U.S. Securities and Exchange Commission
Washington, D. C. 20549
Form 10-K
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2004
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________ .
Commission file number 1-12053
Southwest Georgia Financial Corporation
(Exact Name of Corporation as specified in its charter)
Georgia 58-1392259
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 First Street, S. E.
Moultrie, Georgia 31768
(Address of principal executive offices) (Zip Code)
(Corporation's telephone number, including area code)(229) 985-1120
Securities registered pursuant to Section 12(b) of this Act:
Common Stock $1 Par Value American Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ]
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of June 30, 2004: $48,731,766 based on 2,397,037 shares at the price of
$20.33 per share. The number of shares has been adjusted for the 20 percent
stock dividend that was distributed on October 29, 2004.
As of March 24, 2005, 4,263,020 shares of the $1.00 par value Common Stock of
Southwest Georgia Financial Corporation were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2005 annual
meeting of shareholders, to be filed with the Commission are incorporated by
reference into Part III.
SOUTHEST GEORGIA FINANCIAL CORPORATION
Form 10-K
For the year ended December 31, 2004
CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Corporation's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Corporation
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
-2-
PART I
Item 1. Business
Southwest Georgia Financial Corporation (the "Corporation") is a Georgia bank
holding company organized in 1980, which, in 1981, acquired 100% of the
outstanding shares of Southwest Georgia Bank (the "Bank"), the Corporation's
state non-member bank subsidiary, formerly known as Moultrie National Bank.
The Bank commenced operations as a national banking association in 1928.
Currently, it is a FDIC insured, state-chartered bank.
The Corporation's primary business is providing banking services to
individuals and businesses principally in Colquitt County, Baker County,
Thomas County, Worth County, and the surrounding counties of southwest
Georgia through the Bank. The Bank also operates Empire Financial Services,
Inc. ("Empire"), a commercial mortgage banking firm. Effective February 27,
2004, the Corporation acquired and merged with First Bank Holding Company,
Inc. ("First Bank"), and its subsidiary bank, Sylvester Banking Company. The
Bank operates the former Sylvester Banking Company as a full service branch
of the Bank serving an area approximately 30 miles in radius from Sylvester,
Worth County, Georgia. The branch has approximately 25 percent of the Worth
County deposit market.
The Corporation's executive office is located at 201 First Street, S. E.,
Moultrie, Georgia 31768, and its telephone number is (229) 985-1120.
All references herein to the Corporation include Southwest Georgia Financial
Corporation, the Bank, and Empire, unless the context indicates a different
meaning.
General
The Corporation is a registered bank holding company. All of the
Corporation's activities are currently conducted by the Bank and Empire. The
Bank is community-oriented and offers such customary banking services as
consumer and commercial checking accounts, NOW accounts, savings accounts,
certificates of deposit, lines of credit, Mastercard and VISA accounts, and
money transfers. The Bank finances commercial and consumer transactions,
makes secured and unsecured loans, and provides a variety of other banking
services. The Bank has a trust department that performs corporate, pension,
and personal trust services and acts as trustee, executor, and administrator
for estates and as administrator or trustee of various types of employee
benefit plans for corporations and other organizations. The Bank operates
Southwest Georgia Insurance Services Division, an insurance agency that
offers property and casualty insurance, life, health, and disability
insurance. Empire, a subsidiary of the Bank, is a commercial mortgage
banking firm that offers commercial mortgage banking services.
-3-
Markets
The Corporation conducts banking activities in multiple counties in southwest
Georgia. Agriculture plays an important part in the economy of the Bank's
market area. A large portion of Georgia's produce crops, which include
turnips, cabbage, sweet potatoes, and squash, and its producers of tobacco,
peanuts, and cotton are in the Bank's market. In addition, manufacturing
firms, service industries, and retail stores employ a large number of
residents. Apparel, lumber and wood products, and textile manufacturers are
among the various types of manufacturers located in the Bank's market.
Empire provides mortgage banking services which includes underwriting,
construction, and long-term financing of commercial properties principally
throughout the Southeastern United States.
Deposits
The Bank offers a full range of depository accounts and services to both
consumers and businesses. At December 31, 2004, the Corporation's deposit
base, totaling $222,488,102, consisted of $36,399,339 in noninterest-bearing
demand deposits (16.4% of total deposits), $64,764,638 in interest-bearing
demand deposits including money market accounts (29.1% of total deposits),
$28,080,860 in savings deposits (12.6% of total deposits), $65,900,438 in
time deposits in amounts less than $100,000 (29.6% of total deposits), and
$27,342,827 in time deposits of $100,000 or more (12.3 % of total deposits).
Loans
The Bank makes both secured and unsecured loans to individuals, corporations,
and other businesses. Both consumer and commercial lending operations
include various types of credit for the Bank's customers. Secured loans
include first and second real estate mortgage loans. The Bank also makes
direct installment loans to consumers on both a secured and unsecured basis.
At December 31, 2004, consumer installment, real estate (including
construction and mortgage loans), and commercial (including financial and
agricultural) loans represented approximately 8.8%, 80.0% and 11.2%,
respectively, of the Bank's total loan portfolio.
Lending Policy
The current lending policy of the Bank is to offer consumer and commercial
credit services to individuals and businesses that meet the Bank's credit
standards. The Bank provides each lending officer with written guidelines
for lending activities. Lending authority is delegated by the Board of
Directors of the Bank to loan officers, each of whom is limited in the amount
of secured and unsecured loans which can be made to a single borrower or
related group of borrowers.
The Loan Committee of the Bank's Board of Directors is responsible for
approving and monitoring the loan policy and providing guidance and counsel
to all lending personnel. It also approves all extensions of credit over
$200,000. The Loan Committee is composed of the Chief Executive Officer and
President, and other executive officers of the Bank, as well as certain Bank
Directors.
-4-
Servicing and Origination Fees on Loans
The Corporation through 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. In 2004, Bank revenue received from
mortgage banking services was $3,611,755 compared with $3,446,658 in 2003.
All of this income was from Empire except for $29,905 in 2004 and $69,659 in
2003, which was mortgage banking income from the Bank.
Loan Review and Nonperforming Assets
The Bank regularly reviews its loan portfolio to determine deficiencies and
corrective action to be taken. Loan reviews are prepared by the Bank's loan
review officer and presented periodically to the Board's Loan Committee and
the Audit Committee. Also, the Bank's external auditors conduct independent
loan review adequacy tests and include their findings annually as part of
their overall report to the Audit Committee and to the Board of Directors.
Certain loans are monitored more often by the loan review officer and the
Loan Committee. These loans include non-accruing loans, loans more than 90
days past due, and other loans, regardless of size, that may be considered
high risk based on factors defined within the Bank's loan review policy.
Asset/Liability Management
The Loan Committee is charged with establishing policies to manage the assets
and liabilities of the Bank. Its task is to manage asset growth, net
interest margin, liquidity, and capital in order to maximize income and
reduce interest rate risk. To meet these objectives while maintaining
prudent management of risks, the Loan Committee directs the Bank's overall
acquisition and allocation of funds. At its monthly meetings, the Loan
Committee reviews and discusses the monthly asset and liability funds budget
and income and expense budget in relation to the actual composition and flow
of funds; the ratio of the amount of rate sensitive assets to the amount of
rate sensitive liabilities; the ratio of loan loss reserve to outstanding
loans; and other variables, such as expected loan demand, investment
opportunities, core deposit growth within specified categories, regulatory
changes, monetary policy adjustments, and the overall state of the local,
state, and national economy.
Investment Policy
The Bank's investment portfolio policy is to maximize income consistent with
liquidity, asset quality, and regulatory constraints. The policy is reviewed
periodically by the Board of Directors. Individual transactions, portfolio
composition, and performance are reviewed and approved monthly by the Board
of Directors.
-5-
Employees
The Bank had 125 full-time employees at December 31, 2004. The Bank is not a
party to any collective bargaining agreement, and the Bank believes that its
employee relations are good.
Competition
The banking business is highly competitive. The Bank competes with other
depository institutions and other financial service organizations, including
brokers, finance companies, credit unions and certain governmental agencies.
Further, changes in the laws applicable to banks, savings and loan
associations, and other financial institutions and the increased competition
from investment bankers, brokers, and other financial service organizations
may have a significant impact on the competitive environment in which the
Bank operates. See "Supervision and Regulation."
The Bank ranks first in market share in two of the counties in which it
competes, third in another, and has a growing presence in the fourth.
Monetary Policies
The results of operations of the Bank are affected by credit policies of
monetary authorities, particularly the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). The instruments of monetary policy
employed by the Federal Reserve include open market operations in
U. S. Government securities, changes in the discount rate on bank borrowings,
and changes in reserve requirements against bank deposits. In view of
changing conditions in the national economy and in the money markets, as well
as the effect of action by monetary and fiscal authorities, including the
Federal Reserve, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand, or the business and earnings of
the Bank.
Payment of Dividends
The Corporation is a legal entity separate and distinct from the Bank. Most
of the revenue of the Corporation results from dividends paid to it by the
Bank. Federal and state laws and regulations impose restrictions on the
ability of the Corporation and the Bank to pay dividends.
-6-
Payment of Dividends (continued)
The Bank is a state-chartered bank regulated by the Department of Banking and
Finance (the "DBF") and the Federal Deposit Insurance Corporation (the
"FDIC"). Under the regulations of the DBF, dividends may not be declared out
of the retained earnings of a state bank without first obtaining the written
permission of the DBF unless such bank meets all the following requirements:
(a) Total classified assets as of the most recent examination of the bank do
not exceed 80% of equity capital (as defined by regulation);
(b) The aggregate amount of dividends declared or anticipated to be declared
in the calendar year does not exceed 50% of the net profits after taxes
but before dividends for the previous calendar year; and,
(c) The ratio of equity capital to adjusted assets is not less than 6%.
The payment of dividends by the Corporation and the Bank may also be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which, depending upon
the financial condition of the bank, could include the payment of dividends),
such authority may require, after notice and hearing, that such bank cease
and desist from such practice. In addition to the formal statutes and
regulations, regulatory authorities consider the adequacy of the Bank's total
capital in relation to its assets, deposits, and other such items. Capital
adequacy considerations could further limit the availability of dividends to
the Bank. For 2004, the Corporation's cash dividend payout to stockholders
was 38.8% of net income.
Supervision and Regulation
The following is an explanation of the supervision and regulation of the
Corporation and the Bank as financial institutions. This explanation does
not purport to describe state, federal or American Stock Exchange (the
"Amex") supervision and regulation of general business corporations or Amex
listed companies.
The Corporation is a registered bank holding company subject to regulation by
the Federal Reserve under the Bank Holding Company Act of 1956, as amended
(the "Act"). The Corporation is required to file financial information with
the Federal Reserve periodically and is subject to periodic examination by
the Federal Reserve.
The Act requires every bank holding company to obtain the Federal Reserve's
prior approval before (1) it may acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank that it does not
already control; (2) it or any of its non-bank subsidiaries may acquire all
or substantially all of the assets of a bank; and (3) it may merge or
consolidate with any other bank holding company.
-7-
Supervision and Regulation (continued)
In addition, a bank holding company is generally prohibited from engaging in,
or acquiring, direct or indirect control of the voting shares of any company
engaged in non-banking activities. This prohibition does not apply to
activities listed in the Act or found by the Federal Reserve, by order or
regulation, to be closely related to banking or managing or controlling banks
as to be a proper incident thereto. Some of the activities that the Federal
Reserve has determined by regulation or order to be closely related to
banking include:
* making or servicing loans and certain types of leases;
* performing certain data processing services;
* acting as fiduciary or investment or financial advisor;
* providing brokerage services;
* underwriting bank eligible securities;
* underwriting debt and equity securities on a limited basis through
separately capitalized subsidiaries; and
* making investments in corporations or projects designed primarily to
promote community welfare.
Although the activities of bank holding companies have traditionally been
limited to the business of banking and activities closely related or
incidental to banking (as discussed above), the Gramm-Leach-Bliley Act (the
"GLB Act") relaxed the previous limitations thus permitting bank holding
companies to engage in a broader range of financial activities.
Specifically, bank holding companies may elect to become financial holding
companies which may affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. Among the
activities that are deemed "financial in nature" include:
* lending, exchanging, transferring, investing for others or safeguarding
money or securities;
* insuring, guaranteeing, or indemnifying against loss, harm, damage,
illness, disability, or death, or providing and issuing annuities, and
acting as principal, agent, or broker with respect thereto;
* providing financial, investment, or economic advisory services,
including advising an investment company;
* issuing or selling instruments representing interests in pools of
assets permissible for a bank to hold directly; and
* underwriting, dealing in or making a market in securities.
-8-
Supervision and Regulation (continued)
A bank holding company may become a financial holding company under this
statute only if each of its subsidiary banks is well capitalized, is well
managed and has at least a satisfactory rating under the Community Reinvestment
Act. A bank holding company that falls out of compliance with such requirement
may be required to cease engaging in certain activities. Any bank holding
company that does not elect to become a financial holding company remains
subject to the current restrictions of the Bank Holding Company Act.
Under this legislation, the Federal Reserve Board serves as the primary
"umbrella" regulator of financial holding companies with supervisory
authority over each parent company and limited authority over its subsidiaries.
The primary regulator of each subsidiary of a financial holding company will
depend on the type of activity conducted by the subsidiary. For example,
broker-dealer subsidiaries will be regulated largely by securities regulators
and insurance subsidiaries will be regulated largely by insurance authorities.
The Corporation has no immediate plans to register as a financial holding
company.
The Corporation is an "affiliate" of the Bank under the Federal Reserve Act,
which imposes certain restrictions on (1) loans by the Bank to the
Corporation (2) investments in the stock or securities of the Corporation by
the Bank, (3) the Bank's taking the stock or securities of an "affiliate" as
collateral for loans by the Bank to a borrower, and (4) the purchase of
assets from the Corporation by the Bank. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit, lease or sale of property or
furnishing of services.
The Corporation must also register with the Georgia Department of Banking and
Finance ("DBF") and file periodic information with the DBF. As part of such
registration, the DBF requires information with respect to the financial
condition, operations, management and intercompany relationships of the
Corporation and the Bank and related matters. The DBF may also require such
other information as is necessary to keep itself informed as to whether the
provisions of Georgia law and the regulations and orders issued thereunder by
the DBF have been complied with, and the DBF may examine the Corporation and
the Bank.
The Bank, as a non-member of the Federal Reserve System, is subject to the
supervision of, and is regularly examined by, the FDIC and DBF. In addition,
both the FDIC and the DBF must grant prior approval of any merger,
consolidation, or other corporate reorganization involving the Bank. A bank
can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with the default of a commonly-controlled
institution.
In accordance with the GLB Act, federal banking regulators adopted rules that
limit the ability of banks and other financial institutions to disclose non-
public information about consumers to nonaffiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal
information to a nonaffiliated third party. The privacy provisions of the
GLB Act affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors.
-9-
Supervision and Regulation (continued)
A major focus of governmental policy on financial institutions in recent
years has been aimed at combating terrorist financing. This has generally
been accomplished by amending existing anti-money laundering laws and
regulations. The USA Patriot Act of 2001 (the "USA Patriot Act") imposed
significant new compliance and due diligence obligations, creating new crimes
and penalties and expanding the extra-territorial jurisdiction of the United
States. The United States Treasury Department has issued a number of
implementing regulations which apply to various requirements of the USA Patriot
Act to the Corporation and the Bank. These regulations impose obligations on
financial institutions to maintain appropriate policies, procedures and
controls to detect, prevent and report money laundering and terrorist financing
and to verify the identity of their customers. Failure of a financial
institution to maintain and implement adequate programs to combat terrorist
financing, or to comply with all of the relevant laws or regulations, could
have serious legal and reputational consequences for the institution.
Capital Adequacy
The Federal Reserve and the FDIC have implemented substantially identical
risk-based rules for assessing bank and bank holding company capital
adequacy. These regulations establish minimum capital standards in relation
to assets and off-balance sheet exposures as adjusted for credit risk. Banks
and bank holding companies are required to have (1) a minimum level of total
capital to risk-weighted assets of eight percent; (2) a minimum Tier I
Capital to risk-weighted assets of four percent; and (3) a minimum
stockholders' equity to risk-weighted assets of four percent. In addition,
the Federal Reserve and the FDIC have established a minimum three percent
leverage ratio of Tier I Capital to total assets for the most highly rated
banks and bank holding companies. "Tier I Capital" generally consists of
common equity not including unrecognized gains and losses on securities,
minority interests in equity accounts of consolidated subsidiaries and certain
perpetual preferred stock less certain intangibles. The Federal Reserve and
the FDIC will require a bank holding company and a bank, respectively, to
maintain a leverage ratio greater than three percent if either is experiencing
or anticipating significant growth or is operating with less than well-
diversified risks in the opinion of the Federal Reserve. The Federal Reserve
and the FDIC use the leverage ratio in tandem with the risk-based ratio to
assess the capital adequacy of banks and bank holding companies. The FDIC,
the Office of the Comptroller of the Currency (the "OCC") and the Federal
Reserve have amended the capital adequacy standards to provide for the
consideration of interest rate risk in the overall determination of a bank's
capital ratio, requiring banks with greater interest rate risk to maintain
adequate capital for the risk. The revised standards have not had a
significant effect on the Corporation's capital requirements.
In addition, Section 38 to the Federal Deposit Insurance Act implemented the
prompt corrective action provisions that Congress enacted as a part of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991
Act"). The "prompt corrective action" provisions set forth five regulatory
zones in which all banks are placed largely based on their capital positions.
Regulators are permitted to take increasingly harsh action as a bank's
financial condition declines. Regulators are also empowered to place in
receivership or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches 2%. Better-capitalized
institutions are generally subject to less onerous regulation and supervision
than banks with lesser amounts of capital.
