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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 March 31, 2004
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from __________ to __________
Commission file number 1-12053
SOUTHWEST GEORGIA FINANCIAL CORPORATION
(Exact Name Of Small Business Issuer as specified in its Charter)
Georgia 58-1392259
- ------------------------------- -------------------
(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
201 FIRST STREET, S.E., MOULTRIE, GEORGIA 31768
------------------------------------------------
Address Of Principal Executive Offices
(229) 985-1120
--------------------------------------------------------------------
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO ___________
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES __________ NO X
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding At April 15, 2004
-------------------------- -----------------------------
Common Stock, $1 Par Value 3,543,850
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
PAGE #
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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 - March 31, 2004 (unaudited)
and December 31, 2003. 2
b. Consolidated statements of income (unaudited) - for the
three months ended March 31, 2004 and 2003. 3
c. Consolidated statements of comprehensive income (unaudited)
- for the three months ended March 31, 2004 and 2003. 4
d. Consolidated statements of cash flows (unaudited) for the
three months ended March 31, 2004 and 2003. 5
e. Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 20
-1-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2004 and December 31, 2003
(Unaudited)
March 31, December 31,
2004 2003
------------ ------------
ASSETS
Cash and due from banks $ 11,474,446 $ 10,959,728
Interest-bearing deposits with banks 75,269 43,942
Federal funds sold 17,174,000 0
Investment securities available for sale,
at fair value 59,006,922 71,544,353
Investment securities held to maturity
(estimated fair value of $91,411,677
and $56,456,044) 89,698,033 54,695,369
------------ ------------
Total investment securities 148,704,955 126,239,722
------------ ------------
Loans 105,490,676 97,161,681
Less: Unearned income (42,817) (46,465)
Allowance for loan losses (2,512,952) (2,337,811)
------------ ------------
Loans, net 102,934,907 94,777,405
------------ ------------
Premises and equipment 6,368,838 5,655,415
Foreclosed assets, net 988,078 1,203,386
Intangible assets 3,637,754 2,037,526
Other assets 5,324,956 5,235,873
------------ ------------
Total assets $296,683,203 $246,152,997
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 35,013,750 $ 27,904,580
NOW accounts 51,640,822 35,319,083
Money Market 13,360,981 13,827,745
Savings 27,756,305 18,200,946
Certificates of deposit $100,000 and over 32,049,300 25,235,601
Other time accounts 70,181,354 62,387,796
------------ ------------
Total deposits 230,002,512 182,875,751
------------ ------------
Federal funds purchased 0 2,000,000
Other borrowed funds 5,000,000 10,000,000
Long-term debt 13,631,429 13,691,429
Other liabilities 8,447,234 4,597,711
------------ ------------
Total liabilities 257,081,175 213,164,891
------------ ------------
Stockholders' equity:
Common stock - par value $1; authorized
5,000,000 shares; issued 3,543,850 shares 3,543,850 3,302,750
Capital surplus 12,466,638 7,172,051
Retained earnings 30,272,249 29,554,946
Accumulated other comprehensive income 1,289,723 720,866
Treasury stock 772,575 shares for 2004 and
763,575 shares for 2003, at cost (7,970,432) (7,762,507)
------------ ------------
Total stockholders' equity 39,602,028 32,988,106
------------ ------------
Total liabilities and stockholders' equity $296,683,203 $246,152,997
============ ============
-3-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Three Months
Ended March 31,
------------------------
2004 2003
---------- ----------
Interest income:
Interest and fees on loans $1,715,380 $1,924,254
Interest and dividend on securities available for sale 544,244 337,023
Interest on taxable securities held to maturity 712,168 870,126
Interest on tax exempt securities available for sale 156,269 153,123
Interest on tax exempt securities held to maturity 56,663 38,339
Interest on federal funds sold 30,307 1,546
Interest on deposits with banks 16,120 18,720
---------- ----------
Total interest income 3,231,151 3,343,131
---------- ----------
Interest expense:
Interest on deposits 583,126 801,788
Interest federal funds purchased 65 0
Interest on other borrowings 59,285 18,700
Interest on long-term debt 114,491 121,285
---------- ----------
Total interest expense 756,967 941,773
---------- ----------
Net interest income 2,474,184 2,401,358
Provision for loan losses 7,018 150,000
---------- ----------
Net interest income after provision for loan losses 2,467,166 2,251,358
---------- ----------
Noninterest income:
Service charges on deposit accounts 350,090 261,847
Income from trust services 73,446 67,728
Income from retail brokerage services 55,848 56,423
Income from insurance services 294,838 264,541
Income from mortgage banking services 1,097,028 879,910
Net gain (loss) on disposition of assets (186,202) (2,100)
Net gain (loss) on sale of securities 2,914 0
Other income 89,651 72,502
---------- ----------
Total noninterest income 1,777,613 1,600,851
---------- ----------
Noninterest expense:
Salaries and employee benefits 1,613,641 1,475,869
Occupancy expense 183,040 149,507
Equipment expense 153,408 134,918
Data processing expense 174,336 132,524
Amortization of intangible assets 95,116 80,988
Other operating expenses 839,762 579,255
---------- ----------
Total noninterest expenses 3,059,303 2,553,061
---------- ----------
Income before income taxes 1,185,476 1,299,148
Provision for income taxes 107,909 418,963
---------- ----------
Net income $1,077,567 $ 880,185
