Forward-Looking Statements

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

These factors include risks related to:
* the conditions in the financial markets and economic conditions generally;
* the Corporation's ability to raise capital;
* the Corporation's liquidity;
* 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;
* changes in regulation and monetary policy;
* losses due to fraudulent and negligent conduct of customers, service providers and 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;
* weather, natural disasters and other catastrophic events; and other factors discussed in the Corporation's other filings with the Securities and Exchange Commission.

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

Overview

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

Our strategy is to:
* maintain the diversity of our revenue, including both interest and noninterest income through a broad base of business,
* strengthen our sales and marketing efforts while developing our employees to provide the best possible service to our customers,
* expand our market share where opportunity exists, and
* grow outside of our current geographic market either through de-novo branching or acquisitions into areas proximate to our current market area.

We believe that investing in sales and marketing in this challenging market will provide us with a competitive advantage. To that end, we have continued with our plans to expand geographically and established a loan production office in Valdosta, Georgia, in the first quarter of 2008. We have established leadership in place in Valdosta and have purchased a permanent site for a branch bank. We are soon to break ground and begin the construction phase of our branch bank building.

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, such as loans, securities and federal funds sold, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Net interest income is highly sensitive to the fluctuations in interest rates. For example, after reaching a high of 5.25%, the Federal Reserve Bank decreased the overnight borrowing rate for banks by 5% to a range of 0% to .25% from September 2007 to December 2008. The Federal funds rate remained at this low level during the entire first half of 2009.

Our profitability is impacted as well by operating expenses such as salaries and employee benefits, occupancy and other operating expenses, including income taxes. Our lending activities are significantly influenced by regional and local factors. Some specific factors include 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.

To address interest rate fluctuations out of our control, we manage our balance sheet in an effort to diminish the impact of sudden interest rates changes by broadening our revenue sources to reduce the risk and exposure of our financial results to the impact of changes in interest rates, which is outside of our control. Sources of noninterest income include our insurance agency and Empire, the Corporation's commercial mortgage banking subsidiary, as well as fees on customer accounts, trust and retail brokerage services. Noninterest income was 50% of second quarter 2009 net interest income and 27% of second quarter 2009 total revenue.

Since mid-2007, and particularly during the past year, the financial markets and economic conditions generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in home prices and the values of subprime mortgages, but spread to all commercial and residential mortgages as property prices declined rapidly and to nearly all asset classes. The effect of the market and economic downturn also spread to other areas of the credit markets and severely affected the availability of liquidity. The magnitude of these declines led to a crisis of confidence in the financial sector as a result of concerns about the capital base and viability of certain financial institutions. During this period, interbank lending and commercial paper borrowing fell sharply, precipitating a credit freeze for both institutional and individual borrowers. Unemployment has also increased significantly.

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 can have on the Corporation's results of operations. We believe that the allowance for loan losses as of June 30, 2009 is adequate, however, under adversely different 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 require material estimates and assumptions. Note 1 to the Consolidated Financial Statements provides a description of our significant accounting policies and contributes to the understanding of how our financial performance is reported.

LIQUIDITY AND CAPITAL RESOURCES

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

The liquidity and capital resources of the Corporation are monitored on a periodic basis by state and Federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Bank's liquidity ratios at June 30, 2009, were considered satisfactory. At that date, the Bank's short-term investments were adequate to cover any reasonably anticipated immediate need for funds. Due to the 5% drop in the short-term rate by the Federal Reserve since September 2007, the majority of our callable securities were called by the issuer in 2008. We had $86 million of our callable securities called during the first half of last year. We have reinvested these proceeds from called investment securities in new loans, new investment securities, and for repayment of our debt obligations. We are not aware of any known trends, events, or uncertainties that will have or that are reasonably likely to have a material adverse effect on the Corporation's liquidity or operations. At June 30, 2009, the Corporation's and the Bank's risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. During the six months ended June 30, 2009, total capital increased $476 thousand to $23.8 million and decreased $1.3 million from the same period last year due to reporting some losses and making dividend payments. The stock repurchase program, adopted by the Board in January 2000, expired during the first quarter of last year. As part of its capital management planning, the Corporation and its Board of Directors elected not to extend the authorization of the stock repurchase program. Also, the Corporation continues to maintain a healthy level of capital adequacy as measured by its equity-to-asset ratio of 8.84% as of June 30, 2009. 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 June 30, 2009, was $259 thousand compared with a net income of $764 thousand for the same period in 2008, representing an decrease of $505 thousand. Lower net income was primarily due to a $693 thousand increase in operating expenses compared with the second quarter of 2008, as well as a 48.9%, or $299 thousand, decline in commercial mortgage banking revenue.

