Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2004
[ ] 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 July 15, 2004
-------------------------- ----------------------------
Common Stock, $1 Par Value 3,546,600
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
TABLE OF CONTENTS
PAGE #
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are provided for Southwest
Georgia Financial Corporation as required by this Item 1.
a. Consolidated balance sheets - June 30, 2004 (unaudited) and
December 31, 2003. 2
b. Consolidated statements of income (unaudited) - for the
six months and the three months ended June 30, 2004 and 2003. 3
c. Consolidated statements of comprehensive income (unaudited) -
for the six months and the three months ended June 30, 2004
and 2003. 4
d. Consolidated statements of cash flows (unaudited) for the six
months ended June 30, 2004 and 2003. 5
e. Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
ITEM 4. CONTROLS AND PROCEDURES 23
PART II - OTHER INFORMATION
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURE 26
-1-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2004 and December 31, 2003
(Unaudited)
June 30, December 31,
2004 2003
ASSETS
Cash and due from banks $ 10,257,148 $ 10,959,728
Interest-bearing deposits with banks 265,178 43,942
Federal funds sold 0 0
Investment securities available for sale,
at fair value 56,170,408 71,544,353
Investment securities held to maturity
(estimated fair value of $105,529,650
and $56,456,044) 106,650,431 54,695,369
Total investment securities 162,820,839 126,239,722
Loans 105,528,034 97,161,681
Less: Unearned income (43,959) (46,465)
Allowance for loan losses (2,506,837) (2,337,811)
Loans, net 102,977,238 94,777,405
Premises and equipment 6,545,750 5,655,415
Foreclosed assets, net 988,078 1,203,386
Intangible assets 3,489,455 2,037,526
Other assets 5,675,556 5,235,873
Total assets $293,019,242 $246,152,997
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 34,812,737 $ 27,904,580
NOW accounts 48,194,563 35,319,083
Money Market 10,538,971 13,827,745
Savings 29,683,283 18,200,946
Certificates of deposit $100,000 and over 32,103,273 25,235,601
Other time accounts 68,090,324 62,387,796
Total deposits 223,423,151 182,875,751
Federal funds purchased 4,585,000 2,000,000
Other borrowed funds 0 10,000,000
Long-term debt 23,631,429 13,691,429
Other liabilities 2,782,809 4,597,711
Total liabilities 254,422,389 213,164,891
Stockholders' equity:
Common stock - par value $1; authorized
5,000,000 shares; issued 3,546,600 shares 3,546,600 3,302,750
Capital surplus 12,503,263 7,172,051
Retained earnings 30,975,993 29,554,946
Accumulated other comprehensive income 8,293 720,866
Treasury stock 791,895 shares for 2004 and
763,575 shares for 2003, at cost (8,437,296) (7,762,507)
Total stockholders' equity 38,596,853 32,988,106
Total liabilities and stockholders' equity $293,019,242 $246,152,997
-2-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Three Months
Ended June 30,
2004 2003
Interest income:
Interest and fees on loans $1,795,523 $1,928,704
Interest and dividend on securities available for sale 435,529 492,875
Interest on taxable securities held to maturity 1,053,749 752,394
Interest on tax exempt securities available for sale 156,277 153,026
Interest on tax exempt securities held to maturity 64,323 42,497
Interest on federal funds sold 4,737 0
Interest on deposits with banks 1,675 10,424
Total interest income 3,511,813 3,379,920
Interest expense:
Interest on deposits 618,346 728,810
Interest federal funds purchased 5,877 619
Interest on other borrowings 890 49,925
Interest on long-term debt 180,207 116,383
Total interest expense 805,320 895,737
Net interest income 2,706,493 2,484,183
Provision for loan losses 9,905 150,000
Net interest income after provision for loan losses 2,696,588 2,334,183
Noninterest income:
Service charges on deposit accounts 414,700 292,627
Income from trust services 72,334 66,075
Income from retail brokerage services 60,550 78,096
Income from insurance services 292,832 210,302
Income from mortgage banking services 862,026 829,442
Net gain (loss) on disposition of assets 0 (1,850,762)
Net gain (loss) on sale of securities 0 0
Other income 38,378 17,366
Total noninterest income 1,740,820 (356,854)
Noninterest expense:
Salaries and employee benefits 1,689,125 1,412,362
Occupancy expense 194,773 149,541
Equipment expense 162,957 134,026
Data processing expense 262,736 140,536
Amortization of intangible assets 123,371 80,987
Other operating expenses 556,195 680,864
Total noninterest expenses 2,989,157 2,598,316
Income (loss) before income taxes 1,448,251 (620,987)
Provision for income taxes 386,524 (250,653)
Net income (loss) $1,061,727 $ (370,334)
Earnings per share of common stock:
Net income (loss), basic & diluted $ 0.38 $ (0.14)
Dividends paid, basic & diluted $ 0.13 $ 0.13
Weighted average shares outstanding 2,760,879 2,565,293
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Six Months
Ended June 30,
2004 2003
Interest income:
Interest and fees on loans $3,510,903 $3,852,958
Interest and dividend on securities available for sale 979,773 829,898
Interest on taxable securities held to maturity 1,765,917 1,622,520
Interest on tax exempt securities available for sale 312,546 306,149
Interest on tax exempt securities held to maturity 120,986 80,836
Interest on federal funds sold 35,044 1,546
Interest on deposits with banks 17,795 29,144
Total interest income 6,742,964 6,723,051
Interest expense:
Interest on deposits 1,201,472 1,530,598
Interest federal funds purchased 5,942 619
Interest on other borrowings 60,175 68,625
Interest on long-term debt 294,698 237,668
Total interest expense 1,562,287 1,837,510
Net interest income 5,180,677 4,885,541
Provision for loan losses 16,923 300,000
Net interest income after provision for loan losses 5,163,754 4,585,541
Noninterest income:
Service charges on deposit accounts 764,790 554,474
Income from trust services 145,780 133,803
Income from retail brokerage services 116,398 134,519
Income from insurance services 587,670 474,843
Income from mortgage banking services 1,959,054 1,709,352
Net gain (loss) on disposition of assets (186,202) (1,852,862)
Net gain (loss) on sale of securities 2,914 0
Other income 128,029 89,868
Total noninterest income 3,518,433 1,243,997
Noninterest expense:
Salaries and employee benefits 3,302,766 2,888,231
Occupancy expense 377,813 299,048
Equipment expense 316,365 268,944
Data processing expense 437,072 273,060
Amortization of intangible assets 218,487 161,975
Other operating expenses 1,395,957 1,260,119
Total noninterest expenses 6,048,460 5,151,377
Income (loss) before income taxes 2,633,727 678,161
Provision for income taxes 494,433 168,310
Net income (loss) $2,139,294 $ 509,851
Earnings per share of common stock:
Net income (loss), basic & diluted $ 0.79 $ 0.20
Dividends paid, basic & diluted $ 0.26 $ 0.26
Weighted average shares outstanding 2,693,262 2,574,190
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Three Months
Ended June 30,
2004 2003
Net income $1,061,727 $ (370,334)
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period (1,942,040) 697,860
Federal income tax expense (660,294) 237,272
Other comprehensive income, net of tax: (1,281,746) 460,588
Total comprehensive income $ (220,019) $ 90,254
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Six Months
Ended June 30,
2004 2003
Net income $2,139,294 $ 509,851
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period (1,080,555) 602,227
Federal income tax expense (367,982) 204,757
Other comprehensive income, net of tax: (712,573) 397,470
Total comprehensive income $1,426,721 $ 907,321
-4-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Six Months
Ended June 30,
2004 2003
Cash flows from operating activities:
Net income $2,139,294 $ 509,851
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 16,923 300,000
Depreciation 348,394 295,851
Net amortization and accretion of
investment securities 25,924 48,645
Amortization of intangibles 218,487 161,975
Net loss (gain) on sale and disposal of assets 183,288 1,859,161
Changes in:
Other assets (127,048) 47,251
Other liabilities (1,546,030) (814,281)
Net cash provided by operating activities 1,259,232 2,408,453
Investing activities:
Proceeds from maturities of securities
held to maturity 21,000,000 13,000,000
Proceeds from maturities of securities
available for sale 15,837,455 20,285,171
Proceeds from sale of securities available for sale 5,157 0
Purchase of securities held to maturity (40,583,868) (2,997,500)
Purchase of securities available for sale (500,000) (42,990,000)
Net change in other short-term investments 0 2,000,000
Net change in loans 1,970,749 5,217,851
Purchase of premises and equipment (874,475) (264,945)
Proceeds from sales of other assets 352,133 495,899
Net change in interest-bearing deposits with banks (221,236) 3,946,409
Acquisition, net of cash acquired (847,636) 0
Net cash provided(used) for investing activities (3,861,721) (1,307,115)
Financing activities:
Net change in deposits 712,884 (3,615,199)
Net change in federal funds purchased 2,585,000 0
Net change in short-term borrowings (10,000,000) 2,600,000
Net change in long-term borrowings 9,940,000 (68,083)
Cash dividends declared (718,248) (667,270)
Proceeds from the exercise of stock options 55,062 15,000
Payment for common stock (674,789) (635,547)
Net cash provided(used) for financing activities 1,899,909 (2,371,099)
Increase(decrease) in cash and due from banks (702,580) (1,269,761)
Cash and due from banks - beginning of period 10,959,728 11,880,622
Cash and due from banks - end of period $10,257,148 $10,610,861
NONCASH ITEMS:
Increase in foreclosed property and decrease in loans $ 76,145 $ 1,251,611
Unrealized gain(loss) on securities available for sale $ (712,573) $ 397,470
-5-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(UNAUDITED)
For Six Months
Ended June 30,
2004 2003
NONCASH INVESTING & FINANCING ACTIVITY:
Fair value of assets acquired and liabilities
