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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2003
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from __________ to __________
Commission file number 0-20099
SOUTHWEST GEORGIA FINANCIAL CORPORATION
(Exact Name Of Small Business Issuer as specified in its Charter)
Georgia 58-1392259
(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
201 FIRST STREET, S.E., MOULTRIE, GEORGIA 31768
Address Of Principal Executive Offices
(229) 985-1120
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding At July 15, 2003
Common Stock, $1 Par Value 3,301,000
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
PAGE #
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are provided for Southwest Georgia
Financial Corporation as required by this Item 1.
a. Consolidated balance sheets (unaudited) - June 30, 2003 and
December 31, 2002. 2
b. Consolidated statements of income (unaudited) - for the six
months and the three months ended June 30, 2003 and 2002. 3
c. Consolidated statements of comprehensive income (unaudited) -
for the six months and the three months ended June 30, 2003
and 2002. 4
d. Consolidated statements of cash flows (unaudited) for the six
months ended June 30, 2003 and 2002. 5
e. Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 6. OTHER INFORMATION 20
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURE 21
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2003 and December 31, 2002
June 30, December 31,
2003 2002
ASSETS
Cash and due from banks $ 10,610,861 $ 11,880,622
Interest-bearing deposits with banks 50,076 3,996,485
Federal funds sold 0 2,000,000
Investment securities available
for sale, at fair value 63,316,369 40,055,321
Investment securities held to maturity
(estimated fair value of $58,209,787
and $68,492,520) 55,144,920 65,150,087
Total investment securities 118,461,289 105,205,408
Loans 99,403,796 105,987,365
Less: Unearned income (51,907) (54,066)
Allowance for loan losses (2,087,790) (1,899,738)
Loans, net 97,264,099 104,033,561
Premises and equipment 5,121,221 5,434,115
Foreclosed assets, net 1,172,604 1,982,467
Intangible assets 2,199,502 2,361,477
Other assets 3,514,655 3,573,504
Total assets $238,394,307 $240,467,639
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 25,593,552 $ 28,924,659
NOW accounts 32,298,117 36,113,124
Money Market 17,398,554 12,514,257
Savings 19,197,729 18,193,291
Certificates of deposit $100,000 and over 26,168,575 26,097,720
Other time accounts 65,651,624 68,080,299
Total deposits 186,308,151 189,923,350
Other borrowed funds 5,000,000 2,400,000
Long-term debt 10,973,169 11,041,252
Other liabilities 3,171,502 3,781,026
Total liabilities 205,452,822 207,145,628
Stockholders' equity:
Common stock - par value $1; authorized
5,000,000 shares; issued 3,301,000 shares 3,301,000 3,300,000
Capital surplus 7,147,551 7,133,551
Retained earnings 28,245,928 28,403,347
Accumulated other comprehensive income 1,586,173 1,188,733
Treasury stock 744,575 shares for 2003 and
711,075 shares for 2002, at cost (7,339,167) (6,703,620)
Total stockholders' equity 32,941,485 33,322,011
Total liabilities and stockholders' equity $238,394,307 $240,467,639
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Three Months
Ended June 30,
2003 2002
Interest income:
Interest and fees on loans $1,928,704 $2,322,390
Interest and dividend on securities available for sale 492,875 258,214
Interest on taxable securities held to maturity 752,394 941,572
Interest on tax exempt securities available for sale 153,026 143,547
Interest on tax exempt securities held to maturity 42,497 33,721
Interest on federal funds sold 0 2,878
Interest on deposits with banks 10,424 10,568
Total interest income 3,379,920 3,712,890
Interest expense:
Interest on deposits 728,810 1,028,772
Interest federal funds purchased 619 1,670
Interest on other borrowings 49,925 25,472
Interest on long-term debt 116,383 89,653
Total interest expense 895,737 1,145,567
Net interest income 2,484,183 2,567,323
Provision for loan losses 150,000 105,000
Net interest income after provision for loan losses 2,334,183 2,462,323
Noninterest income:
Service charges on deposit accounts 292,627 265,333
Income from trust services 66,075 50,004
Income from retail brokerage services 78,096 59,011
Income from insurance services 210,302 219,341
