricultural loans		38,166		0		38,166		0		12,567,685		12,605,851
Consumer & other loans		35,303		0		35,303		8,252		3,425,504		3,469,059

Total loans	$	6,786,871	$	0	$	6,786,871	$	912,785	$	211,014,193	$	218,713,849

Impaired Loans

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At June 30, 2014, and December 31, 2013, impaired loans amounted to $4,776,409 and $2,997,359, respectively. A reserve amount of $348,199 and $469,302 were recorded in the allowance for loan losses for these impaired loans as of June 30, 2014, and December 31, 2013, respectively.

The following tables present impaired loans, segregated by class of loans as of June 30, 2014, and December 31, 2013:

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
June 30, 2014	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment

Commercial, financial and agricultural loans	$	207,078	$	25,500	$	181,578	$	207,078		79,617	$	114,625	$	4,176
Real estate:
Construction loans		212,065		91,265		0		91,265		0		34,006		13,402
Commercial mortgage loans		1,442,866		949,434		493,432		1,442,866		95,310		781,196		18,308
Residential loans		1,723,656		0		1,702,744		1,702,744		113,117		2,166,681		50,198
Agricultural loans		1,289,494		1,103,831		185,663		1,289,494		60,155		503,982		56,517
Consumer & other loans		42,962		42,962		0		42,962		0		24,669		782

Total loans	$	4,918,121	$	2,212,992	$	2,563,417	$	4,776,409	$	348,199	$	3,625,159	$	143,383

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
December 31, 2013	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment

Commercial, financial and agricultural loans	$	56,429	$	0	$	56,429	$	56,429	$	38,219	$	63,317	$	2,301
Real estate:
Construction loans		0		0		0		0		0		0		0
Commercial mortgage loans		894,722		118,537		712,829		831,366		221,512		454,169		19,285
Residential loans		1,940,949		167,614		1,722,330		1,889,944		132,703		1,982,756		81,454
Agricultural loans		197,398		0		197,398		197,398		76,868		148,725		9,198
Consumer & other loans		22,222		22,222		0		22,222		0		17,473		1,451

Total loans	$	3,111,720	$	308,373	$	2,688,986	$	2,997,359	$	469,302	$	2,666,440	$	113,689

-22-

At June 30, 2014, and December 31, 2013, included in impaired loans were $237,793 and $374,236, respectively, of troubled debt restructurings.

Troubled Debt Restructurings (TDR)

Loans are considered to have been modified in a 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.

Loan modifications are reviewed and recommended by the Corporation’s senior credit officer, who determines whether the loan meets the criteria for a TDR. The Loan Committee either approves or denies such requests. 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 non-accrual at June 30, 2014, and December 31, 2013, as well as those currently paying under restructured terms and those that have defaulted under restructured terms at June 30, 2014, and December 31, 2013. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 days past due.

	June 30, 2014
					Under restructured terms
	Accruing		Non-accruing		#		Current		#		Default
Commercial, financial, and agricultural loans	$	33,936	$	0		1	$	33,936		0	$	0
Real estate:
Construction loans		0		0		0		0		0		0
Commercial mortgage loans		0		0		0		0		0		0
Residential loans		0		0		0		0		0		0
Agricultural loans		187,622		0		1		187,622		0		0
Consumer & other loans		16,235		0		1		2,503		4		13,732
Total TDR’s	$	237,793	$	0		3	$	224,061		4	$	13,732

	December 31, 2013
					Under restructured terms
	Accruing		Non-accruing		#		Current		#		Default
Commercial, financial, and agricultural loans	$	36,079	$	0		1	$	36,079		0	$	0
Real estate:
Construction loans		0		0		0		0		0		0
Commercial mortgage loans		0		118,537		0		0		1		118,537
Residential loans		0		0		0		0		0		0
Agricultural loans		197,398		0		1		197,398		0		0
Consumer & other loans		22,222		0		5		22,222		0		0
Total TDR’s	$	255,699	$	118,537		7	$	255,699		1	$	118,537

-23-

The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and non-accrual at June 30, 2014, and December 31, 2013.