-10-
Capital Adequacy (continued)
The FDIC has adopted regulations implementing the prompt corrective action
provisions of the 1991 Act which place financial institutions in the
following five categories based upon capitalization ratios: (1) a "well
capitalized" institution has a total risk-based capital ratio of at least 10
percent, a Tier I risk-based ratio of at least 6 percent, and a leverage
ratio of at least 5 percent; (2) an "adequately capitalized" institution has
a total risk-based ratio of at least 8 percent, a Tier I risk-based ratio of
at least 4 percent, and a leverage ratio of at least 4 percent; (3) an
"undercapitalized" institution has a total risk-based capital ratio of under
8 percent, a Tier I risk-based capital ratio of under 4 percent, or a
leverage ratio of under 4 percent; (4) a "significantly undercapitalized"
institution has a total risk-based capital ratio of under 6 percent, a Tier I
risk-based ratio of under 3 percent, or a leverage ratio of under 3 percent;
and (5) a "critically undercapitalized" institution has a leverage ratio of 2
percent or less. An institution in any of the three undercapitalized
categories would be prohibited from declaring dividends or making capital
distributions. The regulations also establish procedures for "downgrading"
an institution to a lower capital category based on supervisory factors other
than capital. The Bank, at December 31, 2004, would be considered to be a
"well capitalized" institution.
Available Information
The Corporation is subject to the information requirements of the Securities
Exchange Act of 1934, which means that it is required to file certain
reports, proxy statements, and other information, all of which are available
at the Public Reference Section of the Securities and Exchange Commission at
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. You may also obtain
copies of the reports, proxy statements, and other information from the
Public Reference Section of the SEC, at prescribed rates, by calling 1-800-
SEC-0330. The SEC maintains a World Wide Web site on the Internet at
www.sec.gov where you can access reports, proxy, information and registration
statements, and other information regarding Corporations that file
electronically with the SEC through the EDGAR system.
The Corporation's Internet website address is www.sgfc.com.
Executive Officers of the Corporation
Executive officers are elected by the Board of Directors annually in May and
hold office until the following May unless they resign or are removed from
office by the Board of Directors.
-11-
Executive Officers of the Corporation (continued)
The principal executive officers of the Corporation and their ages, positions
with the Corporation, and terms of office as of January 31, 2005, are as
follows:
Officer Of The
Name (Age) Principal Position Corporation Since
- ------------------------ ---------------------------------- -----------------
DeWitt Drew Chief Executive Officer and President 1999
(48) of the Corporation and Bank
John J. Cole, Jr. Executive Vice President of the 1984
(54) Corporation and Executive Vice President
and Cashier of the Bank
J. David Dyer, Jr. Senior Vice President of the Corporation 2002
(57) and Bank and Chief Executive Officer
and President of Empire
George R. Kirkland Senior Vice President and Treasurer 1991
(54) of the Corporation and Senior Vice
President and Comptroller of the Bank
C. Wallace Sansbury Senior Vice President of the Corporation 1996
(62) and Bank
Randall L. Webb, Jr. Senior Vice President of the Corporation 1994
(56) and Bank
Geraldine A. Ferrone Senior Vice President of the Corporation 1995
(58) and Bank
J. Larry Blanton Senior Vice President of the Corporation 2000
(58) and Bank
Susan T. Whittle Senior Vice President of the Corporation 2001
(46) and Bank
Robert M. Carlton, Jr. Senior Vice President of the Corporation 1995
(63) and Bank
Morris I. Bryant Senior Vice President of the Corporation 2004
(63) and Bank
The following is a brief description of the business experience of the
principal executive officers of the Corporation. Except as otherwise
indicated, each principal executive officer has been engaged in their present
or last employment, in the same or similar position, for more than five
years.
-12-
Executive Officers of the Corporation (continued)
Mr. Drew is a director of Southwest Georgia Financial Corporation and
Southwest Georgia Bank and was named President and Chief Executive Officer in
May 2002. Previously he served as President and Chief Operating Officer
beginning in 2001 and Executive Vice President in 1999 of Southwest Georgia
Financial Corporation and Southwest Georgia Bank. Prior to employment with
Southwest Georgia Financial Corporation, Mr. Drew was employed by Citizens
Bank and Savings Corporation in Russellville, Alabama as Senior Vice
President and Loan Administrator.
Mr. Cole became Executive Vice President and Cashier of the Bank and
Executive Vice President of the Corporation in 2002. Previously, he had been
Senior Vice President and Cashier of the Bank and Senior Vice President of
the Corporation.
Mr. Dyer became Senior Vice President of the Bank and Corporation in 2002.
Previously, he also serves as Chief Executive Officer and President of
Empire, now a wholly owned subsidiary of the Bank. Mr. Dyer has served as
Chief Executive Officer and President of Empire since forming the firm in
1985.
Mr. Kirkland became Senior Vice President and Treasurer of the Corporation
and Senior Vice President and Comptroller of the Bank in 1993.
Mr. Sansbury became Senior Vice President of the Bank and Corporation in
December 1996.
Mr. Webb became Senior Vice President of the Bank and Corporation in 1997.
Previously, he had been Vice President of the Bank and Corporation since 1994
and Assistant Vice President of the Bank since 1984.
Mrs. Ferrone became Senior Vice President in 2000 and Vice President of the
Bank and Corporation in 1995. Previously, she had been Assistant Vice
President of the Bank since 1988.
Mr. Blanton became Senior Vice President of the Bank and Corporation in 2001.
Previously, he has served as Vice President of the Bank and Corporation since
2000 and in various other positions with the bank since 1999.
Mrs. Whittle became Senior Vice President of the Bank and the Corporation in
2001. Previously, she had been Senior Vice President and Senior Lender at
Citizens Bank in Russellville, Alabama since 1999.
Mr. Carlton became Senior Vice President of the Bank and Corporation in 2004.
Previously, he had been Vice President of the Bank since 1995.
Mr. Bryant became Senior Vice President of the Corporation and of the Bank in
2004. Previously, he was employed by Sylvester Banking Company in Sylvester,
Georgia, as Vice President and Cashier since 1969.
-13-
Table 1 - Distribution of Assets, Liabilities, and Shareholders' Equity;
Interest Rates and Interest Differentials
The following tables set forth, for the fiscal years ended December 31, 2004,
2003, and 2002, the daily average balances outstanding for the major
categories of earning assets and interest-bearing liabilities and the average
interest rate earned or paid thereon. Except for percentages, all data is in
thousands of dollars.
Year Ended December 31, 2004
Average
Balance Interest Rate
(Dollars in thousands)
ASSETS
Cash and due from banks $ 10,137 $ - - %
Earning assets:
Interest-bearing deposits 5,476 81 1.48%
Loans, net (a) (b) (c) 99,716 7,002 7.02%
Taxable investment securities
held to maturity 131,496 5,787 4.40%
Nontaxable investment securities
held to maturity (c) 6,014 365 6.07%
Nontaxable investment securities
available for sale (c) 14,869 941 6.33%
Other investment securities
available for sale 1,428 50 3.50%
Federal funds sold 3,190 35 1.10%
Total earning assets 262,189 14,261 5.44%
Premises and equipment 6,460
Other assets 9,082
Total assets $ 287,868
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 34,628 $ - - %
Interest-bearing liabilities:
Savings deposits 87,827 693 0.79%
Time deposits 95,911 1,789 1.87%
Federal funds purchased 520 7 1.35%
Other borrowings 27,525 912 3.31%
Total interest-bearing liabilities 211,783 3,401 1.61%
Other liabilities 3,274
Total liabilities 249,685
Common stock 3,607
Surplus 14,343
Retained earnings 28,668
Less treasury stock (8,435)
Total shareholders' equity 38,183
Total liabilities and shareholders' equity $ 287,868
Net interest income and margin $ 10,860 4.14%
(a) Average loans are shown net of unearned income and the allowance for loan
losses. Nonperforming loans are included.
(b) Interest income includes loan fees as follows: 2004 - $453,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 percent.
-14-
Table 1 - Distribution of Assets, Liabilities, and Shareholders' Equity;
Interest Rates and Interest Differentials (continued)
Year Ended December 31, 2003
Average
Balance Interest Rate
(Dollars in thousands)
ASSETS
Cash and due from banks $ 9,582 $ - - %
Earning assets:
Interest-bearing deposits 4,071 43 1.06%
Loans, net (a) (b) (c) 97,464 7,309 7.50%
Taxable investment securities
held to maturity 98,408 4,946 5.03%
Nontaxable investment securities
held to maturity (c) 3,738 247 6.61%
Nontaxable investment securities
available for sale (c) 14,709 928 6.31%
Other investment securities
available for sale 1,173 46 3.92%
Federal funds sold 135 2 1.48%
Total earning assets 219,698 13,521 6.15%
Premises and equipment 5,352
Other assets 7,229
Total assets $ 241,861
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 25,844 $ - - %
Interest-bearing liabilities:
Savings deposits 69,079 660 0.96%
Time deposits 90,999 2,062 2.27%
Federal funds purchased 249 3 1.20%
Other borrowings 19,121 663 3.47%
Total interest-bearing liabilities 179,448 3,388 1.89%
Other liabilities 3,332
Total liabilities 208,624
Common stock 3,301
Surplus 7,149
Retained earnings 30,021
Less treasury stock (7,234)
Total shareholders' equity 33,237
Total liabilities and shareholders' equity $ 241,861
Net interest income and margin $ 10,133 4.61%
(a) Average loans are shown net of unearned income and the allowance for loan
losses. Nonperforming loans are included.
(b) Interest income includes loan fees as follows: 2003 - $385,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 percent.
-15-
Table 1 - Distribution of Assets, Liabilities, and Shareholders' Equity;
Interest Rates and Interest Differentials (continued)
Year Ended December 31, 2002
Average
Balance Interest Rate
(Dollars in thousands)
ASSETS
Cash and due from banks $ 8,966 $ - - %
Earning assets:
Interest-bearing deposits 3,661 56 1.53%
Loans, net (a) (b) (c) 112,618 9,280 8.24%
Taxable investment securities
held to maturity 78,031 4,596 5.89%
Nontaxable investment securities
held to maturity (c) 3,130 220 7.03%
Nontaxable investment securities
available for sale (c) 13,340 875 6.56%
Other investment securities
available for sale 1,352 61 4.51%
Federal funds sold 1,399 22 1.57%
Total earning assets 213,531 15,110 7.08%
Premises and equipment 5,539
Other assets 8,333
Total assets $ 236,369
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 26,521 $ - - %
Interest-bearing liabilities:
Savings deposits 64,617 961 1.49%
Time deposits 97,354 3,007 3.09%
Federal funds purchased 99 2 2.02%
Other borrowings 12,749 459 3.60%
Total interest-bearing liabilities 174,819 4,429 2.53%
Other liabilities 2,837
Total liabilities 204,177
Common stock 3,051
Surplus 2,900
Retained earnings 32,364
Less treasury stock (6,123)
Total shareholders' equity 32,192
Total liabilities and shareholders' equity $ 236,369
Net interest income and margin $ 10,681 5.00%
(a) Average loans are shown net of unearned income and the allowance for loan
losses. Nonperforming loans are included.
(b) Interest income includes loan fees as follows: 2002 - $444,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 percent.
-16-
Table 2 - Rate/Volume Analysis
The following table sets forth, for the indicated years ended December 31, a
summary of the changes in interest paid resulting from changes in volume and
changes in rate. The change due to volume is calculated by multiplying the
change in volume by the prior year's rate. The change due to rate is
calculated by multiplying the change in rate by the prior year's volume. The
change attributable to both volume and rate is calculated by multiplying the
change in volume by the change in rate.
Due To
Increase Changes In (a)
2004 2003 (Decrease) Volume Rate
(Dollars in thousands)
Interest earned on:
Interest-bearing deposits $ 81 $ 43 $ 38 $ 18 $ 20
Loans, net (b) 7,002 7,309 (307) 174 (481)
Taxable investment
securities held to maturity 5,787 4,946 841 1,340 (499)
Nontaxable investment
securities held to
maturity (b) 365 247 118 136 (18)
Nontaxable investment
securities available
for sale (b) 941 928 13 10 3
Other securities available
for sale 50 46 4 8 (4)
Federal funds sold 35 2 33 34 (1)
Total interest income 14,261 13,521 740 1,720 (980)
Interest paid on:
Savings deposits 693 660 33 94 (61)
Time deposits 1,789 2,062 (273) 121 (394)
Federal funds purchased 7 3 4 4 0
Other borrowings 912 663 249 279 (30)
Total interest expense 3,401 3,388 13 498 (485)
Net interest earnings $10,860 $10,133 $ 727 $1,222 $(495)
-17-
Table 2 - Rate/Volume Analysis (continued)
Due To
Increase Changes In (a)
2003 2002 (Decrease) Volume Rate
(Dollars in thousands)
Interest earned on:
Interest-bearing deposits $ 43 $ 56 $ (13) $ 7 $ (20)
Loans, net (b) 7,309 9,280 (1,971) (1,182) (789)
Taxable investment
securities held to maturity 4,946 4,596 350 794 (444)
Nontaxable investment
securities held to
maturity (b) 247 220 27 39 (12)
Nontaxable investment
securities available
for sale (b) 928 875 53 84 (31)
Other securities available
for sale 46 61 (15) (8) (7)
Federal funds sold 2 22 (20) (19) (1)
Total interest income 13,521 15,110 (1,589) (285) (1,304)
Interest paid on:
Savings deposits 660 961 (301) 72 (373)
Time deposits 2,062 3,007 (945) (186) (759)
Federal funds purchased 3 2 1 2 (1)
Other borrowings 663 459 204 220 (16)
Total interest expense 3,388 4,429 (1,041) 108 (1,149)
Net interest earnings $10,133 $10,681 $ (548) $ (393) $ (155)
(a) Volume and rate components are in proportion to the relationship of the
absolute dollar amounts of the change in each.
(b) Reflects taxable equivalent adjustments using a tax rate of 34 percent for
2004, 2003, and 2002 in adjusting interest on nontaxable loans and
securities to a fully taxable basis.
-18-
Table 3 - Investment Portfolio
The carrying values of investment securities for the indicated years are
presented below:
Year Ended December 31,
2004 2003 2002
(Dollars in thousands)
Securities held to maturity:
U. S. Government Agencies $108,508 $ 47,542 $ 59,541
State and municipal 7,538 7,153 5,609
Total securities held to maturity $116,046 $ 54,695 $ 65,150
Securities available for sale:
Equity securities $ 3,342 $ 2,225 $ 2,179
U. S. Government Agencies 38,813 53,998 21,024
State and municipal 13,836 13,922 13,311
Mortgage backed 861 1,399 3,541
Total securities available for sale $ 56,852 $ 71,544 $ 40,055
The following table shows the maturities of debt securities at December 31,
2004, and the weighted average yields (for nontaxable obligations on a fully
taxable basis assuming a 34% tax rate) of such securities.
MATURITY
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
Debt
Securities:
U. S.
Government
Agencies $18,629 5.59% $84,798 3.85% $43,894 4.27% $ - - %
State and
Municipal 1,085 7.10% 1,437 6.46% 15,769 6.76% 3,083 5.98%
Mortgage
Backed - - % 362 5.73% 369 6.40% 130 6.54%
Total $19,714 5.67% $86,597 3.90% $60,032 4.94% $3,213 6.00%
-19-
Table 3 - Investment Portfolio (continued)
The calculation of weighted average yields is based on the carrying value and
effective yields of each security weighted for the scheduled maturity of each
security. At December 31, 2004 and 2003, securities carried at approximately
$62,138,000 and $41,988,000, respectively, were pledged to secure public and
trust deposits, as required by law.
Table 4 - Loan Portfolio
The following table sets forth the amount of loans outstanding for the
indicated years according to type of loan.
Year Ended December 31,
2004 2003 2002 2001 2000
(Dollars in thousands)
Commercial, financial and
agricultural $ 11,188 $ 9,547 $ 9,273 $ 11,142 $ 16,871
Real estate:
Commercial mortgage loans 40,385 42,969 47,219 54,178 48,161
Residential loans 33,968 30,244 33,900 38,751 39,292
Agricultural loans 5,621 4,851 5,333 7,524 8,506
Installment 8,795 9,550 10,263 10,014 11,183
Total loans 99,957 97,161 105,988 121,609 124,013
Less:
Unearned income 42 46 54 60 123
Allowance for loan losses 2,507 2,338 1,900 1,883 1,795
Net loans $ 97,408 $ 94,777 $ 104,034 $ 119,666 $ 122,095
The following table shows maturities and interest sensitivity of the
commercial, financial and agricultural loan portfolio, excluding real estate
mortgage and consumer loans at December 31, 2004.
Commercial,
Financial and
Agricultural
(Dollars in thousands)
Distribution of loans which are due:
In one year or less $ 5,353
After one year but within five years 5,496
After five years 339
Total $ 11,188
-20-
Table 4 - Loan Portfolio (continued)
The following table shows, for the selected loans above due after one year,
the amounts which have predetermined interest rates and the amounts which
have floating or adjustable interest rates at December 31, 2004.
Loans With
Predetermined Loans With
Rates Floating Rates Total
(Dollars in thousands)
Commercial, financial
and agricultural $ 3,740 $ 2,095 $ 5,835
The following table presents information concerning outstanding balances of
nonperforming loans and foreclosed assets for the indicated years.
Nonperforming loans comprise: (a) loans accounted for on a nonaccrual basis
("nonaccrual loans"); (b) loans which are contractually past due 90 days or
more as to interest or principal payments and still accruing ("past-due
loans"); (c) loans for which the terms have been renegotiated to provide a
reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower ("renegotiated loans"); and (d) loans
now current but where there are serious doubts as to the ability of the
borrower to comply with present loan repayment terms ("potential problem
loans").
Nonperforming loans
--------------------------------------------------
Non- Renego- Potential
accrual Past-Due tiated Problem Foreclosed
Loans Loans Loans Loans Total Assets
------- ------- ------- ------- ------- -------
(Dollars in thousands)
December 31, 2004 $ 1,387 $ 4 $ 9 $ 163 $ 1,563 $ 14
December 31, 2003 $ 1,012 $ 0 $ 60 $ 414 $ 1,486 $ 1,203
December 31, 2002 $ 1,529 $ 3 $ 0 $ 408 $ 1,940 $ 1,982
December 31, 2001 $ 424 $ 178 $ 0 $ 52 $ 654 $ 3,545
December 31, 2000 $ 742 $ 1,402 $ 0 $ 1,464 $ 3,608 $ 2,097
The Corporation follows a policy of continuing to accrue interest on consumer
and bank card loans that are contractually past due over 90 days up to the
time of charging the loan amount against the allowance for loan losses.
-21-
Table 4 - Loan Portfolio (continued)
Summary of Loan Loss Experience
The following table is a summary of average loans outstanding during the
reported periods, changes in the allowance for loan losses arising from loans
charged off and recoveries on loans previously charged off by loan category,
and additions to the allowance which have been charged to operating expenses.