On a per share basis, net income for the second quarter decreased 67% to $.10 per diluted share compared with $.30 per diluted share for the same quarter in 2008. The weighted average common diluted shares outstanding for the quarter were 2.548 million, down eight thousand shares from second quarter last year. The decrease in average quarterly diluted shares was due to the expiration of some stock options during 2008 and a decrease in stock price.

                               2nd Qtr  1st Qtr  4th Qtr  3rd Qtr  2nd Qtr
                                 2009     2009     2008     2008     2008
Return on average total assets   0.38%   0.56%    (0.17)%  ( 3.99)%   1.10%
Return on average total equity   4.37%   6.48%    (2.02)%  (42.53)%  11.43%
Average shareholders' equity
 to Average total assets         8.66%   8.62%     8.61%     9.37%    9.60%
Net interest margin
  (tax equivalent)               4.12%   4.07%     4.26%     4.19%    3.97%

Comparison of Statements of Income for the Quarter

Noninterest income, which was 26.5% of the Corporation's total revenue for the quarter, was $1.207 million for the second quarter, down 18.8% from the same period in 2008. Mortgage banking services revenue, which is a large contributor to noninterest income, decreased $299 thousand, or 48.8%, from last year's second quarter as the credit crisis has made the mortgage funding environment challenging and has restricted loan opportunities. Regardless of the economic situation, the mortgage banking business has a strong pipeline of projects and also services a $384 million portfolio of non-recourse loans. Trust services and retail brokerage services revenue decreased $6 thousand, or 9.6%, and $23 thousand, or 23.9%, respectively, in the second quarter of 2009. These decreases were partially offset by a slight increase in revenue from insurance services, and an increase in service charges on deposit accounts of $46 thousand, or 11.4%, compared with last year's second quarter. A recent change in our service charge rate structure on deposit accounts influenced the increase.

Total interest income decreased $446 thousand, or 11.8%, for the three months ended June 30, 2009 compared with the same period in 2008. Interest on deposits in other banks and Federal funds sold decreased $83 thousand, and interest on investment securities decreased $402 thousand. Lower interest on investment securities was mainly due to a $25 million decline in average securities compared with the same period last year. These decreases were partially offset by an increase in interest and fees on loans of $61 thousand. Despite a significantly lower interest rate environment, interest and fees on loans increased because of a higher average loan volume of $20 million compared with the second quarter of 2008.

Total interest expense decreased $519 thousand, or 36.3%, in the second quarter of 2009 compared with the same period in 2008. Interest on deposits decreased $442 thousand, or 37.6%, during the second quarter of 2009 reflecting lower interest rates compared with the second quarter of 2008. The average rate paid on average time deposits has decreased 145 basis points since June 30, 2008. Interest on total borrowings decreased $77 thousand, or 30.4%, compared with the same quarter in 2008.

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 $2.439 million for the second quarter of 2009 compared with $2.365 million in net interest income in the 2008 second quarter as lower levels and costs of borrowings as well as lower costs of deposits more than offset the decline in interest income. Net interest income after provision for loan losses for the second quarter of 2009 was $2.379 million compared with $2.365 million for the same period in 2008. The provision for loan losses increased to $60 thousand compared with no provision for loan losses during last year's second quarter. The Corporation's net interest margin was 4.12% for the second quarter of 2009, compared with 3.97% for the same period in 2008. This improvement in margin was impacted by increased loan volume and low funding costs.