	June 30, 2014								December 31, 2013
	Accruing				Non-accruing				Accruing				Non-accruing
	#		Balance		#		Balance		#		Balance		#		Balance
Type of concession:
Forbearance of interest		1	$	33,936		0	$	0		0	$	0		1	$	118,537
Payment modification		1		187,622		0		0		1		36,079		0		0
Rate reduction		4		12,776		0		0		1		4,131		0		0
Rate reduction, payment modification		1		3,459		0		0		5		215,489		0		0
Total		7	$	237,793		0	$	0		7	$	255,699		1	$	118,537

As of June 30, 2014, and December 31, 2013, the Corporation had a balance of $237,793 and $374,236, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans as of June 30, 2014, and $211,829 at December 31, 2013. The Corporation’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $76,821 and $94,737 at June 30, 2014, and December 31, 2013, respectively. The Corporation had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of June 30, 2014.

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.

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

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 June 30, 2014, all Grade 8 loans have been charged-off.

-24-

The following tables present internal loan grading by class of loans as of June 30, 2014, and December 31, 2013:

June 30, 2014	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	298,051	$	0	$	0	$	27,580	$	0	$	371,375	$	697,006
Grade 2- Above Avg.		0		86,013		0		92,926		374,899		0		553,838
Grade 3- Acceptable		34,101,434		5,326,167		33,752,680		34,726,198		7,767,979		1,911,435		117,585,893
Grade 4- Fair		11,775,027		8,759,689		43,608,358		25,552,634		3,368,249		809,581		93,873,538
Grade 5a- Watch		392,495		933,671		1,967,690		831,711		1,264,312		2,502		5,392,381
Grade 5b- OAEM		38,598		0		134,484		1,402,937		669,930		51,845		2,297,794
Grade 6- Substandard		222,455		209,620		2,081,028		4,116,805		185,663		39,470		6,855,041
Grade 7- Doubtful		0		0		0		34,598		0		8,252		42,850
Total loans	$	46,828,060	$	15,315,160	$	81,544,240	$	66,785,389	$	13,631,032	$	3,194,460	$	227,298,341

December 31, 2013	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	377,030	$	0	$	0	$	28,675	$	0	$	367,222	$	772,927
Grade 2- Above Avg.		14,500		635,975		0		96,613		383,104		408		1,130,600
Grade 3- Acceptable		31,122,794		4,835,273		33,044,849		34,569,435		7,175,714		2,183,886		112,931,951
Grade 4- Fair		11,800,838		8,866,362		40,678,393		23,093,070		4,017,325		844,609		89,300,597
Grade 5a- Watch		127,359		936,550		2,060,701		1,091,573		164,132		13,523		4,393,838
Grade 5b- OAEM		39,994		248,497		1,702,801		598,666		668,181		20,108		3,278,247
Grade 6- Substandard		192,259		336,206		1,235,902		4,869,802		197,397		39,303		6,870,869
Grade 7- Doubtful		0		0		0		34,820		0		0		34,820
Total loans	$	43,674,774	$	15,858,863	$	78,722,646	$	64,382,654	$	12,605,853	$	3,469,059	$	218,713,849

-25-

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 over $50,000 are analyzed on an individual basis to determine if the future collateral value is sufficient to support the outstanding debt of the loan. If an estimated loss is calculated, it is included in the estimated ALL until it is charged to the loan loss reserve. The calculation for loan risk graded 5, 6, 7 or 8, other outstanding loans and other commitments to lend is based on assigning an estimated loss factor based on a twelve quarter rolling historical net loss rate. The estimated requirement for unallocated general reserves from migration and economic analysis is determined by considering (1) trends in asset quality, (2) level and trends in charge-off experience, (3) macro-economic trends and conditions, (4) micro economic trends and conditions and (5) risk profile of lending activities. Within each of these categories, a high risk factor percentage and a low risk factor percentage from a rating of excessive, high, moderate or low will be determined by management and applied to the loan portfolio. This results in a high and low range of the estimated reserves required. By adding the estimated high and low value from the migration and economic analysis to the estimated reserve from the loan portfolio, a high and low range of total estimated loss reserves is obtained. This amount is then compared to the actual amount in the loan loss reserve.

The calculation of ALL is performed on a monthly basis and is presented to the Loan Committee and the Board of Directors.

