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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, 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 October 15, 2004
Common Stock, $1 Par Value 4,255,920
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 - September 30, 2004 (unaudited) and
December 31, 2003. 2
b. Consolidated statements of income (unaudited) - for the nine
months and the three months ended September 30, 2004 and 2003. 3
c. Consolidated statements of comprehensive income (unaudited) -
for the nine months and the three months ended
September 30, 2004 and 2003. 4
d. Consolidated statements of cash flows (unaudited) for the nine
months ended September 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. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURE 25
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
(Unaudited)
September 30, December 31,
2004 2003
ASSETS
Cash and due from banks $ 9,303,085 $ 10,959,728
Interest-bearing deposits with banks 5,737,921 43,942
Federal funds sold 0 0
Investment securities available for sale,
at fair value 56,664,703 71,544,353
Investment securities held to maturity (estimated
fair value of $105,641,238 and $56,456,044) 105,115,359 54,695,369
Total investment securities 161,780,062 126,239,722
Loans 102,662,537 97,161,681
Less: Unearned income (46,600) (46,465)
Allowance for loan losses (2,506,837) (2,337,811)
Loans, net 100,109,100 94,777,405
Premises and equipment 6,722,321 5,655,415
Foreclosed assets, net 875,000 1,203,386
Intangible assets 3,366,517 2,037,526
Other assets 5,630,136 5,235,873
Total assets $293,524,142 $246,152,997
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 31,930,638 $ 27,904,580
NOW accounts 52,923,285 35,319,083
Money Market 10,133,697 13,827,745
Savings 28,225,215 18,200,946
Certificates of deposit $100,000 and over 27,263,036 25,235,601
Other time accounts 66,731,594 62,387,796
Total deposits 217,207,465 182,875,751
Federal funds purchased 0 2,000,000
Other borrowed funds 8,000,000 10,000,000
Long-term debt 25,631,429 13,691,429
Other liabilities 3,572,989 4,597,711
Total liabilities 254,411,883 213,164,891
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 31,440,816 29,554,946
Accumulated other comprehensive income 739,631 720,866
Treasury stock 818,430 shares for 2004 and
763,575 shares for 2003, at cost (9,118,051) (7,762,507)
Total stockholders' equity 39,112,259 32,988,106
Total liabilities and stockholders' equity $293,524,142 $246,152,997
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Three Months
Ended September 30,
2004 2003
Interest income:
Interest and fees on loans $1,772,284 $1,734,492
Interest and dividend on securities available for sale 424,809 567,246
Interest on taxable securities held to maturity 1,092,857 704,979
Interest on tax exempt securities available for sale 156,285 156,736
Interest on tax exempt securities held to maturity 60,877 34,649
Interest on federal funds sold 0 0
Interest on deposits with banks 13,136 3,959
Total interest income 3,520,248 3,202,061
Interest expense:
Interest on deposits 613,041 627,377
Interest federal funds purchased 836 2,606
Interest on other borrowings 29,358 60,168
Interest on long-term debt 225,436 109,844
Total interest expense 868,671 799,995
Net interest income 2,651,577 2,402,066
Provision for loan losses 57,514 150,000
Net interest income after provision for loan losses 2,594,063 2,252,066
Noninterest income:
Service charges on deposit accounts 402,432 376,534
Income from trust services 86,698 71,510
Income from retail brokerage services 59,228 62,215
Income from insurance services 230,902 236,487
Income from mortgage banking services 710,394 886,915
Net gain (loss) on disposition of assets (96,147) 18,985
Net gain on sale of securities 0 0
Other income 44,416 16,442
Total noninterest income 1,437,923 1,669,088
Noninterest expense:
Salaries and employee benefits 1,683,314 1,414,635
Occupancy expense 200,892 159,751
Equipment expense 157,563 126,013
Data processing expense 162,865 132,384
Amortization of intangible assets 122,938 80,988
Other operating expenses 609,914 524,504
Total noninterest expenses 2,937,486 2,438,275
Income before income taxes 1,094,500 1,482,879
Provision for income taxes 275,016 531,348
Net income $ 819,484 $ 951,531
Earnings per share of common stock:
Net income, basic & diluted $ 0.30 $ 0.37
Dividends paid, basic & diluted $ 0.13 $ 0.13
Weighted average shares outstanding 2,743,713 2,550,729
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Nine Months
Ended September 30,
2004 2003
Interest income:
Interest and fees on loans $5,283,187 $5,587,450
