SOUTHWEST GEORGIA FINANCIAL CORP - FORM 10-Q

Attached files

file	filename
EX-32.2 - SECTION 906 CERTIFICATION BY CFO - SOUTHWEST GEORGIA FINANCIAL CORP	exhibit322q117.htm
EX-32.1 - SECTION 906 CERTIFICATION BY CEO - SOUTHWEST GEORGIA FINANCIAL CORP	exhibit321q117.htm
EX-31.2 - SECTION 302 CERTIFICATION BY CFO - SOUTHWEST GEORGIA FINANCIAL CORP	exhibit312q117.htm
EX-31.1 - SECTION 302 CERTIFICATION BY CEO - SOUTHWEST GEORGIA FINANCIAL CORP	exhibit311q117.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 March 31, 2017

[ ]	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 March 31, 2017
Common Stock, $1 Par Value		2,547,437

SOUTHWEST GEORGIA FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2017

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 – March 31, 2017 (unaudited) and
			December 31, 2016 (audited).	2

		b.	Consolidated statements of income (unaudited) – for the three months
			ended March 31, 2017 and 2016.	3

		c.	Consolidated statements of comprehensive income (unaudited) - for the
			three months ended March 31, 2017 and 2016.	4

		d.	Consolidated statements of cash flows (unaudited) for the three months
			ended March 31, 2017 and 2016.	5

		e.	Notes to Consolidated Financial Statements	6

	ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF
			FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31

	ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
			MARKET RISK	39

	ITEM 4.		CONTROLS AND PROCEDURES	39

PART II - OTHER INFORMATION

	ITEM 6.		EXHIBITS	39

	SIGNATURE			40

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2017 and December 31, 2016
	(Unaudited)			(Audited)
	March 31,			December 31,
	2017			2016
ASSETS
Cash and due from banks	$	7,133,341		$	7,700,522
Interest-bearing deposits in other banks		18,106,238			18,819,394
Cash and cash equivalents		25,239,579			26,519,916

Certificates of deposit in other banks		1,235,000			0

Investment securities available for sale, at fair value		59,691,911			53,565,503
Investment securities held to maturity (fair value
approximates $53,437,710 and $55,123,073)		52,698,128			54,602,535
Federal Home Loan Bank stock, at cost		1,904,700			1,874,200
Total investment securities		114,294,739			110,042,238

Loans		310,724,906			292,543,131
Less: Unearned income		(17,773	)		(18,895	)
Allowance for loan losses		(3,161,834	)		(3,124,611	)
Loans, net		307,545,299			289,399,625

Premises and equipment, net		11,260,054			11,209,285
Bank property held for sale		211,500			211,500
Foreclosed assets, net		126,713			126,713
Intangible assets		31,250			35,156
Bank owned life insurance		5,389,945			5,356,683
Other assets		5,563,028			5,600,114

Total assets	$	470,897,107		$	448,501,230

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
NOW accounts	$	38,164,337		$	47,420,335
Money Market		114,701,682			95,658,654
Savings		30,189,626			29,006,734
Certificates of deposit $100,000 and over		41,340,805			43,234,832
Other time accounts		39,890,453			39,524,168
Total interest-bearing deposits		264,286,903			254,844,723
Noninterest-bearing deposits		128,719,653			116,648,264
Total deposits		393,006,556			371,492,987

Short-term borrowed funds		8,447,619			8,447,619
Long-term debt		26,028,571			26,028,571
Other liabilities		4,110,886			4,109,719
Total liabilities		431,593,632			410,078,896

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		31,118,496			30,333,410
Accumulated other comprehensive loss		(1,689,936	)		(1,785,991	)
Treasury stock, at cost 1,746,398 shares for 2017
and 2016		(26,120,453	)		(26,120,453	)
Total stockholders' equity		39,303,475			38,422,334

Total liabilities and stockholders' equity	$	470,897,107		$	448,501,230

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
	For the Three Months
	Ended March 31,
	(Unaudited)		(Unaudited)
	2017		2016
Interest income:
Interest and fees on loans	$	3,785,083	$	3,575,133
Interest on taxable securities available for sale		288,698		282,526
Interest on taxable securities held to maturity		36,941		50,515
Interest on tax exempt securities		316,018		316,256
Dividends		23,718		22,450
Interest on deposits in other banks		50,229		22,193
Interest on certificates of deposit in other banks		1,352		52
Total interest income		4,502,039		4,269,125

Interest expense:
Interest on deposits		271,675		207,738
Interest on federal funds purchased		2		3
Interest on other short-term borrowings		26,102		23,318
Interest on long-term debt		137,868		144,270
Total interest expense		435,647		375,329
Net interest income		4,066,392		3,893,796
Provision for loan losses		75,000		30,000
Net interest income after provision for loan losses		3,991,392		3,863,796

Noninterest income:
Service charges on deposit accounts		269,724		276,310
Income from trust services		54,412		52,098
Income from retail brokerage services		88,532		80,548
Income from insurance services		433,046		472,180
Income from mortgage banking services		72,355		90,521
Net gain on sale or disposition of assets		366		366
Net gain on sale of securities		124,211		27,906
Other income		240,580		226,518
Total noninterest income		1,283,226		1,226,447

Noninterest expense:
Salaries and employee benefits		2,298,156		2,176,286
Occupancy expense		278,638		288,324
Equipment expense		205,431		221,873
Data processing expense		386,763		343,136
Amortization of intangible assets		3,906		3,906
Other operating expenses		727,824		694,731
Total noninterest expenses		3,900,718		3,728,256
Income before income taxes		1,373,900		1,361,987
Provision for income taxes		308,596		314,342
Net income	$	1,065,304	$	1,047,645

Earnings per share of common stock:
Net income, basic	$	0.42	$	0.41
Net income, diluted	$	0.42	$	0.41
Dividends paid per share	$	0.11	$	0.10
Weighted average shares outstanding		2,547,437		2,547,837
Diluted average shares outstanding		2,547,437		2,547,837

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	For the Three Months
	Ended March 31,
	(Unaudited)			(Unaudited)
	2017			2016