assumed in acquisition of First Bank Holding
Company and Sylvester Banking Company:
Federal Funds $ 6,509,000 $ 0
Securities 26,934,422 0
Loans, net 10,263,650 0
Bank premises & equipment 588,372 0
Core deposit intangibles 1,670,415 0
Other assets 334,677 0
Deposits (39,834,516) 0
Other liabilities ( 98,384) 0
Net fair value of non-cash assets & liabilities 6,367,636 0
Common stock issued for acquisition ( 5,520,000) 0
Cash acquired from acquisition 3,352,364 0
Cash paid for acquisition $ 4,200,000 $ 0
-6-
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.
-7-
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries (the "Corporation") conform to generally
accepted accounting principles and to general practices within the banking
industry. The following is a description of the more significant of those
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest
Georgia Financial Corporation and its wholly-owned 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.
-8-
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 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
-9-
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 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.
-10-
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.
-11-
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.
-12-
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 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.
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 Corporation and its predecessors 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 and Thomas Counties, both contiguous with Colquitt
County. We recently completed the acquisition of Sylvester Banking Company,
adding Worth County into our market territory. Worth County is also
contiguous to Colquitt County to the north. Including the recent
acquisition, we have four full service banking facilities and five automated
teller machines.
-13-
Our strategy is
* to diversify our business base in order to broaden our revenue sources,
* to strengthen our sales and marketing efforts while developing our
employees in order to provide the best possible service to our customers,
* to maintain our strong market share, and
* to grow outside of our current geographic market through acquisitions into
areas proximate to our current market area.
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. During the first
six months of 2004, the U.S. economy continues to be marked by steady low
interest rates.
Our profitability, as in any business, 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
economic factors. Some specific factors include changes in population,
demographics of the population, competition among lenders, interest rate
conditions and prevailing market rates on competing investments, customer
preferences and levels of personal income and savings in the Corporation's
primary market area.
To address interest rate fluctuations, we manage our balance sheet in an
effort to diminish the impact should interest rates suddenly change. In
addition, broadening our revenue sources helps to reduce the risk and
exposure of our financial results to the impact of changes in interest
rates, which is outside of our control.
As a result of our strategy to diversify revenue, noninterest income has
grown over the last few years. Particularly, the Corporation has fully
integrated its insurance agency and Empire, the Corporation's commercial
mortgage banking subsidiary, into its operations.
We made significant improvements with respect to overall asset quality in
2004 and 2003. Specifically, during the second quarter of 2003, the
Corporation made the decision to transfer the Colquitt Retirement Inn, the
Corporation's largest nonperforming asset, for a nominal fee of $200,000 to
the Georgia Trust for Historic Preservation.
Acquisition
On February 27, 2004, the Corporation acquired ownership of First Bank
Holding Company and its sole subsidiary, Sylvester Banking Company, which
are located in Sylvester, Georgia. The Corporation acquired all of the
common shares of First Bank Holding Company and Sylvester Banking Company
for $4.2 million in cash and 240,000 shares of Southwest Georgia Financial
Corporation common stock valued at $5.5 million. The approximate total
value of the transaction was $9.7 million. Sylvester Banking Company was
merged into Southwest Georgia Bank (the "Bank"), which is a subsidiary of
-14-
the Corporation. Sylvester Banking Company, which has been in business
since 1898, at the time of the acquisition had $49.6 million in assets. It
is a one office, full service community bank that holds approximately 25
percent of the deposits of Worth County, Georgia. Sylvester Banking Company
is located is Worth County, Georgia, contiguous with Colquitt County. The
business combination was accounted for by the purchase method of accounting
and the results of operations of Sylvester Banking Company office since the
date of acquisition are included in the Consolidated Financial Statements.