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the three and six month periods ended June 30, 2014. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. The annualized net charge-offs to average loans outstanding ratio was 0.2% for the six months ended June 30, 2014.

Three months ended June 30, 2014:

	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, March 31, 2014	$	297,718		$	1,085,716	$	1,131,001	$	312,280	$	69,069		$	177,678	$	3,073,462

Charge-offs		0			0		0		26,266		0			1,436		27,702
Recoveries		1,467			0		0		3,800		0			726		5,993
Net charge-offs		(1,467	)		0		0		22,466		0			710		21,709
Provisions charged to operations		(4,320	)		0		61,097		16,397		(1,115	)		2,942		75,000
Balance at end of period, June 30, 2014	$	294,865		$	1,085,716	$	1,192,098	$	306,211	$	67,954		$	179,910	$	3,126,754

-26-

Six months ended June 30, 2014:

	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, 2013	$	297,546		$	1,032,053	$	1,192,098	$	301,169	$	76,868		$	177,827	$	3,077,561

Charge-offs		0			120,800		0		26,266		0			5,556		152,622
Recoveries		6,036			0		0		14,912		0			867		21,815
Net charge-offs		(6,036	)		120,800		0		11,354		0			4,689		130,807
Provisions charged to operations		(8,717	)		174,463		0		16,396		(8,914	)		6,772		180,000
Balance at end of period, June 30, 2014	$	294,865		$	1,085,716	$	1,192,098	$	306,211	$	67,954		$	179,910	$	3,126,754

Ending balance -
Individually evaluated for impairment	$	79,617		$	0	$	95,310	$	113,117	$	60,155		$	0	$	348,199
Collectively evaluated for impairment		215,248			1,085,716		1,096,788		193,094		7,799			179,910		2,778,555
Balance at end of period	$	294,865		$	1,085,716	$	1,192,098	$	306,211	$	67,954		$	179,910	$	3,126,754

Loans :
Ending balance -
Individually evaluated for impairment	$	210,878		$	1,086,447	$	3,574,579	$	4,037,748	$	1,487,878		$	45,344	$	10,442,874
Collectively evaluated for impairment		46,617,182			14,228,713		77,969,661		62,747,641		12,143,154			3,149,116		216,855,467
Balance at end of period	$	46,828,060		$	15,315,160	$	81,544,240	$	66,785,389	$	13,631,032		$	3,194,460	$	227,298,341

-27-

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the year ended December 31, 2013.

	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, 2012	$	309,946		$	1,032,053	$	1,047,292	$	284,603	$	0	$	171,009	$	2,844,903

Charge-offs		17,746			0		160,824		46,093		0		9,179		233,842
Recoveries		23,187			0		4,497		13,154		0		5,662		46,500
Net charge-offs		(5,441	)		0		156,327		32,939		0		3,517		187,342
Provisions charged to operations		(17,841	)		0		301,133		49,505		76,868		10,335		420,000
Balance at end of period, December 31, 2013	$	297,546		$	1,032,053	$	1,192,098	$	301,169	$	76,868	$	177,827	$	3,077,561

Ending balance -
Individually evaluated for impairment	$	38,219		$	0	$	221,512	$	132,703	$	76,868	$	0	$	469,302
Collectively evaluated for impairment		259,327			1,032,053		970,586		168,466		0		177,827		2,608,259
Balance at end of period	$	297,546		$	1,032,053	$	1,192,098	$	301,169	$	76,868	$	177,827	$	3,077,561

Loans :
Ending balance -
Individually evaluated for impairment	$	72,971		$	944,387	$	4,372,425	$	4,256,508	$	380,931	$	30,474	$	10,057,696
Collectively evaluated for impairment		43,601,803			14,914,476		74,350,221		60,126,148		12,224,920		3,438,585		208,656,153
Balance at end of period	$	43,674,774		$	15,858,863	$	78,722,646	$	64,382,656	$	12,605,851	$	3,469,059	$	218,713,849

Transfers from Loans

Transfers from loans to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statements of cash flow. Such transfers totaled $260,548 and $104,330 for the periods ending June 30, 2014, and 2013, respectively.

-28-

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical information, this Form 10-Q report contains forward-looking statements within the meaning of the federal securities laws. The Corporation cautions that there are various factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the Corporation’s forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized.

