10-Q 1 tenq916.htm FORM 10-Q

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 September 30, 2016

[ ]	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 September 30, 2016
Common Stock, $1 Par Value		2,547,837

SOUTHWEST GEORGIA FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2016

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 – September 30, 2016 (unaudited) and
			December 31, 2015 (audited).	2

		b.	Consolidated statements of income (unaudited) – for the three months
			and the nine months ended September 30, 2016 and 2015.	3

		c.	Consolidated statements of comprehensive income (unaudited) - for the
			three months and the nine months ended September 30, 2016 and 2015.	4

		d.	Consolidated statements of cash flows (unaudited) for the nine months
			ended September 30, 2016 and 2015.	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	40

	SIGNATURE			41

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2016 and December 31, 2015
	(Unaudited)			(Audited)
	September 30,			December 31,
	2016			2015
ASSETS
Cash and due from banks	$	6,514,663		$	6,156,818
Interest-bearing deposits in other banks		26,503,586			24,923,455
Cash and cash equivalents		33,018,249			31,080,273

Certificates of deposit in other banks		0			245,000

Investment securities available for sale, at fair value		45,338,142			51,476,411
Investment securities held to maturity (fair value
approximates $57,999,648 and $62,198,699)		56,388,703			60,888,804
Federal Home Loan Bank stock, at cost		1,874,200			1,869,200
Total investment securities		103,601,045			114,234,415

Loans		287,246,527			250,805,381
Less: Unearned income		(20,272	)		(19,046	)
Allowance for loan losses		(3,093,450	)		(3,032,242	)
Loans, net		284,132,805			247,754,093

Premises and equipment, net		11,771,842			11,157,444
Foreclosed assets, net		126,713			81,750
Intangible assets		39,063			50,781
Bank owned life insurance		5,325,562			5,231,393
Other assets		5,014,660			5,020,321

Total assets	$	443,029,939		$	414,855,470

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
NOW accounts	$	32,983,468		$	25,382,480
Money Market		97,974,940			108,226,017
Savings		30,833,756			27,720,845
Certificates of deposit $100,000 and over		35,393,043			25,189,020
Other time accounts		48,029,484			50,728,148
Total interest-bearing deposits		245,214,691			237,246,510
Noninterest-bearing deposits		119,041,558			101,769,333
Total deposits		364,256,249			339,015,843

Short-term borrowed funds		8,447,619			7,590,476
Long-term debt		26,885,714			28,476,190
Other liabilities		4,349,626			3,675,271
Total liabilities		403,939,208			378,757,780

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		29,611,624			27,369,480
Accumulated other comprehensive loss		(402,466	)		(1,153,363	)
Treasury stock, at cost 1,745,998 shares for 2016
and 2015		(26,113,795	)		(26,113,795	)
Total stockholders' equity		39,090,731			36,097,690

Total liabilities and stockholders' equity	$	443,029,939		$	414,855,470

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
	(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)
	2016		2015		2016			2015
Interest income:
Interest and fees on loans	$	3,784,837	$	3,215,018	$	11,017,174		$	9,424,445
Interest on taxable securities available for sale		220,638		264,592		733,346			825,897
Interest on taxable securities held to maturity		42,079		60,699		137,402			198,004
Interest on tax exempt securities		312,819		313,436		944,124			929,409
Dividends		22,031		17,941		67,976			53,613
Interest on deposits in other banks		26,024		14,426		64,784			41,530
Interest on certificates of deposit in other banks		0		2,877		52			9,652
Total interest income		4,408,428		3,888,989		12,964,858			11,482,550

Interest expense:
Interest on deposits		242,930		202,174		676,128			588,348
Interest on federal funds purchased		3		86		8			423
Interest on other short-term borrowings		28,470		18,688		76,048			47,245
Interest on long-term debt		140,933		104,398		429,473			328,493
Total interest expense		412,336		325,346		1,181,657			964,509
Net interest income		3,996,092		3,563,643		11,783,201			10,518,041
Provision for loan losses		45,000		51,300		115,000			141,300
Net interest income after provision for loan losses		3,951,092		3,512,343		11,668,201			10,376,741

Noninterest income:
Service charges on deposit accounts		276,733		283,612		808,294			839,519
Income from trust services		53,528		52,552		156,791			190,408
Income from retail brokerage services		89,684		82,436		258,220			280,638
Income from insurance services		310,145		331,052		1,123,928			1,066,898
Income from mortgage banking services		89,438		79,657		272,102			235,666
Net gain (loss) on sale or disposition of assets		410		252		(177	)		22,092
Net gain on sale of securities		57,052		0		168,919			3,587
Other income		183,288		178,925		595,505			575,519
Total noninterest income		1,060,278		1,008,486		3,383,582			3,214,327

Noninterest expense:
Salaries and employee benefits		2,221,615		1,907,517		6,575,324			5,879,758
Occupancy expense		297,253		298,935		864,372			855,002
Equipment expense		182,431		226,560		632,589			664,623
Data processing expense		349,621		313,905		1,004,167			921,314
Amortization of intangible assets		3,906		3,906		11,719			11,719
Other operating expenses		683,905		708,257		2,058,939			2,107,120
Total noninterest expenses		3,738,731		3,459,080		11,147,110			10,439,536
Income before income taxes		1,272,639		1,061,749		3,904,673			3,151,532
Provision for income taxes		299,884		204,468		872,699			620,936
Net income	$	972,755	$	857,281	$	3,031,974			2,530,596

Earnings per share of common stock:
Net income, basic	$	0.38	$	0.33	$	1.19		$	0.99
Net income, diluted	$	0.38	$	0.33	$	1.19		$	0.99
Dividends paid per share	$	0.11	$	0.10	$	0.31		$	0.30
Weighted average shares outstanding		2,547,837		2,547,837		2,547,837			2,547,837
Diluted average shares outstanding		2,547,837		2,547,837		2,547,837			2,547,837