Net income	$	1,065,304		$	1,047,645
Other comprehensive income:
Unrealized holding gains on investment securities available for sale		269,749			957,828
Reclassification adjustment for gains realized in income		(124,211	)		(3,021	)
Less: Tax effect		49,483			324,634
Total other comprehensive income, net of tax		96,055			630,173
Total comprehensive income	$	1,161,359		$	1,677,818

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Three Months
	Ended March 31,
	(Unaudited)			(Unaudited)
	2017			2016
Cash flows from operating activities:
Net income	$	1,065,304		$	1,047,645
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses		75,000			30,000
Depreciation		218,425			233,166
Net amortization of investment securities		103,941			37,715
Income on cash surrender value of bank owned life insurance		(33,262	)		(31,731	)
Amortization of intangibles		3,906			3,906
Net gain on sale of securities		(124,211	)		(27,906	)
Change in:
Other assets		(12,397	)		(259,477	)
Other liabilities		1,166			421,713
Net cash provided by operating activities		1,297,872			1,455,031

Cash flows from investing activities:
Proceeds from calls, paydowns and maturities of securities HTM		1,847,082			894,425
Proceeds from calls, paydowns and maturities of securities AFS		167,612			5,909,000
Proceeds from sale of securities available for sale		136,211			5,302,031
Proceeds from sale of securities held to maturity		0			576,834
Proceeds from maturities of certificates of deposit in other banks		0			245,000
Purchase of securities available for sale		(6,207,098	)		0
Purchase of Federal Home Loan Bank Stock		(30,500	)		(36,200	)
Purchase of certificates of deposit in other banks		(1,235,000	)		0
Net change in loans		(18,220,674	)		(19,978,000	)
Purchase of premises and equipment		(269,194	)		(220,926	)
Net cash used by investing activities		(23,811,561	)		(7,307,836	)

Cash flows from financing activities:
Net change in deposits		21,513,570			(7,611,170	)
Cash dividends paid		(280,218	)		(254,784	)
Net cash provided (used) by financing activities		21,233,352			(7,865,954	)

Increase in cash and cash equivalents		(1,280,337	)		(13,718,759	)
Cash and cash equivalents - beginning of period		26,519,916			31,080,273
Cash and cash equivalents - end of period	$	25,239,579		$	17,361,514

NONCASH ITEMS:
Unrealized gain on securities available for sale		145,538			954,807

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 2016 Annual Report on Form 10K.

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Southwest Georgia Financial Corporation (the “Corporation”) and its direct and indirect subsidiaries, including its wholly-owned banking subsidiary, Southwest Georgia Bank (the “Bank”), conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the banking industry. The following is a description of the more significant of those policies.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation.

Nature of Operations

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

The Corporation’s primary business is providing banking services through the Bank to individuals and businesses principally in the counties of Colquitt, Baker, Worth, Lowndes and the surrounding counties of southwest Georgia. The Corporation has two full-service banking centers, a commercial banking center and a mortgage origination office in Valdosta, Georgia. The Corporation expanded its geographical footprint in to neighboring Tift County, Georgia, by opening a loan production office in January 2016.

Use of Estimates

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

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

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

Cash and Cash Equivalents and Statement of Cash Flows

For purposes of reporting cash flows, the Corporation considers cash and cash equivalents to include all cash on hand, deposit amounts due from banks, interest-bearing deposits in other banks, and federal funds sold. The Corporation maintains its cash balances in several financial institutions. Accounts at the financial institutions are secured by the Federal Deposit Insurance Corporation (the “FDIC”) up to $250,000. There were uninsured deposits of $935,036 at March 31, 2017.

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 after 2003, the Corporation used the straight-line method of depreciation. The following estimated useful lives are used for financial statement purposes:

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

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

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

Bank Property Held for Sale

During 2016, the Bank’s former branch in Pavo, Georgia, was transferred from premises to bank property held for sale and depreciation was discontinued. The property was booked at the lower of cost or market value based on a current appraisal of $211,500. The Corporation has this property available for sale.

Loans and Allowances for Loan Losses

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

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

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

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

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

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collection of the principal is unlikely. The allowance is an amount which management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on evaluation of the collectability of loans and prior loss experience. This evaluation takes into consideration such factors as changes in the nature and volume of the loan portfolios, current economic conditions that may affect the borrowers’ ability to pay, overall portfolio quality, and review of specific problem loans.

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

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.

Intangible Assets

Intangible assets are amortized over a determined useful life using the straight-line basis. These assets are evaluated annually as to the recoverability of the carrying value. The remaining intangibles have a remaining life of two 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 direct and indirect subsidiaries have post-retirement plans covering substantially all employees. The Corporation makes annual contributions to the plans in amounts not exceeding the regulatory requirements.

Bank Owned Life Insurance

The Bank owns life insurance policies on a group of employees. Banking laws and regulations allow the Bank to purchase life insurance policies on certain employees in order to help offset the Bank’s overall employee compensation costs. The beneficial aspects of these life insurance policies are tax-free earnings and a tax free death benefit, which are realized by the Bank as the owner of the policies. The cash surrender value of these policies is included as an asset on the balance sheet, and any increases in cash surrender value are recorded as noninterest income on the statement of income. At March 31, 2017 and 2016, the policies had a value of $5,389,945 and $5,263,124, respectively, and were 13.7% and 14.0%, respectively, of stockholders’ equity. These values are within regulatory guidelines.

Income Taxes

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

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

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

The Corporation recognizes penalties related to income tax matters in income tax expense. The Corporation is subject to U.S. federal and Georgia state income tax audit for returns for the tax period ending December 31, 2013 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.

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 $52,810 and $44,894 for the three month periods ended March 31, 2017 and 2016, respectively.

Recent Market and Regulatory Developments

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

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

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

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

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

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

As of March 31, 2017, the Bank is considered to be well-capitalized under the Basel III Capital Rules.