These factors include risks related to:

· the conditions in the banking system, financial markets, and general economic conditions;

· the Corporation’s ability to raise capital;

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

· the Corporation’s construction and land development loans;

· asset quality;

· the adequacy of the allowance for loan losses;

· technology difficulties or failures;

· the Corporation’s ability to execute its business strategy;

· the loss of key personnel;

· competition from financial institutions and other financial service providers;

· the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations;

· the impact of new minimum capital thresholds established as a part of the implementation of Basel III;

· changes in regulation and monetary policy;

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

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

· changes in or application of environmental and other laws and regulations to which the Corporation is subject;

· political, legal and local economic conditions and developments;

· financial market conditions and the results of financing efforts;

· changes in commodity prices and interest rates;

· a cyber-security 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 Securities and Exchange Commission.

Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of the Corporation. Any such statement speaks only as of the date the statement was made. The Corporation undertakes no obligation to update or revise any forward-looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in the Corporation’s current and subsequent filings with the Securities and Exchange Commission.

-29-

Overview

The Corporation is a full-service community bank holding company headquartered in Moultrie, Georgia. The community of Moultrie has been served by the Bank since 1928. We provide comprehensive financial services to consumer, business and governmental customers, which, in addition to conventional banking products, include a full range of mortgage banking, trust, investment and insurance services. Our primary market area incorporates Colquitt County, where we are headquartered, and Baker, Lowndes, Thomas, and Worth Counties, each contiguous with Colquitt County, and the surrounding counties of southwest Georgia. We have six full service banking facilities and six automated teller machines.

Our strategy is to:

· maintain the diversity of our revenue, including both interest and noninterest income through a broad base of business,

· strengthen our sales and marketing efforts while developing our employees to provide the best possible service to our customers,

· expand our market share where opportunity exists, and

· grow outside of our current geographic market either through de-novo branching or acquisitions into areas proximate to our current market area.

We believe that investing in sales and marketing in this challenging market will provide us with a competitive advantage. To that end, we expanded geographically with a full-service banking center that was completed and opened in June 2010 and a mortgage origination office that opened in January 2011 both in Valdosta, Georgia. Continuing our expansion in the Valdosta market, we opened our second banking center in March 2012. We have begun construction on a commercial office adjacent to our North Valdosta branch that will be two stories and approximately 11,000 square feet and is expected to open around August 2014.

The Corporation’s profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets and the interest paid on interest-bearing liabilities. The Corporation’s earning assets are primarily loans, securities, and short-term interest-bearing deposits with banks and the interest-bearing liabilities are principally customer deposits and borrowings. Net interest income is highly sensitive to fluctuations in interest rates. For example, after the overnight borrowing rate for banks reached 5.25% in September 2007, the Federal Reserve Bank began decreasing it incrementally until it had been decreased by approximately 5% to a range of 0% to 0.25%. This historically low interest rate level has remained unchanged for the period from October 2008 through June 2014. To address interest rate fluctuations, we manage our balance sheet in an effort to diminish the impact should interest rates suddenly change.

Broadening our revenue sources helps to reduce the risk and exposure of our financial results to the impact of changes in interest rates, which are outside of our control. Sources of noninterest income include our insurance agency and Empire, the Corporation’s commercial mortgage banking subsidiary, as well as fees on customer accounts, and trust and retail brokerage services. In the second quarter of 2014, noninterest income was 25.1% of the Corporation’s total revenue.

Our profitability is impacted also by operating expenses such as salaries, employee benefits, occupancy, and income taxes. Our lending activities are significantly influenced by regional and local factors such as changes in population, competition among lenders, interest rate conditions and prevailing market rates on competing uses of funds and investments, customer preferences and levels of personal income and savings in the Corporation’s primary market area.

-30-

The economic downturn continues to challenge our region; however, our strength and stability in the market and our focused efforts enabled us to achieve positive results. We continued to invest in our people and communities, fully aware of the near-term impact that would have on earnings. Although the economy is slowly recovering, regulatory burdens continue to outpace growth opportunities. Despite those challenges, we will continue to focus on our customers and believe that our strategic positioning, strong balance sheet and capital levels position us to sustain our franchise, capture market share and build customer loyalty.