Total assets of $49.6 million and liabilities of $39.9 million were booked
at fair value including booking a core deposit intangible of $1.7 million.
This core deposit intangible is being amortized over a 10-year period.
The following table shows the fair value of assets acquired and liabilities
assumed as of the acquisition date.
Dollars in
thousands
Cash, due from banks, and Federal funds sold $ 9,861
Investment securities 26,934
Loans, net 10,264
Bank premises and equipment 588
Core deposit intangible 1,670
Other assets 335
Deposits (39,834)
Other liabilities ( 98)
Net assets acquired $ 9,720
The following table shows selected pro forma information of the Corporation
as if the acquisition had occurred on January 1, 2003. The pro forma
information does not include any operating efficiencies that could be
realized in a branch acquisition.
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2004 2003 2004 2003
Net interest income $ 2,707 $ 2,879 $ 5,412 $ 5,670
Net income $ 1,062 $ (317) $ 2,202 $ 615
Basic earnings per share $ .38 $ (.11) $ .79 $ .22
Diluted earnings per share $ .38 $ (.11) $ .79 $ .22
-15-
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,
2004 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 that the balance it has in short-term investments at any
given time will adequately cover any reasonably anticipated immediate need
for funds. Additionally, 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 June 30, 2004, 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 June 30, 2004, 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, 2004, total capital
increased $5.6 million to $38.6 million. The majority of this increase
resulted from the 240,000 shares of common stock issued for the acquisition.
Under a share repurchase program adopted by the Board in January 2000, the
Corporation repurchased 28,320 shares of its common stock during the first
six months of 2004 at an average price of $23.83 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 13.17 percent
as of June 30, 2004. 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,
-16-
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.
Performance Summary
The Corporation's net income after taxes for the three-month period ending
June 30, 2004, was $1.062 million compared with a net loss of $370 thousand
for the same period in 2003, representing an increase of $1.432 million.
Net income for the second quarter last year reflects a $1.739 million pre-tax
charge for the transfer of the Corporation's largest nonperforming asset to
the Georgia Trust for Historical Preservation in the second quarter of 2003.
Excluding the negative impact of this pre-tax charge from the second quarter
of 2003, net income for the second quarter this year grew 36 percent and
earnings per share increased 26 percent compared with the adjusted second
quarter of 2003. Other factors contributing to the quarterly growth in
earnings included increases of $83 thousand of insurance services income,
$122 thousand of service charge income from deposit accounts, $33 thousand of
mortgage banking services income and a $140 thousand decrease in the provision
for loan losses.
On a per share basis, net income for the second quarter was $.38 per diluted
share compared with $(.14) per share for the same quarter in 2003. The
weighted average common shares outstanding for the quarter were 2.671
million, up 7.6 percent or 196 thousand average shares from the previous
comparable quarter. This increase in average shares was due to the
acquisition partially offset by the Corporation's stock repurchase program.
Because of our strong capital position, we continued with the stock
repurchase program that began in January 2000.
On a year-to-date basis, net income was $2.139 million compared with $510
thousand for the same period in 2003. Year-to-date earnings per share were
$.79 versus $.20 for the same period in 2003. Excluding the pre-tax charge
associated with the non-performing asset in 2003, first half earnings
improved 29 percent and earnings per share increased 23 percent. Other
major factors contributing to the year-to-date improvement in earnings
included increases of $113 thousand of insurance services income, $250
thousand of mortgage banking services income, $211 thousand of service
charge income on deposit accounts, and $283 thousand decrease in the
provision for loan losses.
-17-
We measure our performance on selected key ratios, which are provided for
the three-months and six-months periods ended June 30, 2004 and 2003.
