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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, 2003
[ ] 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 is an accelerated filer (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 October 15, 2003
Common Stock, $1 Par Value 3,302,750
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
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, 2003 (unaudited) and
December 31, 2002. 2
b. Consolidated statements of income (unaudited) - for the nine
months and the three months ended September 30, 2003 and 2002. 3
c. Consolidated statements of comprehensive income (unaudited) -
for the nine months and the three months ended September 30,
2003 and 2002. 4
d. Consolidated statements of cash flows (unaudited) for the nine
months ended September 30, 2003 and 2002. 5
e. Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 20
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
(Unaudited)
September 30, December 31,
2003 2002
ASSETS
Cash and due from banks $ 9,657,443 $ 11,880,622
Interest-bearing deposits with banks 53,918 3,996,485
Federal funds sold 0 2,000,000
Investment securities available
for sale, at fair value 76,184,461 40,055,321
Investment securities held to maturity
(estimated fair value of $52,505,687
and $68,492,520) 50,318,942 65,150,087
Total investment securities 126,503,403 105,205,408
Loans 94,614,208 105,987,365
Less: Unearned income (52,376) (54,066)
Allowance for loan losses (2,337,811) (1,899,738)
Loans, net 92,224,021 104,033,561
Premises and equipment 5,239,007 5,434,115
Foreclosed assets, net 1,139,297 1,982,467
Intangible assets 2,118,514 2,361,477
Other assets 3,585,666 3,573,504
Total assets $240,521,269 $240,467,639
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 23,459,630 $ 28,924,659
NOW accounts 33,703,601 36,113,124
Money Market 13,913,924 12,514,257
Savings 19,239,450 18,193,291
Certificates of deposit $100,000 and over 25,716,226 26,097,720
Other time accounts 63,445,093 68,080,299
Total deposits 179,477,924 189,923,350
Federal funds purchased 480,000 0
Other borrowed funds 10,000,000 2,400,000
Long-term debt 13,805,714 11,041,252
Other liabilities 4,201,792 3,781,026
Total liabilities 207,965,430 207,145,628
Stockholders' equity:
Common stock - par value $1; authorized
5,000,000 shares; issued 3,302,750 shares 3,302,750 3,300,000
Capital surplus 7,172,051 7,133,551
Retained earnings 28,866,326 28,403,347
Accumulated other comprehensive income 780,204 1,188,733
Treasury stock 755,075 shares for 2003 and
711,075 shares for 2002, at cost (7,565,492) (6,703,620)
Total stockholders' equity 32,555,839 33,322,011
Total liabilities and stockholders' equity $240,521,269 $240,467,639
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Three Months
Ended September 30,
2003 2002
Interest income:
Interest and fees on loans $1,734,492 $2,265,508
Interest and dividend on securities available for sale 567,246 267,953
Interest on taxable securities held to maturity 704,979 901,064
Interest on tax exempt securities available for sale 156,736 146,704
Interest on tax exempt securities held to maturity 34,649 34,008
Interest on federal funds sold 0 6,698
Interest on deposits with banks 3,959 11,540
Total interest income 3,202,061 3,633,475
Interest expense:
Interest on deposits 627,377 914,863
Interest federal funds purchased 2,606 294
Interest on other borrowings 60,168 34,991
Interest on long-term debt 109,844 98,654
Total interest expense 799,995 1,048,802
Net interest income 2,402,066 2,584,673
Provision for loan losses 150,000 120,000
Net interest income after provision for loan losses 2,252,066 2,464,673
Noninterest income:
Service charges on deposit accounts 376,534 294,735
Income from trust services 71,510 58,492
Income from retail brokerage services 62,215 45,168
Income from insurance services 236,487 217,869
Income from mortgage banking services 886,915 797,125
Net gain (loss) on disposition of assets 18,985 ( 7,941)
Net gain (loss) on sale of securities 0 0
Other income 16,442 22,323
Total noninterest income 1,669,088 1,427,771
Noninterest expense:
Salaries and employee benefits 1,414,635 1,536,352
Occupancy expense 159,751 161,932
Equipment expense 126,013 117,731
Data processing expense 132,384 126,718
Amortization of intangible assets 80,988 80,981
Other operating expenses 524,504 527,037