Recent Accounting Pronouncements

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

In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The updated accounting guidance requires changes to the presentation of the components of net periodic benefit cost on the income statement by requiring service cost to be presented with other employee compensation costs and other components of net periodic pension cost to be presented outside of any subtotal of operating income. This ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2017-07 is not expected to have a material impact on the Corporation’s consolidated financial statements.

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

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

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which provides a new framework for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption will be permitted and should apply it to transactions that have not been reported in financial statements that have been issued or made available for issuance. The adoption of ASU 2017-01 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, This ASU requires entities to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption will be permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, adjustments should be reflected at the beginning of the fiscal year that includes that interim period. The adoption of ASU 2016-18 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. The amendments are effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Corporation’s consolidated financial statements.

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

NOTE 2

Fair Value Measurements

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

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

Fair Value Hierarchy:

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

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

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

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

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

Cash and Cash Equivalents:

For disclosure purposes for cash, 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 approximate fair value.

Loans:

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

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

Foreclosed Assets:

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

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:

The table below presents the recorded amount of assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016.

March 31, 2017	Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. government treasury securities	$	0	$	966,020	$	0	$	966,020
U.S. government agency securities		0		47,018,234		0		47,018,234
State and municipal securities		0		6,696,861		0		6,696,861
Residential mortgage-backed securities		0		2,358,756		0		2,358,756
Corporate notes		0		2,551,660		0		2,551,660
Equity securities		0		100,380		0		100,380
Total	$	0	$	59,691,911	$	0	$	59,691,911

December 31, 2016	Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. government treasury securities	$	0	$	962,150	$	0	$	962,150
U.S. government agency securities		0		40,984,897		0		40,984,897
State and municipal securities		0		6,452,597		0		6,452,597
Residential mortgage-backed securities		0		2,529,314		0		2,529,314
Corporate notes		0		2,524,165		0		2,524,165
Equity securities		0		112,380		0		112,380
Total	$	0	$	53,565,503	$	0	$	53,565,503

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 March 31, 2017, and December 31, 2016.

March 31, 2017	Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	126,713	$	126,713
Impaired loans		0		0		3,087,571		3,087,571
Total assets at fair value	$	0	$	0	$	3,214,284	$	3,214,284

December 31, 2016	Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	126,713	$	126,713
Impaired loans		0		0		3,011,472		3,011,472
Total assets at fair value	$	0	$	0	$	3,138,185	$	3,138,185

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 March 31, 2017, and December 31, 2016, are as follows:

			Estimated Fair Value
March 31, 2017	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	25,240	$	25,240	$	0	$	0	$	25,240
Certificates of deposit in other banks		1,235		1,235		0		0		1,235
Investment securities available for sale		59,692		0		59,692		0		59,692
Investment securities held to maturity		52,698		0		53,438		0		53,438
Federal Home Loan Bank stock		1,905		0		1,905		0		1,905
Loans, net		307,545		0		304,793		3,088		307,881
Liabilities:
Deposits		393,007		0		393,261		0		393,261
Federal Home Loan Bank advances		34,476		0		34,329		0		34,329

			Estimated Fair Value
December 31, 2016	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	26,520	$	26,520	$	0	$	0	$	26,520
Certificates of deposit in other banks		0		0		0		0		0
Investment securities available for sale		53,566		0		53,566		0		53,566
Investment securities held to maturity		54,603		0		55,123		0		55,123
Federal Home Loan Bank stock		1,874		0		1,874		0		1,874
Loans, net		289,400		0		286,869		3,011		289,880
Liabilities:
Deposits		371,493		0		371,793		0		371,793
Federal Home Loan Bank advances		34,476		0		34,337		0		34,337

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 March 31, 2017, and December 31, 2016, were as follows:

Securities Available For Sale:

March 31, 2017	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

U.S. government treasury securities	$	978,464	$	0	$	12,444	$	966,020
U.S. government agency securities		47,101,132		711,857		794,755		47,018,234
State and municipal securities		6,714,688		60,219		78,046		6,696,861
Residential mortgage-backed securities		2,285,093		75,315		1,652		2,358,756
Corporate notes		2,497,252		54,408		0		2,551,660

Total debt securities AFS		59,576,629		901,799		886,897		59,591,531
Equity securities		100,380		0		0		100,380
Total securities AFS	$	59,677,009	$	901,799	$	886,897	$	59,691,911

December 31, 2016	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

U.S. government treasury securities	$	977,967	$	0	$	15,817	$	962,150
U.S. government agency securities		41,117,402		697,811		830,316		40,984,897
State and municipal securities		6,537,093		25,170		109,666		6,452,597
Residential mortgage-backed securities		2,454,282		76,284		1,252		2,529,314
Corporate notes		2,497,016		27,944		795		2,524,165

Total debt securities AFS		53,583,760		827,209		957,846		53,453,123
Equity securities		112,380		0		0		112,380
Total securities AFS	$	53,696,140	$	827,209	$	957,846	$	53,565,503

Securities Held to Maturity:

March 31, 2017	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

State and municipal securities	$	48,807,037	$	669,959	$	56,376	$	49,420,620
Residential mortgage-backed securities		3,891,091		125,999		0		4,017,090

Total securities HTM	$	52,698,128	$	795,958	$	56,376	$	53,437,710

December 31, 2016	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

State and municipal securities	$	50,435,624	$	508,109	$	117,077	$	50,826,656
Residential mortgage-backed securities		4,166,911		129,506		0		4,296,417

Total securities HTM	$	54,602,535	$	637,615	$	117,077	$	55,123,073

The amortized cost and estimated fair value of securities at March 31, 2017, and December 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

March 31, 2017
Available for Sale:	Amortized Cost		Estimated Fair Value

Amounts maturing in:
One year or less	$	0	$	0
After one through five years		14,054,162		14,268,498
After five through ten years		42,005,858		41,795,693
After ten years		3,516,609		3,527,340

Total debt securities AFS		59,576,629		59,591,531
Equity securities		100,380		100,380
Total securities AFS	$	59,677,009	$	59,691,911