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
	2016			2015		2016			2015

Net income	$	972,755		$	857,281	$	3,031,974		$	2,530,596
Other comprehensive income (loss):
Unrealized holding gains (losses) on investment securities available for sale		(162,813	)		561,405		1,281,757			593,114
Reclassification adjustment for (gains) losses realized in income		(57,052	)		0		(144,034	)		17,992
Less: Tax effect		(74,754	)		190,878		386,826			207,776
Total other comprehensive income (loss), net of tax		(145,111	)		370,527		750,897			403,330
Total comprehensive income	$	827,644		$	1,227,808	$	3,782,871		$	2,933,926

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months
	Ended September 30,
	(Unaudited)			(Unaudited)
	2016			2015
Cash flows from operating activities:
Net income	$	3,031,974		$	2,530,596
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses		115,000			141,300
Depreciation		688,790			711,978
Net amortization of investment securities		205,981			236,511
Income on cash surrender value of bank owned life insurance		(94,169	)		(110,281	)
Amortization of intangibles		11,719			11,719
Gain on sale/writedown of foreclosed assets		0			(12,787	)
Net gain on sale of securities		(168,919	)		(3,587	)
Net loss (gain) on disposal of other assets		1,275			(9,305	)
Change in:
Other assets		(381,169	)		(88,838	)
Other liabilities		674,355			49,210
Net cash provided by operating activities		4,084,837			3,456,516

Cash flows from investing activities:
Proceeds from calls, paydowns and maturities of securities HTM		4,227,615			3,115,158
Proceeds from calls, paydowns and maturities of securities AFS		10,160,070			1,892,662
Proceeds from Federal Home Loan Bank Stock repurchase		413,700			141,600
Proceeds from sale of securities available for sale		11,933,634			4,044,500
Proceeds from sale of securities held to maturity		576,834			516,746
Proceeds from maturities of certificates of deposit in other banks		245,000			245,000
Purchase of securities held to maturity		(478,559	)		(3,583,857	)
Purchase of securities available for sale		(14,680,561	)		(1,094,645	)
Purchase of Federal Home Loan Bank Stock		(418,700	)		(195,800	)
Net change in loans		(36,538,675	)		(14,761,304	)
Proceeds from bank owned life insurance		0			30,011
Purchase of premises and equipment		(1,304,463	)		(319,416	)
Proceeds from sales of other assets		0			351,000
Net cash used by investing activities		(25,864,105	)		(9,618,345	)

Cash flows from financing activities:
Net change in deposits		25,240,406			12,798,589
Payment of short-term portion of long-term debt		(6,733,333	)		(5,133,333	)
Proceeds from issuance of short-term debt		857,143			1,600,000
Proceeds from issuance of long-term debt		5,142,857			6,400,000
Cash dividends paid		(789,829	)		(764,351	)
Net cash provided by financing activities		23,717,244			14,900,905

Increase in cash and cash equivalents		1,937,976			8,739,076
Cash and cash equivalents - beginning of period		31,080,273			12,558,697
Cash and cash equivalents - end of period	$	33,018,249		$	21,297,773

NONCASH ITEMS:
Increase in foreclosed properties and decrease in loans	$	44,963		$	0
Unrealized gain on securities available for sale		1,137,723			611,106
Net reclass between short and long-term debt		6,733,333			5,133,333
Sale of foreclosed properties through loans		0			150,000

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 2015 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 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 Southwest Georgia Financial 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 customers through its banking offices in southwest Georgia. Its primary deposit products are money market, NOW, savings and certificates of deposit, and its primary lending products are consumer and commercial mortgage loans. The Corporation provides, in addition to conventional banking services, investment planning and management, trust management, mortgage banking, and commercial and individual insurance products. Insurance products and advice are provided by the Southwest Georgia Bank’s Southwest Georgia Insurance Services Division.

The Corporation’s primary business is providing banking services through the Southwest Georgia Bank (the “Bank”) to individuals and businesses principally in the counties of Colquitt, Baker, Worth, Lowndes and the surrounding counties of southwest Georgia. We have two full-service banking centers and a mortgage origination office in Valdosta, Georgia. A new commercial banking center in Valdosta, Georgia was completed and opened in August of 2014. We have expanded our geographical footprint into neighboring Tift County, Georgia, with a loan production office that opened for business 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 up to $250,000. Uninsured deposits aggregate to $880,770 at September 30, 2016.

Investment Securities

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

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other-than-temporarily impaired are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation has been calculated primarily using the straight-line method for buildings and building improvements over the assets estimated useful lives. Equipment and furniture are depreciated using the modified accelerated recovery system method over the assets estimated useful lives for financial reporting and income tax purposes for assets purchased on or before December 31, 2003. For assets acquired since 2003, the Corporation used the straight-line method of depreciation. The following estimated useful lives are used for financial statement purposes:

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

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

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

Loans and Allowances for Loan Losses

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

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

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

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

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

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

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 less than three years.

Credit Related Financial Instruments

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

Retirement Plans

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

Bank Owned Life Insurance

The Corporation’s subsidiary bank has bank owned life insurance policies on a group of employees. Banking laws and regulations allow the Bank to purchase life insurance policies on certain employees in order to help offset the Bank’s overall employee compensation costs. The beneficial aspects of these life insurance policies are tax-free earnings and a tax free death benefit, which are realized by the Bank as the owner of the policies. The cash surrender value of these policies is included as an asset on the balance sheet, and any increases in cash surrender value are recorded as noninterest income on the statement of income. At September 30, 2016, and December 31, 2015, the policies had a value of $5,325,562 and $5,231,393, respectively, and were 13.6% and 14.5%, 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.

Mortgage Banking Services

The Bank and Empire recognize mortgage banking income from secondary market loan origination fees and commercial mortgage banking fees, respectively. The Bank originates fixed and variable rate mortgage loans, substantially all of which are sold into the secondary market. Empire recognizes as income in the current period fees collected on loans for investing participants. Empire does not directly fund any mortgages and acts as a service-oriented broker for participating mortgage lenders.