Year Ended December 31,
2004 2003 2002 2001 2000
(Dollars in thousands)
Average loans outstanding $102,208 $99,589 $114,586 $123,668 $118,809
Amount of allowance for
loan losses at beginning
of period $ 2,338 $ 1,900 $ 1,883 $ 1,795 $ 1,944
Amount of loans charged off
during period:
Commercial, financial and
agricultural 0 37 226 69 360
Real estate:
Commercial 79 0 0 0 1
Residential 25 71 113 18 26
Agricultural 0 0 0 0 0
Installment 176 169 258 261 112
Total loans charged off 280 277 597 348 499
Amount of recoveries during
period:
Commercial, financial, and
agricultural 88 147 25 18 81
Real estate:
Commercial 17 0 0 0 0
Residential 13 14 5 2 5
Agricultural 0 0 0 0 0
Installment 65 37 50 36 44
Total loans recovered 183 198 80 56 130
Net loans charged off
during period 97 79 517 292 369
Additions to allowance for
loan losses charged to
operating expense during period 92 517 534 380 220
Purchased reserve 174 0 0 0 0
Amount of allowance for
loan losses at end
of period $ 2,507 $ 2,338 $ 1,900 $ 1,883 $ 1,795
Ratio of net charge-offs
during period to average
loans outstanding for
the period .10% .08% .45% .24% .31%
The allowance is based upon management's analysis of the portfolio under
current and expected economic conditions. This analysis includes a study of
loss experience, a review of delinquencies, and
-22-
Table 4 - Loan Portfolio (continued)
an estimate of the possibility of loss in view of the risk characteristics of
the portfolio. Based on the above factors, management considers the current
allowance to be adequate.
Allocation of Allowance for Loan Losses
Management has allocated the allowance for loan losses within the categories
of loans set forth in the table below according to amounts deemed reasonably
necessary to provide for possible losses. The amount of the allowance
applicable to each category and the percentage of loans in each category to
total loans are presented below.
December 31, 2004 December 31, 2003 December 31, 2002
% of % of % of
Total Total Total
Category Allocation Loans Allocation Loans Allocation Loans
(Dollars in thousands)
Domestic:
Commercial, financial
and agricultural $ 281 11.2% $ 229 9.8% $ 166 8.7%
Real estate:
Commercial 1,016 40.4% 1,034 44.2% 847 44.6%
Residential 852 34.1% 727 31.1% 608 32.0%
Agricultural 140 5.6% 117 5.0% 95 5.0%
Installment 218 8.7% 231 9.9% 184 9.7%
Total $ 2,507 100.0% $ 2,338 100.0% $ 1,900 100.0%
December 31, 2001 December 31, 2000
% of % of
Total Total
Category Allocation Loans Allocation Loans
(Dollars in thousands)
Domestic:
Commercial, financial
and agricultural $ 173 9.2% $ 244 13.6%
Real estate:
Commercial 838 44.5% 696 38.8%
Residential 600 31.9% 569 31.7%
Agricultural 117 6.2% 124 6.9%
Installment 155 8.2% 162 9.0%
Total $ 1,883 100.0% $ 1,795 100.0%
-23-
The calculation is based upon total loans including unearned interest.
Management believes that the portfolio is well diversified and, to a large
extent, secured without undue concentrations in any specific risk area.
Control of loan quality is regularly monitored by management and is reviewed
by the Bank's Board of Directors which meets monthly. Independent external
review of the loan portfolio is provided by examinations conducted by
regulatory authorities. The amount of additions to the allowance for loan
losses charged to operating expense for the periods indicated were based upon
many factors, including actual charge offs and evaluations of current and
prospective economic conditions in the market area. Management believes the
allowance for loan losses is adequate to cover any potential loan losses.
Table 5 - Deposits
The average amounts of deposits for the last three years are presented below.
Year Ended December 31,
2004 2003 2002
(Dollars in thousands)
Noninterest-bearing
demand deposits $ 34,628 $ 25,844 $ 26,521
NOW accounts 48,961 35,831 34,198
Money market deposit
accounts 12,020 14,386 14,153
Savings 26,846 18,861 16,266
Time deposits 95,911 90,999 97,354
Total interest-bearing 183,738 160,077 161,971
Total average deposits $ 218,366 $ 185,921 $ 188,492
The maturity of certificates of deposit of $100,000 or more as of December
31, 2004, are presented below.
(Dollars in thousands)
3 months or less $ 7,962
Over 3 months through 6 months 5,637
Over 6 months through 12 months 6,864
Over 12 months 6,880
Total outstanding certificates of deposit
of $100,000 or more $ 27,343
-24-
Return On Equity and Assets
Certain financial ratios are presented below.
Year Ended December 31,
2004 2003 2002
Return on average assets 1.34% 1.03% 1.52%
Return on average equity 10.12% 7.46% 11.19%
Dividend payout ratio
(dividends declared
divided by net income) 38.79% 53.57% 35.13%
Average equity to average
assets ratio 13.26% 13.74% 13.62%
Item 2. Properties
The executive offices of the Corporation and the main banking office of the
Bank are located in a 19,000 square foot facility at 201 First Street, S. E.,
Moultrie, Georgia. The Bank's Operations Center is located at 10 Second
Avenue, Moultrie, Georgia. The Trust and Investment Division of the Bank is
located at 25 Second Avenue, Moultrie, Georgia. A building located across
the street from the main office at 205 Second Street, S. E., Moultrie,
Georgia, has been renovated for the Bank's Administrative Services offices,
training and meeting rooms, record storage, and the drive-thru teller
facility.
Southwest Georgia Bank Property Table
Square
Name Address Feet
- ------------------------- ---------------------------------------------- ------
Main Office 201 First Street, SE, Moultrie, GA 31768 19,000
Operations Center 10 Second Avenue, SE, Moultrie, GA 31768 5,000
Trust & Investment Office 25 Second Avenue, SE, Moultrie, GA 31768 11,000
Administrative Services 205 Second Street, SE, Moultrie, GA 31768 15,000
Southwest Georgia Ins.
Services 501 South Main Street, Moultrie, GA 31768 5,600
Baker County Bank Highway 91, Newton, GA 31717 4,400
Bank of Pavo 1102 West Harris Street, Pavo, GA 31778 3,900
Sylvester Banking Company 300 North Main Street, Sylvester, GA 31791 12,000
Empire Financial Services 121 Executive Parkway, Milledgeville, GA 31061 2,700
All the buildings and land, which include parking and drive-in teller
stations, are owned by the Bank. There are two automated teller machines on
the Bank's main office premises, one in each of the Baker County, Thomas
County, and Worth County branch offices, and one additional automated teller
machine located in Doerun, Georgia. These automated teller machines are
linked to the STAR network of automated teller machines.
-25-
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Corporation or
the Bank is a party or to which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of 2004 for a vote
of the security holders through the solicitation of proxies or otherwise.
-26-
PART II
Item 5. Market for Corporation's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities
Common Stock Market Prices
The Corporation's common stock trades on the American Stock Exchange under the
symbol "SGB". The closing price on December 31, 2004, was $22.70. Below is a
schedule of the high and low stock prices for each quarter of 2004 and 2003.
2004
- ---------------------------------------------------------
For The
Quarter Fourth Third* Second* First*
- -------- ------ ------ ------- ------
High $23.99 $24.33 $21.25 $20.00
Low $21.58 $20.08 $19.33 $18.12
2003*
- ---------------------------------------------------------
For The
Quarter Fourth Third Second First
- -------- ------ ------ ------- ------
High $19.87 $19.79 $17.08 $16.04
Low $18.33 $15.83 $15.00 $14.83
*Adjusted for the 20% stock dividend.
As of December 31, 2004, we had 582 registered record holders of the
Corporation's common stock. Also, there were approximately 300 additional
shareholders who held shares through trust and brokerage firms. Cash
dividends paid on the Corporation's common stock were $.46 in 2004 and $.43
in 2003. In total, we declared $1.499 million in cash dividends in 2004 and
$1.329 million in 2003.
Our dividend policy objective is to pay out a portion of earnings in
dividends to our shareholders in a consistent manner over time, and we intend
to continue paying dividends. However, no assurance can be given that
dividends will be declared in the future. The amount and frequency of
dividends is determined by the Corporation's Board of Directors after
consideration of various factors, which may include the Corporation's
financial condition and results of operations, investment opportunities
available to the Corporation, capital requirements, tax considerations and
general economic conditions. The primary source of funds available to the
parent company is the payment of dividends by its subsidiary bank. Federal
and State banking laws restrict the amount of dividends that can be paid
without regulatory approval. See "Business - Payment of Dividends". The
Corporation and its predecessors have paid cash dividends for the past
seventy-seven consecutive years.
-27-
Item 6. Selected Financial Data
Five-Year Selected Financial Data
(Dollars in thousands, except per share data and ratios)
2004 2003 2002 2001 2000
For The Year: Earnings & Share Data
Interest income $ 13,822 $ 13,126 $ 14,738 $ 17,562 $ 18,403
Interest expense 3,401 3,387 4,429 7,926 7,894
Net interest income 10,421 9,739 10,309 9,636 10,509
Non-interest income 6,754 4,545 5,596 5,156 2,518
Non-interest expense 12,073 10,267 10,299 9,884 8,371
Net income 3,865 2,480 3,602 3,219 3,359
Earnings per share - basic $ 1.19 $ 0.81 $ 1.15 $ 1.00 $ 0.98
Earnings per share - diluted 1.18 0.80 1.14 1.00 0.98
Weighted average shares
outstanding - basic 3,258 3,072 3,143 3,228 3,422
Weighted average shares
outstanding - diluted 3,281 3,084 3,148 3,229 3,422
Dividends declared per share $ 0.46 $ 0.43 $ 0.40 $ 0.39 $ 0.39
At Year End: Balance Sheet Data
Total assets $305,225 $246,153 $240,468 $234,844 $240,380
Loans, net 97,408 94,777 104,034 119,666 122,094
Deposits 222,488 182,876 189,923 192,901 199,485
Shareholders' equity 39,444 32,988 33,322 30,957 30,641
Book value per share 12.03 10.83 10.73 9.74 9.23
Tangible book value per share $ 11.05 $ 10.16 $ 9.97 $ 8.90 $ 9.03
Common shares outstanding
(including treasury shares) 4,263 3,964 3,960 3,960 3,960
Selected Average Balances
Average total assets $287,868 $241,861 $236,369 $239,928 $232,530
Average loans 102,208 99,589 114,586 123,668 118,809
Average deposits 218,366 185,921 188,492 198,527 188,874
Average shareholders' equity $ 38,183 $ 33,237 $ 32,193 $ 30,693 $ 30,331
Asset Quality
Non-performing assets to
total assets .46% .90% 1.46% 1.77% 1.76%
Non-performing assets $ 1,405 $ 2,215 $ 3,515 $ 4,146 $ 4,238
Net loan charge-offs (recoveries) $ 98 $ 79 $ 517 $ 351 $ 499
Net loan charge-offs (recoveries)
to average loans 0.10% 0.08% 0.45% 0.24% 0.31%
Reserve for loan losses to loans 2.51% 2.41% 1.79% 1.55% 1.45%
Performance Ratios
Return on average total assets 1.34% 1.03% 1.52% 1.34% 1.44%
Return on average shareholders'
Equity 10.12% 7.46% 11.19% 10.49% 11.08%
Average shareholders' equity to
average total assets 13.26% 13.74% 13.62% 12.79% 13.04%
Efficiency ratio 68.54% 69.94% 63.27% 65.13% 61.48%
Net interest margin 4.14% 4.61% 5.00% 4.51% 5.17%
Dividend payout ratio 38.79% 53.57% 35.13% 39.30% 39.91%
-28-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
For further information about the Corporation, see selected statistical
information on pages 14 - 28 of this report on Form 10-K.
Overview
The Corporation is a full-service community bank holding company
headquartered in Moultrie, Georgia. The community of Moultrie has been
served by the Bank since 1928. We provide comprehensive financial services to
consumer, business and governmental customers, which, in addition to
conventional banking products, include a full range of mortgage banking,
trust, investment and insurance services. Our primary market area
incorporates Colquitt County, where we are headquartered, and Baker, Thomas,
and Worth Counties, each contiguous with Colquitt County. Including this
acquisition, we have four full service banking facilities and six automated
teller machines.
Our strategy is
* to maintain the diversity of our revenue, including both interest and
noninterest income through a broad base of business,
* to strengthen our sales and marketing efforts while developing our
employees to provide the best possible service to our customers,
* to expand our market share where opportunity exists, 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 fluctuations in interest rates. During 2004, the U.S.
economy was marked by historically low interest rates. Since July 2004,
short-term rates increased 1.25 percent by year end.
Our profitability is impacted as well by operating expenses such as salaries
and employee benefits, occupancy and other operating expenses, including
income taxes. Our lending activities are significantly influenced by
regional and local factors such as 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 and was 64.8 percent of 2004 net interest
income. Sources of noninterest income include our insurance agency and
Empire, the Corporation's commercial mortgage banking subsidiary, as well as
fees on customer accounts.
-29-
We made significant improvements with respect to overall asset quality in
2004 and 2003. During the second quarter of 2004, we sold a large foreclosed
property with a loss on sale of approximately $90,000. 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. As a result,
non-performing assets to total assets were 0.5 percent and 0.9 percent at the
end of 2004 and 2003, respectively compared with 1.5 percent at December 31,
2002.
On February 27, 2004, the Corporation acquired ownership of First Bank
Holding Company and its bank subsidiary, Sylvester Banking Company. 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. Sylvester Banking
Company, which has been in business since 1898, at the time of the
acquisition had $49.6 million in assets. The business combination was
accounted for by the purchase method of accounting and the results of
operations of Sylvester Banking Company 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
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 as if the
acquisition had occurred during the last three years. The pro forma
information does not include any operating efficiencies that could be
realized in a branch acquisition, and pro forma results are not necessarily
indicative of the results which would have been realized had the acquisition
occurred at such date.
-30-
The following are our pro forma results for the three years ended December
31, 2004 showing our results included with those of First Bank and Sylvester:
2004 2003 2002
(Dollars in Thousands)
Net interest income $ 10,652 $ 11,236 $ 11,956
Net Income $ 3,928 $ 2,606 $ 3,830
Basic earnings per share $ 1.18 $ .77 $ 1.11
Diluted earnings per share $ 1.17 $ .77 $ 1.11
Stock Dividends
On September 25, 2004, the Board of Directors elected to pay a 20% stock
dividend to shareholders of record as of October 7, 2004. All per share
financial information has been adjusted to take into account the stock
dividend.
Critical Accounting Policies
In the course of the Corporation's normal business activity, management must
select and apply many accounting policies and methodologies that lead to the
financial results presented in the consolidated financial statements of the
Corporation. Management considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy because of the
uncertainty and subjectivity inherent in estimating the levels of allowance
needed to cover probable credit losses within the loan portfolio and the
material effect that these estimates have on the Corporation's results of
operations. We believe that the allowance for loan losses as of December 31,
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 would have resulted in material estimates and
assumptions changes. Note 1 to the Consolidated Financial Statements
provides a description of our significant accounting policies and contributes
to the understanding of how our financial performance is reported.
RESULTS OF OPERATIONS
Performance Summary
Net income for 2004 was $3.9 million, an increase of approximately $1.4
million, or 56 percent, when compared with $2.5 million in 2003. Higher net
income in 2004 was primarily due to the $1.2 million after-tax charge in the
second quarter of 2003 for the transfer of a non-performing asset, the
Colquitt Retirement Inn. Excluding the charge associated with the non-
performing asset in 2003, 2004 earnings improved 6.5 percent. Other major
factors contributing to the 2004 improvement in earnings included increases
of $100,000 in insurance services income, $165,000 in mortgage banking
services income, $263,000 in service charge on deposit accounts, and a
$425,000 decrease in the provision for loan losses. The majority of the 2004
increase in net interest income and non-interest expenses was related to the
operations of the acquired bank.
-31-
On a per share basis, net income for 2004 was $1.18 per diluted share
compared with $0.80 per diluted share for 2003. Excluding the charge
associated with the non-performing asset in 2003, diluted earnings per share
was the same at $1.18. The diluted weighted average common shares
outstanding for the year ended December 31, 2004, were 3.3 million, up 6.4
percent or 197,093 average shares from the previous year. The increase in the
average shares outstanding was primarily attributed to the stock issued to
acquire the outstanding shares of First Bank Holding Company, and partially
offset by the Corporation's stock repurchase program.
Because of our strong capital condition, we continued through 2004 the stock
repurchase program that began in January 2000. In 2004, 67,622 shares were
repurchased. Through the end of 2004, a total of 522,095 shares have been
repurchased since the beginning of the program. The share repurchase program
was extended by the Board of Directors at their meeting in January 2005
through the end of January 2006. The Corporation is authorized to purchase
an additional 100,000 shares under the plan.
Net income for 2003 was $2.5 million, a decrease of approximately $1.1
million, or 31.1 percent, when compared with $3.6 million in 2002. The
primary factors contributing to the decline included the $1.2 million after-
tax charge for the transfer of the Colquitt Retirement Inn and a decrease of
10.9 percent, or $1.6 million, in interest income. Partially offsetting the
decline was a gain of $426,000 in mortgage banking services income, a 14.1
percent increase over the previous year, and a reduction from 2002 of $1.0
million, or 23.5 percent, in interest expense.
We measure our performance on selected key ratios, which are provided for the
last three years in the following table:
2004 2003 2002
------ ------ ------
Return on average total assets 1.34% 1.03% 1.52%
Return on average shareholders' equity 10.12% 7.46% 11.19%
Average shareholders' equity to average total assets 13.04% 13.74% 13.62%
Net interest margin (tax equivalent) 4.14% 4.61% 5.00%
Net Interest Income
Net interest income for 2004 increased $682,000, or 7 percent, compared with
2003. The increase was influenced by the mix of earning assets and interest-
bearing liabilities and the operations of the acquired branch office.
Interest income from earning assets increased $696,000, or 5.3 percent, in
2004 compared with 2003, while interest expenses increased $14,000 or 0.4
percent for the same period.
The majority of the $696,000 increase in interest income for the year
resulted from increased volumes in earning assets related to the
acquisition. Average investment volumes increased $35.8 million, or 30.3
percent, in 2004 compared with 2003 while the average yield decreased 59
basis points. Average loan volumes increased $2.3 million during 2004, but a
yield decrease of 48 basis points to 7.02 percent resulted in a decrease in
interest income from loans of $307,000.