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------ ------- ------ ------
Return on average total assets 1.46% (.61)% 1.54% .42%
Return on average total equity 10.89% (4.37)% 11.50% 3.02%
Average shareholders' equity to
average total assets 13.36% 13.93% 13.37% 13.95%
Net interest margin (tax equivalent) 4.26% 4.69% 4.28% 4.66%
Comparison of Statements of Income
Total noninterest income increased $2.274 million for the six months ended
June 30, 2004, compared with the same period in 2003. Comparison of three
months income increased $2.098 million compared with 2003. The majority of
this increase was due to the $1.739 million pre-tax charge for the
foreclosed property in the second quarter of 2003, as noted earlier. For
the first six months of 2004, the largest component of noninterest income,
mortgage banking income, was $1.959 million, up from $1.709 million in 2003,
service charges on deposit accounts increased $211 thousand to $765
thousand, and income from insurance services increased to $588 thousand
compared with $475 thousand in the first six months of 2003. These
increases were partially offset by a loss on the sale of bank property in
the first quarter of 2004. For the quarter ended June 30, 2004, mortgage
banking income was $862 thousand, up from $829 thousand in 2003, service
charges on deposit accounts increased $122 thousand to $415 thousand, and
income from insurance services increased to $293 thousand compared to $210
thousand in the second quarter of 2003. The Corporation continues to reduce
its dependence on net interest income while focusing on growth in mortgage
banking revenue, income from insurance services, and service charges income
on deposit accounts. Improved economic conditions have driven increased
revenue from mortgage banking and insurance services. Also, the
Corporation's pricing structure for deposit services continues to be
effective.
Total interest income increased $132 thousand comparing the three months
ended June 30, 2004 with the same period in 2003. For the first six months
of 2004, total interest income increased $20 thousand comparing the same
period in 2003. This improvement for the three-month period and the six-
month period is the result of increases in interest and dividends on
investment securities partially offset by decreases in interest and fees on
loans. This growth in interest income is primarily related to increases in
average volume of investment securities. The average volume of investment
securities, (mainly U.S. Government Agencies), increased $42.0 million for
the three-month period and increased $30.2 million for the six-month period
compared with the same periods last year. The majority of this growth in
securities was related to the acquisition of Sylvester Banking Company in
February 2004.
-18-
The total interest expense decreased $91 thousand, or 10.2 percent, in the
second quarter of 2004 compared with the same period in 2003. The total
interest expense for the six-month period ended June 30, 2004 decreased $276
thousand, or 15.0 percent, compared with the same period in 2003. Over this
period, the average balances on interest-bearing deposits increased $18.5
million, or 11.3 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. The rate on
time deposits decreased 64 basis points comparing the first six months of
2004 with the same period in 2003. Interest on long-term debt increased $64
thousand, or 55.2 percent, during the second quarter of 2004 and increased
$57 thousand, or 24.0 percent, for the first six months of 2004, while
interest on other short-term borrowings decreased $49 thousand during the
second quarter of 2004 and decreased $9 thousand for the first six months of
2004. During this low rate environment, the Corporation is shifting from
short-term to longer term debt in order to position itself to take advantage
of rising interest rates.
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 second quarter of 2004 increased $223 thousand, or 9.0 percent,
compared with the same period in 2003. Net interest income for the first
six months of 2004 was $5.2 million compared with $4.9 million for the same
period in 2003. 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 4.26
percent and 4.69 percent during the second quarter of 2004 and 2003,
respectively. During the six-month period ended June 30, 2004, the
Corporation's net interest margin was 4.28 percent compared with 4.66
percent for the same period in 2003. The decreased net interest margin is
primarily due to lower yields on earning assets. However, the improvement
in net interest income was due to growth in interest income from higher
volume of earning assets and an improved mix in deposit liabilities. The
operations of the newly acquired banking office contributed to this net
interest income improvement.
Provision for loan losses was $10 thousand for the second quarter compared
with $150 thousand in the same quarter of 2003. Also, the six-month
provision for loan losses was $283 thousand less than in the comparable
period of 2003. This year, due to improving asset quality and charge-off
experience, the Corporation has reduced its provision for loan losses.
Total noninterest expenses increased by $391 thousand, or 15.1 percent, for
the three months ended June 30, 2004 and increased $897 thousand for the six
months ended June 30, 2004 compared with the same periods in 2003. The
majority of this increase in noninterest expense was related to the
operating costs of the acquired banking office and to non-recurring expenses
associated with the acquisition. During the second quarter, the Corporation
has completed the migration of the acquired banking office's operations into
its platforms and operating systems. Because of the merger related
expenses, the newly acquired office's operation is not yet a contributor to
net income. Management expects that before the end of the third quarter much
of the merger related expenses will be incurred and we expect to begin to
realize efficiencies from the merged operations.