Held to Maturity:	Amortized Cost		Estimated Fair Value

Amounts maturing in:
One year or less	$	6,866,331	$	6,872,320
After one through five years		27,079,074		27,470,942
After five through ten years		14,290,246		14,642,051
After ten years		4,462,477		4,452,397

Total securities HTM	$	52,698,128	$	53,437,710

December 31, 2016
Available for Sale:	Amortized Cost		Estimated Fair Value

Amounts maturing in:
One year or less	$	0	$	0
After one through five years		10,130,179		10,303,973
After five through ten years		39,818,677		39,507,820
After ten years		3,634,904		3,641,330

Total debt securities AFS		53,583,760		53,453,123
Equity securities		112,380		112,380
Total securities AFS	$	53,696,140	$	53,565,503

Held to Maturity:	Amortized Cost		Estimated Fair Value

Amounts maturing in:
One year or less	$	7,939,740	$	7,941,397
After one through five years		26,537,314		26,786,525
After five through ten years		15,178,560		15,493,803
After ten years		4,946,921		4,901,348

Total securities HTM	$	54,602,535	$	55,123,073

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:

March 31, 2017	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities Available for Sale
Temporarily impaired debt securities:
U.S. government treasury securities	$	12,444	$	966,020	$	0	$	0
U.S. government agency securities		794,755		22,318,748		0		0
State and municipal securities		78,046		3,918,525		0		0
Residential mortgage-backed securities		1,652		276,918		0		0
Total debt securities available for sale	$	886,897	$	27,480,211	$	0	$	0

Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities	$	56,376		7,870,968	$	0	$	0
Total securities held to maturity	$	56,376	$	7,870,968	$	0	$	0

December 31, 2016	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities Available for Sale
Temporarily impaired debt securities:
U.S. government treasury securities	$	15,817	$	962,150	$	0	$	0
U.S. government agency securities		830,316		19,330,575		0		0
State and municipal securities		109,666		4,676,685		0		0
Residential mortgage-backed securities		1,252		311,851		0		0
Corporate notes		0		0		795		499,205
Total debt securities available for sale	$	957,051	$	25,281,261	$	795	$	499,205

Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities	$	117,077	$	16,162,203	$	0	$	0
Total securities held to maturity	$	117,077	$	16,162,203	$	0	$	0

During the three months ended March 31, 2017, 2,400 shares of available for sale Federal Agricultural Mortgage Corporation equity securities were sold in the amount of $136,211 resulting in a realized gain of $124,211.

During the first quarter of 2016, we sold mortgage-backed securities in the amount of $924,406 which resulted in a realized gain of $35,344 and U. S. government agency securities in the amount of $4,954,459 which resulted in a realized loss of $7,438 for a net realized gain of $27,906. Of the investment securities sold, $5,302,031 were available for sale and $576,834 were held to maturity. These transactions occurred in order to provide liquidity and remove small lots of mortgage-backed securities. The small lots of held to maturity mortgage-backed securities sold were paid down by over 85% of face value.

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 March 31, 2017, forty-six debt securities with unrealized losses have depreciated 2.6% 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.

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 March 31, 2017 and December 31, 2016, were as follows:

	March 31, 2017					December 31, 2016

Commercial, financial and agricultural loans	$	71,220,724		22.9	%	$	70,999,423		24.3	%
Real estate:
Construction loans		28,395,680		9.2	%		25,999,295		8.9	%
Commercial mortgage loans		100,795,717		32.4	%		91,732,812		31.3	%
Residential loans		85,878,381		27.6	%		83,270,983		28.5	%
Agricultural loans		20,395,308		6.6	%		16,580,126		5.7	%
Consumer & other loans		4,039,096		1.3	%		3,960,492		1.3	%

Loans outstanding		310,724,906		100.0	%		292,543,131		100.0	%

Unearned interest and discount		(17,773	)				(18,895	)
Allowance for loan losses		(3,161,834	)				(3,124,611	)
Net loans	$	307,545,299				$	289,399,625

The Corporation’s only significant concentration of credit at March 31, 2017, occurred in real estate loans which totaled $235,465,086. However, this amount was not concentrated in any specific segment within the market or geographic area.

Certain 1-4 family and multifamily mortgage loans are pledged to Federal Home Loan Bank to secure outstanding advances. At March 31, 2017, $57,857,556 in 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 March 31, 2017.

	Commercial, Financial, Agricultural and Construction

Distribution of loans which are due:
In one year or less	$	25,595,422
After one year but within five years		49,051,767
After five years		24,969,215

Total	$	99,616,404

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 March 31, 2017.

	Loans With
	Predetermined	Loans With
	Rates	Floating Rates	Total

Commercial, financial,
agricultural and construction	$ 67,059,098	$ 6,961,884	$ 74,020,982

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 $1,221,935 and $246,320 at March 31, 2017, and December 31, 2016, respectively. There were no past due loans over ninety days and still accruing at March 31, 2017, or December 31, 2016. 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 $92,922 for March 31, 2017, and $476 for December 31, 2016.

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

	Age Analysis of Past Due Loans As of March 31, 2017
	30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans

Commercial, financial and agricultural loans	$	858,710	$	0	$	858,710	$	0	$	70,362,014	$	71,220,724
Real estate:
Construction loans		729,228		0		729,228		0		27,666,452		28,395,680
Commercial mortgage loans		1,792,554		0		1,792,554		0		99,003,163		100,795,717
Residential loans		1,285,004		0		1,285,004		318,093		84,275,284		85,878,381
Agricultural loans		248,691		0		248,691		903,842		19,242,775		20,395,308
Consumer & other loans		33,711		0		33,711		0		4,005,385		4,039,096

Total loans	$	4,947,898	$	0	$	4,947,898	$	1,221,935	$	304,555,073	$	310,724,906

	Age Analysis of Past Due Loans As of December 31, 2016
	30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans

Commercial, financial and agricultural loans	$	1,264,998	$	0	$	1,264,998	$	38,798	$	69,695,627	$	70,999,423
Real estate:
Construction loans		66,931		0		66,931		207,522		25,724,842		25,999,295
Commercial mortgage loans		1,268,405		0		1,268,405		0		90,464,407		91,732,812
Residential loans		1,376,671		0		1,376,671		0		81,894,312		83,270,983
Agricultural loans		0		0		0		0		16,580,126		16,580,126
Consumer & other loans		65,127		0		65,127		0		3,895,365		3,960,492

Total loans	$	4,042,132	$	0	$	4,042,132	$	246,320	$	288,254,679	$	292,543,131

Impaired Loans

At March 31, 2017, and December 31, 2016, impaired loans amounted to $3,620,260 and $3,560,901, respectively. A reserve amount of $532,689 and $549,429 were recorded in the allowance for loan losses for these impaired loans as of March 31, 2017, and December 31, 2016, respectively.