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 $40,731 and $119,940 for the three and nine month periods ended September 30, 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, common equity Tier 1, Tier 1 risk-based capital and Total risk-based capital ratios. The Board of Governors of the Federal Reserve System published the Basel III Capital Rules (Basel III) establishing a new comprehensive capital framework applicable to all depository institutions, bank holding companies with total consolidated assets of $1 billion or more, and all 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 (CET1), additional Tier 1 capital or Tier 2 capital.

As of September 30, 2016, 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.

Basel III also introduced a “capital conservation buffer,” which adds .625% each year to the CET1, Tier 1, and Total capital ratios, which is in addition to each capital ratio, and is phased-in over a four-year period beginning January 2016. The minimum capital level requirements including the buffer applicable to the Bank under Basel III in 2016 are: (i) a CET1 risk-based capital ratio of 5.125%; (ii) a Tier 1 risk-based capital ratio of 6.625%; (iii) a Total risk-based capital ratio of 8.625%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. CET1 capital will consist of retained earnings and common stock instruments, subject to certain adjustments. The Bank became subject to these new initial minimum capital level requirements as of January 1, 2015.

As of September 30, 2016, the most recent notifications from the FDIC categorized the Bank as “well-capitalized” under current regulations and met all capital adequacy requirements under Basel III on a fully phased-in basis as if such requirements were currently in effect.

Basel III provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded. The Bank made a one-time permanent election in the first quarter of 2015 in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Bank’s available-for-sale securities portfolio.

Basel III sets 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. Basel III prescribes a standardized approach for risk weightings that expand the risk-weighting categories depending on the nature of the assets which results in higher risk weights for a variety of asset categories.

Recent Accounting Pronouncements

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.

In March 2016, the FASB issued ASU No. 2016-09 - Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. For public entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU No. 2016-09 is being reviewed for any material impact on the Corporation’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07: Investments —Equity Method and Joint Ventures. The amendments in this update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The adoption of ASU No. 2016-07 is not expected to have a material impact on the Corporation’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets. The new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured as fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU No. 2016-01 is being reviewed for any material impact there may be on the Corporation's consolidated financial statements.

NOTE 2

Fair Value Measurements

On 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 approximates fair value.

Loans:

The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allocation is established within the allowance for loan losses. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 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 September 30, 2016 and December 31, 2015.

September 30, 2016	Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. government agency securities	$	0	$	35,780,250	$	0	$	35,780,250
State and municipal securities		0		4,148,889		0		4,148,889
Residential mortgage-backed securities		0		2,779,468		0		2,779,468
Corporate notes		0		2,517,155		0		2,517,155
Equity securities		0		112,380		0		112,380
Total	$	0	$	45,338,142	$	0	$	45,338,142

December 31, 2015	Level 1		Level 2		Level 3		Total
Investment securities available for sale:
U.S. government agency securities	$	0	$	42,642,322	$	0	$	42,642,322
State and municipal securities		0		2,607,684		0		2,607,684
Residential mortgage-backed securities		0		3,741,445		0		3,741,445
Corporate notes		0		2,472,960		0		2,472,960
Equity securities		0		12,000		0		12,000
Total	$	0	$	51,476,411	$	0	$	51,476,411

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 September 30, 2016, and December 31, 2015.

September 30, 2016	Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	126,713	$	126,713
Impaired loans		0		0		3,562,656		3,562,656
Total assets at fair value	$	0	$	0	$	3,689,369	$	3,689,369

December 31, 2015	Level 1		Level 2		Level 3		Total
Foreclosed assets	$	0	$	0	$	81,750	$	81,750
Impaired loans		0		0		5,254,501		5,254,501
Total assets at fair value	$	0	$	0	$	5,336,251	$	5,336,251

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 September 30, 2016, and December 31, 2015, are as follows:

			Estimated Fair Value
September 30, 2016	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	33,018	$	33,018	$	0	$	0	$	33,018
Investment securities available for sale		45,338		0		45,338		0		45,338
Investment securities held to maturity		56,389		0		58,000		0		58,000
Federal Home Loan Bank stock		1,874		0		1,874		0		1,874
Loans, net		284,133		0		281,468		3,563		285,031
Liabilities:
Deposits		364,256		0		364,616		0		364,616
Federal Home Loan Bank advances		35,333		0		35,517		0		35,517

			Estimated Fair Value
December 31, 2015	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	31,080	$	31,080	$	0	$	0	$	31,080
Certificates of deposit in other banks		245		245		0		0		245
Investment securities available for sale		51,476		0		51,476		0		51,476
Investment securities held to maturity		60,889		0		62,199		0		62,199
Federal Home Loan Bank stock		1,869		0		1,869		0		1,869
Loans, net		247,754		0		243,460		5,255		248,715
Liabilities:
Deposits		339,016		0		339,337		0		339,337
Federal Home Loan Bank advances		36,067		0		35,964		0		35,964

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 September 30, 2016, and December 31, 2015, were as follows:

Securities Available For Sale:

September 30, 2016	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

U.S. government agency securities	$	34,154,554	$	1,629,122	$	3,426	$	35,780,250
State and municipal securities		4,068,726		81,252		1,089		4,148,889
Residential mortgage-backed securities		2,650,448		129,020		0		2,779,468
Corporate notes		2,496,725		21,375		945		2,517,155

Total debt securities AFS		43,370,453		1,860,769		5,460		45,225,762
Equity securities		112,380		0		0		112,380
Total securities AFS	$	43,482,833	$	1,860,769	$	5,460	$	45,338,142

December 31, 2015	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

U.S. government agency securities	$	42,074,712	$	782,567	$	214,957	$	42,642,322
State and municipal securities		2,573,844		33,840		0		2,607,684
Residential mortgage-backed securities		3,601,949		140,934		1,438		3,741,445
Corporate notes		2,496,320		0		23,360		2,472,960