Income from mortgage banking services 829,442 867,091
Net gain (loss) on disposition of assets (1,850,762) (286,200)
Net gain (loss) on sale of securities 0 121,270
Other income 17,366 38,963
Total noninterest income (356,854) 1,334,813
Noninterest expense:
Salaries and employee benefits 1,412,362 1,544,994
Occupancy expense 149,541 127,674
Equipment expense 134,026 119,060
Data processing expense 140,536 138,824
Amortization of intangible assets 80,987 80,982
Other operating expenses 680,864 568,577
Total noninterest expenses 2,598,316 2,580,111
Income (loss) before income taxes (620,987) 1,217,025
Provision (benefit) for income taxes (250,653) 316,145
Net income (loss) $ (370,334) $ 900,880
Earnings per share of common stock:
Net income (loss), basic & diluted $ (0.14) $ 0.34
Dividends paid, basic & diluted 0.13 0.12
Weighted average shares outstanding 2,565,293 2,626,987
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Six Months
Ended June 30,
2003 2002
Interest income:
Interest and fees on loans $3,852,958 $4,834,951
Interest and dividend on securities available for sale 829,898 497,164
Interest on taxable securities held to maturity 1,622,520 1,813,671
Interest on tax exempt securities available for sale 306,149 287,085
Interest on tax exempt securities held to maturity 80,836 67,441
Interest on federal funds sold 1,546 8,897
Interest on deposits with banks 29,144 23,341
Total interest income 6,723,051 7,532,550
Interest expense:
Interest on deposits 1,530,598 2,201,969
Interest federal funds purchased 619 1,670
Interest on other borrowings 68,625 54,410
Interest on long-term debt 237,668 120,097
Total interest expense 1,837,510 2,378,146
Net interest income 4,885,541 5,154,404
Provision for loan losses 300,000 255,000
Net interest income after provision for loan losses 4,585,541 4,899,404
Noninterest income:
Service charges on deposit accounts 554,474 505,920
Income from trust services 133,803 100,832
Income from retail brokerage services 134,519 146,077
Income from insurance services 474,843 458,575
Income from mortgage banking services 1,709,352 1,494,143
Net gain (loss) on disposition of assets (1,852,862) (245,485)
Net gain (loss) on sale of securities 0 121,270
Other income 89,868 116,998
Total noninterest income 1,243,997 2,698,330
Noninterest expense:
Salaries and employee benefits 2,888,231 3,160,151
Occupancy expense 299,048 260,161
Equipment expense 268,944 234,883
Data processing expense 273,060 275,001
Amortization of intangible assets 161,975 161,963
Other operating expenses 1,260,119 1,124,656
Total noninterest expenses 5,151,377 5,216,815
Income (loss) before income taxes 678,161 2,380,919
Provision (benefit) for income taxes 168,310 649,379
Net income (loss) $ 509,851 $1,731,540
Earnings per share of common stock:
Net income (loss), basic & diluted $ 0.20 $ 0.66
Dividends paid, basic & diluted 0.26 0.24
Weighted average shares outstanding 2,574,190 2,633,232
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Three Months
Ended June 30,
2003 2002
Net income $ (370,334) $ 900,880
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period 697,860 948,709
Federal income tax expense 237,272 322,561
Other comprehensive income, net of tax: 460,588 626,148
Total comprehensive income $ 90,254 $1,527,028
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Six Months
Ended June 30,
2003 2002
Net income $ 509,851 $1,731,540
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period 602,227 840,892
Federal income tax expense 204,757 285,903
Other comprehensive income, net of tax: 397,470 554,989
Total comprehensive income $ 907,321 $2,286,529
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Six Months
Ended June 30,
2003 2002
Cash flows from operating activities:
Net income $ 509,851 $ 1,731,540
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 300,000 255,000
Depreciation 295,851 254,327
Net amortization and accretion of
investment securities 48,645 21,772
Amortization of intangibles 161,975 161,963
Net loss (gain) on sale and disposal of assets 1,859,161 129,015
Changes in:
Other assets 47,251 ( 675,933)
Other liabilities ( 814,281) ( 623,561)
Net cash provided by operating activities 2,408,453 1,254,123
Investing activities:
Proceeds from maturities of securities
held to maturity 13,000,000 8,000,000
Proceeds from maturities of securities
available for sale 20,285,171 1,977,370