Interest and dividend on securities available for sale 1,404,582 1,397,144
Interest on taxable securities held to maturity 2,858,774 2,327,499
Interest on tax exempt securities available for sale 468,831 462,885
Interest on tax exempt securities held to maturity 181,863 115,485
Interest on federal funds sold 35,044 1,546
Interest on deposits with banks 30,931 33,103
Total interest income 10,263,212 9,925,112
Interest expense:
Interest on deposits 1,814,513 2,157,975
Interest federal funds purchased 6,778 3,225
Interest on other borrowings 89,533 128,793
Interest on long-term debt 520,134 347,512
Total interest expense 2,430,958 2,637,505
Net interest income 7,832,254 7,287,607
Provision for loan losses 74,437 450,000
Net interest income after provision for loan losses 7,757,817 6,837,607
Noninterest income:
Service charges on deposit accounts 1,167,222 931,008
Income from trust services 232,478 205,313
Income from retail brokerage services 175,626 196,734
Income from insurance services 818,572 711,330
Income from mortgage banking services 2,669,448 2,596,267
Net gain (loss) on disposition of assets (282,349) (1,833,877)
Net gain on sale of securities 2,914 0
Other income 172,445 106,310
Total noninterest income 4,956,356 2,913,085
Noninterest expense:
Salaries and employee benefits 4,986,080 4,302,866
Occupancy expense 578,705 458,799
Equipment expense 473,928 394,957
Data processing expense 599,937 405,444
Amortization of intangible assets 341,425 242,963
Other operating expenses 2,005,871 1,784,623
Total noninterest expenses 8,985,946 7,589,652
Income before income taxes 3,728,227 2,161,040
Provision for income taxes 769,449 699,658
Net income $2,958,778 $1,461,382
Earnings per share of common stock:
Net income, basic & diluted $ 1.09 $ 0.57
Dividends paid, basic & diluted $ 0.39 $ 0.39
Weighted average shares outstanding 2,710,202 2,566,284
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Three Months
Ended September 30,
2004 2003
Net income $ 819,484 $ 951,531
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period 1,108,088 (1,221,165)
Federal income tax expense 376,750 (415,196)
Other comprehensive income, net of tax: 731,338 (805,969)
Total comprehensive income $1,550,822 $ 145,562
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Nine Months
Ended September 30,
2004 2003
Net income $2,958,778 $1,461,382
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period 27,533 (618,968)
Federal income tax expense 9,084 (210,439)
Other comprehensive income, net of tax: 18,449 (408,529)
Total comprehensive income $2,977,227 $1,052,853
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Nine Months
Ended September 30,
2004 2003
Cash flows from operating activities:
Net income $ 2,958,778 $ 1,461,382
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 74,437 450,000
Depreciation 527,579 443,777
Net amortization and accretion of
investment securities 34,189 70,249
Amortization of intangibles 341,425 242,963
Net loss (gain) on sale and disposal of assets 279,434 1,833,876
Changes in:
Other assets (88,547) (25,109)
Other liabilities (1,132,917) 631,205
Net cash provided by operating activities 2,994,378 5,108,343
Investing activities:
Proceeds from maturities of securities
held to maturity 24,530,000 17,830,000
Proceeds from maturities of securities
available for sale 16,948,051 30,863,513
Proceeds from sale of securities available for sale 5,157 192,400
Purchase of securities held to maturity (42,583,868) (2,997,500)
Purchase of securities available for sale (1,000,000) (67,875,624)
Net change in other short-term investments 0 2,000,000
Net change in loans 4,649,373 10,014,140
Purchase of premises and equipment (1,251,006) (552,457)
Proceeds from sales of other assets 529,081 671,493
Net change in interest-bearing deposits with banks (5,693,979) 3,942,567
Acquisition, net of cash acquired ( 847,636) 0
Net cash provided(used) for investing activities (4,714,827) (5,911,468)
Financing activities:
Net change in deposits (5,502,802) (10,445,426)
Net change in federal funds purchased (2,000,000) 480,000
Net change in short-term borrowings (2,000,000) 7,600,000
Net change in long-term borrowings 11,940,000 2,764,462
Cash dividends declared (1,072,910) (998,468)
Proceeds from the exercise of stock options 55,062 41,250
Payment for common stock (1,355,544) (861,872)
Net cash provided(used) for financing activities 63,806 (1,420,054)
Increase(decrease) in cash and due from banks (1,656,643) (2,223,179)
Cash and due from banks - beginning of period 10,959,728 11,880,622
Cash and due from banks - end of period $ 9,303,085 $ 9,657,443
NONCASH ITEMS:
Increase in foreclosed properties and