The following tables present impaired loans, segregated by class of loans as of March 31, 2017, and December 31, 2016:

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
March 31, 2017	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment

Commercial, financial and agricultural loans	$	64,140	$	0	$	64,140	$	64,140	$	8,926	$	37,254	$	686
Real estate:
Construction loans		242,714		121,914		0		121,914		0		188,623		4,300
Commercial mortgage loans		875,452		0		875,452		875,452		240,254		4,198,111		9,137
Residential loans		2,333,882		225,238		2,087,732		2,312,970		283,509		3,788,272		27,707
Agricultural loans		243,106		243,106		0		243,106		0		899,964		37,483
Consumer & other loans		2,678		2,678		0		2,678		0		6,024		27

Total loans	$	3,761,972	$	592,936	$	3,027,324	$	3,620,260	$	532,689	$	9,118,248	$	79,340

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
December 31, 2016	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment

Commercial, financial and agricultural loans	$	102,086	$	4,798	$	97,288	$	102,086	$	12,021	$	21,154	$	2,464
Real estate:
Construction loans		247,015		126,215		0		126,215		0		168,432		12,691
Commercial mortgage loans		880,670		0		880,670		880,670		245,472		4,005,175		46,195
Residential loans		2,223,421		230,610		1,971,899		2,202,509		291,936		3,272,528		122,370
Agricultural loans		246,175		246,175		0		246,175		0		851,740		8,150
Consumer & other loans		3,246		3,246		0		3,246		0		6,501		201

Total loans	$	3,702,613	$	611,044	$	2,949,857	$	3,560,901	$	549,429	$	8,325,530	$	192,071

At March 31, 2016, the year-to-date average recorded investment of impaired loans was $6,371,657 and the interest income received during impairment was $59,215.

At March 31, 2017, and December 31, 2016, included in impaired loans were $911,013 and $914,378, respectively, of troubled debt restructurings.

Troubled Debt Restructurings (TDR)

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

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

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

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

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

The following tables present the amount of troubled debt restructuring by loan class, classified separately as accrual and nonaccrual at March 31, 2017, and December 31, 2016, as well as those currently paying under restructured terms and those that have defaulted under restructured terms as of March 31, 2017, and December 31, 2016. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 or more days past due.

	March 31, 2017
					Under restructured terms
	Accruing		Non-accruing		#		Current		#		Default
Commercial, financial, and agricultural loans	$	0	$	0		0	$	0		0	$	0
Real estate:
Construction loans		0		0		0		0		0		0
Commercial mortgage loans		0		0		0		0		0		0
Residential loans		4,493		0		1		4,493		0		0
Agricultural loans		0		903,842		0		0		3		903,842
Consumer & other loans		2,678		0		1		2,678		0		0
Total TDR’s	$	7,171	$	903,842		2	$	7,171		3	$	903,842

	December 31, 2016
					Under restructured terms
	Accruing		Non-accruing		#		Current		#		Default
Commercial, financial, and agricultural loans	$	0	$	0		0	$	0		0	$	0
Real estate:
Construction loans		0		0		0		0		0		0
Commercial mortgage loans		0		0		0		0		0		0
Residential loans		4,853		0		1		4,853		0		0
Agricultural loans		906,279		0		3		906,279		0		0
Consumer & other loans		3,246		0		1		3,246		0		0
Total TDR’s	$	914,378	$	0		5	$	914,378		0	$	0

The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and non-accrual at March 31, 2017, and December 31, 2016.

	March 31, 2017								December 31, 2016
	Accruing				Nonaccruing				Accruing				Nonaccruing
	#		Balance		#		Balance		#		Balance		#		Balance
Type of concession:
Payment modification		0	$	0		0	$	0		0	$	0		0	$	0
Rate reduction		0		0		0		0		0		0		0		0
Rate reduction, payment modification		2		7,171		3		903,842		5		914,378		0		0
Forbearance of interest		0		0		0		0		0		0		0		0
Total		2	$	7,171		3	$	903,842		5	$	914,378		0	$	0

As of March 31, 2017, and December 31, 2016, the Corporation had a balance of $911,013 and $914,378, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans at March 31, 2017, and December 31, 2016. The Corporation had no balance in the allowance for loan losses allocated to such troubled debt restructurings at March 31, 2017, or December 31, 2016. The Corporation had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of March 31, 2017.

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 March 31, 2017, all Grade 8 loans have been charged-off.

The following tables present internal loan grading by class of loans as of March 31, 2017, and December 31, 2016:

March 31, 2017	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	956,664	$	0	$	0	$	24,701	$	0	$	384,097	$	1,365,462
Grade 2- Above Avg.		0		0		0		0		0		9,594		9,594
Grade 3- Acceptable		25,691,714		5,875,182		29,194,091		29,983,604		11,039,244		1,286,821		103,070,656
Grade 4- Fair		42,366,959		22,384,785		65,526,934		51,080,553		7,959,550		2,332,976		191,651,757
Grade 5a- Watch		382,608		0		1,091,440		794,826		0		13,398		2,282,272
Grade 5b- OAEM		1,486,493		13,799		3,627,272		1,121,312		339,950		6,141		6,594,967
Grade 6- Substandard		249,494		121,914		1,355,980		2,873,385		1,056,564		6,069		5,663,406
Grade 7- Doubtful		86,792		0		0		0		0		0		86,792
Total loans	$	71,220,724	$	28,395,680	$	100,795,717	$	85,878,381	$	20,395,308	$	4,039,096	$	310,724,906