Proceeds from sale of securities available for sale 0 483,270
Purchase of securities held to maturity ( 2,997,500) (10,079,712)
Purchase of securities available for sale (42,990,000) ( 5,971,862)
Net change in other short-term investments 2,000,000 ( 870,000)
Net change in loans 5,217,851 7,734,504
Purchase of premises and equipment ( 264,945) ( 287,469)
Proceeds from sales of other assets 495,899 1,770,939
Net change in interest-bearing deposits with banks 3,946,409 ( 720,273)
Net cash provided(used) for investing activities ( 1,307,115) 2,036,767
Financing activities:
Net change in deposits ( 3,615,199) ( 6,679,100)
Net change in short-term borrowings 2,600,000 ( 2,400,000)
Net change in long-term borrowings ( 68,083) 5,172,269
Cash dividends declared ( 667,270) ( 620,904)
Proceeds from the exercise of stock options 15,000 0
Payment for common stock ( 635,547) ( 434,260)
Net cash provided(used) for financing activities ( 2,371,099) ( 4,961,995)
Increase(decrease) in cash and due from banks ( 1,269,761) ( 1,671,105)
Cash and due from banks - beginning of period 11,880,622 9,211,645
Cash and due from banks - end of period $10,610,861 $ 7,540,540
NONCASH ITEMS:
Increase in foreclosed properties
and decrease in loans $ 1,251,611 $ 218,947
Unrealized gain(loss) on securities
available for sale $ 397,470 $ 554,989
SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and changes in financial position in
conformity with generally accepted accounting principles. The interim
financial statements furnished reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries (the "Corporation") conform to generally
accepted accounting principles and to general practices within the banking
industry. The following is a description of the more significant of those
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest
Georgia Financial Corporation and its wholly-owned Subsidiaries, Southwest
Georgia Bank (the "Bank") and Empire Financial Services, Inc. (the "Empire").
All significant intercompany accounts and transactions have been eliminated
in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with these evaluations, management
obtains independent appraisals for significant properties.
A substantial portion of the Corporation's loans are secured by real estate
located primarily in Georgia. Accordingly, the ultimate collection of these
loans is susceptible to changes in the real estate market conditions of this
market area.
Interest Bearing Deposits in Banks
Interest bearing deposits in banks mature within one year and are carried at
cost.
Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized
cost. Securities not classified as held to maturity or trading, including
equity securities with readily determinable fair values, are classified as
"available for sale" and recorded at fair value with unrealized gains and
losses reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that
are deemed to be other than temporary are reflected in earnings as realized
-7-
losses. Gains and losses on the sale of securities are recorded on the trade
date and are determined using the specific identification method.
Long-Lived Assets
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation has been calculated primarily using the straight-
line method for buildings and building improvements over the assets estimated
useful lives. Equipment and furniture are depreciated using the modified
accelerated recovery system method over the assets estimated useful lives for
financial reporting and income tax purposes. The following estimated useful
lives are used for financial statement purposes:
Land improvements 5 - 31 years
Building and improvements 10 - 40 years
Machinery and equipment 5 - 10 years
Computer equipment 3 - 5 years
Office furniture and fixtures 5 - 10 years
Certain leases are capitalized as assets for financial reporting purposes.
Such capitalized assets are amortized, using the straight-line method, over
the terms of the leases. Maintenance and repairs are charged to expense and
betterments are capitalized.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and
the write-down would be material, an assessment of recoverability is
performed prior to any write-down of the asset. Impairment on intangibles is
evaluated at each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount should be assessed.