Total debt securities AFS		50,746,825		957,341		239,755		51,464,411
Equity securities		12,000		0		0		12,000
Total securities AFS	$	50,758,825	$	957,341	$	239,755	$	51,476,411

Securities Held to Maturity:

September 30, 2016	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

State and municipal securities	$	51,882,323	$	1,412,588	$	7,739	$	53,287,172
Residential mortgage-backed securities		4,506,380		206,096		0		4,712,476

Total securities HTM	$	56,388,703	$	1,618,684	$	7,739	$	57,999,648

December 31, 2015	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

State and municipal securities	$	54,775,093	$	1,124,007	$	41,153	$	55,857,947
Residential mortgage-backed securities		6,113,711		227,041		0		6,340,752

Total securities HTM	$	60,888,804	$	1,351,048	$	41,153	$	62,198,699

The amortized cost and estimated fair value of securities at September 30, 2016, and December 31, 2015, 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.

September 30, 2016
Available for Sale:	Amortized Cost		Estimated Fair Value

Amounts maturing in:
One year or less	$	0	$	0
After one through five years		6,934,107		7,127,904
After five through ten years		32,668,949		34,209,965
After ten years		3,767,397		3,887,893

Total debt securities AFS		43,370,453		45,225,762
Equity securities		112,380		112,380
Total securities AFS	$	43,482,833	$	45,338,142

Held to Maturity:	Amortized Cost		Estimated Fair Value

Amounts maturing in:
One year or less	$	6,367,329	$	6,375,231
After one through five years		26,020,754		26,516,943
After five through ten years		17,351,665		18,169,853
After ten years		6,648,955		6,937,621

Total securities HTM	$	56,388,703	$	57,999,648

December 31, 2015
Available for Sale:	Amortized Cost		Estimated Fair Value

Amounts maturing in:
One year or less	$	0	$	0
After one through five years		22,374,572		22,310,228
After five through ten years		22,553,504		23,222,962
After ten years		5,818,749		5,931,221

Total debt securities AFS		50,746,825		51,464,411
Equity securities		12,000		12,000
Total securities AFS	$	50,758,825	$	51,476,411

Held to Maturity:		Amortized Cost		Estimated Fair Value

Amounts maturing in:
One year or less	$	3,956,629	$	3,968,196
After one through five years		27,302,169		27,617,796
After five through ten years		21,412,080		22,253,863
After ten years		8,217,926		8,358,844

Total securities HTM	$	60,888,804	$	62,198,699

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:

September 30, 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 agency securities	$	3,426	$	994,080	$	0	$	0
State and municipal securities		1,089		704,371		0		0
Residential mortgage-backed securities		0		0		0		0
Corporate notes		0		0		945		499,055
Total debt securities available for sale	$	4,515	$	1,698,451	$	945	$	499,055

Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities	$	7,739	$	5,888,665	$	0	$	0
Residential mortgage-backed securities		0		0		0		0
Total securities held to maturity	$	7,739	$	5,888,665	$	0	$	0

December 31, 2015	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities Available for Sale
Temporarily impaired debt securities:
U.S. government agency securities	$	73,907	$	11,885,323	$	141,050	$	5,858,950
State and municipal securities		0		0		0		0
Residential mortgage-backed securities		1,438		441,997		0		0
Corporate notes		22,360		1,973,960		1,000		499,000
Total debt securities available for sale	$	97,705	$	14,301,280	$	142,050	$	6,357,950

Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities	$	26,435	$	7,250,634	$	14,718	$	994,476
Residential mortgage-backed securities		0		0		0		0
Total securities held to maturity	$	26,435	$	7,250,634	$	14,718	$	994,476

During the three months ended September 30, 2016, we sold one available for sale U.S. Government Agency security in the amount of $1,549,453, resulting in a gain of $57,052. In the first half of 2016, we sold available for sale U.S. Government Agency securities in the amount of $10,036,609 resulting in a net realized gain of $76,524. Also, available for sale mortgage-backed securities in the amount of $347,572 and held to maturity mortgage-backed securities in the amount of $576,834 were sold in the first half of 2016 for net gains of $10,458 and $24,885, respectively. These transactions occurred in order to provide liquidity and remove small lots of mortgage-backed securities. These small lots of held to maturity mortgage-backed securities sold were paid down to over 85% of face value.

During the third quarter of 2015, no investment securities were sold. In the first half of 2015, a $3,587 gain on the sale of securities was recognized as a result of selling $4,044,500 million in short-term U.S. Government Agency securities and $516,746 in mortgage-backed securities in order to provide liquidity and remove small lots of mortgage-backed securities. These small lots of held to maturity mortgage-backed securities sold were paid down to 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 September 30, 2016, nineteen debt securities with unrealized losses have depreciated 0.2% 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 September 30, 2016 and December 31, 2015, were as follows:

	September 30, 2016					December 31, 2015

Commercial, financial and agricultural loans	$	72,301,178		25.2	%	$	58,173,187		23.2	%
Real estate:
Construction loans		23,610,795		8.2	%		19,831,070		7.9	%
Commercial mortgage loans		88,607,249		30.9	%		85,777,359		34.2	%
Residential loans		82,049,316		28.5	%		67,969,119		27.1	%
Agricultural loans		16,415,755		5.7	%		15,620,266		6.2	%
Consumer & other loans		4,262,234		1.5	%		3,434,380		1.4	%

Loans outstanding		287,246,527		100.0	%		250,805,381		100.0	%

Unearned interest and discount		(20,272	)				(19,046	)
Allowance for loan losses		(3,093,450	)				(3,032,242	)
Net loans	$	284,132,805				$	247,754,093

The Corporation’s only significant concentration of credit at September 30, 2016, occurred in real estate loans which totaled $210,683,115. 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 September 30, 2016, $54,682,688 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 September 30, 2016.