Total noninterest expenses 2,438,275 2,550,751
Income before income taxes 1,482,879 1,341,693
Provision for income taxes 531,348 413,090
Net income $ 951,531 $ 928,603
Earnings per share of common stock:
Net income, basic & diluted $ 0.37 $ 0.35
Dividends paid, basic & diluted 0.13 0.12
Weighted average shares outstanding 2,550,729 2,613,793
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Nine Months
Ended September 30,
2003 2002
Interest income:
Interest and fees on loans $5,587,450 $7,100,459
Interest and dividend on securities available for sale 1,397,144 765,117
Interest on taxable securities held to maturity 2,327,499 2,714,735
Interest on tax exempt securities available for sale 462,885 433,789
Interest on tax exempt securities held to maturity 115,485 101,449
Interest on federal funds sold 1,546 15,595
Interest on deposits with banks 33,103 34,881
Total interest income 9,925,112 11,166,025
Interest expense:
Interest on deposits 2,157,975 3,116,832
Interest federal funds purchased 3,225 1,964
Interest on other borrowings 128,793 89,401
Interest on long-term debt 347,512 218,751
Total interest expense 2,637,505 3,426,948
Net interest income 7,287,607 7,739,077
Provision for loan losses 450,000 375,000
Net interest income after provision for loan losses 6,837,607 7,364,077
Noninterest income:
Service charges on deposit accounts 931,008 800,655
Income from trust services 205,313 159,324
Income from retail brokerage services 196,734 191,245
Income from insurance services 711,330 676,444
Income from mortgage banking services 2,596,267 2,291,268
Net gain (loss) on disposition of assets (1,833,877) (253,426)
Net gain (loss) on sale of securities 0 121,270
Other income 106,310 139,321
Total noninterest income 2,913,085 4,126,101
Noninterest expense:
Salaries and employee benefits 4,302,866 4,696,503
Occupancy expense 458,799 422,093
Equipment expense 394,957 352,614
Data processing expense 405,444 401,719
Amortization of intangible assets 242,963 242,944
Other operating expenses 1,784,623 1,651,693
Total noninterest expenses 7,589,652 7,767,566
Income before income taxes 2,161,040 3,722,612
Provision for income taxes 699,658 1,062,469
Net income $1,461,382 $2,660,143
Earnings per share of common stock:
Net income, basic & diluted $ 0.57 $ 1.01
Dividends paid, basic & diluted 0.39 0.36
Weighted average shares outstanding 2,566,284 2,626,681
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Three Months
Ended September 30,
2003 2002
Net income $ 951,531 $ 928,603
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period (1,221,165) 993,106
Federal income tax expense (415,196) 337,656
Other comprehensive income, net of tax: (805,969) 655,450
Total comprehensive income $ 145,562 $1,584,053
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Nine Months
Ended September 30,
2003 2002
Net income $1,461,382 $2,660,143
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period (618,968) 1,833,998
Federal income tax expense (210,439) 623,559
Other comprehensive income, net of tax: (408,529) 1,210,439
Total comprehensive income $1,052,853 $3,870,582
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Nine Months
Ended September 30,
2003 2002
Cash flows from operating activities:
Net income $ 1,461,382 $ 2,660,143
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 450,000 375,000
Depreciation 443,777 380,613
Net amortization and accretion of
investment securities 70,249 39,553
Amortization of intangibles 242,963 242,944
Net loss (gain) on sale and disposal of assets 1,833,876 136,955
Changes in:
Other assets ( 25,109) ( 480,335)
Other liabilities 631,205 ( 189,916)
Net cash provided by operating activities 5,108,343 3,164,957
Investing activities:
Proceeds from maturities of securities
held to maturity 17,830,000 10,785,000
Proceeds from maturities of securities
available for sale 30,863,513 2,366,461
Proceeds from sale of securities available for sale 192,400 483,270
Purchase of securities held to maturity ( 2,997,500) (10,589,712)
Purchase of securities available for sale (67,875,624) (12,064,308)
Net change in other short-term investments 2,000,000 ( 195,000)
Net change in loans 10,014,140 9,645,131
Purchase of premises and equipment ( 552,457) ( 399,718)
Proceeds from sales of other assets 671,493 1,840,939
Net change in interest-bearing deposits with banks 3,942,567 ( 303,524)