The Corporation’s nonperforming assets decreased $549 thousand to $1.4 million at the end of June 2014, compared with the same period last year. Foreclosed assets decreased $631 thousand compared with the second quarter last year.

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 June 30, 2014, is adequate; however, under adverse conditions or assumptions, future additions to the allowance may be necessary. There have been no significant changes in the methods or assumptions used in our accounting policies that would have resulted in material estimates and assumptions changes. Note 1 to the Consolidated Financial Statements provides a description of our significant accounting policies and contributes to the understanding of how our financial performance is reported.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw their funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. In the ordinary course of business, the Corporation’s cash flows are generated from interest and fee income as well as from loan repayments and the maturity or sale of other earning assets. In addition, liquidity is continuously provided through the acquisition of new deposits and borrowings or the rollover of maturing deposits and borrowings. The Corporation strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-earning liabilities so its short-term investments balance, at any given time, will adequately cover any reasonably anticipated immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks that could provide funds on short notice, if needed.

The liquidity and capital resources of the Corporation are monitored on a periodic basis by state and Federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Bank’s liquidity ratios at June 30, 2014, were considered satisfactory. At that date, the Bank’s short-term investments were adequate to cover any reasonably anticipated immediate need for funds. We are not aware of any known trends, events, or uncertainties that will have or that are reasonably likely to have a material adverse effect on the Corporation’s liquidity or operations. At June 30, 2014, the Corporation’s and the Bank’s risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. During the six months ended June 30, 2014, total capital increased $1.7 million to $33.2 million and increased $2.9 million from the same period last year. Also, the Corporation continues to maintain a healthy level of capital adequacy as measured by its equity-to-asset ratio of 8.83% as of June 30, 2014 and average equity-to-average asset ratio for the second quarter ending June 30, 2014 of 8.56%. The Corporation is not aware of any events or trends likely to result in a material change in capital resources other than the effects of normal operations on the retention of net earnings. Also, the Corporation’s management is not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have a material effect on the Corporation’s capital resources.

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RESULTS OF OPERATIONS

The Corporation’s results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since interest rates are determined by market forces and economic conditions beyond the control of the Corporation, the ability to generate net interest income is dependent upon the Bank’s ability to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets.

Performance Summary

The Corporation's net income after taxes for the three-month period ending June 30, 2014, was $737 thousand, up $163 thousand from net income of $574 thousand for the second quarter of 2013. This increase in net income was primarily due to $20 thousand gain on the disposition of assets and higher net interest income of $125 thousand compared with the second quarter of 2013.

On a per share basis, net income for the second quarter was $.28 per diluted share compared with $.23 per diluted share for the same quarter in 2013. The weighted average common diluted shares outstanding for the quarter were 2.548 million, the same as second quarter last year.

We measure our performance on selected key ratios, which are provided for the previous five quarterly periods.

	2nd Qtr			1st Qtr			4th Qtr			3rd Qtr			2nd Qtr
	2014			2014			2013			2013			2013
Return on average total assets		0.77	%		0.72	%		1.05	%		0.71	%		0.64	%
Return on average total equity		8.95	%		8.71	%		12.50	%		8.49	%		7.47	%
Average shareholders’ equity to Average total assets		8.56	%		8.30	%		8.39	%		8.37	%		8.54	%
Net interest margin (tax equivalent)		4.02	%		3.78	%		4.02	%		4.04	%		4.10	%

Comparison of Statements of Income for the Quarter

Total interest income increased $125 thousand to $3.7 million for the three months ended June 30, 2014, compared with the same period in 2013, reflecting $103 thousand higher interest income from investment securities and an increase of $24 thousand higher interest income and fees from loans due to loan growth. Slight decreases were noted in interest income from deposits in other banks when compared with the second quarter of 2013.

Total interest expense decreased $70 thousand, or 17.4%, to $334 thousand in the second quarter of 2014 compared with the same period in 2013. Interest paid on deposits decreased $23 thousand, or 10.6%, during the second quarter of 2014 due to the low interest rate environment. The average rate paid on average time deposits has decreased 13 basis points when compared with the same period last year. Interest on total borrowings decreased $47 thousand compared with the same quarter in 2013 due to the repayment of short term debt.