	Commercial, Financial, Agricultural and Construction

Distribution of loans which are due:
In one year or less	$	26,200,937
After one year but within five years		45,296,045
After five years		24,414,991

Total	$	95,911,973

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 September 30, 2016.

	Loans With
	Predetermined	Loans With
	Rates	Floating Rates	Total

Commercial, financial,
agricultural and construction	$ 63,974,258	$ 5,736,778	$ 69,711,036

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 $351,864 and $1,545,599 at September 30, 2016, and December 31, 2015, respectively. There were no past due loans over ninety days and still accruing at September 30, 2016, and one past due loan over ninety days and still accruing in the amount of $521 at December 31, 2015. 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 $766 for September 30, 2016, and $40,346 for December 31, 2015.

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 September 30, 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	$	1,849,423	$	0	$	1,849,423	$	351,864	$	70,099,891	$	72,301,178
Real estate:
Construction loans		67,327		0		67,327		0		23,543,468		23,610,795
Commercial mortgage loans		821,018		0		821,018		0		87,786,231		88,607,249
Residential loans		658,001		0		658,001		0		81,391,315		82,049,316
Agricultural loans		0		0		0		0		16,415,755		16,415,755
Consumer & other loans		29,511		0		29,511		0		4,232,723		4,262,234

Total loans	$	3,425,280	$	0	$	3,425,280	$	351,864	$	283,469,383	$	287,246,527

	Age Analysis of Past Due Loans As of December 31, 2015
	30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans

Commercial, financial and agricultural loans	$	449,618	$	521	$	450,139	$	0	$	57,723,048	$	58,173,187
Real estate:
Construction loans		121,694		0		121,694		0		19,709,376		19,831,070
Commercial mortgage loans		810,515		0		810,515		0		84,966,844		85,777,359
Residential loans		2,238,684		0		2,238,684		639,094		65,091,341		67,969,119
Agricultural loans		148,761		0		148,761		906,505		14,565,000		15,620,266
Consumer & other loans		84,342		0		84,342		0		3,350,038		3,434,380

Total loans	$	3,853,614	$	521	$	3,854,135	$	1,545,599	$	245,405,647	$	250,805,381

Impaired Loans

At September 30, 2016, and December 31, 2015, impaired loans amounted to $3,698,650 and $5,558,615, respectively. A reserve amount of $135,994 and $304,114 were recorded in the allowance for loan losses for these impaired loans as of September 30, 2016, and December 31, 2015, respectively.

The following tables present impaired loans, segregated by class of loans as of September 30, 2016, and December 31, 2015:

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
September 30, 2016	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment

Commercial, financial and agricultural loans	$	436,375	$	287,335	$	64,529	$	351,864	$	4,744	$	5,304	$	0
Real estate:
Construction loans		183,499		62,699		0		62,699		0		162,330		9,026
Commercial mortgage loans		885,327		538,207		347,120		885,327		65,083		3,804,154		36,171
Residential loans		2,167,126		964,160		1,182,054		2,146,214		66,167		2,761,723		92,068
Agricultural loans		248,964		248,964		0		248,964		0		799,914		6,103
Consumer & other loans		3,582		3,582		0		3,582		0		6,271		156

Total loans	$	3,924,873	$	2,104,947	$	1,593,703	$	3,698,650	$	135,994	$	7,539,696	$	143,524

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
December 31, 2015	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment

Commercial, financial and agricultural loans	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Real estate:
Construction loans		193,524		72,724		0		72,724		0		133,693		15,049
Commercial mortgage loans		3,256,589		496,159		2,760,430		3,256,589		212,283		2,096,082		89,947
Residential loans		1,988,434		662,523		1,304,999		1,967,522		91,831		3,832,546		107,070
Agricultural loans		257,211		257,211		0		257,211		0		422,099		25,823
Consumer & other loans		4,569		4,569		0		4,569		0		0		0

Total loans	$	5,700,327	$	1,493,186	$	4,065,429	$	5,558,615	$	304,114	$	6,484,420	$	237,889

At September 30, 2015, the year-to-date average recorded investment of impaired loans was $6,758,628 and the interest income received during impairment was $169,785.

At September 30, 2016, and December 31, 2015, included in impaired loans were $914,761 and $2,290,411, 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 September 30, 2016, and December 31, 2015, as well as those currently paying under restructured terms and those that have defaulted under restructured terms at September 30, 2016, and December 31, 2015. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 days past due.

	September 30, 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		4,900		0		1		4,900		0		0
Agricultural loans		906,279		0		3		906,279		0		0
Consumer & other loans		3,582		0		1		3,582		0		0
Total TDR’s	$	914,761	$	0		5	$	914,761		0	$	0

	December 31, 2015
					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		2,280,466		0		1		2,280,466		0		0
Residential loans		5,376		0		1		5,376		0		0
Agricultural loans		0		0		0		0		0		0
Consumer & other loans		4,569		0		1		4,569		0		0
Total TDR’s	$	2,290,411	$	0		3	$	2,290,411		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 September 30, 2016, and December 31, 2015.

	September 30, 2016								December 31, 2015
	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		5		914,761		0		0		3		2,290,411		0		0
Forbearance of interest		0		0		0		0		0		0		0		0
Total		5	$	914,761		0	$	0		3	$	2,290,411		0	$	0

As of September 30, 2016, and December 31, 2015, the Corporation had a balance of $914,761 and $2,290,411, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans at September 30, 2016, and December 31, 2015. The Corporation’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $0 and $130,441 at September 30, 2016, and December 31, 2015, respectively. The Corporation had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of September 30, 2016.

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 September 30, 2016, all Grade 8 loans have been charged-off.