Impairment, if any, is recognized through a valuation allowance with a
corresponding charge recorded in the income statement.
Loans and Allowances for Loan Losses
Loans are stated at principal amounts outstanding less unearned income and
the allowance for loan losses. Interest income is credited to income based
on the principal amount outstanding at the respective rate of interest except
for interest on certain installment loans made on a discount basis which is
recognized in a manner that results in a level-yield on the principal
outstanding.
Accrual of interest income is discontinued on loans when, in the opinion of
management, collection of such interest income becomes doubtful. Accrual of
interest on such loans is resumed when, in management's judgment, the
collection of interest and principal becomes probable.
Fees on loans and costs incurred in origination of most loans are recognized
at the time the loan is placed on the books. Because loan fees are not
significant, the results on operations are not materially different from the
results which would be obtained by accounting for loan fees and costs as
amortized over the term of the loan as an adjustment of the yield.
-8-
A loan is considered impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis
for commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collection of the principal is unlikely.
The allowance is an amount which management believes will be adequate to
absorb estimated losses on existing loans that may become uncollectible based
on evaluation of the collectibility of loans and prior loss experience. This
evaluation takes into consideration such factors as changes in the nature and
volume of the loan portfolios, current economic conditions that may affect
the borrowers' ability to pay, overall portfolio quality, and review of
specific problem loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based upon changes in economic
conditions. Also, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses. Such agencies may require the Corporation to recognize additions to
the allowance based on their judgments of information available to them at
the time of their examination.
Foreclosed Assets
Properties acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at the lower of cost or fair value at the
date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
-9-
Credit Related Financial Instruments
In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit, and standby letters of credit.
Such financial instruments are recorded when they are funded.
Retirement Plans
The Corporation and its subsidiaries have pension plans covering
substantially all employees. The Corporation makes annual contributions to
the plans in amounts not exceeding the regulatory requirements.
Income Taxes
The Corporation and its subsidiaries file a consolidated income tax return.
The subsidiaries provide for income taxes based on its contribution to income
taxes (benefits) of the consolidated group.
Deferred income tax assets and liabilities result from temporary differences
between the tax basis of assets and liabilities and their reportable amounts
in the financial statements that will result in taxable or deductible amounts
in future years.
Recent Accounting Pronouncements
The Corporation adopted FASB Statement No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002. This standard requires, among
other things, that goodwill will not be amortized from the effective date of
its adoption. Instead, goodwill and other intangibles will be subjected to
an annual test for impairment of value. This will not only effect goodwill
arising from acquisitions completed after the effective date, but will also
effect any unamortized balance of goodwill and other intangible assets.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Corporation considers cash and cash
equivalents to include cash on hand, noninterest-bearing deposit amounts due
from banks, and highly liquid debt instruments purchased with an original
maturity of three months or less.
Trust Department
Trust income is included in the accompanying consolidated financial
statements on the cash basis in accordance with established industry
practices. Reporting of such fees on the accrual basis would have no
material effect on reported income.
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Servicing and Origination Fees on Loans
The Corporation from its subsidiary, Empire, recognizes as income in the
current period all loan origination and brokerage fees collected on loans
originated and closed for investing participants. Loan servicing fees are
based on a percentage of loan interest paid by the borrower and recognized
over the term of the loan as loan payments are received. Empire does not
directly fund any mortgages and acts as a service-oriented broker for
participating mortgage lenders. Fees charged for continuing servicing fees
are comparable with market rates charged in the industry. Based on these
facts, deferred mortgage servicing rights as defined under FASB 65 and FASB
122, are not required to be recognized. Late charges assessed on past due
payments are recognized as income by the Corporation when collected.