-19-
Comparison of Financial Condition Statements
During the first six months of 2004, total assets increased $46.9 million,
or 19.0 percent, from December 31, 2003. The majority of the increase in
assets is a result of the acquisition of Sylvester Banking Company.
The Corporation's loan portfolio of $105.5 million increased 8.6 percent
from the December 31, 2003, level of $97.1 million. 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 36.0 percent
of total assets.
Investment securities and other short-term investments represent 55.7
percent of total assets. Investment securities increased $36.6 million
since December 31, 2003. Other short-term investments increased $221
thousand since December 31, 2003. This resulted in an overall increase in
investments of $36.8 million. The majority of this increase in investment
securities was due to the acquisition and is mainly comprised of U.S.
Government agency securities with an average maturity of approximately 5
years.
Deposits, the primary source of the Corporation's funds, increased from
$182.9 million at December 31, 2003, to $223.4 million at June 30, 2004.
This increase reflected the above mentioned acquisition. The Corporation
believes its share of total deposits in Colquitt County remains relatively
stable. At June 30, 2004, total deposits represented 76.2 percent of total
assets.
The Corporation decreased its level of short-term borrowings with the
Federal Home Loan Bank and increased long-term borrowings during the second
quarter. Short-term borrowings were reduced by $10.0 million comparing the
second quarter with December 31, 2003, while long-term borrowings increased
$10.0 million for the same period. During the second quarter, the
Corporation shifted into some longer term debt maturities to better position
itself for rising rates. This longer term debt was a $10 million advance
from the Federal Home Loan Bank with a fixed rate of 3.85 percent maturing
April 30, 2014, and is convertible to a variable rate at the option of the
Federal Home Loan Bank on April 30, 2009. These are the major contractual
obligations' changes for the Corporation during the last six months.
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 management's assumptions about the local and
national economy. The allowance for loan losses was 2.38 percent of total
loans outstanding at June 30, 2004, compared with 2.41 percent of loans
outstanding at December 31, 2003. Non-performing assets as a percentage of
total loans was .76%, relatively stable from .74% a year ago. Management
considers the allowance for loan losses as of June 30, 2004, adequate to
cover potential losses in the loan portfolio.
-20-
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of our customers and
to 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 June 30, June 30,
in thousands): 2004 2003
- -------------------------------------- -------- --------
Commitments to extend credit $ 17,688 $ 16,956
Standby letters of credit and
financial guarantees $ 127 $ 179
The Corporation does not have any special purpose entities or off-balance
sheets financing arrangements.
-21-
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 June 30, 2004, the Corporation's one-year cumulative rate-sensitive
assets represented 104 percent of the cumulative rate-sensitive liabilities
compared with 110 percent for the same period in 2003. This slight change
in the cumulative gap is a result of the Corporation's management of its
exposure to interest rate risk. The Corporation has become less asset-
sensitive at the one-year gap position resulting from the additional assets
and liabilities acquired from the Sylvester Banking Company merger. This
merger has had little affect to the Corporation's one-year gap position.
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.
-22-
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.
Based on this evaluation, management believes 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.
-23-
PART II. - OTHER INFORMATION
ITEM 5 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date - May 25, 2004 - annual shareholders' meeting.
(b) Elected the following directors:
Cecil H. Barber Roy H. Reeves
John H. Clark Johnny R. Slocumb
DeWitt Drew Violet K. Weaver
Michael J. McLean C. Broughton Williams, Jr.
Richard L. Moss
Director Emeritus:
Albert W. Barber
Leo T. Barber, Jr.
Mrs. Kenneth V. Cope
Robert M. Duggan
E. J. McLean, Jr.
Earl D. Moore
Jack Short
Mrs. Hugh Turner
(c) The following matter was voted on at the annual
shareholders' meeting.
Number Of Percent Of
Votes Cast Outstanding Shares
(1) Election Of
Directors 2,025,664 73.00%
Against 6,095 .30%
Total Shares Voted 2,031,759 73.30%
-24-
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 April 28, 2004, the Corporation furnished an 8-K to report the following
event: issuance of a press release to report earnings for the quarter ended
March 31, 2004.
On May 26, 2004, the Corporation furnished an 8-K to report the following
event: issuance of a press release to announce its Annual Shareholders'
Meeting held on May 25, 2004.
-25-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
BY: /s/George R. Kirkland
_____________________________________
GEORGE R. KIRKLAND
SENIOR VICE-PRESIDENT AND TREASURER
(FINANCIAL AND ACCOUNTING OFFICER)
Date: August 13, 2004