The following tables present internal loan grading by class of loans as of September 30, 2016, and December 31, 2015:

September 30, 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	$	680,054	$	0	$	0	$	25,224	$	0	$	438,277	$	1,143,555
Grade 2- Above Avg.		0		0		0		7,903		319,938		0		327,841
Grade 3- Acceptable		29,012,322		4,569,016		25,182,875		31,961,069		9,800,644		1,798,287		102,324,213
Grade 4- Fair		40,249,152		17,338,734		57,062,397		44,994,021		4,610,795		1,987,580		166,242,679
Grade 5a- Watch		223,747		1,573,019		2,076,679		1,153,163		619,764		23,451		5,669,823
Grade 5b- OAEM		1,667,876		0		2,902,294		1,259,624		0		3,582		5,833,376
Grade 6- Substandard		376,794		130,026		1,383,004		2,618,555		1,064,614		11,057		5,584,050
Grade 7- Doubtful		91,233		0		0		29,757		0		0		120,990
Total loans	$	72,301,178	$	23,610,795	$	88,607,249	$	82,049,316	$	16,415,755	$	4,262,234	$	287,246,527

December 31, 2015	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	731,270	$	0	$	0	$	25,988	$	0	$	416,250	$	1,173,508
Grade 2- Above Avg.		0		0		0		10,011		329,069		0		339,080
Grade 3- Acceptable		30,581,968		7,569,566		26,285,799		31,303,029		9,648,983		1,756,139		107,145,484
Grade 4- Fair		26,075,703		11,022,826		53,296,973		30,946,390		3,930,746		1,230,515		126,503,153
Grade 5a- Watch		217,295		1,097,222		4,791,317		1,263,077		638,402		5,999		8,013,312
Grade 5b- OAEM		560,678		0		523,596		1,233,611		0		13,802		2,331,687
Grade 6- Substandard		6,273		141,456		879,674		3,155,625		1,073,066		11,675		5,267,769
Grade 7- Doubtful		0		0		0		31,388		0		0		31,388
Total loans	$	58,173,187	$	19,831,070	$	85,777,359	$	67,969,119	$	15,620,266	$	3,434,380	$	250,805,381

Allowance for Loan Losses Methodology

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

The ALL is calculated by the addition of the estimated loss derived from each of the above categories. The impaired loans and nonaccrual loans over $50,000 are analyzed on an individual basis to determine if the future collateral value is sufficient to support the outstanding debt of the loan. If an estimated loss is calculated, it is included in the estimated ALL until it is charged to the loan loss reserve. The calculation for loan risk graded 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 and nine month periods ended September 30, 2016. 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 0.03% for the nine months ended September 30, 2016.

Three months ended September 30, 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, June 30, 2016	$	169,974	$	1,043,083	$	1,192,098	$	434,915		$	86,656	$	185,916		$	3,112,642

Charge-offs		89,052		0		0		3,394			0		0			92,446
Recoveries		26,007		0		0		1,947			0		300			28,254
Net charge-offs		63,045		0		0		1,447			0		(300	)		64,192
Provisions charged to operations		48,019		0		0		(4,230	)		0		1,211			45,000
Balance at end of period, September 30, 2016	$	154,948	$	1,043,083	$	1,192,098	$	429,238		$	86,656	$	187,427		$	3,093,450

Nine months ended September 30, 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		89,052		0		0		3,394			0		8,426		100,872
Recoveries		27,607		0		0		16,994			0		2,479		47,080
Net charge-offs		61,445		0		0		(13,600	)		0		5,947		53,792
Provisions charged to operations		71,612		0		0		33,747			0		9,641		115,000
Balance at end of period, September 30, 2016	$	154,948	$	1,043,083	$	1,192,098	$	429,238		$	86,656	$	187,427	$	3,093,450

Ending balance -
Individually evaluated for impairment	$	4,744	$	0	$	65,083	$	66,167		$	0	$	0	$	135,994
Collectively evaluated for impairment		150,204		1,043,083		1,127,015		363,071			86,656		187,427		2,957,456
Balance at end of period	$	154,948	$	1,043,083	$	1,192,098	$	429,238		$	86,656	$	187,427	$	3,093,450

Loans :
Ending balance -
Individually evaluated for impairment	$	351,864	$	1,473,191	$	4,922,412	$	2,300,813		$	1,660,061	$	3,582	$	10,711,923
Collectively evaluated for impairment		71,949,314		22,137,604		83,684,837		79,748,503			14,755,694		4,258,652		276,534,604
Balance at end of period	$	72,301,178	$	23,610,795	$	88,607,249	$	82,049,316		$	16,415,755	$	4,262,234	$	287,246,527

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the year ended December 31, 2015.

	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, 2014	$	299,850	$	1,043,083	$	1,192,098	$	312,822	$	86,656	$	179,642		$	3,114,151

Charge-offs		263,809		0		0		33,238		0		22,153			319,200
Recoveries		42,253		0		0		22,047		0		31,691			95,991
Net charge-offs		221,556		0		0		11,191		0		(9,538	)		223,209
Provisions charged to operations		66,487		0		0		80,260		0		(5,447	)		141,300
Balance at end of period, December 31, 2015	$	144,781	$	1,043,083	$	1,192,098	$	381,891	$	86,656	$	183,733		$	3,032,242

Ending balance -
Individually evaluated for impairment	$	0	$	0	$	212,283	$	91,831	$	0	$	0		$	304,114
Collectively evaluated for impairment		144,781		1,043,083		979,815		290,060		86,656		183,733			2,728,128
Balance at end of period	$	144,781	$	1,043,083	$	1,192,098	$	381,891	$	86,656	$	183,733		$	3,032,242

Loans :
Ending balance -
Individually evaluated for impairment	$	0	$	1,012,831	$	5,414,491	$	2,896,953	$	1,682,207	$	4,569		$	11,011,051
Collectively evaluated for impairment		58,173,187		18,818,239		80,362,868		65,072,166		13,938,059		3,429,811			239,794,330
Balance at end of period	$	58,173,187	$	19,831,070	$	85,777,359	$	67,969,119	$	15,620,266	$	3,434,380		$	250,805,381

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

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

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

· the Corporation’s ability to raise capital;

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

· the Corporation’s construction and land development loans;

· asset quality;

· the adequacy of the allowance for loan losses;

· technology difficulties or failures;

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

· the loss of key personnel;

· competition from financial institutions and other financial service providers;

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

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

· changes in regulation and monetary policy;

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

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

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

· political, legal and local economic conditions and developments;

· financial market conditions and the results of financing efforts;

· changes in commodity prices and interest rates;

· a 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.