Net cash provided(used) for investing activities ( 5,911,468) 1,568,539
Financing activities:
Net change in deposits (10,445,426) (11,651,884)
Net change in federal funds purchased 480,000 0
Net change in short-term borrowings 7,600,000 0
Net change in long-term borrowings 2,764,462 7,768,314
Cash dividends declared ( 998,468) ( 928,886)
Proceeds from the exercise of stock options 41,250 0
Payment for common stock ( 861,872) ( 688,240)
Net cash provided(used) for financing activities ( 1,420,054) ( 5,500,696)
Increase(decrease) in cash and due from banks ( 2,223,179) ( 767,200)
Cash and due from banks - beginning of period 11,880,622 9,211,645
Cash and due from banks - end of period $ 9,657,443 $ 8,444,445
NONCASH ITEMS:
Increase in foreclosed properties
and decrease in loans $ 1,345,400 $ 218,947
Unrealized gain(loss) on securities
available for sale $( 408,499) $ 1,210,438
SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
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.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries (the "Corporation") conform to generally accepted
accounting principles and to general practices within the banking industry.
The following is a description of the more significant of those policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest
Georgia Financial Corporation and its wholly-owned Subsidiaries, Southwest
Georgia Bank ("the Bank") and Empire Financial Services, Inc. ("Empire").
All significant intercompany accounts and transactions have been eliminated in
the consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with these evaluations, management obtains independent
appraisals for significant properties.
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.
Interest Bearing Deposits in Banks
Interest bearing deposits in banks mature within one year and are carried at
cost.
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 temporary are reflected in earnings as realized
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losses. Gains and losses on the sale of securities are recorded on the trade
date and are determined using the specific identification method.
Long-Lived Assets
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. 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
Certain leases are capitalized as assets for financial reporting purposes.
Such capitalized assets are amortized, using the straight-line method, over
the terms of the leases. 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.
-8-
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 collectibility 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
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. Revenue and
expenses from operations and changes in the valuation allowance are included
in net expenses from foreclosed assets.
-9-
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 pension plans covering substantially
all employees. The Corporation makes annual contributions to the plans in
amounts not exceeding the regulatory requirements.
Income Taxes
The Corporation and its subsidiaries file a consolidated income tax return.
The subsidiaries provide for income taxes based on its contribution to income
taxes (benefits) of the consolidated group.
Deferred income tax assets and liabilities result from temporary differences
between the tax basis of assets and liabilities and their reportable amounts
in the financial statements that will result in taxable or deductible amounts
in future years.
Recent Accounting Pronouncements
The Corporation adopted FASB Statement No. 142, "Goodwill and Other Intangible
Assets", effective January 1, 2002. This standard requires, among other
things, that goodwill will not be amortized from the effective date of its
adoption. Instead, goodwill and other intangibles will be subjected to an
annual test for impairment of value. This will not only effect goodwill
arising from acquisitions completed after the effective date, but will also
effect any unamortized balance of goodwill and other intangible assets.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Corporation considers cash and cash
equivalents to include cash on hand, noninterest-bearing deposit amounts due
from banks, and highly liquid debt instruments purchased with an original
maturity of three months or less.
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.