decrease in loans $ 208,145 $ 1,345,400
Unrealized gain(loss) on securities
available for sale $ 18,449 $ (408,499)
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(UNAUDITED)
For Nine Months
Ended September 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 $
Securities 26,934,422
Loans, net 10,263,650
Bank premises & equipment 588,372
Core deposit intangibles 1,670,415
Other assets 334,677
Deposits (39,834,516)
Other liabilities (98,384)
Net fair value of non-cash assets & liabilities 6,367,636
Common stock issued for acquisition (5,520,000)
Cash acquired from acquisition 3,352,364
Cash paid for acquisition $ 4,200,000 $
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
Southwest Georgia Financial Corporation (the "Corporation"), a bank-holding
company organized under the laws of Georgia, provides deposit, lending, and
other financial services to businesses and individuals primarily in the
Southwest region of Georgia. The Corporation and its subsidiaries are
subject to regulation by certain federal and state agencies.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore
do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations, and changes in
financial position in conformity with generally accepted accounting
principles. The interim financial statements furnished reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. The interim
consolidated financial statements should be read in conjunction with the
Corporation's 2003 Annual Report on Form 10K.
-7-
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries 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 may be 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
-9-
from the results which would be obtained by accounting for loan fees and
costs as amortized over the term of the loan as an adjustment of the yield.
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for impairment
disclosures.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes the collection of the principal is
unlikely. The allowance is an amount which management believes will be
adequate to absorb estimated losses on existing loans that may become
uncollectible based on evaluation of the 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 nine months of 2004, the U.S. economy continues to be marked by
relative 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. Last quarter, we wrote down a foreclosed property $90,000
subject to a pending sale contract. 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
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merged into Southwest Georgia Bank, a subsidiary of 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 was a one
office, full-service community bank that holds approximately 25
percent of the deposits of Worth County, Georgia. Sylvester Banking
Company is located in 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 the 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 Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2004 2003 2004 2003
Net interest income $2,652 $2,766 $8,063 $8,434
Net income $ 819 $ 995 $3,022 $1,609
Basic earnings per share $ .30 $ .36 $ 1.08 $ .57
Diluted earnings per share $ .30 $ .36 $ 1.08 $ .57
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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
September 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 September 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 September 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 nine months ended September 30, 2004,
total capital increased $6.1 million to $39.1 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 54,855 shares of its common stock
during the first nine months of 2004 at an average price of $24.71 per
share. There are approximately 150,000 shares authorized to be repurchased
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 13.33 percent as of September 30, 2004. The Corporation is aware of no
events or trends likely to result in a material change in capital resources
other than the effects of normal operations on the retention of net earnings,
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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.
Performance Summary
The Corporation's net income after taxes for the three-month period ending
September 30, 2004, was $819 thousand compared with a net income of $952
thousand for the same period in 2003, representing a decrease of $133
thousand. Factors contributing to the quarterly decline in earnings
included decreases of $177 thousand of mortgage banking services income and
a $90 thousand write down on foreclosed property.