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The primary source of revenue for the Corporation is net interest income, which is the difference between total interest income on earning assets and interest expense on interest-bearing sources of funds. Net interest income improved to $3.4 million for the second quarter of 2014 compared with $3.2 million in net interest income in the 2013 second quarter. Net interest income after provision for loan losses for the second quarter of 2014 was $3.3 million compared with $3.1 million for the same period in 2013. The second quarter provision for loan losses was $75 thousand in 2014 and $105 thousand for the same period in 2013. The Corporation’s net interest margin was 4.02% for the second quarter of 2014, down 8 basis points from the same period last year. The decrease in net interest margin was impacted by a 19 basis point drop in earning asset yields compared with second quarter 2013.

Noninterest income, at 25.1% of the Corporation’s total revenue for the quarter, was $1.2 million for the second quarter, increasing 8.4% compared with the same period in 2013. The majority of the increase in noninterest income was from $45 thousand increase in income from service charges on deposit accounts and $35 thousand increase in insurance services income. Other significant increases were noted in the disposition of assets of $20 thousand and increases from retail brokerage services of $8 thousand. Partially offsetting these increases were a decrease of $26 thousand in income from both commercial and residential mortgage banking services compared with last year’s second quarter.

Noninterest expense remained stable at $3.6 million for the second quarter of 2014 compared with the second quarter of 2013. The largest component of noninterest expense, salaries and employee benefits, remained stable at $2.1 million compared with the same period last year. Noted changes in noninterest expenses were $14 thousand decrease in equipment expenses and $50 thousand decrease in amortization of intangible assets related to the prior acquisitions. These decreases were partially offset by $53 thousand increase in normal other operating expenses compared with the second quarter of a year ago.

Comparison of Statements of Income for the Six-month Period

Total interest income for the first six months of 2014 increased $190 thousand to $7.3 million when compared with the same period in 2013. This increase was primarily due to a $141 thousand increase in interest on securities due to a $13.7 million higher average volume of securities and also by slight decreases in interest on deposits and certificates of deposit in other banks. Interest and fees from loans also increased by $55 thousand due to a higher average volume of loans of approximately $13.8 million when compared with the first six months of last year.

Total interest expense for the six-month period ended June 30, 2014, decreased $101 thousand, or 12.1%, to $735 thousand compared with the same period in 2013. The decrease in interest expense was related to lower interest paid on interest-bearing deposits of $72 thousand, or 15.7%, compared with the first half of 2013 reflecting lower interest rates. Interest on total borrowings declined $29 thousand for the first six months of 2014 compared with the same period last year.

Net interest income for the first six months of 2014 was 4.7% higher at $6.5 million compared with $6.3 million for the same period in 2013, mainly as a result of higher income from securities and lower interest paid on deposits. Net interest income after provision for loan losses was $6.4 million for the first half of 2014 compared with $6.0 million for the same period 2013. The provision for loan losses was $180 thousand in the first half of 2014 and $210 thousand in the first half of 2013. Net interest margin was 3.90% for the first six months of 2014, down from 4.03% for the half of 2013.

For the first six months of 2014, noninterest income was $2.6 million, up 9.9% compared with the same period in 2013. The increase was primarily attributed to a $154 thousand gain on the sale of securities as well as an increase from the gain on the sale or disposition of assets, and an increase in service charges on deposit accounts of $69 thousand. Income from retail brokerage services and insurance also increased $24 thousand and $36 thousand, respectively, compared with the first six months of 2013. These increases were partially offset by a decrease in income from mortgage banking services of $152 thousand.

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Noninterest expense decreased $45 thousand for the first six months of 2014 compared with the same period last year. The decrease was mainly attributed to decreases in amortization of intangible assets, salary and employee benefits, and equipment expense of $71 thousand, $38 thousand, and $28 thousand, respectively. These decreases were partially offset by an increase in other operating expense of $80 thousand when compared with the same period in 2013.

Comparison of Financial Condition Statements

At June 30, 2014, total assets were $376 million, a $1.7 million increase from December 31, 2013. The six month changes in earning asset mix were primarily noted in $9 million growth in loans and $15 million increase in investment securities offset by a $24 million decrease in interest-bearing deposits in other banks. Total deposits decreased slightly for the first six months of 2014.