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Servicing and Origination Fees on Loans
The Corporation from its subsidiary, Empire, recognizes as income in the
current period all loan origination and brokerage fees collected on loans
originated and closed for investing participants. Loan servicing fees are
based on a percentage of loan interest paid by the borrower and recognized
over the term of the loan as loan payments are received. Empire does not
directly fund any mortgages and acts as a service-oriented broker for
participating mortgage lenders. Fees charged for continuing servicing fees
are comparable with market rates charged in the industry. Based on these
facts, deferred mortgage servicing rights as defined under FASB 65 and FASB
122, are not required to be recognized. Late charges assessed on past due
payments are recognized as income by the Corporation when collected.
Advertising Costs
It is the policy of the Corporation to expense advertising costs as they are
incurred. The Corporation does not engage in any direct-response, advertising
and accordingly has no advertising costs reported as assets on its balance
sheet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Form 10-Q report contains forward-looking statements in addition to
historical information. The Corporation cautions that there are various
factors that could cause actual results to differ materially from those
indicated in the forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995; accordingly, there can be no
assurance that such indicated results will be realized.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. There are a variety of factors that could
cause the Corporation's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the
Corporation's forward-looking statements. These factors include legislative
and regulatory initiatives regarding deregulation and restructuring of the
banking industry; the extent and timing of the entry of additional competition
in the Corporation's markets; potential business strategies, including
acquisitions or dispositions of assets or internal restructuring, that may be
pursued by the Corporation; the Corporation's effectiveness with implementing
its strategies; state and federal banking regulations; changes in or
application of environmental and other laws and regulations to which the
Corporation is subject; political, legal and 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 filings with the Securities and Exchange Commission. The words
"believe", "expect", "anticipate", "project", and similar expressions signify
such forward-looking statements.
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.
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 that the balance it has in short-term investments at any given
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time will adequately cover any reasonably anticipated immediate need for
funds. Additionally, the subsidiary Southwest Georgia Bank (the "Bank")
maintains relationships with correspondent banks which could provide funds to
it 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, 2003, were considered satisfactory. At that
date, the Bank's short-term investments were adequate to cover any reasonably
anticipated immediate need for funds. The Corporation is aware of no events
or trends likely to result in a material change in liquidity. At September
30, 2003, 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, 2003, total capital decreased $766
thousand to $32.5 million. Under a share repurchase program adopted by the
Board in January 2000, the Corporation repurchased 44,000 shares of its common
stock during the first nine months of 2003 at an average price of $19.59 per
share. There are approximately 150,000 shares authorized to be purchased
under the current program. Also, the Corporation continues to maintain a
healthy level of capital adequacy as measured by its equity-to-asset ratio of
13.54 percent as of September 30, 2003. The Corporation is aware of no events
or trends likely to result in a material change in capital resources other
than normal operations resulting in the retention of net earnings,
repurchasing shares, and paying dividends to shareholders. Also, the
Corporation's management is not aware of any current recommendations by the
regulatory authorities which, if they were to be 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.
Comparison of Statements of Income
The Corporation's net income after taxes for the three-month period ending
September 30, 2003, was $952 thousand compared with a net income of $929
thousand for the same period in 2002, representing an increase of $23
thousand, or 2.5 percent. The earnings improvement was primarily a result
of a 17 percent increase in noninterest income combined with reduced
expenses which more than offset lower net interest income and a higher
provision for loan loss. For the first nine months of 2003, the
Corporation earned a net income of $1.461 million or $.57 per share
compared with $2.660 million or $1.01 per share in 2002. The $1.2 million
decline in net income is primarily related to the $1.739 million pre-tax
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charge for the transfer of the Corporation's largest nonperforming asset,
for a nominal fee of $200,000, to the Georgia Trust for Historical
Preservation during the second quarter of this year.