December 31, 2016	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	615,535	$	0	$	0	$	24,963	$	0	$	395,765	$	1,036,263
Grade 2- Above Avg.		0		0		0		7,172		289,561		10,195		306,928
Grade 3- Acceptable		28,049,484		7,456,101		24,383,326		29,654,781		8,899,344		1,343,547		99,786,583
Grade 4- Fair		40,358,471		18,402,769		62,023,892		48,747,687		6,306,754		2,182,145		178,021,718
Grade 5a- Watch		111,488		0		1,071,667		832,624		22,642		16,002		2,054,423
Grade 5b- OAEM		1,561,359		14,210		2,883,133		1,260,719		0		3,247		5,722,668
Grade 6- Substandard		214,862		126,215		1,370,794		2,743,037		1,061,825		9,591		5,526,324
Grade 7- Doubtful		88,224		0		0		0		0		0		88,224
Total loans	$	70,999,423	$	25,999,295	$	91,732,812	$	83,270,983	$	16,580,126	$	3,960,492	$	292,543,131

Allowance for Loan Losses Methodology

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

The ALL is calculated by the addition of the estimated loss derived from each of the above categories. The impaired loans and nonaccrual loans are analyzed on an individual basis to determine if the future collateral value is sufficient to support the outstanding debt of the loan. If an estimated loss is calculated, it is included in the estimated ALL until it is charged to the loan loss reserve. The calculation for loan risk graded 5b, 6, 7 or 8, other outstanding loans and other commitments to lend is based on assigning an estimated loss factor based on a twelve quarter rolling historical weighted average net loss rate. The estimated requirement for unallocated general reserves from migration and economic analysis is determined by considering (1) trends in asset quality, (2) level and trends in charge-off experience, (3) macroeconomic trends and conditions, (4) microeconomic trends and conditions and (5) risk profile of lending activities. Within each of these categories, a 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 month period ended March 31, 2017. 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 0.05% for the three months ended March 31, 2017.

Three months ended March 31, 2017:

March 31, 2017	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate			Agricultural Real Estate		Consumer and Other		Total
Allowance for loan losses:
Beginning balance, December 31, 2016	$	191,267	$	1,043,083	$	1,192,098	$	420,189		$	86,656	$	191,318	$	3,124,611

Charge-offs		34,000		0		0		0			0		5,815		39,815
Recoveries		855		0		0		0			0		1,183		2,038
Net charge-offs		33,145		0		0		0			0		4,632		37,777
Provisions charged to operations		74,700		0		0		(2,354	)		0		2,654		75,000
Balance at end of period, March 31, 2017	$	232,822	$	1,043,083	$	1,192,098	$	417,835		$	86,656	$	189,340	$	3,161,834

Ending balance -
Individually evaluated for impairment	$	8,926	$	0	$	240,254	$	283,509		$	0	$	0	$	532,689
Collectively evaluated for impairment		223,896		1,043,083		951,844		134,326			86,656		189,340		2,629,145
Balance at end of period	$	232,822	$	1,043,083	$	1,192,098	$	417,835		$	86,656	$	189,340	$	3,161,834

Loans :
Ending balance -
Individually evaluated for impairment	$	64,140	$	121,914	$	4,467,550	$	2,393,279		$	1,056,565	$	2,678	$	8,106,126
Collectively evaluated for impairment		71,156,584		28,273,766		96,328,167		83,485,102			19,338,743		4,036,418		302,618,780
Balance at end of period	$	71,220,724	$	28,395,680	$	100,795,717	$	85,878,381		$	20,395,308	$	4,039,096	$	310,724,906

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the year ended December 31, 2016.

December 31, 2016	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, 2015	$	144,781	$	1,043,083	$	1,192,098	$	381,891		$	86,656	$	183,733	$	3,032,242

Charge-offs		103,387		0		0		3,394			0		9,225		116,006
Recoveries		28,303		0		0		16,994			0		3,078		48,375
Net charge-offs		75,084		0		0		(13,600	)		0		6,147		67,631
Provisions charged to operations		121,570		0		0		24,698			0		13,732		160,000
Balance at end of period, December 31, 2016	$	191,267	$	1,043,083	$	1,192,098	$	420,189		$	86,656	$	191,318	$	3,124,611

Ending balance -
Individually evaluated for impairment	$	12,021	$	0	$	245,472	$	291,936		$	0	$	0	$	549,429
Collectively evaluated for impairment		179,246		1,043,083		946,626		128,253			86,656		191,318		2,575,182
Balance at end of period	$	191,267	$	1,043,083	$	1,192,098	$	420,189		$	86,656	$	191,318	$	3,124,611

Loans :
Ending balance -
Individually evaluated for impairment	$	102,086	$	126,215	$	4,496,700	$	2,281,439		$	1,061,826	$	3,246	$	8,071,512
Collectively evaluated for impairment		70,897,337		25,873,080		87,236,112		80,989,544			15,518,300		3,957,246		284,471,619
Balance at end of period	$	70,999,423	$	25,999,295	$	91,732,812	$	83,270,983		$	16,580,126	$	3,960,492	$	292,543,131

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

The Corporation cautions that there are various factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in any forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include risks related to:

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

· the Corporation’s ability to 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;

· changes in regulatory capital and other requirements;

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

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

The foregoing list of factors is not exclusive, and readers are cautioned not to place undue reliance on any forward-looking statements. The Corporation undertakes no obligation to update or revise any forward-looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in the Corporation’s current and subsequent filings with the SEC.

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, retail brokerage and insurance services. Our primary market area incorporates Colquitt County, where we are headquartered, as well as Baker, Lowndes, Tift and Worth Counties, each contiguous with Colquitt County, and the surrounding counties of southwest Georgia. We have five full service banking facilities, six automated teller machines, and a loan production office in Tifton, Georgia.