Total noninterest expense increased 17.4% to $3.406 million from $2.900 million for the second quarter of last year. The increase was primarily due to a $693 thousand increase in other operating expenses when compared with the prior year's second quarter. That increase was primarily the result of $520 thousand in higher legal expenses and a $196 thousand increase in Federal Deposit Insurance Corporation ('FDIC') insurance assessment, including a $122 thousand special charge. Higher legal expenses were related to an insurance claim for restitution of payments made to some participating banks of Empire Financial Services, the Company's commercial mortgage banking subsidiary. Data processing expense increased $33 thousand to $174 thousand for the second quarter of 2009. These increases were partially offset by a decline in salaries and employee benefits of $213 thousand, or 12.1%. This decrease was mainly due to a reduction in performance awards and benefit plan expenses.

Comparison of Statements of Income for the Six-month Period

For the first six months of 2009, noninterest income was $2.424 million, down 24.2% from the same period in 2008. The majority of the decline was a result of lower mortgage banking services revenue which decreased $671 thousand, or 51.7%, from the same period last year. Income from insurance services decreased $58 thousand, or 9.3%, when compared with the six-month period in 2008. Revenue from trust services and income from retail brokerage services decreased $24 thousand and $52 thousand, respectively when compared with the same period in 2008. These decreases in revenue were partially offset by an increase in service charges on deposit accounts of $45 thousand, or 5.6%, when compared with the same period last year as a change in service charge rate structure on deposit accounts was implemented during the second quarter.

Total interest income for the first six months of 2009 decreased $995 thousand when compared with the same period in 2008. This decrease in the six-month period of 2009 was primarily due to a $526 thousand decrease in interest on investment securities due to a $21 million average lower volume of securities. Interest on Federal funds sold and deposits in other banks decreased $351 thousand compared with the first half of 2008. This decrease is related to the lower interest rate environment. During the first half of 2009, the Federal Reserve Bank maintained short-term interest rates at a range of 0% to 0.25% after decreasing 5% since third quarter 2007.

Total interest expense for the six-month period ended June 30, 2009 decreased $1.136 million, or 37.5%, compared with the same period in 2008. The decrease in interest expense was primarily related to lower interest paid on interest-bearing deposits of $953 thousand, or 38.6%, compared with the

second quarter of 2008 reflecting lower interest rates. Interest on borrowings decreased $182 thousand, or 32.6%, for the first six months of 2009 compared with the same period last year.

Net interest income for the first six months of 2009 was 3% higher at $4.825 million compared with $4.684 million for the same period in 2008, mainly as a result of lower interest paid on deposits and borrowings. Net interest income after provision for loan losses was $4.579 million for the first half of 2009 compared with $4.684 for the same period in 2008. A provision for loan losses of $246 thousand was recognized in the first six months of 2009 mostly due to charge-offs recognized in the first quarter of 2009. Importantly, net interest margin was 4.10% for the first six months of 2009, an improvement of 24 basis points from the same period a year ago.

Noninterest expense increased $386 thousand for the first six months of 2009 compared with the same period last year, due primarily to a $728 thousand, or 58.5%, increase in other operating expenses. The increase in other operating expenses was primarily a result of $733 thousand in increased legal expense and higher insurance fees to the FDIC of $254 thousand. This increase was partially offset by a decrease in salary and employee benefits of $365 thousand. Data processing expense increased $47 thousand when compared with the first half of 2008, while amortization of intangible assets decreased $19 thousand. The intangible assets related to the purchase of the commercial mortgage banking subsidiary were fully amortized in 2008.