Advertising Costs
It is the policy of the Corporation to expense advertising costs as they are
incurred. The Corporation does not engage in any direct-response,
advertising and accordingly has no advertising costs reported as assets on
its balance sheet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This Form 10-Q report contains forward-looking statements in addition to
historical information. The Corporation cautions that there are various
factors that could cause actual results to differ materially from those
indicated in the forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995; accordingly, there can be no
assurance that such indicated results will be realized.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. There are a variety of factors that could
cause the Corporation's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the
Corporation's forward-looking statements. These factors include legislative
and regulatory initiatives regarding deregulation and restructuring of the
banking industry; the extent and timing of the entry of additional
competition in the Corporation's markets; potential business strategies,
including acquisitions or dispositions of assets or internal restructuring,
that may be pursued by the Corporation; the Corporation's effectiveness with
implementing its strategies; state and federal banking regulations; changes
in or application of environmental and other laws and regulations to which
the Corporation is subject; political, legal and economic conditions and
developments; financial market conditions and the results of financing
efforts; changes in commodity prices and interest rates; weather, natural
disasters and other catastrophic events; and other factors discussed in the
Corporation's filings with the Securities and Exchange Commission. The words
"believe", "expect", "anticipate", "project", and similar expressions signify
such forward-looking statements.
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of the Corporation. Any such statement
speaks only as of the date the statement was made. The Corporation
undertakes no obligation to update or revise any forward-looking statements.
Additional information with respect to factors that may cause results to
differ materially from those contemplated by such forward-looking statements
is included in the Corporation's current and subsequent filings with the
Securities and Exchange Commission.
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow requirements
of customers who may be either depositors wanting to withdraw their funds or
borrowers needing assurance that sufficient funds will be available to meet
their credit needs. In the ordinary course of business, Southwest Georgia
Financial Corporation's (the "Corporation") cash flows are generated from
interest and fee income as well as from loan repayments and the maturity or
sale of other earning assets. In addition, liquidity is continuously
provided through the acquisition of new deposits and borrowings or the
rollover of maturing deposits and borrowings. The Corporation strives to
maintain an adequate liquidity position by managing the balances and
maturities of interest-earning assets and interest-earning liabilities so
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that the balance it has in short-term investments at any given time will
adequately cover any reasonably anticipated immediate need for funds.
Additionally, the subsidiary Southwest Georgia Bank (the "Bank") maintains
relationships with correspondent banks which could provide funds to it on
short notice, if needed.
The liquidity and capital resources of the Corporation are monitored on a
periodic basis by state and Federal regulatory authorities. As determined
under guidelines established by these regulatory authorities, the Bank's
liquidity ratios at June 30, 2003, were considered satisfactory. At that
date, the Bank's short-term investments were adequate to cover any reasonably
anticipated immediate need for funds. The Corporation is aware of no events
or trends likely to result in a material change in liquidity. At June 30,
2003, the Corporation's and the Bank's risk-based capital ratios were
considered adequate based on guidelines established by regulatory
authorities. During the six months ended June 30, 2003, total capital
decreased $381 thousand to $32.9 million. Under a share repurchase program
adopted by the Board in January 2000, the Corporation repurchased 33,500
shares of its common stock during the first six months of 2003 at an average
price of $18.97 per share. There are approximately 150,000 shares authorized
to be purchased under the current program. Also, the Corporation continues
to maintain a healthy level of capital adequacy as measured by its equity-to-
asset ratio of 13.82 percent as of June 30, 2003. The Corporation is aware
of no events or trends likely to result in a material change in capital
resources other than normal operations resulting in the retention of net
earnings, repurchasing shares, and paying dividends to shareholders. Also,
the Corporation's management is not aware of any current recommendations by
the regulatory authorities which, if they were to be implemented, would have
a material effect on the Corporation's capital resources.
Results of Operations
The Corporation's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and
investment losses, to generate noninterest income, and to control noninterest
expense. Since interest rates are determined by market forces and economic
conditions beyond the control of the Corporation, the ability to generate net
interest income is dependent upon the Bank's ability to obtain an adequate
spread between the rate earned on interest-earning assets and the rate paid
on interest-bearing liabilities. Thus, the key performance measure for net
interest income is the interest margin or net yield, which is taxable-
equivalent net interest income divided by average earning assets.