Total loans increased $7.8 million to $227.3 million at June 30, 2014, compared with $219.4 million at June 30, 2013. The Corporation continues to be conservative in its lending practices in order to maintain a quality loan portfolio. Loans, a major use of funds, represented 60.5% of total assets.

Investment securities, interest-bearing deposits in other banks, and certificates of deposit in other banks represented 30.9% of total assets at June 30, 2014. Compared with June 30, 2013, investment securities increased $16.6 million and interest-bearing deposits in other banks decreased $1.4 million. This resulted in an overall increase in investments of $15.2 million since June 30, 2013.

Deposits increased to $313.8 million at the end of the second quarter of 2014, up $3.4 million from the end of 2013. The increase was primarily in noninterest-bearing demand deposits. At June 30, 2014, total deposits represented 83.6% of total assets.

Total debt decreased by $3 million compared with the end of last year. The $7 million short-term fixed-rate debt has a maturity date of July 25, 2014, and the Corporation will repay it to the Federal Home Loan Bank.

The following table shows the major contractual obligations for the Corporation.

Long-term debt consists of the following:

	June 30,		December 31,		June 30,
	2014		2013		2013

Advance from FHLB with a 3.39% fixed rate of interest maturing August 20, 2018 (convertible to a variable rate at quarterly options of FHLB – no conversion option has been made).		5,000,000		5,000,000		5,000,000

Advance from FHLB with a 2.78% fixed rate of interest maturing September 10, 2018 (convertible to a variable rate at quarterly options of FHLB – no conversion option has been made).		5,000,000		5,000,000		5,000,000

Advance from FHLB with a 1.4325% fixed rate of interest maturing September 4, 2018 (principal reducing hybrid advance with principal reductions of $1.8 million annually beginning September 4, 2014).		7,200,000		7,200,000		0

Total long-term debt	$	17,200,000	$	17,200,000	$	10,000,000

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The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated monthly based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that management believes require attention.

Other factors used in determining the adequacy of the reserve are management’s judgment about factors affecting loan quality and their assumptions about the local and national economy. The allowance for loan losses was 1.38% of total loans outstanding at June 30, 2014, compared with 1.41% of loans outstanding at December 31, 2013, and 1.39% at June 30, 2013. Net charge-offs in the 2014 second quarter were $21.7 thousand compared with net charge-offs of $0 in the second quarter of 2013. Management considers the allowance for loan losses as of June 30, 2014, adequate to cover potential losses in the loan portfolio. For more information about loans, see Part I, Item 1, “Note 4 – Loans and Allowance for Loan Losses.”

Nonperforming assets were $1.4 million, or 0.38% of total assets, in the second quarter of 2014, slightly up from $1.4 million, or 0.36% of total assets, at the end of 2013, and down from $2.0 million, or 0.57% of total assets in the same period last year. Nonaccrual loans were $1.0 million in the second quarter of 2014. There were $438 thousand of foreclosed properties in nonperforming assets at the end of the second quarter of 2014 compared with $1.1 million at the end of last year’s second quarter.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance-sheet risk to meet the financing needs of our customers and reduce risk exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit in the form of loans or through letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. Since many of the commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, the contractual or notional amounts do not represent future cash requirements.

Financial instruments whose contract amounts represent credit risk (dollars in thousands):

June 30,

2014

June 30,

2013

Commitments to extend credit

16,468

17,881

Standby letters of credit and financial guarantees

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

Capital Resources and Dividends

At June 30, 2014, the Corporation’s and the Bank’s risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. Our total risk based capital ratio now stands at 15.12%, which is over 51 percent in excess of the regulatory standard for a “well-capitalized” bank. Southwest Georgia Financial Corporation’s and Southwest Georgia Bank’s risk based capital ratios are shown in the following table.