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, about six years ago, we began expanding geographically in Valdosta, Georgia, with two full-service banking centers, a mortgage origination office, and most recently added a commercial banking center in August 2014. Continuing to expand our geographical footprint, in January 2016, a loan production office was opened in the neighboring community of Tifton, Georgia. We received regulatory approval to add a full-service branch in Tifton, Georgia, and expect to complete construction in the first quarter of 2018.

The Corporation’s profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets and the interest paid on interest-bearing liabilities. The Corporation’s earning assets are primarily loans, securities, and short-term interest-bearing deposits with banks, and the interest-bearing liabilities are principally customer deposits and borrowings. Net interest income is highly sensitive to fluctuations in interest rates. To address interest rate fluctuations, we manage our balance sheet in an effort to diminish the impact should interest rates suddenly change.

Broadening our revenue sources helps to reduce the risk and exposure of our financial results to the impact of changes in interest rates, which are outside of our control. Sources of noninterest income include our insurance agency, fees on customer accounts, and trust and retail brokerage services through our Wealth Strategies division. In the first quarter of 2017, noninterest income was 22.2% of the Corporation’s total revenue.

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

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 increased to $1.349 million at the end of March 31, 2017, up $1.262 million from the same period last year. Foreclosed assets increased $45 thousand to $127 thousand compared with the first 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 March 31, 2017, 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 March 31, 2017, 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 March 31, 2017, the Corporation’s and the Bank’s risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. During the three months ended March 31, 2017, total capital increased $881 thousand to $39.3 million and increased $1.8 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 8.35% as of March 31, 2017, and average equity-to-average asset ratio for the first quarter ending March 31, 2017, of 8.38%. 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.

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 March 31, 2017, was $1.065 million, up $18 thousand from net income of $1.048 million for the first quarter of 2016. This increase in net income was primarily due to an increase of $233 thousand in interest income and an increase of $57 thousand in noninterest income. This revenue growth was partially offset by an increase of $172 thousand in noninterest expense and an increase of $60 thousand in interest expense compared with the first quarter of 2016.

On a per share basis, net income for the first quarter was $.42 per diluted share compared with $.41 per diluted share for the same quarter in 2016. The weighted average common diluted shares outstanding for the quarter were 2.547 million, down from 2.548 million first quarter last year.

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

	1st Qtr			4th Qtr			3rd Qtr			2nd Qtr			1st Qtr
	2017			2016			2016			2016			2016
Return on average total assets		0.91	%		0.89	%		0.89	%		0.96	%		1.01	%
Return on average total equity		10.91	%		10.23	%		9.95	%		10.63	%		11.30	%
Average shareholders’ equity to average total assets		8.38	%		8.65	%		8.97	%		9.05	%		8.94	%
Net interest margin (tax equivalent)		3.98	%		3.97	%		4.12	%		4.21	%		4.29	%

Comparison of Statements of Income for the Quarter

Total interest income increased $233 thousand to $4.502 million for the three months ended March 31, 2017, compared with the same period in 2016, reflecting an increase in interest income and fees on loans of $210 thousand. Interest on deposits in other banks increased $28 thousand when compared with the first quarter of 2016. These increases were partially offset by a decrease in interest income from investment securities of $8 thousand compared with the same period last year. Interest on certificates of deposit in other banks and dividends remained relatively flat compared with the first quarter last year.

Total interest expense increased $60 thousand, or 16.1%, to $436 thousand in the first quarter of 2017 compared with the same period in 2016. Interest paid on deposits increased $64 thousand, or 30.8%, during the first quarter of 2017 due to increased average interest-bearing deposit volume of $29.0 million. Partially offsetting this increase, interest on total borrowings decreased $4 thousand compared with the same quarter in 2016.

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 $4.1 million for the first quarter of 2017 compared with $3.9 million in net interest income in the 2016 first quarter. Net interest income after provision for loan losses for the first quarter of 2017 was $4.0 million compared with $3.9 million for the same period in 2016. The first quarter provision for loan losses was $75 thousand in 2017, up from $30 thousand in 2016. The Corporation’s net interest margin was 3.98% for the first quarter of 2017, down 31 basis points from the same period last year. The lower net interest margin was a result of decreased yield on total earning assets, but especially a 43 basis point decline in average rate earned on loans. Also contributing to lower margin, interest paid on interest-bearing liabilities increased by 3 basis points compared with March 31, 2016.

Noninterest income, at 22.2% of the Corporation’s total revenue for the quarter, was $1.3 million for the first quarter, increasing 4.6% compared with the same period in 2016. The $57 thousand increase in noninterest income was the result of a $124 thousand gain on sale of securities compared with a $28 thousand gain on the sale of securities in the first quarter of 2016. Other operating income and income from retail brokerage services increased $14 thousand and $8 thousand, respectively, compared with the first quarter 2016. Also, there was a slight increase in income from trust services of $2 thousand compared with the first quarter last year. Offsetting these increases were decreases in income from insurance services and mortgage banking services of $39 thousand and $18 thousand, respectively, compared with the prior year first quarter. Also, service charges on deposit accounts decreased $7 thousand compared with the first quarter last year.

Noninterest expense was $3.9 million for the first quarter of 2017, an increase of $172 thousand when compared with the first quarter of 2016. The largest component of noninterest expense, salaries and employee benefits, increased $122 thousand to $2.3 million for the first quarter mainly due to expansion in the Valdosta and Tifton markets. Data processing expense also increased $44 thousand compared with the first quarter last year due mostly to preparation for migration to a new core processing vendor. Other operating expenses also increased $33 thousand compared with the first quarter of 2016. Partially offsetting these increases, combined equipment and occupancy expenses decreased $26 thousand compared with the first quarter a year ago.

Comparison of Financial Condition Statements

At March 31, 2017, total assets were $470.9 million, a $22.4 million increase from December 31, 2016. Growth in total loans of $18.2 million and an increase of $4.3 million in investment securities was funded by an increase in total deposits of $21.5 million for the first three months of 2017. This increase in deposits was primarily in money market and noninterest-bearing accounts.