On a per share basis, net income for the third quarter was $.30 per diluted
share compared with $.37 per share for the same quarter in 2003. The
weighted average common shares outstanding for the quarter were 2.744
million, up 7.6 percent or 193 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 $2.959 million compared with $1.460
million for the same period in 2003. Year-to-date earnings per share were
$1.09 versus $.57 for the same period in 2003. Net income for the first
nine months of 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 pre-tax charge associated with the non-performing asset in 2003, the
first nine months earnings improved 13 percent and earnings per share
increased 7 percent. Other major factors contributing to the year-to-date
improvement in earnings included increases of $108 thousand of insurance
services income, $73 thousand of mortgage banking services income, $236
thousand of service charge income on deposit accounts, and a $376 thousand
decrease in the provision for loan losses.
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We measure our performance on selected key ratios, which are provided for
the three-months and six-months periods ended September 30, 2004 and 2003.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Return on average total assets 1.12% 1.59% 1.39% .81%
Return on average total equity 8.43% 11.71% 10.44% 5.84%
Average shareholders' equity to
average total assets 13.30% 13.58% 13.34% 13.83%
Net interest margin (tax equivalent) 4.14% 4.56% 4.23% 4.63%
Comparison of Statements of Income for the Quarter
Noninterest income for the third quarter of 2004 decreased $232 thousand to
$1.438 million compared with the third quarter of 2003. For the quarter ended
September 30, 2004, mortgage banking income was $710 thousand, down from $887
thousand in 2003. The mortgage banking business was impacted by damaging
weather and its effect on the timing of the closing of several large loans.
Negatively impacting noninterest income in the quarter was a $90 thousand
charge associated with the loss on a foreclosed property. Also, during the
third quarter service charges on deposit accounts increased $26 thousand to
$403 thousand and income from insurance services decreased to $231 thousand
compared with $237 thousand in the third 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.
Total interest income increased $318 thousand for the three months ended
September 30, 2004 compared with the same period in 2003. This improvement
for the three-month period was the result of increases in interest and
dividends on investment securities. This growth in interest income was
primarily related to increases in average volume of investment securities.
The average volume of investment securities, (mainly U.S. Government
Agencies), increased $39.1 million for the three-month period compared with
the same period last year. The majority of this growth in securities was
related to the acquisition of Sylvester Banking Company in February 2004.
Total interest expense increased $68 thousand, or 8.5 percent, in the third
quarter of 2004 compared with the same period in 2003. Most of this quarter's
increase was from the operation of the Sylvester office. Interest on long-
term debt increased $115 thousand, or 104.6 percent, during the third quarter
of 2004, while interest on other short-term borrowings decreased $31 thousand
during the period. 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.
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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 2004 increased $250 thousand, or 10.4 percent,
compared with 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 4.14 percent and 4.56 percent during the third quarter of 2004 and 2003,
respectively. 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 $58 thousand for the third quarter compared with
$150 thousand in the same quarter 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 $499 thousand, or 20.5 percent, for
the three months ended September 30, 2004 compared with the same period in
2003. The majority of this increase in noninterest expense was related to the
operating costs of the acquired banking office.
Comparison of Statements of Income for the Nine-month Period
Total noninterest income increased $2.044 million for the nine months ended
September 30, 2004, compared with the same period in 2003. The majority of
this increase for the nine months 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 nine months of 2004, the largest component of noninterest
income, mortgage banking income, was $2.669 million, up from $2.596 million in
2003, service charges on deposit accounts increased $236 thousand to $1.167
million, and income from insurance services increased to $819 thousand
compared with $711 thousand in the first nine months of 2003. These increases
were partially offset by a loss on the sale of bank property in the first
quarter of 2004 and the $90 thousand write-down during this quarter on the
foreclosed property previously mentioned. Improved economic conditions have
driven increased year to date revenue from mortgage banking and insurance
services. Also, the Corporation's pricing structure for deposit services
continues to be effective.
For the first nine months of 2004, total interest income increased $338
thousand comparing the same period in 2003. The basis for the increase in the
nine-month period of 2004 was the same as for the third quarter. The average
volume of investment securities, (mainly U.S. Government Agencies), increased
$33.2 million for the nine-month period compared with the same period last
year. The majority of this growth in securities was related to the
acquisition of Sylvester Banking Company in February 2004.