Comparison of Financial Condition Statements

At June 30, 2009, total assets were $269.2 million, up $1.9 million from December 31, 2008. Some of the increases in assets were a result of a $2.2 million increase in foreclosed assets and a $1.6 million increase in premises and equipment. Premises and equipment increased due to the $1.6 million purchase of land in Valdosta, Georgia that will be the site of a new bank branch in 2009. These increases were partially offset by a decline of $6.4 million in investment securities. This decrease in investment securities was due to the maturing or calling of $18.1 million of U.S. Government Agency and municipal securities, most of which were called by the issuers during the first half of 2009 as well as $5.1 million in principal payments from mortgage-backed securities. The proceeds from these called investment securities were reinvested in $16.2 million in new securities.

The Corporation's loan portfolio of $151.0 million remained relatively flat from the December 31, 2008, level of $149.1 million. Total loans have grown 14.1% since June 30, 2008 due to stronger demand in our local market and the addition of our loan production office in Valdosta, Georgia. The Corporation continues to be conservative in its lending practices in order to maintain a quality loan portfolio. Loans, a major use of funds, represent 56.1% of total assets.

Investment securities and short-term investments which include Federal funds sold and interest-bearing deposits in other banks represent 34.8% of total assets. Investment securities decreased $6.4 million and short-term investments increased $3.1 million since December 31, 2008. This resulted in an overall decrease in investments of $3.3 million.

Deposits increased to $221.1 million at the end of the second quarter of 2009, up $6.5 million from the end of 2008. The bulk of the deposit growth was in NOW accounts and in certificates of deposit. At June 30, 2009, total deposits represented 82.1% of total assets.

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

Long-term debt consists of the following:

                                                June 30, December 31, June 30,
                                                 2009        2008      2008
Advance from Federal Home Loan Bank with a
 3.39% fixed rate of interest maturing
 August 20, 2018.  (convertible to a variable
 rate at option of Federal Home Loan Bank on
 August 22, 2011).                             5,000,000    5,000,000        0

Advance from Federal Home Loan Bank with a
 3.85% fixed rate of interest maturing
 April 30, 2014.                              10,000,000            0        0

Advance from Federal Home Loan Bank with a
 2.78% fixed rate of interest maturing
 September 10, 2018. (convertible to a
 variable rate at option of Federal Home
 Loan Bank on September 10, 2010).             5,000,000    5,000,000        0

Total long-term debt                         $20,000,000  $10,000,000  $     0

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 1.66% of total loans outstanding at June 30, 2009, compared with 1.59% of loans outstanding at December 31, 2008 and 1.80% at June 30, 2008. Nonperforming assets totaled $2.6 million at June 30, 2009, or 0.97% of total assets, compared with $3.2 million in nonperforming assets, or 1.19% of total assets at June 30, 2008. The decrease in non-performing assets was primarily related to the partial charge-off of one large commercial real estate loan in our nonaccrual loans category in the fourth quarter of 2008. This loan was moved to other real estate owned in the second quarter or 2009 due to foreclosure of the project. Management considers the allowance for loan losses as of June 30, 2009, adequate to cover potential losses in the loan portfolio.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance-sheet risk to meet the financing needs of our customers and reduce risk exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit in the form of loans or through letters of credit. The instruments involve, to varying degrees,

elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. Since many of the commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, the contractual or notional amounts do not represent future cash requirements.

Financial instruments whose contract
 amounts represent credit risk
  (dollars in thousands):                             June 30,    June 30,
                                                        2009        2008
Commitments to extend credit                          $ 12,259   $ 20,718
Standby letters of credit and financial guarantees    $     10   $     10

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

Capital Resources and Dividends

At June 30, 2009, the Corporation's and the Bank's risk-based capital ratios
were considered adequate based on guidelines established by regulatory
authorities.  Our total risk based capital ratio now stands at 15.87%, which
is more than 58 percent in excess of the regulatory standard for a "well-
capitalized" bank.  Southwest Georgia Financial Corporation's and Southwest
. . .