The decrease of $14,000 of interest expense in 2004 compared with 2003
primarily resulted from a 40 basis point decline in the average rate paid on
time deposits. This decrease was partially offset by interest expenses on
acquired deposits and increases of $8.4 million in long-term debt volume.
During 2004, average interest bearing deposits increased $23.7 million, or
14.8 percent, with the majority of the increase, or $18.7 million, in lower
rate savings accounts. Non-interest bearing deposits increased $8.8 million
or 34%. The deposit mix changed due to the lower rate environment causing a
shift from time to savings and NOW account deposits. Interest expense on
deposits continues to closely follow interest rate trends.
-32-
Net interest income for 2003 decreased $571,000, or 5.5 percent, compared
with 2002. Interest income from earning assets decreased $1.6 million, or
10.9 percent, in 2003 compared with 2002, while interest expenses decreased
$1.0 million or 23.5 percent for the same period. The majority of the $1.6
million decrease in interest income for the year resulted from reduced yields
and volume primarily on loans. Average loan volume decreased $15.0 million,
or 13.1 percent, in 2003 compared with 2002 while the average yield decreased
74 basis points. The decrease of $1.0 million of interest expense in 2003
compared with 2002 primarily resulted from an 82 basis point decline in the
average rate paid on time deposits. During 2003, while the level of average
core deposits remained relatively stable, average time deposits decreased
$6.4 million, or 6.5 percent. The deposit mix changed slightly due to the
lower rate environment causing a shift from time to savings deposits.
Net Interest Margin
Net interest margin, which is the net return on earning assets, is a key
performance ratio for evaluating net interest income. It is computed by
dividing net interest income by average total earning assets.
Net interest margin was 4.14 percent for 2004, a 47 basis point decrease from
4.61 percent in 2003. The net interest margin in 2003 was down 39 basis
points compared with the net interest margin of 5.00 percent in 2002. Our
net interest margin decline is primarily due to lower yields on earning
assets acquired with the Sylvester Banking Company acquisition. We have
maintained a relatively strong net interest margin compared with peers
considering the very low interest rate environment during the last few years.
The recent 1.25 percent rise in the federal reserve discount rate since June
of 2004 had little impact on the 2004 net interest income because it did not
significantly change market rates.
Noninterest Income
Noninterest income is an important contributor to net earnings. The largest
single component of the Corporation's noninterest income in recent years has
been mortgage banking services fees. The following table summarizes the
changes in noninterest income during the past three years:
2004 2003 2002
(Dollars in Thousands)
% % %
Amount Change Amount Change Amount Change
------ ----- ------ ------ ------ -----
Service charges on
deposit accounts $1,554 20.4% $1,290 18.1 % $1,092 13.9%
Income from trust services 310 18.3 262 21.3 216 (15.3)
Income from retail brokerage
services 245 (6.1) 261 (2.2) 267 (31.5)
Income from insurance services 1,102 10.0 1,002 8.7 922 (0.5)
Income from mortgage banking
services 3,612 4.8 3,447 14.1 3,021 23.7
Gain (loss) on the sale or
abandonment of assets (280) 84.8 (1,846) * (214) *
Gain (loss) on the sale
of securities 3 * 0 * 121 *
Other income 208 61.2 129 (24.1) 170 (5.6)
Total noninterest income $6,754 48.6% $4,545 (18.8)% $5,595 8.5%
* = less than 1%
-33-
Excluding the $1.7 million charge associated with the Colquitt Retirement Inn
in 2003, noninterest income in 2004 increased $470,000 compared with 2004.
Service charges on deposit accounts increased due to the addition of the
acquired branch office and our recently offered overdraft protection program.
Increases in fees from trust activities, insurance services, and mortgage
banking services more than offset the decrease in income from security sales.
Mortgage banking income increased as loan origination fees on commercial
mortgages increased over the prior year. The mortgage banking servicing
portfolio is comprised of all non-recourse loans which we service for
participating commercial mortgage lenders. At December 31, 2004, Empire was
servicing approximately $567 million in loans.
Service charges on deposit accounts were positively impacted by a new
overdraft protection program implemented in the last half 2003. The
increases in fees from deposit accounts trust and insurance services and
mortgage banking services was not enough to fully offset the $1.7 million pre-
tax charge for the transfer of our one major nonperforming asset (the
Colquitt Retirement Inn) to the Georgia Trust for Historic Preservation
during the second quarter of 2003.
Noninterest Expense
Noninterest expense includes all expenses of the Corporation other than
interest expense, provision for loan losses and income tax expense. The
following table summarizes the changes in the noninterest expenses for the
past three years:
2004 2003 2002
-------------- --------------- --------------
(Dollars in Thousands)
% % %
Amount Change Amount Change Amount Change
------- ----- ------- ------ ------- -----
Salaries and
employee benefits $ 6,668 16.0% $ 5,749 (4.9)% $ 6,045 7.1%
Occupancy expense 735 30.6 563 1.8 553 2.0
Equipment expense 660 13.4 582 12.2 518 2.4
Data processing expense 766 41.6 541 1.7 532 (3.1)
Amortization of
intangible assets 502 54.9 324 0.0 324 88.4
Other operating expense 2,742 9.3 2,508 7.8 2,327 (5.9)
Total noninterest expense $12,073 17.6% $10,267 (0.3)% $10,299 4.2%
Total noninterest expense increased $1.8 million, or 17.6 percent, in 2004
compared with 2003 primarily as a result of the Corporation's acquisition of
Sylvester Banking Company. Salaries and employee benefits expense increased
16 percent due to an increase in 19 full-time equivalent employees to a total
of 125 at December 31, 2004 compared with the prior year end. Excluding the
acquired branch office's operations and acquisition costs, 2004 noninterest
expenses increased 3.4 percent compared with 2003 primarily due to increases
in personnel.
Amortization of intangible assets increased $178,000 in 2004 compared with
the previous year. This increase resulted from the amortization of core
deposit premiums related to the purchase of Sylvester Banking Company.
-34-
Total noninterest expense decreased $32,000, or .3 percent, in 2003 compared
with 2002 primarily as a result of the Corporation's implementation of
improved processes and technology. Salaries and employee benefits expense
declined 4.9 percent due to a decline in full-time equivalent employees of
6.2 percent to a total of 106 at December 31, 2003 compared with the prior
year end. In addition, both executive and staff employee bonus awards were
less in 2003 than 2002.
The improvement in salaries and employee benefits in 2003 was somewhat offset
by an increase of $181,000 in other operating expenses from higher consulting
services fees and pension and ESOP administrative expenses. These also
included higher legal fees related to the acquisition of Sylvester Banking
Company.
The "efficiency ratio" (noninterest expenses divided by total noninterest
income plus net interest income), a measure of productivity, was 68.54
percent for 2004 and 69.94 percent and 63.27 percent for 2003 and 2002,
respectively.
Federal Income Tax Expense
The Corporation expensed $1.14 million, $1.02 million and $1.47 million for
federal income taxes for the years ending December 31, 2004, 2003 and 2002,
respectively. These amounts resulted in an effective tax rate of 22.8% for
2004, 29.1% for 2003 and 29.0% for 2002. See Note 9 of the Corporation's
Notes to Consolidated Financial Statements for further details of tax
expense.
USES AND SOURCES OF FUNDS
The Corporation, primarily through the Bank, acts as a financial
intermediary. As such, our financial condition should be considered in terms
of how we manage our sources and uses of funds. Our primary sources of funds
are deposits and borrowings. We invest our funds in assets, and our earning
assets are what provide us income.
During 2004, total average assets increased $46 million, or 19 percent, to
$287.9 million. The Corporation's earning assets, which include loans,
investment securities, deposits at the Federal Home Loan Bank, and federal
funds sold averaged $262.1 million in 2004, a 19.3 percent increase over
$219.6 million in 2003. This increase was the result of the acquisition of
Sylvester Banking Company. The earning asset mix remained relatively stable
during the year. For 2004, average earning assets were comprised of 38
percent loans, 59 percent investment securities, and 3 percent federal funds
sold and funds at the Federal Home Loan Bank. The ratio of average earning
assets to average total assets increased to 91.1 percent for 2004 compared
with 90.8 percent for 2003. This increase was primarily related to the
decreased level of foreclosed assets.
Loans
Loans are one of the Corporation's largest earning assets and users of funds.
Because of the importance of loans, most of the other assets and liabilities
are managed to accommodate the needs of the loan portfolio. During 2004,
average loans represented 38 percent of average earning assets and 35.5
percent of average total assets.
-35-
The composition of the Corporation's loan portfolio at December 31, 2004,
2003, and 2002 was as follows:
2004 2003 2002
-------------- --------------- --------------
(Dollars in Thousands)
% % %
Amount Change Amount Change Amount Change
------- ----- ------- ------ ------- -----
Real estate -
commercial mortgage $40,386 (6.0)% $42,968 (9.0)% $ 47,218 (12.8)%
Real estate-residential 33,968 12.3 % 30,245 (10.8)% 33,901 (12.5)%
Real estate-agricultural 5,621 15.9 % 4,851 (9.0)% 5,333 (29.1)%
Commercial, financial,
and agricultural loans 11,188 17.2 % 9,547 (3.0)% 9,272 (16.8)%
Consumer loans 8,752 (7.9)% 9,504 (6.9)% 10,209 2.5 %
Total loans $99,915 2.9 % $97,115 (8.3)% $105,933 (12.8)%
Average total loans increased in 2004 due to our acquisition early in 2004.
Despite the decrease in local loan demand, we continued to apply stringent
credit criteria on all loan applications. As a result of low loan demand, the
ratio of total loans to total deposits at year end declined to 44.9 percent
in 2004 compared with 53.1 percent in 2003. The loan portfolio mix at year
end 2004 consisted of 40.4 percent loans secured by commercial real estate,
34 percent of loans secured by residential real estate, and 5.6 percent of
loans secured by agricultural real estate. The loan portfolio also included
other commercial, financial, and agricultural purposes (11.2 percent) and
loans to individuals for consumer purposes (8.8 percent).
Allowance and Provision for Possible Loan Losses
The allowance for loan losses represents our estimate of the amount required
for probable loan losses in the Corporation's loan portfolio. Loans, or
portions thereof, which are considered to be uncollectible, are charged
against this allowance and any subsequent recoveries are credited to the
allowance. There can be no assurance that the Corporation will not sustain
losses in future periods which could be substantial in relation to the size
of the allowance for loan losses at December 31, 2004.
We have a loan review program in place which provides for the regular
examination and evaluation of the risk elements within the loan portfolio.
The adequacy of the allowance for loan losses is regularly evaluated based on
the review of all significant loans with particular emphasis on nonaccruing,
past due, and other potentially impaired loans that have been identified as
possible problems.
The allowance for loan losses was $2.5 million, or 2.5 percent of total loans
outstanding, as of December 31, 2004. This level represented a $169,000
increase from the corresponding 2003 year-end amount which was 2.4 percent of
total loans outstanding.
The provision for loan losses was $92,000 in 2004, a $425,000 decrease from
the prior year's provision. This provision reflected our assessment of the
adequacy of the allowance to absorb possible losses in the loan portfolio.
See Note 3 of the Corporation's Notes to Consolidated Financial Statements
for details of the changes in the allowance for loan losses.
-36-
Investment Securities
The Corporation's investment securities consist primarily of U.S. Government
agency securities. The investment portfolio serves several important
functions for the Corporation. Investments in securities are used as a
source of income, to complement loan demand and to satisfy pledging
requirements in the most profitable way possible. The investment portfolio
is a source of liquidity when loan demand exceeds funding availability, and
is a vehicle for adjusting balance sheet sensitivity to cushion against
adverse rate movements. Our investment policy attempts to provide adequate
liquidity by maintaining a portfolio with staggered maturities ranging from
one to five years.
The following table summarizes the contractual maturity of investment
securities as of December 31, 2004:
Securities Securities Held to
Amounts Maturing In: Available for Sale Maturity
(dollars in thousands)
One year or less $ 5,134 $ 8,580
After one through five years 26,801 60,434
After five through ten years 20,542 44,122
After ten years 173 2,910
Equity & mortgage-backed securities 4,202 0
Total investment securities $56,852 $116,046
The total investment portfolio increased to $172.9 million from $126.2
million at year-end 2004 compared with year-end 2003, an increase of $46.7
million, or 37 percent. This increase was due to our acquisition in early
2004 and to a decrease in loan demand. The average total investment
portfolio increased to $153.8 million in 2004 compared with $118.0 million
for 2003. The 2004 growth in securities held to maturity of $61 million was
primarily attributed to purchases of mainly U.S. Government agency securities.
We will continue to actively manage the size, components, and maturity
structure of the investment securities portfolio. Future investment
strategies will continue to be based on profit objectives, economic conditions,
interest rate risk objectives, and balance sheet liquidity demands.
Nonperforming Assets
Nonperforming assets are defined as nonaccrual loans, loans that are 90 days
past due and still accruing, and property acquired by foreclosure. The level
of nonperforming assets decreased $810,000 at year-end 2004 compared with
year-end 2003. This decrease primarily resulted from a reduction in
foreclosed real estate. Nonperforming assets were approximately $1.4
million, or 0.46 percent of total assets as of December 31, 2004, compared
with $2.2 million, or 0.90 percent of total assets at year-end 2003.
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds is deposits. The Corporation offers a variety of
deposit accounts having a wide range of interest rates and terms. We rely
primarily on competitive pricing policies and customer service to attract and
retain these deposits.
-37-
In 2004, average deposits increased 17.4 percent compared with 2003 from
$185.9 million to $218.4 million. This increase in deposits was primarily
due to our acquisition of Sylvester Banking Company in February 2004. The
majority of the increase in average deposits occurred in average savings and
NOW account deposits. Lower interest rates during 2004 resulted in a slight
change in the deposit mix. Some customers shifted money from certificates of
deposit to savings and NOW accounts due to lower rates paid on time
certificates of deposit. As of December 31, 2004, the Corporation had a
total of $27.3 million in certificates of deposit of $100,000 or more each.
This was a 8.3 percent increase over the $25.2 million total in 2003.
We have used borrowings from the Federal Home Loan Bank to support our
residential mortgage lending activities. During 2004, the Corporation repaid
short-term advances with the Federal Home Loan Bank of $10 million leaving
$5.0 million to be paid in January 2005 and $3.0 million to be paid in August
2005. Also, in 2004 the Corporation borrowed an additional $20.0 million in
long-term advances from the Federal Home Loan Bank. All three advances have
fixed rates for 5, 3, or 2 years with a maturity in 2014 with the lender
having an option to convert the advance to a variable rate after the fixed
rate period. Details on the Federal Home Bank advances are presented in Note
7 to the financial statements.
Liquidity
Liquidity is managed to assume that the Corporation can meet the cash flow
requirements of customers who may be either depositors wanting to withdraw
their funds or borrowers needing funds to meet their credit needs. Many
factors affect the ability to accomplish liquidity objectives successfully.
Those factors include the economic environment, our asset/liability mix and our
overall reputation and credit standing in the marketplace. In the ordinary
course of business, our cash flows are generated from deposits, interest and fee
income, from loan repayments and the maturity or sale of other earning assets.
The Consolidated Statement of Cash Flows details the Corporation's cash flows
from operating, investing, and financing activities. During 2004, operating
and financing activities generated cash flows of $15.5 million, while investing
activities used $13.1 million of this and increased the cash and due from banks
balances increased by $2.4 million. Cash produced from operations continues to
provide cash for the payment of dividends and common stock repurchases.
Liability liquidity represents our ability to renew or replace our short-term
borrowings and deposits as they mature or are withdrawn. The Corporation's
deposit mix includes a significant amount of core deposits. Core deposits
are defined as total deposits less public funds and time deposits of $100,000
or more. These funds are relatively stable because they are generally
accounts of individual customers who are concerned not only with rates paid,
but with the value of the services they receive, such as efficient operations
performed by helpful personnel. Total core deposits remained stable
representing 80.4 percent of total deposits on December 31, 2004, compared
with 80.9 percent in 2003.
Asset liquidity is provided through ordinary business activity, such as cash
which is received from interest and fee payments as well as from maturing
loans and investments. Additional sources include marketable securities and
short-term investments which can be easily converted to cash without
significant loss. The Corporation's investment securities maturing within
one year or less were $13.7 million on December 31, 2004, which represented 8
percent of the investment debt securities portfolio.
-38-
Also, the Corporation had $11 million of investment securities callable at
the option of the issuer and that are reasonably likely to be called during
2005. These maturing and callable investment securities are sources for
repayment of our short-term and long-term debt obligations.
We are not aware of any known trends, events, or uncertainties that will have
or that are reasonably likely to have a material effect on the Corporation's
liquidity or operations.
Contractual Obligations
The chart below shows the Corporation's contractual obligations and
commercial commitments, and its scheduled future cash payments under those
commitments as of December 31, 2004.
The majority of the Corporation's outstanding contractual obligations were
long-term debt. The remaining contractual obligations were comprised of
telephone operating leases and purchase obligations for data processing
services with our primary service bureau. We have no capital lease
obligations.
Payments Due by Period
------------------------------------------
Contractual Less
Obligations than 1 1-3 4-5 After 5
(Dollars in thousands) Total year years years Years
- ----------------------------- ------- ------ ----- ----- -------
Long-term debt $30,517 $174 $229 $114 $30,000
Operating leases 22 14 8 0 0
Total contractual obligations $30,539 $188 $237 $114 $30,000
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 necessarily represent future
cash requirements.
Financial instruments whose contract amounts
represent credit risk (dollars in thousands): 2004 2003
- --------------------------------------------- -------- --------
Commitments to extend credit $ 25,317 $ 17,499
Standby letters of credit $ 142 $ 52
The Corporation does not have any special purpose entities or off-balance
sheet financing arrangements.
CAPITAL RESOURCES AND DIVIDENDS
We continue to maintain a healthy level of capital adequacy as measured by
our average equity to average assets ratio of 13.04 percent in 2004 and 13.74
percent in 2003.