Total noninterest income decreased $1.213 million for the nine months ended
September 30, 2003, compared with the same period in 2002. The majority of
the nine-month decline was due to the $1.739 million pre-tax charge for the
foreclosed property, as noted earlier. For the first nine months of 2003,
another large component of noninterest income, mortgage banking income, was
$2.596 million, up from $2.291 million in 2002. During the third quarter of
2003, noninterest income increased 17 percent to $1.669 million compared with
$1.427 million in the same quarter last year. All significant lines of
noninterest income showed increases both year-to-date and for the third
quarter when compared with like periods from the prior year
Total interest income decreased $431 thousand comparing the three months ended
September 30, 2003 with the same period in 2002. For the first nine months of
2003, total interest income decreased $1.240 million comparing the same period
in 2002. The decrease for the three-month period and the nine-month period is
the result of decreases in interest and fees on loans. This decrease in
interest income is primarily related to decreases in loan rates and in average
volume of loans. The average yield on loans decreased 81 basis points
comparing the three-month period and decreased 73 basis points comparing the
nine-month period with the same periods in 2002. The average volume of loans
decreased $15.7 million for the nine-month period compared with the same
period last year.
The total interest expense decreased $249 thousand, or 23.7 percent, in the
third quarter of 2003 compared with the same period in 2002. The total
interest expense for the nine-month period ended September 30, 2003 decreased
$789 thousand, or 23.0 percent, compared with the same period in 2002. Over
this period, the average balances on interest-bearing deposits decreased $1.2
million, or 0.7 percent. The decrease in interest expense is primarily
related to decreases in the rate on interest-bearing deposits, partially
offset by an increase in interest expense on long-term debt and in interest on
other borrowings. The rate on time deposits decreased 88 basis points
comparing the first nine months of 2003 with the same period in 2002.
Interest on long-term debt increased $11 thousand, or 11.3 percent, during the
third quarter of 2003 and increased $129 thousand, or 58.9 percent, for the
first nine months of 2003 compared with the same periods in 2002.
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
for the third quarter of 2003 decreased $183 thousand, or 7.1 percent,
compared with the same period in 2002. Net interest income for the first nine
months of 2003 was $7.3 million compared with $7.7 million for the same period
in 2002. Net interest income is determined primarily by the volume of earning
assets and the various rate spreads between these assets and their funding
sources. The Corporation's net interest margin was 4.56 percent and 5.02
percent during the third quarter of 2003 and 2002, respectively. During the
nine-month period ended September 30, 2003, the Corporation's net interest
margin was 4.63 percent compared with 5.03 percent for the same period in
2002.
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Total noninterest expenses decreased by $112 thousand, or 4.4 percent, for the
three months ended September 30, 2003 and decreased $178 thousand for the nine
months ended September 30, 2003 compared with the same periods in 2002. The
majority, $394 thousand, of this decrease in noninterest expense was
attributable to a reduction in salary and employee benefits and was partially
offset by increases in expenses related to occupancy and equipment expenses.
Other operating expenses increased by $133 thousand for nine months ended
September 30, 2003 compared with 2002. The majority of this increase, $99
thousand for nine months, was mainly due to operating losses from foreclosed
property which the Corporation continued to operate until the second quarter
of this year when the property was transferred to the Georgia Trust for
Historical Preservation. Net operating expenses related to the operations of
this facility for the nine month period were $294 thousand and management
feels that the disposition of the property will have a positive impact on
future annual earnings of approximately $300 thousand. Other increases in
noninterest expense compared with the same period a year ago occurred in the
normal course of operations. Management will continue to monitor expenses
closely in an effort to achieve all cost efficiencies available.
Comparison of Financial Condition Statements
During the first nine months of 2003, total assets increased $54 thousand, or
less than 1.0 percent, from December 31, 2002, and increased $6.9 million, or
2.9 percent, from September 30, 2002.
The Corporation's loan portfolio of $94.6 million decreased 10.7 percent from
the December 31, 2002, level of $105.9 million. The Corporation's continued
focus on high credit standards combined with a soft economy has contributed to
the decrease in loans. Loans, a major use of funds, represent 39.3 percent of
total assets.