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 recently opened 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, we expanded geographically in Valdosta, Georgia, since 2010 with two full-service banking centers, a mortgage origination office, and a commercial banking center. Continuing to expand our geographical footprint, in January 2016, a loan production office was opened in the neighboring community of Tifton, Georgia.

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 third quarter of 2016, noninterest income was 19.4% 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 decreased by $880 thousand to $479 thousand at the end of September 30, 2016, compared with the same period last year. Foreclosed assets increased $127 thousand to $127 thousand compared with the third 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 September 30, 2016, 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 September 30, 2016, 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 September 30, 2016, the Corporation’s and the Bank’s risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. During the nine months ended September 30, 2016, total capital increased $3.0 million to $39.1 million and increased $2.6 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 8.82% as of September 30, 2016, and average equity-to-average asset ratio for the third quarter ending September 30, 2016, of 8.97%. 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 September 30, 2016, was $973 thousand, up $115 thousand from net income of $857 thousand for the third quarter of 2015. This increase in net income was primarily due to an increase of $519 thousand in interest income and an increase of $52 thousand in noninterest income. This revenue growth was partially offset by an increase of $280 thousand in noninterest expense and an increase of $87 thousand in interest expense compared with the third quarter of 2015.

On a per share basis, net income for the third quarter was $.38 per diluted share compared with $.33 per diluted share for the same quarter in 2015. The weighted average common diluted shares outstanding for the quarter were 2.548 million, the same as third quarter last year.

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

	3rd Qtr			2nd Qtr			1st Qtr			4th Qtr			3rd Qtr
	2016			2016			2016			2015			2015
Return on average total assets		0.89	%		0.96	%		1.01	%		0.83	%		0.87	%
Return on average total equity		9.95	%		10.63	%		11.30	%		9.16	%		9.48	%
Average shareholders’ equity to average total assets		8.97	%		9.05	%		8.94	%		9.03	%		9.17	%
Net interest margin (tax equivalent)		4.12	%		4.21	%		4.29	%		3.99	%		4.10	%

Comparison of Statements of Income for the Quarter

Total interest income increased $519 thousand to $4.408 million for the three months ended September 30, 2016, compared with the same period in 2015, reflecting an increase in interest income and fees on loans of $570 thousand. Interest on deposits in other banks and dividends increased $11 thousand and $4 thousand, respectively, when compared with the third quarter of 2015. These increases were partially offset by a decrease in interest income from investment securities of $63 thousand compared with the same period last year. Interest on certificates of deposit in other banks also decreased by $3 thousand compared with the third quarter last year.

Total interest expense increased $87 thousand, or 26.7%, to $412 thousand in the third quarter of 2016 compared with the same period in 2015. Interest paid on deposits increased $41 thousand, or 20.2%, during the third quarter of 2016 due to slight changes in deposit mix. Interest on total borrowings increased $46 thousand compared with the same quarter in 2015 due to an increase of borrowings compared with the prior year to fund loan growth.

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 $4.0 million for the third quarter of 2016 compared with $3.6 million in net interest income in the 2015 third quarter. Net interest income after provision for loan losses for the third quarter of 2016 was $4.0 million compared with $3.5 million for the same period in 2015. The third quarter provision for loan losses was $45 thousand in 2016, down from $51 thousand in 2015. The Corporation’s net interest margin was 4.12% for the third quarter of 2016, up 2 basis points from the same period last year. The higher net interest margin was a result of the impact of changes in earning asset mix driven by a $52 million average loan growth. This increase was partially offset by more interest expense paid on certificates of deposit and a $6.6 million increase in average borrowings.

Noninterest income, at 19.4% of the Corporation’s total revenue for the quarter, was $1.1 million for the third quarter, increasing 5.1% compared with the same period in 2015. The $52 thousand increase in noninterest income was the result of a $57 thousand gain on sale of the securities, a $10 thousand increase in income from mortgage banking services, and a $7 thousand increase in income from retail brokerage services. Also, there were slight increases in income from trust services and other income when compared with the third quarter last year. Offsetting these increases was a decrease in income from insurance services of $21 thousand compared with the prior year third quarter. Also, service charges on deposit accounts decreased $7 thousand compared with the third quarter last year.

Noninterest expense was $3.7 million for the third quarter of 2016, an increase of $280 thousand when compared with the third quarter of 2015. The largest component of noninterest expense, salaries and employee benefits, increased $314 thousand to $2.2 million for the third quarter mainly due to expansion in the Valdosta and Tifton markets as well as providing for the retirement of critical staff this year and next year. Data processing expense also increased $36 thousand compared with the third quarter last year. Partially offsetting these increases, combined equipment and occupancy expenses decreased $46 thousand compared with the third quarter a year ago. Other operating expenses also decreased $24 thousand compared with the third quarter of 2015.

Comparison of Statements of Income for the Nine-month Period

Total interest income for the first nine months of 2016 increased $1.5 million to $13.0 million when compared with the same period in 2015. This increase was largely due to a $1.6 million increase in interest income and fees on loans due to a $45.0 million higher average loan volume compared with the first nine months of 2015. Interest on deposits in banks also increased $23 thousand compared to the same period last year. Partially offsetting these increases, interest income from investment securities decreased by $124 thousand due to a $12.7 million lower average volume of investment securities when compared with the first nine months of last year.