The Federal Reserve Board and the FDIC have issued rules regarding risk-based
capital requirements for U.S. banks and bank holding companies. Overall,
these guidelines define the components of capital, require higher levels of
capital for higher risk assets and lower levels of capital for lower risk
assets, and
-39-
include certain off-balance sheet items in the calculation of capital
requirements. The risk-based capital regulations require banks to maintain
an 8 percent total risk-based ratio, of which 4 percent must consist
primarily of tangible common shareholders' equity (Tier I capital) or its
equivalent. Also, the regulations require a financial institution to
maintain a 4 percent leverage ratio in tandem with the risk-based ratios. At
year-end 2004, we were well in excess of the minimum requirements under the
guidelines with a total risk-based capital ratio of 28.66 percent, a Tier I
risk-based capital ratio of 27.40 percent, and a leverage ratio of 12.88
percent.
The following table presents the risk-based capital and leverage ratios for
year-end 2004 and 2003 in comparison to the minimum regulatory guidelines:
Minimum
Regulatory
Risk Based Capital Ratios Dec. 31, 2004 Dec. 31, 2003 Guidelines
- ------------------------- ------------- ------------- ----------
Tier I capital 27.40% 25.55% 4.00%
Total risk-based capital 28.66% 26.80% 8.00%
Leverage 12.88% 13.11% 4.00%
FORWARD-LOOKING STATEMENTS
In addition to historical information, this 2004 Annual 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 other filings with the
Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of the Corporation. Any such statement
speaks only as of the date the statement was made. The Corporation
undertakes no obligation to update or revise any forward-looking statements.
Additional information with respect to factors that may cause results to
differ materially from those contemplated by such forward-looking statements
is included in the Corporation's current and subsequent filings with the
Securities and Exchange Commission.
-40-
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
The Corporation's primary market risk is exposure to interest rate movements.
We have no foreign currency exchange rate risk, commodity price risk, or any
other material market risk. The Corporation has no trading investment
portfolio, nor do we have any interest rate swaps or other derivative
instruments.
Our primary source of earnings, net interest income, can fluctuate with
significant interest rate movements. To lessen the impact of these
movements, we seek to maximize net interest income while remaining within
prudent ranges of risk by practicing sound interest rate sensitivity
management. We attempt to accomplish this objective by structuring the
balance sheet so that the differences in repricing opportunities between
assets and liabilities are minimized. Interest rate sensitivity refers to
the responsiveness of earning assets and interest-bearing liabilities to
changes in market interest rates. The Corporation's interest rate risk
management is carried out by the Asset/Liability Management Committee which
operates under policies and guidelines established by the Bank. The
principal objective of asset/liability management is to manage the levels of
interest-sensitive assets and liabilities to minimize net interest income
fluctuations in times of fluctuating market interest rates. To effectively
measure and manage interest rate risk, the Corporation uses computer
simulations that determine the impact on net interest income of numerous
interest rate scenarios, balance sheet trends and strategies. These
simulations cover the following financial instruments: short-term financial
instruments, investment securities, loans, deposits, and borrowings. These
simulations incorporate assumptions about balance sheet dynamics, such as
loan and deposit growth and pricing, changes in funding mix, and asset and
liability repricing and maturity characteristics. Simulations are run under
various interest rate scenarios to determine the impact on net income and
capital. From these computer simulations, interest rate risk is quantified
and appropriate strategies are developed and implemented. The Corporation
also maintains an investment portfolio 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 table below provides information about the Corporation's financial assets
and liabilities that are sensitive to changes in interest rates. For each
rate-sensitive asset and liability listed, the table presents principal
balances and weighted average interest rates by expected maturity or the
earliest possible repricing opportunity dates.
One of the indicators for our 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.
At year-end 2004, our sensitivity ratio, or one-year cumulative rate-
sensitive assets relative to cumulative rate-sensitive liabilities, was 126
percent compared with 91 percent for 2003. This change in the sensitivity
ratio was a result of the Corporation's management of its exposure to
interest rate risk. We are asset-sensitive at the one year gap position
because we have primarily purchased in 2004 five-year investment securities
with a year or less of call protection. These securities will be
repositioned in the gap analysis after their first call date if they are not
called. The effect of this reposition would show that the Corporation is
liability-sensitive at the one-year gap position.
-41-
All interest rates and yields do not adjust at the same velocity; therefore,
the sensitivity ratio is only a general indicator of the potential effects of
interest rate changes on net interest income. We monitor our asset and
liability mix in an effort to ensure that the effects of interest rate
movements in either direction are not significant over time.
Interest Rate Sensitivity December 31, 2004
----------------------------------------------------------------------------
Expected Maturity/Repricing Dates
-----------------------------------------------------------------
(Dollars in thousands)
2010 Fair
2005 2006 2007 2008 2009 & Beyond Total Value
-------- -------- -------- ------- ------- ------- -------- --------
Rate-sensitive Assets: *
Short-term Investments $ 5,967 $ $ $ $ $ $ 5,967 $ 5,967
Average interest rate 2.10% 2.10%
Securities available for sale 8,160 1,030 1,465 15,749 20,097 10,351 56,852 56,852
Average interest rate 5.42% 5.07% 5.13% 4.49% 4.06% 5.92% 4.76%
Securities held to maturity** 49,579 11,557 5,010 2,997 21,330 25,573 116,046 116,029
Average interest rate 4.23% 5.18% 4.33% 3.13% 4.21% 4.61% 4.38%
Fixed-rate loans 6,838 3,230 4,011 6,900 7,476 21,000 49,455 49,729
Average interest rate 6.97% 8.13% 8.05% 6.55% 6.55% 7.89% 7.40%
Variable-rate loans 41,277 976 1,896 37 6,248 26 50,460 49,627
Average interest rate 5.78% 5.82% 5.85% 4.37% 4.68% 7.00% 5.65%
Total Rate-sensitive Assets $111,821 $ 16,793 $ 12,382 $25,683 $55,151 $56,950 $278,780 $278,204
Average interest rate 4.94% 5.78% 5.86% 4.88% 4.53% 6.06% 5.17%
Rate-sensitive Liabilities:
Time deposits $ 74,663 $ 10,987 $ 3,759 $ 2,473 $ 1,362 $ $ 93,244 $ 95,192
Average interest rate 2.02% 3.00% 3.47% 3.23% 3.59% 2.25%
Other interest-
bearing deposits *** 5,926 27,261 27,261 8,099 8,099 16,199 92,845 92,845
Average interest rate 1.33% 0.76% 0.76% 0.69% 0.69% 0.60% 0.76%
Short-term borrowings 8,000 8,000 7,973
Average interest rate 2.35% 2.35%
Long-term borrowings 174 5,114 10,114 5,115 10,000 30,517 30,430
Average interest rate 5.21% 2.43% 3.54% 3.05% 3.85% 3.38%
Total Rate-sensitive
Liabilities $ 88,763 $ 43,362 $ 41,134 $15,687 $19,461 $16,199 $224,606 $226,440
Average interest rate 2.01% 1.52% 1.69% 1.86% 2.52% 0.60% 1.79%
GAP $ 23,058 $(26,569) $(28,752) $ 9,996 $35,690 $40,751 $ 54,174
Sensitivity Ratio 126% 97% 81% 88% 106% 124%
* All rates are tax-equivalent rates
** Repricing date is call date
*** Interest-bearing deposits with no maturity
Item 8. Financial Statements and Supplementary Data
The information required by this item is file herewith.
-42-
TJS Thigpen, Jones, Seaton & Co., P.C.
Certified Public Accountants
Business Consultants
1004 Hillcrest Parkway P.O. Box 400
Dublin, Georgia 31040-0400
Tel 478-272-2030 Fax 478-272-3318
E-mail tjs@tjscpa.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Directors and Stockholders of Southwest
Georgia Financial Corporation
We have audited the consolidated balance sheets of Southwest Georgia
Financial Corporation and Subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of income, comprehensive income, retained
earnings and cash flows for each of the years in the three year period ended
December 31, 2004. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Southwest Georgia Financial Corporation and Subsidiaries as of December
31, 2004 and 2003, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of
America.
/s/ Thigpen, Jones, Seaton & Co., P.C
Dublin, Georgia
February 24, 2005
-43-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
ASSETS
Cash and due from banks $ 13,366,631 $ 10,959,728
Interest-bearing deposits with banks 5,966,691 43,942
Federal funds sold 0 0
Investment securities available for sale,
at fair value 56,852,442 71,544,353
Securities to be held to maturity (estimated
fair value of $116,029,346 and $56,456,044) 116,045,657 54,695,369
Loans, less allowance for loan losses of
$2,506,837 and $2,337,811 97,407,892 94,777,405
Premises and equipment, net 6,830,392 5,655,415
Foreclosed assets, net 14,200 1,203,386
Intangible assets 3,205,882 2,037,526
Other assets 5,534,903 5,235,873
Total assets $305,224,690 $246,152,997
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 36,399,339 $ 27,904,580
NOW accounts 52,913,461 35,319,083
Money market 11,851,177 13,827,745
Savings 28,080,860 18,200,946
Certificates of deposit $100,000 and over 27,342,827 25,235,601
Other time accounts 65,900,438 62,387,796
Total deposits 222,488,102 182,875,751
Federal funds purchased 0 2,000,000
Other borrowed funds 8,000,000 10,000,000
Long-term debt 30,517,143 13,691,429
Other liabilities 4,775,688 4,597,711
Total liabilities 265,780,933 213,164,891
Stockholders' equity:
Common stock - par value $1; authorized 5,000,000
shares; issued 4,262,520 shares 4,262,520 3,302,750
Capital surplus 31,187,722 7,172,051
Retained earnings 12,627,466 29,554,946
Accumulated other comprehensive income 525,191 720,866
Treasury stock 983,912 shares for 2004 and
916,290 for 2003, at cost (9,159,142) (7,762,507)
Total stockholders' equity 39,443,757 32,988,106
Total liabilities and stockholders' equity $305,224,690 $246,152,997
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 2004, 2003, and 2002
2004 2003 2002
Interest income:
Interest and fees on loans $ 7,002,096 $ 7,309,455 $ 9,279,689
Interest and dividends on securities:
Taxable 5,837,714 4,991,575 4,657,118
Tax exempt 866,139 779,650 722,895
Interest on deposits in banks 80,646 43,285 56,306
Interest on other short-term investments 35,044 1,569 22,107
Total interest income 13,821,639 13,125,534 14,738,115
Interest expense:
Deposits 2,482,447 2,721,244 3,967,799
Other borrowings 918,697 666,119 461,426
Total interest expense 3,401,144 3,387,363 4,429,225
Net interest income 10,420,495 9,738,171 10,308,890
Provision for loan losses 92,344 517,104 534,000
Net interest income after provision
for loan losses 10,328,151 9,221,067 9,774,890
Noninterest income:
Service charges on deposit accounts 1,553,486 1,290,372 1,091,712
Income from trust services 309,741 261,570 215,803
Income from security sales 245,420 261,441 267,042
Income from insurance services 1,102,148 1,002,223 921,828
Income from mortgage banking services 3,611,755 3,446,658 3,021,047
Net gain (loss) on disposition of assets (279,749) (1,845,877) (213,503)
Net gain (loss) on sale of securities 2,914 0 121,270
Other income 208,268 128,403 170,485
Total noninterest income 6,753,983 4,544,790 5,595,684
Noninterest expense:
Salaries and employee benefits 6,667,567 5,749,217 6,044,833
Occupancy expense 735,174 562,725 553,192
Equipment expense 660,310 582,078 517,845
Data processing expense 765,448 541,188 532,018
Amortization of intangible assets 502,060 323,951 323,868
Other operating expenses 2,742,030 2,507,687 2,327,405
Total noninterest expenses 12,072,589 10,266,846 10,299,161
Income before income taxes 5,009,545 3,499,011 5,071,413
Provision for income taxes 1,144,327 1,018,851 1,469,312
Net income $ 3,865,218 $ 2,480,160 $ 3,602,101
Basic earnings per share:
Net income $ 1.19 $ 0.81 $ 1.15
Weighted average shares outstanding 3,258,124 3,072,242 3,143,471
Diluted earnings per share:
Net income $ 1.18 $ 0.80 $ 1.14
Weighted average shares outstanding 3,281,117 3,084,024 3,148,171
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 2004, 2003, and 2002
2004 2003 2002
Net income $ 3,865,218 $ 2,480,160 $ 3,602,101
Other comprehensive income, net of tax:
Unrealized gains on securities available
for sale:
Unrealized holding gains(losses)
arising during the period (297,064) (708,469) 1,556,565
Federal income tax expense(benefit) 101,389 240,602 (529,232)
Other comprehensive income (loss),
net of tax (195,675) (467,867) 1,027,333
Total comprehensive income $ 3,669,543 $ 2,012,293 $ 4,629,434
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
for the years ended December 31, 2004, 2003, and 2002
Accumulated
Other Total
Common Capital Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Income Stock Equity
Balance at Dec. 31, 2001 $3,000,000 $ 2,033,551 $31,466,690 $ 161,400 $(5,704,535) $30,957,106
Net Income - - 3,602,101 - - 3,602,101
Common stock acquired
through purchase program - - - - (999,085) (999,085)
Cash dividend declared
$.40 per share - - (1,265,444) - - (1,265,444)
Stock dividend declared 300,000 5,100,000 (5,400,000) - - -
Unrealized holding gain - - - 1,027,333 - 1,027,333
Balance at Dec. 31, 2002 3,300,000 7,133,551 28,403,347 1,188,733 (6,703,620) 33,322,011
Net Income - - 2,480,160 - - 2,480,160
Common stock acquired
through purchase program - - - - (1,058,887) (1,058,887)
Cash dividend declared
$.43 per share - - (1,328,561) - - (1,328,561)
Exercise of stock options 2,750 38,500 - - - 41,250
Unrealized holding gain - - - (467,867) - (467,867)
Balance at Dec. 31, 2003 3,302,750 7,172,051 29,554,946 720,866 (7,762,507) 32,988,106
Net Income - - 3,865,218 - - 3,865,218
Common stock issued
for acquisitions 240,000 5,280,000 - - - 5,520,000
Common stock acquired
through purchase program - - - - (1,396,635) (1,396,635)
Cash dividend declared
$.46 per share - - (1,499,194) - - (1,499,194)
Stock dividend declared 709,320 18,584,184 (19,293,504) - - -
Exercise of stock options 10,450 151,487 - - - 161,937
Unrealized holding gain - - - (195,675) - (195,675)
Balance at Dec. 31, 2004 $4,262,520 $31,187,722 $12,627,466 $ 525,191 $(9,159,142) $39,443,757
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2004, 2003, and 2002
2004 2003 2002
Cash flows from operating activities:
Net income $ 3,865,218 $ 2,480,160 $ 3,602,101
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 92,344 517,104 534,000
Depreciation 699,991 590,300 553,622
Net amortization and accretion of
investment securities 25,392 89,353 70,220
Amortization of intangibles 502,060 323,951 323,868
Net loss (gain) on sale and
disposal of assets 276,835 1,845,876 92,233
Changes in:
Other assets 6,795 107,505 (454,841)
Other liabilities 180,255 1,057,288 456,549
Net cash provided by operating activities 5,648,890 7,011,537 5,177,752
Investing activities:
Proceeds from maturities of securities
held to maturity 33,610,105 23,905,000 14,855,000
Proceeds from maturities of securities
available for sale 16,064,048 34,038,989 3,102,297
Proceeds from sale of securities
available for sale 5,157 242,000 483,270
Purchase of securities held to maturity (61,582,931) (13,442,500) (17,589,712)
Purchase of securities available for sale (1,631,201) (66,575,625) (16,064,308)
Net change in other short-term investments 0 2,000,000 (870,000)
Net change in loans 7,303,474 7,305,760 14,843,713
Purchase of premises and equipment (1,531,592) (1,115,629) (451,876)
Proceeds from sales of other assets 1,421,681 707,324 2,028,139
Net change in interest-bearing
deposits with banks (5,922,749) 3,952,543 (2,853,274)
Purchase of bank-owned life insurance 0 (1,806,673) 0
Payment for business acquisition (847,636) 0 0
Net cash (used) for investing activities (13,111,644) (10,788,811) (2,516,751)
Financing activities:
Net change in deposits (222,165) (7,047,599) (2,977,236)
Net change in federal funds purchased (2,000,000) 2,000,000 0
Net change in short-term borrowings (2,000,000) 7,600,000 (2,400,000)
Increase in long-term borrowings 16,825,714 2,650,177 7,649,741
Cash dividends declared (1,499,194) (1,328,561) (1,265,444)
Proceeds from the exercise of stock options 161,937 41,250 0
Payment for common stock (1,396,635) (1,058,887) (999,085)
Net cash provided for financing activities 9,869,657 2,856,380 7,976
Increase (decrease) in cash and due from bank 2,406,903 (920,894) 2,668,977
Cash and due from banks - beginning of year 10,959,728 11,880,622 9,211,645
Cash and due from banks - end of year $13,366,631 $10,959,728 $11,880,622
Cash paid during the year for:
Income taxes $ 1,380,000 $ 1,060,000 $ 1,476,671
Interest paid $ 3,206,264 $ 3,496,933 $ 4,685,032
NONCASH ITEMS:
Increase in foreclosed properties
and decrease in loans $ 237,345 $ 1,433,292 $ 254,447
Unrealized gain(loss) on securities AFS $ (195,675) $ (467,867) $ 1,027,333
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
2004 2003 2002
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 $ $
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
-50-
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. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of
the issuer, and (3) the intent and ability of the Corporation to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the trade date and are determined using the
specific identification method.
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 for assets purchased on or before
December 31, 2003. For assets acquired in 2004, the Corporation used the
straight-line method of depreciation. The following estimated useful lives
are used for financial statement purposes:
Land improvements 5 - 31 years
Building and improvements 10 - 40 years
Machinery and equipment 5 - 10 years
Computer equipment 3 - 5 years
Office furniture and fixtures 5 - 10 years
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.
-51-
Accrual of interest income is discontinued on loans when, in the opinion of
management, collection of such interest income becomes doubtful. Accrual of
interest on such loans is resumed when, in management's judgment, the
collection of interest and principal becomes probable.
Fees on loans and costs incurred in origination of most loans are recognized
at the time the loan is placed on the books. Because loan fees are not
significant, the results on operations are not materially different from the
results which would be obtained by accounting for loan fees and costs as
amortized over the term of the loan as an adjustment of the yield.
A loan is considered impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis
for commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collection of the principal is unlikely.