Investment securities and other short-term investments represent 52.6 percent
of total assets. Investment securities increased $21.3 million since December
31, 2002. Other short-term investments decreased $5.9 million since December
31, 2002. This resulted in an overall increase in investments of $15.4
million. This increase in investment securities was due to the additional
long-term borrowings from the Federal Home Loan Bank and better utilization of
funds from loan pay-offs and shorter-term investments.
Deposits, the primary source of the Corporation's funds, decreased from $189.9
million at December 31, 2002, to $179.5 million at September 30, 2003. This
decrease reflected a combination of the weaker economy reducing individual's
cash assets and the increasingly competitive banking environment in the
Corporation's territory. The Corporation believes its share of total deposits
in Colquitt County remains relatively stable. At September 30, 2003, total
deposits represented 74.6 percent of total assets.
The Corporation increased its level of long-term borrowings with the Federal
Home Loan Bank during the first quarter. These funds replaced some short-term
advances paid back to the Federal Home Loan Bank in the second quarter of
2003, and these advances were also used to fund some longer-term investments.
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
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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 management's
assumptions about the local and national economy. The allowance for loan
losses improved to 2.47 percent of total loans outstanding at September 30,
2003, compared with 1.79 percent of loans outstanding at December 31, 2002.
This increase reflected a strengthening of reserves, while non-performing
assets as a percentage of total loans was 1.51%, down from 3.15% a year ago,
as the quantity of non-performing loans declined. The majority of the non-
performing asset decline was from one large property that was disposed of in
the second quarter. Management considers the allowance for loan losses as of
September 30, 2003, adequate to cover potential losses in the loan portfolio.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risk lies within its exposure to interest
rate movement. The Corporation has no foreign currency exchange rate risk,
commodity price risk, or any other material market risk. The Corporation has
no trading investment portfolio. As a result, it does not hold any market
risk-sensitive instruments, which would be subject to a trading environment
which is characterized by volatile short-term movements in interest rates.
Also, the Corporation has no interest rate swaps or other derivative
instruments that are either designated and effective as hedges or which modify
the interest rate characteristics of specified assets or liabilities. The
Corporation's primary source of earnings, net interest income, can fluctuate
with significant interest rate movements. To lessen the impact of these
movements, the Corporation seeks to maximize net interest income while
remaining within prudent ranges of risk by practicing sound interest rate
sensitivity management. The Corporation attempts 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
management. The Corporation maintains an investment portfolio that staggers
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.
The Corporation uses a number of tools to measure interest rate risk. One of
the indicators for the Corporation's interest rate sensitivity position is the
measurement of the difference between its rate-sensitive assets and rate-
sensitive liabilities, which is referred to as the "gap." A gap analysis
displays the earliest possible repricing opportunity for each asset and
liability category based upon contractual maturities and repricing. As of
September 30, 2003, the Corporation's one-year cumulative rate-sensitive
assets represented 98 percent of the cumulative rate-sensitive liabilities
compared with 74 percent for the same period in 2002. This change in the
cumulative gap is a result of the Corporation's management of its exposure to
interest rate risk. The Corporation has become asset-sensitive at the one-
year gap position resulting from management borrowing some additional long-
term funds to take advantage of the lower rates and to reduce the
Corporation's interest rate risk from possible increasing short-term rates.
All interest rates and yields do not adjust at the same velocity; therefore,
the interest rate sensitivity gap is only a general indicator of the potential
effects of interest rate changes on net interest income. The Corporation's
asset and liability mix is monitored to ensure that the effects of interest
rate movements in either direction are not significant over time.
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ITEM 4. 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.
There were no significant changes in the Corporation's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
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PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. 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.
B. Reports on Form 8-k
On July 22, 2003, the Corporation furnished an 8-K to report the following
event: issuance of a press release to report earnings for the quarter
ended June 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
BY: _____________________________________
GEORGE R. KIRKLAND
SENIOR VICE-PRESIDENT AND TREASURER
(FINANCIAL AND ACCOUNTING OFFICER)
Date: November 14, 2003
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