Comparison of Statements of Income
The Corporation's net loss after taxes for the three-month period ending
June 30, 2003, was $370 thousand compared with a net income of $901
thousand for the same period in 2002, representing a decrease of $1.271
million, or 141 percent. For the first six months of 2003, the
Corporation earned a net income of $510 thousand or $.20 per share
compared to 1.732 million or $.66 per share in 2002. The 1.222 million
decline in net income is primarily related to the $1.739 million pre-tax
charge for the transfer of the Corporation's largest nonperforming asset,
for a nominal fee of $200,000, to the Georgia Trust for Historical
Preservation.
-13-
Total noninterest income decreased $1.455 million for the six months ended
June 30, 2003, compared with the same period in 2002. Comparison of three
months income declined $1.692 million compared with 2002. The majority of
this quarterly decline was due to the $1.739 million pre-tax charge for the
foreclosed property, as noted earlier. For the first six months of 2003,
another large component of noninterest income, mortgage banking income, was
$1.709 million, up from $1.494 million in 2002. During the second quarter
of 2003, the mortgage banking origination fees were down, but income from
servicing fees were up compared with the previous quarter and same period a
year ago. Other increases in noninterest income were service charges on
deposit accounts, income from trust services, and income from insurance
services.
Total interest income decreased $333 thousand comparing the three months
ended June 30, 2003 with the same period in 2002. For the first six months
of 2003, total interest income decreased $809 thousand comparing the same
period in 2002. The decrease for the three-month period and the six-month
period is the result of decreases in interest and fees on loans. This
decrease in interest income is primarily related to decreases in loan rates
and in average volume of loans. The average yield on loans decreased 28
basis points comparing the three-month period and decreased 66 basis points
comparing the six-month period with the same periods in 2002. The average
volume of loans decreased $16.2 million for the three-month period and
decreased $15.7 million for the six-month period compared with the same
periods last year.
The total interest expense decreased $250 thousand, or 21.8 percent, in the
second quarter of 2003 compared with the same period in 2002. The total
interest expense for the six-month period ended June 30, 2003 decreased $541
thousand, or 22.7 percent, compared with the same period in 2002. Over this
period, the average balances on interest-bearing deposits decreased $1.9
million, or 1.1 percent. The decrease in interest expense is primarily
related to decreases in the rate on interest-bearing deposits, partially
offset by an increase in interest expense on long-term debt and in interest
on other borrowings. The rate on time deposits decreased 118 basis points
comparing the first six months of 2003 with the same period in 2002.
Interest on long-term debt increased $27 thousand, or 29.8 percent, during
the second quarter of 2003 and increased $118 thousand, or 97.9 percent, for
the first six months of 2003 compared with the same periods in 2002.
The primary source of revenue for the Corporation is net interest income,
which is the difference between total interest income on earning assets and
interest expense on interest-bearing sources of funds. Net interest income
for the second quarter of 2003 decreased $83 thousand, or 3.2 percent,
compared with the same period in 2002. Net interest income for the first six
months of 2003 was $4.9 million compared with $5.2 million for the same
period in 2002. Net interest income is determined primarily by the volume of
earning assets and the various rate spreads between these assets and their
funding sources. The Corporation's net interest margin was 4.69 percent and
4.96 percent during the second quarter of 2003 and 2002, respectively.
During the six-month period ended June 30, 2003, the Corporation's net
interest margin was 4.66 percent compared with 5.03 percent for the same
period in 2002.
Total noninterest expenses increased by $18 thousand, or less than 1.0
percent, for the three months ended June 30, 2003 and decreased $65 thousand
for the six months ended June 30, 2003 compared with the same periods in
2002. The majority, $272 thousand, of this decrease in noninterest expense
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was attributable to a reduction in salary and employee benefits and was
partially offset by increases in expenses related to occupancy and equipment
expenses. Other operating expenses increased by $112 thousand for three
months ended and $135 thousand for six months ended June 30, 2003 compared
with 2002. The majority of this increase, $89 thousand for six months, was
mainly due to operating losses from foreclosed property which the Corporation
continued to operate until this quarter when the property was transferred to
the Georgia Trust for Historical Preservation. Net operating expenses
related to the operations of this facility for the six month period were $242
thousand and management feels that the disposition of the property will have
a positive impact on future annual earnings of approximately $300 thousand.