The allowance is an amount which management believes will be adequate to
absorb estimated losses on existing loans that may become uncollectible based
on evaluation of the 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.
-52-
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.
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
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Postretirement Benefits". This Statement
requires additional disclosures about the assets, obligations and cash flows
of defined benefit pension and postretirement plans, as well as the expense
recorded for such plans. As of December 31, 2004, the Corporation has
disclosed the required elements related to its defined benefit pension plan
in Note 8 to these consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This
Statement provides new rules on the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. Such financial instruments include mandatorily redeemable shares,
instruments that require the issuer to buy back some of its shares in
exchange for cash or other assets, or obligations that can be settled with
shares, the monetary value of which is fixed. Most of the guidance in SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 30, 2003. This Statement had no effect
on the Corporation's consolidated financial statements.
-53-
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.
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.
2. INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities as
shown in the consolidated balance sheets and their estimated fair values at
December 31 were as follows:
-54-
Securities Available For Sale:
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ---------- -------- ------------
December 31, 2004
Equity securities $ 3,336,065 $ 6,495 $ 0 $ 3,342,560
State and municipal securities 12,909,067 926,544 0 13,835,611
Agency securities 38,989,016 227,488 403,066 38,813,438
Mortgage backed securities 823,044 37,789 0 860,833
Total $ 56,057,192 $1,198,316 $403,066 $ 56,852,442
December 31, 2003
Equity securities $ 2,210,808 $ 13,787 $ 0 $ 2,224,595
State and municipal securities 12,906,261 1,016,191 0 13,922,452
Agency securities 54,000,738 574,678 577,251 53,998,165
Mortgage backed securities 1,333,905 65,236 0 1,399,141
Total $ 70,451,712 $1,669,892 $577,251 $ 71,544,353
Securities Held to Maturity:
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ---------- -------- ------------
December 31, 2004
U. S. Treasury and U.S.
Government Agency Securities $108,507,977 $ 490,165 $686,807 $108,311,335
State and Municipal Securities 7,537,680 200,520 20,189 7,718,011
Total $116,045,657 $ 690,685 $706,996 $116,029,346
December 31, 2003
U. S. Treasury and U.S.
Government Agency Securities $ 47,542,062 $1,463,768 $ 966 $ 49,004,864
State and Municipal Securities 7,153,307 298,077 204 7,451,180
Total $ 54,695,369 $1,761,845 $ 1,170 $ 56,456,044
-55-
At December 31, 2004 and 2003, securities with a carrying value of
$62,138,000 and $41,988,000, respectively were pledged as collateral for
public deposits and other purposes as required by law.
There were no investments in obligations of state and municipal subdivisions
which exceeded 10 percent of the Corporation's stockholders' equity at
December 31, 2004.
The amortized cost and estimated fair value of securities at December 31,
2004, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
Amortized Estimated
Available for Sale: Cost Fair Value
- ------------------------------- ------------ ------------
Amounts maturing in:
One year or less $ 5,015,963 $ 5,134,375
After one through five years 26,958,308 26,800,373
After five through ten years 19,753,812 20,541,396
After ten years 170,000 172,905
Total debt securities $ 51,898,083 $ 52,649,049
Mortgage-backed securities 823,044 860,833
Equity securities 3,336,065 3,342,560
Total AFS securities $ 56,057,192 $ 56,852,442
Amortized Estimated
Held to Maturity: Cost Fair Value
- ------------------------------- ------------ ------------
Amounts maturing in:
One year or less $ 8,579,712 $ 8,679,513
After one through five years 60,433,883 60,399,122
After five through ten years 44,121,749 44,021,845
After ten years 2,910,313 2,928,866
Total HTM securities $116,045,657 $116,029,346
For the years ended December 31, 2004, 2003, and 2002, proceeds from sales of
securities available for sale amounted to $5,157, $242,000, and $483,270,
respectively. Gross realized gains amounted to $2,914, $0, and $121,270
respectively.
-56-
Information pertaining to securities with gross unrealized losses at December
31, 2004, aggregated by investment category and length of time that
individual securities have been in continuous loss position, follows:
Less Than Twelve Months Over Twelve Months
------------------------ ----------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ------------ --------- -----------
Securities Available for Sale
Debt securities:
U.S. Government and
federal agency $ 282,754 $ 23,713,750 $ 120,312 $ 4,879,687
State and municipal securities 0 0 0 0
Mortgage-backed securities 0 0 0 0
Total debt securities 282,754 23,713,750 120,312 4,879,687
Equity securities 0 0 0 0
Total securities
available for sale $ 282,754 $ 23,713,750 $ 120,312 $ 4,879,687
Securities Held to Maturity
U.S. Government and
federal agency $ 686,807 $ 47,300,580 $ 0 $ 0
State and municipal securities 20,189 2,030,125 0 0
Total securities
held to maturity $ 706,996 $ 49,330,705 $ 0 $ 0
Management evaluates securities for other-than-temporary impairment at least
on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to (1) the length of time
and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Corporation to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.
At December 31, 2004, the debt securities with unrealized losses have
depreciated 1.4% from the Corporation's amortized cost basis. These
unrealized losses relate principally to current interest rates for similar
types of securities. In analyzing an issuers financial condition, management
considers whether the securities are issued by the federal government, its
agencies, or other governments, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuer's financial
condition. As management has the ability to hold debt securities until
maturity, or for the foreseeable future if classified as available-for-sale,
no declines are deemed to be other-than-temporary.
-57-
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the Corporation's loan portfolio at December 31, 2004,
2003, and 2002 was as follows:
2004 2003 2002
----------- ----------- ------------
Commercial, financial and
agricultural loans $11,188,066 $ 9,546,904 $ 9,272,312
Real estate:
Commercial mortgage loans 40,385,724 42,968,736 47,219,373
Residential loans 33,967,916 30,244,207 33,899,387
Agricultural loans 5,620,766 4,851,236 5,333,203
Other loans 115,963 98,343 40,314
Consumer loans 8,678,825 9,452,255 10,222,776
Loans Outstanding 99,957,260 97,161,681 105,987,365
Unearned discount (42,531) (46,465) (54,066)
Allowance for loan losses (2,506,837) (2,337,811) (1,899,738)
Net loans $97,407,892 $94,777,405 $104,033,561
The Corporation's only significant concentration of credit at December 31,
2004, occurs in real estate loans which totaled approximately $80 million.
However, this amount is not concentrated in any specific segment within the
market or geographic area.
At December 31, 2004 and 2003, impaired loans amounted to $209,449 and
$446,975, respectively. Included in the allowance for loan losses is $31,583
related to impaired loans at December 31, 2004, and $77,309 related to
impaired loans at December 31, 2003. The amounts in the allowance for loan
losses for impaired loans were primarily determined using the fair value of
the loans' collateral.
For the years ended December 31, 2004 and 2003, the average recorded
investment in impaired loans was $328,212 and $457,839 respectively.
Interest income was recognized for cash payments received on loans while they
were impaired of $9,268 for 2004 and $29,499 for 2003.
Loans placed on nonaccrual status amounted to $1,387,041 and $1,012,154 at
December 31, 2004 and 2003, respectively. Past due loans over ninety days
and still accruing at December 31, 2004 and 2003, were $4,256 and $0,
respectively.
Changes in the allowance for loan losses are as follows:
2004 2003 2002
----------- ----------- -----------
Balance, January 1 $ 2,337,811 $ 1,899,738 $ 1,883,171
Provision charged to operations 92,344 517,104 534,000
Loans charged off (280,509) (277,231) (597,783)
Recoveries 182,950 198,200 80,350
Purchased reserve 174,241 0 0
Balance, December 31 $ 2,506,837 $ 2,337,811 $ 1,899,738
-58-
4. BANK PREMISES AND EQUIPMENT
The amounts reported as bank premises and equipment are as follows:
2004 2003
----------- -----------
Land $ 1,177,059 $ 1,166,159
Building 7,149,383 5,835,696
Furniture and equipment 5,838,699 5,000,328
14,165,141 12,002,183
Less accumulated depreciation ( 7,334,749) ( 6,346,768)
Total $ 6,830,392 $ 5,655,415
Depreciation of premises and equipment was $699,991; $590,300 and $553,622 in
2004, 2003, and 2002, respectively.
The Corporation depreciates its long-lived assets on various methods over
their estimated productive lives, as more fully described in Note 1, summary
of significant accounting policies. During 2004, the Corporation changed to
straight line of depreciation for all furniture, fixtures, and equipment
acquired during and subsequent to 2004. The Corporation believes the
straight line method allows more consistent recovery over the estimated
useful life of the asset. The Corporation plans to continue to depreciate
furniture, fixtures, and equipment acquired prior to 2004 on the modified
accelerated cost recovery system (MACRS). The effect of this change was to
increase pre-tax income and net income for 2004 by $39,000 ($.01 per share)
and $26,000 (no effect per share), respectively.
5. DEPOSITS
At December 31, 2004, the scheduled maturities of certificates of deposit are
as follows:
$ Amount
------------
2005 $ 74,662,000
2006 10,987,000
2007 3,759,000
2008 3,373,000
2009 and thereafter 462,000
Total $ 93,243,000
6. SHORT-TERM BORROWINGS
Federal funds purchased generally mature within one to four days. On
December 31, 2004, the Corporation had no federal funds purchased. Other
borrowed funds consist of Federal Home Loan Bank advances of $8,000,000 with
-59-
interest at 2.30 percent as of December 31, 2004 and $10,000,000 million with
interest at 2.71 percent as of December 31, 2003.
Information concerning federal funds purchased and Federal Home Loan Bank
short-term advances are summarized as follows:
2004 2003 2002
----------- ----------- -----------
Average balance during the year $ 5,992,467 $ 6,621,027 $ 4,708,288
Average interest rate during the year 2.39% 3.10% 2.49%
Maximum month-end bal. during the year $10,000,000 $12,000,000 $ 5,865,000
7. LONG-TERM DEBT
Long-term debt consist of the following:
December 31,
2004 2003
----------- -----------
Advance from Federal Home Loan Bank with a 2.51%
fixed rate of interest maturing August 18, 2005.
(transferred to short-term borrowings) $ 0 $ 3,000,000
Advance from Federal Home Loan Bank with a 2.85%
fixed rate of interest maturing March 11, 2013.
(convertible to a variable rate at option of
Federal Home Loan Bank on March 11, 2008). 5,000,000 5,000,000
Advance from Federal Home Loan Bank with a 4.00%
fixed rate of interest maturing August 6, 2012,
(convertible to a variable rate at option of
Federal Home Loan Bank on August 6, 2007). 5,000,000 5,000,000
Advance from Federal Home Loan Bank with a 3.85%
fixed rate of interest maturing April 30, 2014,
(convertible to a variable rate at option of
Federal Home Loan Bank on April 30, 2009). 10,000,000 0
Advance from Federal Home Loan Bank with a 3.08%
fixed rate of interest maturing August 13, 2014,
(convertible to a variable rate at option of
Federal Home Loan Bank on August 13, 2007). 5,000,000 0
Advance from Federal Home Loan Bank with a 2.43%
fixed rate of interest maturing October 28, 2014,
(convertible to a variable rate at option of
Federal Home Loan Bank on October 30, 2006). 5,000,000 0
Advance from Federal Home Loan Bank with a 5.21%
fixed rate of interest due in annual installments
maturing December 17, 2008. 457,143 571,429
Note payable to MIA Company with an 8.00% fixed
rate of interest due in annual installments
maturing January 31, 2005. 60,000 120,000
Total long-term debt $30,517,143 $13,691,429
The advances from Federal Home Loan Bank are collateralized by the pledging
of investment securities.
The following are maturities of long-term debt for the next five years. At
December 31, 2004, there was no floating rate long-term debt.
-60-
Fixed Rate
Due in: $ Amount
- -------------------- -----------
2005 $ 174,286
2006 114,286
2007 114,286
2008 114,285
2009 0
Later Years 30,000,000
Total long-term debt $30,517,143
8. EMPLOYEE BENEFITS PLAN
Pension Plan
The Corporation has a noncontributory defined benefit pension plan which
covers most all employees who have attained the age of 21 years and completed
one year of continuous service. The Corporation is providing for the cost of
this plan as benefits are accrued based upon actuarial determinations
employing the aggregate funding method.
The table of actuarially computed benefit obligations and net assets and the
related changes of the Plan at December 31, 2004, 2003, and 2002 is presented
below.
2004 2003 2002
----------- ----------- -----------
Change in Benefit Obligation
- ---------------------------------
Benefit obligation at beginning
of year $ 7,796,750 $ 6,590,821 $ 6,316,759
Service cost 336,006 300,735 235,049
Interest cost 505,043 476,944 417,378
Acquisition 2,637,735 0 0
Actuarial (gain)loss 199,608 838,502 (91,016)
Benefits paid (421,388) (410,252) (287,349)
Benefit obligation at end of year 11,053,754 7,796,750 6,590,821
Change in Plan Assets
- ---------------------------------
Fair value of plan assets at
beginning of year $ 6,706,808 $ 6,038,280 $ 5,780,395
Actual return on plan assets 366,107 426,605 165,244
Acquisition 2,215,189 0 0
Employer contribution 366,766 652,175 379,990
Benefits paid (421,388) (410,252) (287,349)
Fair value of plan assets at end
of year 9,233,482 6,706,808 6,038,280
-61-
2004 2003 2002
------------ ------------ ------------
Funded Status
Prepaid (accrued) benefit cost $(1,820,272) $(1,089,942) $ (552,541)
Unrecognized net actuarial
(gain)/loss (325,607) 1,613,515 788,274
Unrecognized prior service cost 2,637,735 0 0
Prepaid pension cost recognized $ 491,856 $ 523,573 $ 235,733
Accumulated benefit obligation $ 9,908,839 $ 6,673,520 $ 5,803,483
At December 31, 2004, the plan assets included cash and cash equivalents,
U.S. Treasury bonds and notes, other government agency securities, and equity
securities. The pension plan for Sylvester Banking Company was merged with
the Corporation's plan as of December 31, 2004. The Corporation made
contributions of $117,673 in 2004 to the Sylvester's plan and $79,745 in
benefits were paid to participants prior to the merger of the plans.
Assumptions used to determine the benefit obligation as of December 31, 2004,
2003, and 2002, respectively were:
2004 2003
-------- --------
Weighted-Average Assumptions As
of December 31
- ----------------------------------------
Discount rate 6.50% 6.50%
Rate of compensation increase 5.00% 5.00%
Components of Net Periodic Benefit Cost 2004 2003 2002
- ---------------------------------------- -------- -------- --------
Service cost $336,006 $300,735 $235,049
Interest cost 505,043 476,944 417,378
Expected return on plan assets (538,713) (483,609) (419,663)
Amortization 96,147 70,265 0
Net periodic benefit cost $398,483 $364,335 $232,764
For the years ended December 31, 2004, 2003, and 2002, the assumptions used
to determine net periodic pension costs are as follows:
2004 2003 2002
----- ----- -----
Discount rate 6.50% 6.75% 7.25%
Expected return on plan assets 8.00% 8.00% 7.25%
Rate of compensation increase 5.00% 5.00% 5.00%
The expected rate of return represents the average rate of return to be
earned on plan assets over the period the benefits included in the benefit
obligation are to be paid. In determining the expected rate of return, the
Corporation considers long-term compound annualized returns of historical
market data as well as actual returns on the Corporation's plan assets, and
applies adjustments that reflect more recent capital market experience.
-62-
Planned Asset Allocation as of December 31 2004* 2003
- ------------------------------------------ ----- ----
Equity 32% 18%
Fixed income 64% 75%
Cash & cash equivalents 4% 7%
Total 100% 100%
The Corporation's pension plan investment objective is both security and long-
term stability, with moderate growth. The investment strategies and policies
employed provide for investments, other than "fixed-dollar" investments, to
prevent erosion by inflation. Since the funds are intended for retirement,
the investment time horizon is long-term by nature. Because of the long-term
focus, short-term volatility is acceptable in an effort to provide for higher
long-term returns. Sufficient funds are held in a liquid nature (money
market, short-term securities) to allow for the payment of plan benefits and
expenses, without subjecting the funds to loss upon liquidation. In an
effort to provide a higher return with lower risk, the fund assets are
allocated between stocks, fixed income securities, and cash equivalents. All
plan investments and transactions are in compliance with ERISA and any other
law applicable to employee benefit plans. The targeted investment portfolio
is allocated up to 30% in equities, 50% to 90% in fixed-income investments,
and up to 20% in cash equivalents investments.
All the Corporation's equity investments are in mutual funds with a
Morningstar rating of 3 or higher, have at least $300 million in investments,
and have been in existence 5 years or more. To reduce risk through efficient
diversification and to provide for better liquidity, the stock portion of the
portfolio is maintained with the use of mutual funds. No more than 10% of
the market value of the plan is invested in any one mutual fund. Mutual
funds investing in international stocks is allowed, but is limited to no more
than 5% of the market value of the plan.
Fixed income securities include issues of the U.S. Government and its
agencies, corporate bonds, certificates of deposit, and preferred stocks.
Any corporate bond or preferred stock purchased have a rating (by Standard &
Poor's or Moody's) of "A" or better. Investments in securities of a single
issuer (with the exception of the U.S. Government, U.S. Government Agencies,
and federal insured bank deposits) do not exceed 5% of the market value of
the plan. The average maturity of the fixed income portion of the portfolio
does not exceed 10 years.
-63-
Estimated Contributions*
- ------------------------
The employer expects to contribute $700,000 to this pension plan in 2005.
Estimated Future Benefit Payments*
- ----------------------------------
The following benefit payments, which reflect expected future service and
decrements as appropriate, are expected to be paid for fiscal years
beginning:
2005 $ 613,834
2006 648,873
2007 671,363
2008 693,518
2009 721,902
Years 2010 - 2014 $ 3,721,794
* Reflects merger with the Sylvester Banking Company Pension Plan on
December 31, 2004.
Employee Stock Ownership Plan
The Corporation has a nondiscriminatory Employee Stock Ownership Plan and
Trust to be administered by a trustee. The plan was established to purchase
and hold Southwest Georgia Financial Corporation stock for all eligible
employees. Contributions to the plan are made solely by the Corporation and
are at the discretion of the Board of Directors. The contributions were
$474,278 in 2004, $159,725 in 2003, and $390,605 in 2002.