Total loans increased $18.2 million to $310.7 million at March 31, 2017, compared with $292.5 million at December 31, 2016. 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 66.0% of total assets.

Investment securities, interest-bearing deposits in other banks, and certificates of deposit in other banks represented 28.4% of total assets at March 31, 2017. Compared with December 31, 2016, investment securities increased $4.3 million and certificates of deposit in other banks increased $1.2 million while interest-bearing deposits in other banks decreased $713 thousand. This resulted in an overall increase in investments of $4.8 million since December 31, 2016.

Deposits increased to $393.0 million at the end of the first quarter of 2017, up $21.5 million from the end of 2016. The increase was primarily in money market deposit accounts of $19.0 million and noninterest-bearing deposits of $12.1 million. Savings accounts also increased slightly by $1.2 million compared with year end 2016. Partially offsetting these increases, NOW accounts decreased $9.3 million and total certificates of deposit decreased $1.5 million when compared with December 31, 2016. At March 31, 2017, total deposits represented 83.5% of total assets.

Total debt remained flat at $34.5 million when compared with the end of 2016. The Corporation will repay the Federal Home Loan Bank long-term advances as scheduled.

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

Long-term debt consists of the following:

	March 31,		December 31,		March 31,
	2017		2016		2016

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).		1,800,000		1,800,000		3,600,000

Advance from FHLB with a 0.89% fixed rate of interest maturing July 24, 2017 (principal reducing hybrid advance with principal reductions of $3.33 million annually).		0		0		3,333,333

Advance from FHLB with a 1.259% fixed rate of interest maturing September 30, 2020 (principal reducing hybrid advance with principal reductions of $1.6 million).		4,800,000		4,800,000		6,400,000

Advance from FHLB with a 1.9425% fixed rate of interest maturing December 16, 2022 (principal reducing hybrid advance with principal reductions of $857 thousand annually).		4,285,714		4,285,714		5,142,857

Advance from FHLB with a 1.419% fixed rate of interest maturing August 30, 2023 (principal reducing hybrid advance with principal reductions of $857 thousand annually).		5,142,857		5,142,857		0

Total long-term debt	$	26,028,571	$	26,028,571	$	28,476,190

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 1.02% of total loans outstanding at March 31, 2017, compared with 1.07% at December 31, 2016, and 1.13% at March 31, 2016. Net charge-offs in the 2017 first quarter were $38 thousand compared with net recoveries of $4 thousand in the first quarter of 2016. Management considers the allowance for loan losses as of March 31, 2017, 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 $1.3 million, or 0.29% of total assets, in the first quarter of 2017, up from $373 thousand, or 0.08% of total assets, at the end of 2016, and up from $87 thousand, or 0.02% of total assets in the same period last year. Nonaccrual loans were $1.2 million in the first quarter of 2017 mostly concentrated in one $904 thousand agricultural real estate relationship.

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):	March 31, 2017		March 31, 2016
Commitments to extend credit	$	27,272	$	27,942
Standby letters of credit and financial guarantees	$	2,791	$	1,089

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

Capital Resources and Dividends

The Corporation considers a solid capital foundation as essential to continued strength and growth as well as return to our shareholders. Risk-based capital requirements and rules became effective January 1, 2015, with some conditions that phase in through January 2019. These requirements and rules increase the minimum capital ratios, add a new ratio (CET1), and designate a standardized approach for risk-weighting assets.

As of March 31, 2017, the Corporation met the definition under Basel III of a small bank holding company and, therefore, was exempt from the new consolidated risk-based and leverage capital adequacy guidelines for bank holding companies.

Total risk-based capital for the Corporation and the Bank are composed of CET1, additional Tier 1 capital, and Tier 2 capital. CET 1 capital includes common stock plus related surplus and retained earnings less intangible assets. Additional Tier 1 capital is currently the same as the CET1. Tier 2 capital consists of allowances for possible loan and lease losses, subject to limitations. The Tier 1 leverage ratio is based on average assets. Our total risk-based capital ratio now stands at 13.50%, which is 35 percent in excess of the regulatory standard for “well-capitalized”. See Footnote 1, Summary of Significant Accounting Policies, Recent Market and Regulatory Developments section, elsewhere in this report for further discussion on Basel III and capital requirements. The Corporation’s and the Bank’s risk-based capital ratios as of March 31, 2017, are shown in the following table.

Risk Based Capital Ratios
										Basel III Regulatory Guidelines
										2017			2019
										Required			Required
	Southwest									Minimum			Minimum
	Georgia			Southwest						Capital			Capital
	Financial			Georgia			For Well			Phase-in			Plus
Risk-Based Capital Ratios	Corporation⁽¹⁾			Bank			Capitalized			Guidelines			Buffer
Common Equity Tier 1 capital		12.54	%		11.48	%		6.50	%		5.75	%		7.00	%
Tier 1 capital		12.54	%		11.48	%		8.00	%		7.25	%		8.50	%
Total risk-based capital		13.50	%		12.45	%		10.00	%		9.25	%		10.50	%
Tier 1 leverage ratio		8.79	%		8.05	%		5.00	%		4.00	%		4.00	%

(1) Corporation meets the requirements of the exemption as a small bank holding company.

In March 2017, the Corporation paid a quarterly cash dividend of $0.11 per common share, an increase compared with $0.10 per common share paid in the first quarter of 2016. 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.

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

ITEM 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.

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, 2016, was included in Item 8 of the form 10K , dated December 31, 2016, under the heading “Management’s Report on Internal Control Over Financial Reporting”.

The annual report form 10K, dated December 31, 2016, 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 March 31, 2017, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at March 31, 2017, and December 31, 2016; (ii) Consolidated Statements of Income for the three months ended March 31, 2017, and 2016; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017, and 2016; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; 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.

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
		/s/George R. Kirkland

	BY:	GEORGE R. KIRKLAND
		EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
		OFFICER AND TREASURER

Date: May 15, 2017

SOUTHWEST GEORGIA FINANCIAL CORP - FORM 10-Q - May 15, 2017

Attached files

SOUTHWEST GEORGIA FINANCIAL CORP Reports