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SOUTHWEST GEORGIA FINANCIAL CORPORATION
Risk Based Capital Ratios


	Southwest Georgia Financial Corporation			Regulatory Guidelines
Risk Based Capital Ratios	June 30, 2014			For Well Capitalized			Minimum Guidelines
Tier 1 capital		13.87	%		6.00	%		4.00	%
Total risk based capital		15.12	%		10.00	%		8.00	%
Tier 1 leverage ratio		8.78	%		5.00	%		3.00	%

		Southwest Georgia Bank			Regulatory Guidelines
Risk Based Capital Ratios		June 30, 2014			For Well Capitalized			Minimum Guidelines
Tier 1 capital		13.19	%		6.00	%		4.00	%
Total risk based capital		14.44	%		10.00	%		8.00	%
Tier 1 leverage ratio		8.34	%		5.00	%		3.00	%

On July 2, 2013, the Board of Governors of the Federal Reserve System approved a final rule implementing changes intended to strengthen the regulatory capital framework for all banking organizations (Basel III). The final rule includes transition periods to ease the potential burden with community banks. These changes will be phased in beginning January 2015, and while management continues to evaluate this final rule and its potential impact, preliminary assessments indicate that the Corporation will continue to exceed all regulatory capital requirements under Basel III.

In June 2014, the Corporation paid a quarterly cash dividend of $0.08 per common share. A cash dividend of $0.08 per common share was also paid in March 2014. The Board of Directors will continue to assess conditions for future dividend payments.

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.

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Our primary source of earnings, net interest income, can fluctuate with significant interest rate movements. To lessen the impact of these movements, we seek to maximize net interest income while remaining within prudent ranges of risk by practicing sound interest rate sensitivity management. We attempt to accomplish this objective by structuring the balance sheet so that the differences in repricing opportunities between assets and liabilities are minimized. Interest rate sensitivity refers to the responsiveness of earning assets and interest-bearing liabilities to changes in market interest rates. The Corporation’s interest rate risk management is carried out by the Asset/Liability Management Committee which operates under policies and guidelines established by the Bank. The principal objective of asset/liability management is to manage the levels of interest-sensitive assets and liabilities to minimize net interest income fluctuations in times of fluctuating market interest rates. To effectively measure and manage interest rate risk, the Corporation uses computer simulations that determine the impact on net interest income of numerous interest rate scenarios, balance sheet trends and strategies. These simulations cover the following financial instruments: short-term financial instruments, investment securities, loans, deposits, and borrowings. These simulations incorporate assumptions about balance sheet dynamics, such as loan and deposit growth and pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Simulations are run under various interest rate scenarios to determine the impact on net income and capital. From these computer simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. The Corporation also maintains an investment portfolio which receives monthly cash flows from mortgage-backed securities principal payments, and staggered maturities and provides flexibility over time in managing exposure to changes in interest rates. Any imbalances in the repricing opportunities at any point in time constitute a financial institution’s interest rate sensitivity.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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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, 2013, was included in Item 8 of the form 10K , dated December 31, 2013, under the heading “Management’s Report on Internal Control Over Financial Reporting”.

The annual report form 10K, dated December 31, 2013, does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits the Corporation to provide only management’s report in the annual report.

Changes in Internal Control over Financial Reporting

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

PART II. - OTHER INFORMATION

ITEM 6. EXHIBITS

	Exhibit 31.1	Section 302 Certification of Periodic Financial Report by
		Chief Executive Officer.

	Exhibit 31.2	Section 302 Certification of Periodic Financial Report by
		Chief Financial Officer.

	Exhibit 32.1	Section 906 Certification of Periodic Financial Report by
		Chief Executive Officer.

	Exhibit 32.2	Section 906 Certification of Periodic Financial Report by
		Chief Financial Officer.

	Exhibit 101	Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at June 30, 2014, and December 31, 2013; (ii) Consolidated Statements of Income for the three months and six months ended June 30, 2014, and 2013; (iii) Consolidated Statements of Comprehensive Income for the three months and six months ended June, 2014, and 2013; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013; and (v) Notes to Consolidated Financial Statements.

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		SOUTHWEST GEORGIA FINANCIAL CORPORATION



	BY:	/s/George R. Kirkland

		GEORGE R. KIRKLAND
		EXECUTIVE VICE-PRESIDENT AND
		CHIEF FINANCIAL OFFICER

Date: August 14, 2014

Attached files

SOUTHWEST GEORGIA FINANCIAL CORP Reports

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