Other increases in noninterest expense compared with the same period a year
ago occurred in the normal course of operations. Management will continue to
monitor expenses closely in an effort to achieve all cost efficiencies
available.
Comparison of Financial Condition Statements
During the first six months of 2003, total assets decreased $2.1 million, or
0.9 percent, from December 31, 2002, and increased $6.6 million, or 2.8
percent, from June 30, 2002.
The Corporation's loan portfolio of $99.4 million decreased 6.2 percent from
the December 31, 2002, level of $105.9 million. The Corporation's continued
focus on high credit standards combined with a soft economy has contributed
to the decrease in loans. Loans, the major use of funds, represent 41.7
percent of total assets.
Investment securities and other short-term investments represent 49.7 percent
of total assets. Investment securities increased $13.2 million since
December 31, 2002. Other short-term investments decreased $5.9 million since
December 31, 2002. This resulted in an overall increase in investments of
$7.3 million. This increase in investment securities was due to the
additional long-term borrowings from the Federal Home Loan Bank and better
utilization of funds from loan pay-offs and shorter-term investments.
Deposits, the primary source of the Corporation's funds, decreased from
$189.9 million at December 31, 2002, to $186.3 million at June 30, 2003.
This decrease reflected a combination of the weaker economy reducing
individual's cash assets and the increasingly competitive banking environment
in the Corporation's territory. The Corporation believes its share of total
deposits in Colquitt County remains relatively stable. At June 30, 2003,
total deposits represented 78.2 percent of total assets.
The Corporation increased its level of long-term borrowings with the Federal
Home Loan Bank during the first quarter. These funds replaced some short-
term advances paid back to the Federal Home Loan Bank in the second quarter
of 2003, and these advances were also used to fund some longer-term
investments.
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan losses is
evaluated monthly based on a review of all significant loans, with a
particular emphasis on nonaccruing, past due, and other loans that management
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believes require attention. Other factors used in determining the adequacy
of the reserve are management's judgment about factors affecting loan quality
and management's assumptions about the local and national economy. The
allowance for loan losses improved to 2.10 percent of total loans outstanding
at June 30, 2003, compared with 1.79 percent of loans outstanding at December
31, 2002. This increase reflected a strengthening of reserves, while non-
performing assets as a percentage of total loans was 1.75%, down from 3.11% a
year ago, as the quantity of non-performing loans declined. The majority of
the non-performing asset decline was from one large property that was
disposed of in the second quarter. Management considers the allowance for
loan losses as of June 30, 2003, adequate to cover potential losses in the
loan portfolio.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risk lies within its exposure to interest
rate movement. The Corporation has no foreign currency exchange rate risk,
commodity price risk, or any other material market risk. The Corporation
has no trading investment portfolio. As a result, it does not hold any
market risk-sensitive instruments, which would be subject to a trading
environment which is characterized by volatile short-term movements in
interest rates. Also, the Corporation has no interest rate swaps or other
derivative instruments that are either designated and effective as hedges or
which modify the interest rate characteristics of specified assets or
liabilities. The Corporation's primary source of earnings, net interest
income, can fluctuate with significant interest rate movements. To lessen
the impact of these movements, the Corporation seeks to maximize net interest
income while remaining within prudent ranges of risk by practicing sound
interest rate sensitivity management. The Corporation attempts to accomplish
this objective by structuring the balance sheet so that the differences in
repricing opportunities between assets and liabilities are minimized.
Interest rate sensitivity refers to the responsiveness of earning assets and
interest-bearing liabilities to changes in market interest rates. The
Corporation's interest rate risk management is carried out by the
Asset/Liability Management Committee which operates under policies and
guidelines established by management. The Corporation maintains an investment
portfolio that staggers maturities and provides flexibility over time in
managing exposure to changes in interest rates. Any imbalances in the
repricing opportunities at any point in time constitute a financial
institution's interest rate sensitivity.