Directors Deferred Compensation Plan
The Corporation has a voluntary deferred compensation plan for the Board of
Directors administered by an insurance company. The plan stipulates that if
a director participates in the Plan for four years, the Corporation will pay
the Director future monthly income for ten years beginning at normal
retirement age, and the Corporation will make specified monthly payments to
the Director's beneficiaries in the event of his or her death prior to the
completion of such payments. The plan is funded by actual life insurance
policies with the Corporation as the named beneficiary.
Deferred Compensation Agreement
The Corporation has entered into an employment agreement with an executive
officer of Empire as of January 1, 2002. Under this employee agreement the
executive officer shall be credited with Deferred Compensation for his
service and covenants in the amount of $200,000 on December 31, 2002 and
$200,000 on each anniversary date thereafter to 2006. The executive officer
has irrevocably elected to waive participation in the Pension and Employee
Stock Ownership Plans.
-64-
Directors and Executive Officers Stock Purchase Plan
The Corporation has adopted a stock purchase plan for the executive officers
and directors of Southwest Georgia Financial Corporation. The stock offering
is exempt under the Securities Act of 1933 Regulation D and additionally
exempt under Georgia law.
Under the plan, participants may elect to contribute up to $500 monthly of
salary or directors' fees and receive corporate common stock with an
aggregate value of 1.5 times their contribution. The expense incurred during
2004, 2003, and 2002 on the part of the Corporation totaled $58,550, $54,681,
and $52,283, respectively.
Stock Option Plan
Effective March 19, 1997, the Corporation established a Key Individual Stock
Option Plan ("Plan") which provides for the issuance of options to key
employees and directors of the Corporation. In April 1997, the Plan was
approved by the Corporation's shareholders, and it will be effective for ten
years. A maximum of 190,080 shares of common stock have been authorized for
issuance with respect to options granted under the Plan. The Plan provides
for the grant of incentive stock options and nonqualified stock options to
key employees of the Corporation. The Plan is administered by the Personnel
Committee of the Board of Directors.
In 2004, 13,900 options were granted to the Corporation's key employees and
directors. In 2003 and 2002, the Corporation granted 0 and 5,280 stock
options, respectively. Under the Plan, the exercise price of each option
equals the market price of the Corporation's stock on the grant date for a
term of ten years. All of these options are fully vested. The fair value of
each option grant is estimated on the grant date using an option-pricing
model using weighted-average assumptions.
The following table sets forth the number of options granted, the average
fair value of options granted, and the weighted-average assumptions used to
determine the fair value of the options granted.
2004 2003 2002
-------- -------- --------
Number of options granted 13,900 0 5,280
Average fair value of options granted $ 3.14 $ 0 $ 1.97
Number of option shares exercisable 138,640 135,960 145,860
Average price of options exercisable $ 17.76 $ 17.20 $ 17.12
Weighted-average assumptions:
Dividend yield 2.2% 0 2.5%
Risk-free interest rate 1.3% 0 1.7%
Volatility rate 21.2% 0 24.0%
Expected life 5 years 0 5 years
-65-
A summary of the status of the Corporation's Plan as of December 31, 2004,
2003 and 2002, and the changes during the year is presented below:
No. of Shares Average Price
------------- -------------
Outstanding at Dec. 31, 2001 141,240 $ 17.30
Granted 5,280 12.50
Expired (660) 19.32
Outstanding at Dec. 31, 2002 145,860 17.12
Granted 0 0.00
Expired (6,600) 17.79
Exercised (3,300) 12.50
Outstanding at Dec. 31, 2003 135,960 17.20
Granted 13,900 20.56
Expired 0 0
Exercised (11,220) 14.43
Outstanding at Dec. 31, 2004 138,640 $ 17.76
The following table summarizes information about fixed stock options
outstanding and exercisable at December 31, 2004.
Outstanding Options Exercisable Options
----------------------------------- ----------------------
Weighted-
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price Range At 12/31/04 Life Price At 12/31/04 Price
- ----------- ----------- --------- -------- ----------- -------
$11 to $12 9,900 6.4 Years $ 11.74 9,900 $ 11.74
$12 to $13 7,260 5.8 Years 12.19 7,260 12.19
$13 to $14 17,160 5.4 Years 13.09 17,160 13.09
$19 to $20 97,020 4.0 Years 19.33 97,020 19.33
$21 to $23 7,300 9.7 Years 21.45 7,300 21.45
------- -------
$11 to $23 138,640 $ 17.76 138,640 $ 17.76
-66-
Had compensation cost for the Corporation's stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the method prescribed by SFAS No. 123, the Corporation's net
income and earnings per share would have been adjusted to the pro forma
amounts indicated below:
Years Ended December 31,
2004 2003 2002
------- ------- -------
(In thousands, except per share data)
Net income, as reported $ 3,865 $ 2,480 $ 3,602
Additional (expense) income had the
Corporation adopted SFAS No. 123 (5) 27 (8)
Related tax (benefit) expense (2) 11 (3)
------- ------- -------
Pro forma net income $ 3,862 $ 2,496 $ 3,597
======= ======= =======
Basic earnings per share - As reported $ 1.19 $ .81 $ 1.14
- Pro forma 1.18 .81 1.14
Diluted earnings per share - As reported 1.18 .80 1.14
- Pro forma 1.18 .80 1.14
The pro forma disclosures include the effects of all awards granted on or
after January 1, 1995.
Dividend Reinvestment and Share Purchase Plan
In 1997, the Corporation's Board of Directors approved a dividend
reinvestment and share purchase plan. Also, the Board amended this plan on
September 16, 1998. The purpose of the plan is to provide shareholders of
record of the Corporation's common stock, who elect to participate in the
Plan, with a simple and convenient method of investing cash dividends and
voluntary cash contributions in shares of the common stock without payment of
any brokerage commissions or other charges. Eligible participants may
purchase common stock through automatic reinvestment of common stock
dividends on all or partial shares and make additional voluntary cash
payments of not less than $5 nor more than $5,000 per month. The
participant's price of common stock purchased with dividends or voluntary
cash payments will be the average price of all shares purchased in the open
market, or if issued from unissued shares or treasury stock the price will be
the average of the high and low sales prices of the stock on the American
Stock Exchange on the dividend payable date. During the years ended December
31, 2004, 2003, and 2002, 10,079; 10,669; and 11,016 shares were issued
through the plan at an average of $24.05, $20.46, and $18.05 per share,
respectively. These numbers of shares and average price per share are not
adjusted by stock dividends.
-67-
9. INCOME TAXES
Components of income tax expense for 2004, 2003, and 2002 are as follows:
2004 2003 2002
---------- ---------- ----------
Current payable $1,054,812 $1,077,487 $1,406,412
Deferred taxes (benefit) 89,515 (58,636) 62,900
---------- ---------- ----------
Total income taxes $1,144,327 $1,018,851 $1,469,312
The reasons for the difference between the federal income taxes in the
consolidated statements of income and the amount computed by the applying the
combine statutory federal and state income tax rate to income taxes are as
follows:
2004 2003 2002
----------- ----------- -----------
Taxes at statutory income tax rate $ 1,703,245 $ 1,399,604 $ 2,028,565
Reductions in taxes resulting from
exempt income ( 266,191) ( 277,821) ( 264,193)
Other timing differences ( 292,727) ( 102,932) ( 295,060)
Total income taxes $ 1,144,327 $ 1,018,851 $ 1,469,312
The sources of timing differences for tax reporting purposes and the related
deferred taxes recognized in 2004, 2003, and 2002 are summarized as follows:
2004 2003 2002
--------- --------- ---------
Accretion of discount (net of maturities) $ 25,200 $ 34,700 $ 32,800
Nonqualified retirement plan
contribution / payments ( 8,800) (151,000) ( 1,700)
Gain on disposition of discounted bonds ( 61,900) ( 16,100) ( 12,500)
Book and tax depreciation difference 135,015 73,764 44,300
Total deferred taxes $ 89,515 $( 58,636) $ 62,900
December 31,
2004 2003
Deferred tax liabilities:
Accretion on securities $ 58,800 $ 95,500
Depreciation on fixed assets 207,479 72,464
Unrealized gain on securities available for sale 270,063 371,775
Total deferred tax liabilities 536,342 539,739
Deferred tax assets:
Deferred compensation 235,400 226,600
Total deferred tax assets 235,400 226,600
Net deferred tax liabilities $ 300,942 $ 313,139
-68-
10. RELATED PARTY TRANSACTIONS
The Employee Stock Ownership Plan and Trust of Southwest Georgia Financial
Corporation presently holds 389,594 shares of the Corporation's stock of
which 1,042 shares have been pledged. In the normal course of business, the
Corporation's banking subsidiary has made loans at prevailing interest rates
and terms to directors and executive officers of the Corporation and its
subsidiary, and to their affiliates. The aggregate indebtedness to the Bank
of these related parties approximated $3,221,000 and $2,022,000 at
December 31, 2004 and 2003, respectively. During 2004, approximately
$3,434,000 of such loans was made, and repayments totaled approximately
$2,204,000. None of these above mentioned loans were restructured, nor were
any related party loans charged off during 2004. Also, during 2004 and 2003,
directors and executive officers had approximately $1,944,000 and $1,226,000,
respectively, in deposits with the Bank.
11. COMMITMENTS, CONTINGENT LIABILITIES, AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In the normal course of business, various claims and lawsuits may arise
against the Corporation. Management, after reviewing with counsel all
actions and proceedings, considers that the aggregate liability or loss, if
any, resulting there from will not be material.
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own 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 Consolidated Balance Sheets. The contract or
notional amounts of the instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments.
Commitments to extend credit are contractual obligations to lend to a
customer as long as all established contractual conditions are satisfied.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee by a customer.
Standby letters of credit and financial guarantees are conditional
commitments issued by the Corporation to guarantee the performance of a
customer to a third party. Standby letters of credit and financial
guarantees are generally terminated through the performance of a specified
condition or through the lapse of time.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to commitments to extend credit and standby letters of credit
is represented by the contractual or notional amounts of these instruments.
As these off-balance sheet financial instruments have essentially the same
credit risk involved in extending loans, the Corporation generally uses the
same credit and collateral policies in making these commitments and
conditional obligations as it does for on-balance sheet instruments. 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.
-69-
The contractual or notional amounts of financial instruments having credit
risk in excess of that reported in the Consolidated Balance Sheets are as
follows:
Dec. 31, 2004 Dec. 31, 2003
------------- -------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 25,316,944 $ 17,498,844
Standby letters of credit and financial guarantees $ 142,500 $ 52,500
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following information and tables present the carrying amounts and fair
values of the Corporation's financial instruments at December 31, 2004 and
2003. Where quoted prices are not available, fair values are based on
estimates using discounted cash flows and other valuation techniques. Those
techniques can be significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Corporation.
Cash and Short-Term Investments
For those short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities
For U. S. Government and U. S. Government Agency securities, fair values are
based on market prices or dealer quotes. For other investment securities,
fair value equals quoted market price if available. If a quoted market price
is not available, fair value is estimated using quoted market prices for
similar securities as the basis for a pricing matrix.
Loans
For all homogenous categories of loans, the fair value is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposits
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at December 31, 2004. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of
similar remaining maturities.
-70-
Short-Term Borrowings and Securities Sold Under Repurchase Agreements
For those short-term borrowings, the carrying amount is a reasonable estimate
of fair value. The fair value of securities sold under repurchase agreements
is estimated by discounting the future cash flow using the rates currently
offered for securities sold under repurchase agreements of similar remaining
maturities.
Long-Term Debt
Rates currently available to the Corporation for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements, and the present credit worthiness of the counter parties.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of guarantees and letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counter parties.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. Those
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a
particular instrument. Because no market exists for a significant portion of
the financial instruments, fair value estimates are based on many judgments.
These estimates are subjective in nature and involve matters of judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
-71-
The carrying amount and estimated fair values of the Corporation's financial
instruments are as follows:
December 31, 2004 December 31, 2003
-------------------- --------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Dollars in thousands) (Dollars in thousands)
Financial assets:
Cash $ 13,367 $ 13,367 $ 10,960 $ 10,960
Securities available for sale 56,852 56,852 71,544 71,544
Securities held to maturity 116,046 116,029 54,695 56,456
Short-term investments 5,967 5,967 44 44
Loans 99,915 99,356 97,115 98,530
Less: allowance for loan losses 2,507 2,507 2,338 2,338
Financial liabilities:
Deposits 222,488 224,436 182,876 183,841
Short-term borrowings 8,000 7,973 12,000 12,036
Long-term debt 30,517 30,370 13,691 13,705
Unrecognized financial
instruments:
Commitments to extend credit 25,317 25,317 17,499 17,499
Standby letters of credit 142 142 52 52
13. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expense in excess of one percent of gross
revenue for the respective periods are as follows:
Years Ended December 31
2004 2003 2002
-------- -------- --------
Advertising & promotion $214,547 $195,316 $226,747
Foreclosed assets expenses, net $138,979 $409,346 $405,919
14. STOCKHOLDER'S EQUITY / REGULATORY MATTERS
Dividends paid by the Bank subsidiary are the primary source of funds
available to the parent company for payment of dividends to its shareholders
and other needs. Banking regulations limit the amount of dividends that may
be paid without prior approval of the Bank's regulatory agency. At December
31, 2004, approximately $1,933,000 of the Bank's net assets were available
for payment of dividends without prior approval from the regulatory
authorities.
The Federal Reserve Board requires that banks maintain reserves based on
their average deposits in the form of vault cash and average deposit balances
at the Federal Reserve Banks. For the year ended December 31, 2004, the
Bank's reserve requirements averaged approximately $3,611,000.
-72-
Banking regulatory agencies have approved guidelines to implement a risk-
based capital framework that makes capital requirements more sensitive to the
risk profiles of individual banking companies. These guidelines define
capital as either core (Tier I) capital or supplementary (Tier II) capital.
Tier I capital consists primarily of tangible common stockholders' equity
while Tier II capital is comprised of certain debt instruments and a portion
of the reserve for loan losses. Risk-based capital regulations required
banks to maintain an eight percent total risk-based capital ratio of which
four percent must consist primarily of tangible common stockholders' equity
(Tier I capital). The Corporation's ratios under these rules at December 31,
2004 and 2003 are set forth in the following table. The Corporation's
leverage ratio at December 31, 2004 was 12.88 percent.
As a result of regulatory limitations at December 31, 2004, approximately
$34,959,000 of the parent company's investment in net assets of the
subsidiary bank of $36,892,000, as shown in the accompanying condensed
balance sheets, was restricted from transfer by the subsidiary bank to the
parent company in the form of cash dividends.
On September 22, 2004, the Corporation declared a 20 percent stock dividend
payable to shareholders of record on October 7, 2004. Also, on September 25,
2002, the Corporation declared a 10 percent stock dividend payable to
shareholders of record on October 7, 2002. Share and per share data for all
periods presented have been retroactively restated to reflect the additional
shares outstanding resulting from the stock dividend.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ----- ----------- ------
As of December 31, 2004:
Total capital (to risk-
weighted assets) $38,541,318 28.66% $10,759,120 >= 8.00% $13,448,900 >= 10.00%
Tier I capital (to risk-
weighted assets) $36,850,006 27.40% $ 5,379,560 >= 4.00% $ 8,069,340 >= 6.00%
Tier I capital (to
average assets) $36,850,006 12.88% $ 8,580,410 >= 3.00% $14,300,683 >= 5.00%
As of December 31, 2003:
Total capital (to risk-
weighted assets) $33,164,036 26.80% $ 9,900,240 >= 8.00% $12,375,300 >= 10.00%
Tier I capital (to risk-
weighted assets) $31,617,124 25.55% $ 4,950,120 >= 4.00% $ 7,425,180 >= 6.00%
Tier I capital (to
average assets) $31,617,124 13.11% $ 7,236,332 >= 3.00% $12,060,553 >= 5.00%
-73-
15. PARENT COMPANY FINANCIAL DATA
Southwest Georgia Financial Corporation's condensed balance sheets as of
December 31, 2004 and 2003, and its related condensed statements of
operations and cash flows for the years ended are as follows:
Condensed Balance Sheets
as of December 31, 2004 and 2003
(Dollars in thousands)
2004 2003
-------- --------
ASSETS
Cash $ 1,863 $ 1,354
Investment in consolidated wholly-owned bank
subsidiary, at equity 36,892 30,727
Investment securities available for sale 19 22
Loans 25 385
Other assets 926 766
-------- --------
Total assets $ 39,725 $ 33,254
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 426 $ 330
Other liabilities (145) (64)
-------- --------
Total liabilities 281 266
-------- --------
Stockholders' equity:
Common stock, $1 par value; authorized 5,000,000
Shares; issued 4,262,520 shares 4,263 3,303
Capital surplus 31,188 7,172
Retained earnings 13,152 30,276
Treasury stock, 983,912 for 2004 and 916,290
shares for 2003 (9,159) (7,763)
-------- --------
Total stockholders' equity 39,444 32,988
-------- --------
Total liabilities and stockholders' equity $ 39,725 $ 33,254
======== ========
-74-
15. PARENT COMPANY FINANCIAL DATA (continued)
Condensed Statements Of Income and Expense
for the years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
------- ------- -------
Income:
Dividend received from bank subsidiary $ 3,000 $ 2,000 $ 2,000
Interest on loan 22 14 34
Gain on sale of equity securities 0 0 121
Other 26 51 62
------- ------- -------
Total income 3,048 2,065 2,217
------- ------- -------
Expenses:
Other 168 193 103
------- ------- -------
Income before income taxes and equity in
undistributed income of bank subsidiary 2,880 1,872 2,114
Income tax expense - allocated from
consolidated return (146) (118) (27)
------- ------- -------
Income before equity in undistributed
income of subsidiary 3,026 1,990 2,141
Equity in undistributed income of subsidiary 839 490 1,461
------- ------- -------
Net income 3,865 2,480 3,602
Retained earnings - beginning of year 30,276 29,592 31,628
Stock dividend declared (19,294) 0 (5,400)
Net unrealized gains (losses) on available
for sale securities (196) (458) 1,027
Cash dividend declared (1,499) (1,338) (1,265)
------- ------- -------
Retained earnings - end of year $13,152 $30,276 $29,592
======= ======= =======
-75-
15. PARENT COMPANY FINANCIAL DATA (continued)
Condensed Statements Of Cash Flows
for the years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
------- ------- -------
Operating activities:
Net income $ 3,865 $ 2,480 $ 3,602
Adjustments to reconcile net income to net
Cash provided by operating activities:
Equity in undistributed earnings of
subsidiary (839) (490) (1,461)
Gain on sale of equity securities 0 0 (121)
Changes in:
Other assets (159) (43) (34)
Other liabilities 16 (37) 46
------- ------- -------
Net cash provided of operating activities 2,883 1,910 2,032
------- ------- -------
Investing activities:
Sale of available for sale securities 0 0 483
Net change in loans 360 (165) 497
------- ------- -------
Net cash provided (used) for investing
activities 360 (165) 980
------- ------- -------
Financing activities:
Dividend declared to stockholders (1,499) (1,338) (1,265)
Purchase of treasury stock (1,397) (1,059) (999)
Proceeds from issuance of common stock 162 41 0
------- ------- -------
Net cash provided (used) for financing
Activities (2,734) (2,356) (2,264)
------- ------- -------
Increase (decrease) in cash 509 (611) 748
Cash - beginning of year 1,354 1,965 1,217
------- ------- -------
Cash - end of year $ 1,863 $ 1,354 $ 1,965
======= ======= =======
-76-
16. BUSINESS CONSOLIDATION
Effective February 27, 2004, the Corporation completed the acquisition by
merger of 100% of the outstanding shares of First Bank Holding Company and
its sole subsidiary, Sylvester Banking Company. The approximate value of the
transaction was $9.7 million. The Corporation exchanged $4.2 million in cash
and 240,000 shares of its common stock for all of the common shares of First
Bank Holding Company and Sylvester Banking Company. Sylvester Banking
Company, with about $48 million in assets, has a full service bank operation
that holds approximately 25% of the deposits in Worth County, Georgia. This
acquisition transaction was accounted for as a purchase and did not
materially impact the Corporation's earnings in 2004. The following table
shows selected pro forma information as if the acquisition had occurred
during the last three years. The pro forma information does not include any
operating efficiencies that could be realized in a branch acquisition.