Total interest expense for the nine-month period ended September 30, 2016, increased $217 thousand, or 22.5%, to $1.2 million compared with the same period in 2015. The increase in interest expense was mostly related to higher interest expense on total borrowings of $129 thousand for the first nine months of 2016 due to an $8.0 million larger average of Federal Home Loan Bank advances compared with the same period last year. Interest paid on interest-bearing deposits also increased $88 thousand compared with the first nine months of 2015.

Net interest income for the first nine months of 2016 was 12.0% higher at $11.8 million compared with $10.5 million for the same period in 2015. Net interest income after provision for loan losses was $11.7 million compared with $10.4 million for the same period in 2015. The provision for loan losses was $115 thousand in the first nine months of 2016, down from $141 thousand for the same period of 2015. Net interest margin was 4.20% for the first nine months of 2016, up 14 basis points from 4.06% for the same period last year. Growth in loan volume contributed to the increase in net interest income and margin.

For the first nine months of 2016, noninterest income was $3.4 million, up $169 thousand, or 5.3%, compared with the same period in 2015. The increase was primarily attributed to a $169 thousand gain on the sale of securities in the first nine months of 2016 and a $57 thousand increase in income from insurance services compared with the prior year. Also, income from mortgage banking services and other income increased $36 thousand and $20 thousand, respectively, compared with the first nine months of 2015. Partially offsetting these increases, income from trust services and service charges on deposit accounts declined $34 thousand and $31 thousand, respectively, compared with the same period last year. Income from retail brokerage also declined $22 thousand compared with the first nine months of 2015.

Noninterest expense increased $708 thousand for the first nine months of 2016 compared with the same period last year mainly attributed to an increase in salary and employee benefits of $696 thousand. Data processing, and occupancy expenses increased $83 thousand and $9 thousand, respectively, when compared with the same period in 2015. Partially offsetting these increases, other operating expenses decreased $48 thousand and equipment expense decreased $32 thousand in the first nine months of 2016 compared with the first nine months of 2015.

Comparison of Financial Condition Statements

At September 30, 2016, total assets were $443.0 million, a $28.2 million increase from December 31, 2015. Changes in earning asset mix were primarily noted in a $36.4 million growth in total loans and a decrease of $10.6 million in investment securities. Total deposits grew $25.2 million for the first nine months of 2016. This increase in deposits was primarily in noninterest-bearing accounts.

Total loans increased $36.4 million to $287.2 million at September 30, 2016, compared with $250.8 million at December 31, 2015. 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 64.8% of total assets.

Investment securities and interest-bearing deposits in other banks represented 29.4% of total assets at September 30, 2016. Compared with December 31, 2015, interest-bearing deposits in banks increased $1.6 million, and investment securities decreased $10.6 million. This resulted in an overall decrease in investments of $9.0 million since December 31, 2015. The decrease in investments was primarily used to fund loan growth.

Deposits increased to $364.3 million at the end of the third quarter of 2016, up $25.2 million from the end of 2015. The increase was primarily in noninterest-bearing deposits of $17.3 million and certificates of deposit $100,000 and over of $10.2 million. NOW accounts and savings accounts also increased $7.6 million and $3.1 million, respectively. Mostly offsetting these increases, money market accounts decreased $10.3 million and other time accounts decreased $2.7 million when compared with December 31, 2015. At September 30, 2016, total deposits represented 82.2% of total assets.

Total debt decreased by $733 thousand to $35.3 million when compared with the end of 2015. The Corporation will repay the Federal Home Loan Bank advances as scheduled.

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

Long-term debt consists of the following:

	September 30,		December 31,		September 30,
	2016		2015		2015

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		3,600,000		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		3,333,333		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		6,400,000		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).		5,142,857		5,142,857		0

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		0		0

Total long-term debt	$	26,885,714	$	28,476,190	$	23,333,333

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 1.08% of total loans outstanding at September 30, 2016, compared with 1.21% at December 31, 2015, and 1.33% at September 30, 2015. Net charge-offs in the 2016 third quarter were $64 thousand compared with net charge-offs of $51 thousand in the third quarter of 2015. Management considers the allowance for loan losses as of September 30, 2016, 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 $479 thousand, or 0.11% of total assets, in the third quarter of 2016, down from $1.6 million, or 0.39% of total assets, at the end of 2015, and down from $1.4 million, or 0.35% of total assets in the same period last year. Nonaccrual loans were $352 thousand in the third quarter of 2016. There were two residential foreclosed properties in nonperforming assets at the end of the third quarter of 2016 compared with no foreclosed properties at the end of last year’s third quarter.

Off-Balance Sheet Arrangements

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

Financial instruments whose contract amounts represent credit risk (dollars in thousands):	September 30, 2016		September 30, 2015
Commitments to extend credit	$	34,429	$	22,618
Standby letters of credit and financial guarantees	$	1,143	$	950

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.

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 14.21%, which is 42 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 September 30, 2016, are shown in the following table.

Risk Based Capital Ratios
										Basel III Regulatory Guidelines
										2016			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		13.18	%		12.50	%		6.50	%		5.125	%		7.00	%
Tier 1 capital		13.18	%		12.50	%		8.00	%		6.625	%		8.50	%
Total risk-based capital		14.21	%		13.54	%		10.00	%		8.625	%		10.50	%
Tier 1 leverage ratio		9.06	%		8.60	%		5.00	%		4.00	%		4.00	%

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

In September 2016, the Corporation paid a quarterly cash dividend of $0.11 per common share, a 10% increase compared with $0.10 per common share paid each quarter since the previous increase in March 2015. 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, 2015, was included in Item 8 of the form 10K , dated December 31, 2015, under the heading “Management’s Report on Internal Control Over Financial Reporting”.

The annual report form 10K, dated December 31, 2015, 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 September 30, 2016, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at September 30, 2016, and December 31, 2015; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2016, and 2015; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016, and 2015; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015; 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: November 14, 2016