The Corporation uses a number of tools to measure interest rate risk. One of
the indicators for the Corporation's interest rate sensitivity position is
the measurement of the difference between its rate-sensitive assets and rate-
sensitive liabilities, which is referred to as the "gap." A gap analysis
displays the earliest possible repricing opportunity for each asset and
liability category based upon contractual maturities and repricing. As of
June 30, 2003, the Corporation's one-year cumulative rate-sensitive assets
represented 110 percent of the cumulative rate-sensitive liabilities compared
with 72 percent for the same period in 2002. This change in the cumulative
gap is a result of the Corporation's management of its exposure to interest
rate risk. The Corporation has become asset-sensitive at the one-year gap
position resulting from management borrowing some additional long-term funds
to take advantage of the lower rates and to reduce the Corporation's interest
rate risk from possible increasing short-term rates. All interest rates and
yields do not adjust at the same velocity; therefore, the interest rate
sensitivity gap is only a general indicator of the potential effects of
interest rate changes on net interest income. The Corporation's asset and
liability mix is monitored to ensure that the effects of interest rate
movements in either direction are not significant over time.
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ITEM 4. CONTROLS AND PROCEDURES
The Corporation's management, including the Chief Executive Officer and Chief
Financial Officer, supervised and participated in an evaluation of the
effectiveness of its disclosure controls and procedures (as defined in
federal securities rules) as of the end of the period covered by this report.
Based on, and as of the date of, that evaluation, the Corporation's Chief
Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures were effective in
accumulating and communicating information to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures of that information under the
Securities and Exchange Commission's rules and forms and that the
Corporation's disclosure controls and procedures are designed to ensure that
the information required to be disclosed in reports that are filed or
submitted by the Corporation under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There were no significant changes in the Corporation's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
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PART II. - OTHER INFORMATION
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date - May 27, 2003 - annual shareholders' meeting.
(b) Elected the following directors:
Cecil H. Barber Roy H. Reeves
John H. Clark Johnny R. Slocumb
DeWitt Drew Violet K. Weaver
Michael J. McLean C. Broughton Williams, Jr.
Richard L. Moss
Director Emeritus:
Albert W. Barber
Leo T. Barber, Jr.
Mrs. Kenneth V. Cope
Robert M. Duggan
E. J. McLean, Jr.
Earl D. Moore
Jack Short
Mrs. Hugh Turner
(c) The following matter was voted on at the annual shareholders' meeting.
Number Of Percent Of
Votes Cast Outstanding Shares
>C>
(1) Election Of Directors 2,048,385 79.40%
Against 6,164 .30%
Total Shares Voted 2,054,549 79.70%
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ITEM 6. OTHER INFORMATION
In January of this year, the Corporation announced its decision to continue
with its share repurchase program where it may repurchase up to 150,000
shares, or approximately 6%, of its common stock from time to time through
January 31, 2004. The Board of Directors approved this common stock
repurchase program in view of the strong capital position of Southwest
Georgia Financial Corporation and its subsidiary, Southwest Georgia Bank.
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K
a. There have been no reports filed on Form 8-K for the quarter ended
June 30, 2003.
b. Exhibit 31.1 Section 302 Certification of Periodic Financial Report by
Chief Executive Officer.
c. Exhibit 31.2 Section 302 Certification of Periodic Financial Report by
Chief Financial Officer.
b. Exhibit 32.1 Section 906 Certification of Periodic Financial Report by
Chief Executive Officer.
c. Exhibit 32.2 Section 906 Certification of Periodic Financial Report by
Chief Financial Officer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
BY: /s/George R. Kirkland
GEORGE R. KIRKLAND
SENIOR VICE-PRESIDENT AND TREASURER
(FINANCIAL AND ACCOUNTING OFFICER)
Date: August 14, 2003
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