Pro forma information for years ended:
2004 2003 2002
-------- -------- --------
(Dollars in Thousands)
Net interest income $ 10,652 $ 11,236 $ 11,956
Net Income $ 3,928 $ 2,606 $ 3,830
Basic earnings per share $ 1.18 $ .77 $ 1.11
Diluted earnings per share $ 1.17 $ .77 $ 1.11
-77-
17. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
outstanding during the year.
Year Ended December 31, 2004
----------------------------------
Weighted Per
Average Share
Income Shares Amount
----------- --------- ------
Basic earnings per share:
Net income $ 3,865,218 3,258,124 $ 1.19
Diluted earnings per share:
Net income $ 3,865,218 3,281,117 $ 1.18
Year Ended December 31, 2003
----------------------------------
Weighted Per
Average Share
Income Shares Amount
----------- --------- ------
Basic earnings per share:
Net income $ 2,480,160 3,072,242 $ 0.81
Diluted earnings per share:
Net income $ 2,480,160 3,084,024 $ 0.80
Year Ended December 31, 2002
----------------------------------
Weighted Per
Average Share
Income Shares Amount
----------- --------- ------
Basic earnings per share:
Net income $ 3,602,101 3,143,471 $ 1.15
Diluted earnings per share:
Net income $ 3,602,101 3,148,171 $ 1.14
-78-
18. QUARTERLY DATA
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY DATA
(UNAUDITED)
(Dollars in Thousands)
For the Year 2004
------------------------------------
Fourth Third Second First
------ ------ ------ ------
Interest and dividend income $3,558 $3,520 $3,512 $3,231
Interest expense 970 868 805 757
Net interest income 2,588 2,652 2,707 2,474
Provision for loan losses 18 58 10 7
Net interest income after 2,570 2,594 2,697 2,467
provision for loan losses
Noninterest income 1,798 1,438 1,741 1,778
Noninterest expenses 3,087 2,938 2,989 3,059
Income before income taxes 1,281 1,094 1,449 1,186
Provision(benefit) for income 375 275 387 108
taxes
Net income $ 906 $ 819 $1,062 $1,078
Earnings per share of common
stock:
Basic $ .28 $ .25 $ .32 $ .34
Diluted $ .27 $ .25 $ .32 $ .34
For the Year 2003
------------------------------------
Fourth Third Second First
------ ------ ------ ------
Interest and dividend income $3,200 $3,202 $3,380 $3,343
Interest expense 750 800 896 942
Net interest income 2,450 2,402 2,484 2,401
Provision for loan losses 67 150 150 150
Net interest income after 2,383 2,252 2,334 2,251
provision for loan losses
Noninterest income 1,632 1,669 (357) 1,601
Noninterest expenses 2,677 2,438 2,598 2,553
Income before income taxes 1,338 1,483 (621) 1,299
Provision(benefit) for income 319 531 (251) 419
taxes
Net income $1,019 $ 952 $ (370) $ 880
Earnings per share of common
stock:
Basic $ .33 $ .31 $ (.12) $ .29
Diluted $ .33 $ .31 $ (.12) $ .28
-79-
19. SEGMENT REPORTING
The Corporation operations are divided into five reportable business
segments: The Retail and Commercial Banking Services, Commercial Mortgage
Banking Services, Insurance Services, Trust and Retail Brokerage Services,
and Financial Management Services. These operating segments have been
identified primarily base on the Corporation's organizational structure.
The Retail and Commercial Banking Services segment serves consumer and
commercial customers by offering a variety of loan and deposit products, and
other traditional banking services.
The Commercial Mortgage Banking Services segment originates and services
commercial mortgage loans on properties that are located throughout the
southeastern United States. This segment does not directly fund any
mortgages and acts primarily as a servicer and broker for participating
mortgage lenders.
The Insurance Services segment offers clients a full spectrum of commercial
and personal lines insurance products including life, health, and property
and casualty insurance.
The Trust and Retail Brokerage Services segment provides personal trust
administration, estate settlement, investment management, employee retirement
benefit services, and the Individual Retirement Account (IRA) administration.
Also, this segment offers full service retail brokerage which includes the
sale of retail investment products including stocks, bonds, mutual funds, and
annuities.
The Financial Management Services segment is responsible for the management
of the investment securities portfolio. It also is responsible for managing
financial risks, including liquidity and interest rate risk.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Corporation evaluates
performance based on profit or loss from operations after income taxes not
including nonrecurring gains or losses.
The Corporation's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment appeals to different markets and, accordingly, requires different
technology and marketing strategies.
The Corporation allocates capital and funds used or funds provided for each
reportable business segment. Also, each segment is credited or charged for
the cost of funds provided or used. These credits and charges are reflected
as net intersegment interest income (expense) in the table below. The
Corporation does allocate income taxes to the segments. Other revenue
represents non-interest income, exclusive of the net gain (loss) on
disposition of assets and expenses associated with administrative activities
which are not allocated to the segments. Those expenses include audit,
compliance, investor relations, marketing, personnel, and other executive or
parent company expenditures.
-80-
19. SEGMENT REPORTING (continued)
The Corporation does not have operating segments other than those reported.
Parent Company and the Administrative Offices financial information is
included in the Other category, and is deemed to represent an overhead
function rather than an operating segment. The Administrative Offices
include audit, marketing, personnel, and the executive office.
The Corporation does not have a single external customer from which it
derives 10 percent or more of its revenues and operates in one geographical
area.
This is managements first year to have reportable business segments.
Information about reportable business segments, and reconciliation of such
information to the consolidated financial statements for the year ended
December 31, 2004, are as follows:
-81-
Trust and
Retail and Commercial Retail Inter-
Commercial Mortgage Insurance Brokerage Financial segment
Banking Banking Services Services Management Elimination Other Totals
---------- ---------- --------- --------- ---------- ----------- ----- --------
(Dollars in Thousands)
Net Interest Income (expense)
external customers $ 4,762 (301) 5,911 48 $ 10,420
Net intersegment interest
income (expense) 4,346 (66) (37) 806 (5,049)
Net Interest Income 9,108 (66) (37) 505 862 48 10,420
Provision for Loan Losses 92 92
Noninterest Income (expense)
external customers 1,642 3,612 1,102 555 77 (234) 6,754
Intersegment noninterest
income (expense) 45 (30) (15) 39 (39)
Total Noninterest Income 1,687 3,582 1,087 594 77 (39) (234) 6,754
Noninterest Expenses:
Depreciation 475 42 38 30 71 44 700
Amortization of intangibles 155 278 57 37 (25) 502
Noninterest Income (expense)
external customers 5,751 1,666 900 575 588 1,391 10,871
Total Noninterest Expenses 6,381 1,986 995 642 659 (25) 1,435 12,073
Pre-tax Income 4,322 1,530 55 457 280 (14) (1,621) 5,009
Provision for Income Taxes 1,069 581 15 112 120 (4) (749) 1,144
Net Income $ 3,253 949 40 345 160 (10) (872) $ 3,865
Assets $283,114 5,759 1,159 22,634 186,787 (194,693) 465 $305,225
Expenditures for Fixed Assets $ 1,391 49 33 26 33 $ 1,532
Amounts included in the "Other" column are as follows:
Other
---------
Net interest Income:
Parent Company $ 48
Noninterest Income:
Administrative office expenses related to
loss on disposition of assets (234)
Noninterest Expenses:
Parent Company corporate expenses 168
Administrative office expenses not allocated to segments 1,267
Provison for Income taxes:
Parent Company income taxes (benefit) (146)
Administrative office income taxes not allocated to segments (603)
Net Income: $ ( 872)
Segment assets:
Parent Company assets, after intercomany elimination $ 465
-82-
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
During the past two years, the Corporation did not change accountants nor
have any disagreements with its accountants on any matters of accounting
practices or principles or financial statement disclosure.
Item 9A. 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 December 31, 2004. 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.
Item 9B. Other Information
None.
-83-
PART III
Item 10. Directors and Executive Officers of the Corporation
The information contained under the heading "Information About Nominees For
Director" and "Compliance with Section 16(a) of the Exchange Act" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Corporation's annual meeting of shareholders to be held on
May 24, 2005, to be filed with the Commission, is incorporated herein by
reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Corporation's annual meeting of shareholders to be held on
May 24, 2005, to be filed with the Commission, is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Stock Related Matters
The information contained under the heading "Voting Securities and Principal
Holders" and "Equity Compensation Plan Information" in the definitive Proxy
Statement to be used in connection with the solicitation of proxies for the
Corporation's annual meeting of shareholders to be held on May 24, 2005, to
be filed with the Commission, is incorporated herein by reference. For
purposes of determining the aggregate market value of the Corporation's
voting stock held by nonaffiliates, shares held by all directors and
executive officers of the Corporation have been excluded. The exclusion of
such shares is not intended to, and shall not, constitute a determination as
to which persons or entities may be "affiliates" of the Corporation as
defined by the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Relationships and
Related Transactions" in the definitive Proxy Statement to be used in
connection with the solicitation of proxies for the Corporation's annual
meeting of shareholders to be held on May 24, 2005, to be filed with the
Commission, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information contained under the heading "Information Concerning the
Company's Accountants" in the definitive Proxy Statement to be used in
connection with the solicitation of proxies for the Corporations's annual
meeting of shareholders to be held on May 24, 2005, to be filed with the
Commission, is incorporated herein by reference.
-84-
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1). Financial Statements
The following consolidated financial statements and supplementary information
for the fiscal years ended December 31, 2004, 2003, and 2002 are included in
Part II, Item 8 herein:
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets - December 31, 2004 and 2003
(iii) Consolidated Statements of Income - Years ended December 31, 2004,
2003, and 2002
(iv) Consolidated Statements of Shareholders' Equity - Years ended December
31, 2004, 2003, and 2002
(v) Consolidated Statements of Cash Flows - Years ended December 31, 2004,
2003, and 2002
(vi) Notes to Consolidated Financial Statements - December 31, 2004
(a)(2). Financial Statement Schedules
All applicable financial statement schedules required have been included in
the Notes to the Consolidated Financial Statements.
(b)(3). Exhibits:
The exhibits filed as part of this registration statement are as follows:
Exhibit
Number Description Of Exhibit
3.1 Articles of Incorporation of Southwest Georgia Financial Corporation, as
amended and restated (included as Exhibit 3.1 to the Corporation's Form
10-KSB dated December 31, 1996, previously filed with the commission and
incorporated herein by reference).
3.2 By-Laws of the Corporation as amended (included as Exhibit 3.2 to the
Corporation's Form 10-KSB dated December 31, 1995, previously filed with
the Commission and incorporated herein by reference).
10.1 Pension Retirement Plan of the Corporation, as amended and restated
(included as Exhibit 10.1 to the Corporation's Form 10-K dated December
31, 2000, previously filed with the commission and incorporated herein
by reference).
-85-
Item 15. Exhibits and Financial Statement Schedules (continued)
10.2 Form of Directors' Deferred Compensation Plan of the Corporation
(included as Exhibit 10.3 to the Corporation's Form S-18 dated January
23, 1990, previously filed with the Commission and incorporated herein
by reference).*
10.3 Directors' and Executive Officers' Stock Purchase Plan of the Corporation
dated March 18, 1992 (included as Exhibit 10.7 to the Corporation's Form
10-KSB dated December 31, 1992, previously filed with the Commission and
incorporated herein by reference).*
10.4 Advances, specific collateral pledged, and security agreement between the
Federal Home Loan Bank of Atlanta and the Bank dated January 27, 1992,
and confirmation of credit services transaction for new money advances in
the amount of $4,000,000 dated February 10, 1992, $2,500,000 dated
September 4, 1992, and $1,500,000 dated September 8, 1992 (included as
Exhibit 10.10 to the Corporation's Form 10-KSB dated December 31, 1992,
previously filed with the Commission and incorporated herein by
reference).
10.5 Supplemental Retirement Plan of the Corporation dated December 21, 1994
(included as Exhibit 10.11 to the Corporation's Form 10-KSB dated
December 31, 1994, previously filed with the Commission and incorporated
herein by reference).*
10.6 Trust under the Corporation's Supplemental Retirement Plan, as amended
(included as Exhibit 10.6b to the Corporation's Form 10-K dated
December 31, 1997, previously filed with the Commission and incorporated
herein by reference).*
10.7 Employee Stock Ownership Plan and Trust of the Corporation as amended
(included as Exhibit 10.7 to the Corporation's Form 10-K dated December
31, 2000, previously filed with the commission and incorporated herein
by reference).
10.8 Dividend Reinvestment and Share Purchases Plan of the Corporation as
amended and restated by Amendment No. 1 (included as Exhibit 99 to the
Corporation's Form S-3DPOS dated September 30, 1998, previously filed
with the Commission and incorporated herein by reference).
10.9 Key Individual Stock Option Plan of the Corporation dated March 19, 1997
(included as Exhibit 10.9 to the Corporation's Form 10-K dated December
31, 1997, previously filed with the Commission and incorporated herein
by reference).*
-86-
Item 15. Exhibits and Financial Statement Schedules (continued)
10.10 Employment agreement of J. David Dyer, Jr. (included as Exhibit 10.10 to
the Corporation's Form 10-K dated December 31, 2002, previously filed
with the Commission and incorporated herein by reference).*
10.11 Employment agreement of DeWitt Drew (included as Exhibit 10.11 to the
Corporation's Form S-4 dated January 6, 2004, previously filed with the
Commission and incorporated herein by reference).*
10.15 Consulting agreement of John H. Clark (included as Exhibit 10.15 to the
Corporation's Form S-4 dated January 6, 2004, previously filed with the
Commission and incorporated herein by reference).*
14 Code of Ethical Conduct dated January 28, 2004 (included as Exhibit 14
to the Corporation's Form 10-K dated December 31, 2003, previously filed
with the Commission and incorporated herein by reference).
21 Subsidiaries of the Corporation (included as Exhibit 21 to the
Corporation's Form 10-K dated December 31, 2002, previously filed with
the Commission, incorporated herein by reference).
23.1 Consent of Thigpen, Jones, Seaton & Co., P.C.
31.1 Section 302 Certification of Periodic Financial Report by
Chief Executive Officer.
31.2 Section 302 Certification of Periodic Financial Report by
Chief Financial Officer.
32.1 Section 906 Certification of Periodic Financial Report by
Chief Executive Officer.
32.2 Section 906 Certification of Periodic Financial Report by
Chief Financial Officer.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form.
-87-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Southwest Georgia Financial Corporation
(Corporation)
Date:March 26, 2005 By: /s/ DeWitt Drew
-------------------------------------
DEWITT DREW
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the dates indicated.
/s/ DeWitt Drew Date: March 26, 2005
- --------------------------------------------
DEWITT DREW
President and Chief Executive Officer
[Principal Executive Officer]
/s/ George R. Kirkland Date: March 26, 2005
- --------------------------------------------
GEORGE R. KIRKLAND
Senior Vice-President and Treasurer
[Principal Financial and Accounting Officer]
/s/ John H. Clark Date: March 26, 2005
- --------------------------------------------
JOHN H. CLARK
Chairman of the Board of Directors
-88-
SIGNATURES, Continued
/s/ Cecil H. Barber Date: March 26, 2005
- --------------------------------------------
CECIL H. BARBER
Director
/s/ Michael J. McLean Date: March 26, 2005
- --------------------------------------------
MICHAEL J. MCLEAN
Director
/s/ Richard L. Moss Date: March 26, 2005
- --------------------------------------------
RICHARD L. MOSS
Director
/s/ Roy Reeves Date: March 26, 2005
- --------------------------------------------
ROY REEVES
Director
/s/ Johnny R. Slocumb Date: March 26, 2005
- --------------------------------------------
JOHNNY R. SLOCUMB
Director
/s/ Violet K. Weaver Date: March 26, 2005
- --------------------------------------------
VIOLET K. WEAVER
Director
/s/ C. Broughton Williams Date: March 26, 2005
- --------------------------------------------
C. BROUGHTON WILLIAMS
Director
-89-
Exhibit Index
Exhibit Number Description Of Exhibit
- -------------- -----------------------------------------------------
23.1 Consent of Thigpen, Jones, Seaton & Co., P.C.
31.1 Section 302 Certification of Periodic Financial
Report by Chief Executive Officer.
31.2 Section 302 Certification of Periodic Financial
Report by Chief Financial Officer.
32.1 Section 906 Certification of Periodic Financial
Report by Chief Executive Officer.
32.2 Section 906 Certification of Periodic Financial
Report by Chief Financial Officer.
-90-