The total interest expense for the nine-month period ended September 30, 2004
decreased $206 thousand, or 7.8 percent, compared with the same period in
2003. Over this period, the average balances on interest-bearing deposits
increased $21.4 million, or 13.3 percent. Excluding the Sylvester merger
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impact, 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 53
basis points comparing the first nine months of 2004 with the same period in
2003. Interest on long-term debt increased $173 thousand, or 49.9 percent,
for the first nine months of 2004, while interest on other short-term
borrowings decreased $39 thousand for the first nine months of 2004.
Net interest income for the first nine months of 2004 was $7.8 million
compared with $7.3 million for the same period in 2003. During the nine-month
period ended September 30, 2004, the Corporation's net interest margin was
4.23 percent compared with 4.63 percent for the same period in 2003.
The nine-month provision for loan losses was $376 thousand less than in the
comparable period of 2003. Total noninterest expenses increased by $1.396
million for the nine months ended September 30, 2004 compared with the same
period 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.
Comparison of Financial Condition Statements
At September 30, 2004, total assets were $47.4 million, a 19.2 percent
increase from December 31, 2003. The majority of the increase in assets was a
result of the acquisition of Sylvester Banking Company.
The Corporation's loan portfolio of $102.6 million increased 5.7 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 35.0 percent of total
assets.
Investment securities and other short-term investments represent 55.1 percent
of total assets. Investment securities increased $35.5 million since December
31, 2003. Other short-term investments increased $5.7 million since December
31, 2003. This resulted in an overall increase in investments of $41.2
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 $217.2 million at September 30, 2004. This
increase reflected the above mentioned acquisition. At September 30, 2004,
total deposits represented 74.0 percent of total assets.
The Corporation decreased its level of short-term borrowings and increased
long-term borrowings during the first nine months of 2004 with the Federal
Home Loan Bank. Short-term borrowings were reduced by $2.0 million compared
with the levels at December 31, 2003, while long-term borrowings increased
$11.9 million. During the second and third quarters of 2004, 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. Also, in August, the Corporation borrowed an
additional $5,000,000 advance from the Federal Home Loan Bank with a fixed
rate of 3.08 percent maturing August 13, 2014, which is convertible to a
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variable rate at the option of the Federal Home Loan Bank on August 13, 2007.
These are the major contractual obligations' changes for the Corporation
during the last nine 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 2.44 percent of total loans outstanding at September 30, 2004,
compared with 2.41 percent of loans outstanding at December 31, 2003. Non-
performing assets as a percentage of total loans was .70%, slightly increasing
from .60% a year ago. Management considers the allowance for loan losses as
of September 30, 2004, adequate to cover potential losses in the loan
portfolio.
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 September 30, September 30,
(dollars in thousands): 2004 2003
Commitments to extend credit $ 21,021 $ 19,511
Standby letters of credit
and financial guarantees $ 127 $ 136
The Corporation does not have any special purpose entities or off-balance
sheets financing arrangements.
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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, 2004, the Corporation's one-year cumulative
rate-sensitive assets represented 112 percent of the cumulative rate-
sensitive liabilities compared with 98 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 more 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.
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.
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PART II. - OTHER INFORMATION
ITEM 5 OTHER INFORMATION
The Board of Directors on September 22, 2004, declared a 20% stock dividend
and its regular quarterly cash dividend of $.13 per share. The stock and
cash dividends are payable on October 29, 2004, to shareholders of record
on October 7, 2004 and October 4, 2004, respectively.
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, 2004, 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, 2004.
On September 22, 2004, the Corporation furnished an 8-K to report the
following event:
issuance of a press release to announce its combination of a quarterly
cash dividend and 20% stock dividend.
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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: /s/George R. Kirkland
_____________________________________
GEORGE R. KIRKLAND
SENIOR VICE-PRESIDENT AND TREASURER
(FINANCIAL AND ACCOUNTING OFFICER)
Date: November 15, 2004
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