========== ==========
Earnings per share of common stock:
Net income, basic & diluted $ 0.41 $ 0.34
========== ==========
Dividends paid, basic & diluted 0.13 0.13
========== ==========
Weighted average shares outstanding 2,625,646 2,583,186
========== ==========
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Three Months
Ended March 31,
------------------------
2004 2003
---------- ----------
Net income $1,077,567 $ 880,185
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period 861,485 (95,633)
Federal income tax expense 292,627 (32,515)
---------- ----------
Other comprehensive income, net of tax: 568,858 (63,118)
---------- ----------
Total comprehensive income $1,646,425 $ 817,067
========== ==========
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Three Months
Ended March 31,
2004 2003
----------- -----------
Cash flows from operating activities:
Net income $ 1,077,567 $ 880,185
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 7,018 150,000
Depreciation 170,962 147,926
Net amortization and accretion of
investment securities 7,813 21,381
Amortization of intangibles 95,116 80,988
Net loss (gain) on sale and disposal of assets 183,288 2,100
Changes in:
Other assets 198,626 (30,074)
Other liabilities (742,216) 192,884
----------- -----------
Net cash provided by operating activities 998,174 1,445,390
----------- -----------
Investing activities:
Proceeds from maturities of securities
held to maturity 12,000,000 8,000,000
Proceeds from maturities of securities
available for sale 14,445,740 2,587,842
Proceeds from sale of securities available for sale 5,157 0
Purchase of securities held to maturity (21,125,118) (2,997,500)
Purchase of securities available for sale 0 (19,000,000)
Net change in other short-term investments (10,665,000) 2,000,000
Net change in loans 2,022,985 3,766,503
Purchase of premises and equipment (520,131) (133,104)
Proceeds from sales of other assets 352,133 3,000
Net change in interest-bearing deposits with banks (31,327) 1,492,414
Cash acquired from acquisition 3,352,364 0
----------- -----------
Net cash provided(used) for investing activities (163,197) (4,280,845)
----------- -----------
Financing activities:
Net change in deposits 7,292,245 (2,079,902)
Net change in federal funds purchased (2,000,000) 0
Net change in short-term borrowings (5,000,000) 0
Net change in long-term borrowings (60,000) 4,936,108
Cash dividends declared (360,266) (334,935)
Proceeds from the exercise of stock options 15,687 0
Payment for common stock (207,925) (205,400)
----------- -----------
Net cash provided(used) for financing activities (320,259) 2,315,871
----------- -----------
Increase(decrease) in cash and due from banks 514,718 (519,584)
Cash and due from banks - beginning of period 10,959,728 11,880,622
----------- -----------
Cash and due from banks - end of period $11,474,446 $11,361,038
=========== ===========
NONCASH ITEMS:
Increase in foreclosed properties and
decrease in loans $ 76,145 $ 170,135
=========== ===========
Unrealized gain(loss) on securities
available for sale $ 568,858 $ (63,118)
=========== ===========
-5-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(UNAUDITED)
For Three Months
Ended March 31,
-------------------------
2004 2003
----------- -----------
NONCASH INVESTING & FINANCING ACTIVITY:
Fair value of assets acquired and liabilities
assumed in acquisition of First Bank Holding
Company and Sylvester Banking Company:
Federal Funds $ 6,509,000 0
Securities 26,934,422 0
Loans, net 10,263,650 0
Bank premises & equipment 588,372 0
Intangibles & other assets 1,906,708 0
Deposits (39,834,516) 0
----------- -----------
Net fair value of assets & liabilities 6,367,636 0
Common stock issued for acquisition ( 5,520,000) 0
Cash acquired from acquisition 3,352,364 0
----------- -----------
Cash payable for acquisition $ 4,200,000 $ 0
=========== ===========
-6-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and changes in financial position in
conformity with generally accepted accounting principles. The interim
financial statements furnished reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented.
-7-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries (the "Corporation") conform to generally accepted
accounting principles and to general practices within the banking industry.
The following is a description of the more significant of those policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest
Georgia Financial Corporation and its wholly-owned Subsidiaries,
Southwest Georgia Bank (the "Bank") and Empire Financial Services, Inc.
("Empire"). All significant intercompany accounts and transactions have
been eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with these evaluations,
management obtains independent appraisals for significant properties.
A substantial portion of the Corporation's loans are secured by real
estate located primarily in Georgia. Accordingly, the ultimate
collection of these loans is susceptible to changes in the real estate
market conditions of this market area.
Interest Bearing Deposits in Banks
Interest bearing deposits in banks mature within one year and are carried
at cost.
Securities
Debt securities that management has the positive intent and ability to
hold to maturity are classified as "held to maturity" and recorded at
amortized cost. Securities not classified as held to maturity or
trading, including equity securities with readily determinable fair
values, are classified as "available for sale" and recorded at fair value
with unrealized gains and losses reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using
the interest method over the terms of the securities. Declines in the
fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in
-8-
earnings as realized losses. Gains and losses on the sale of securities
are recorded on the trade date and are determined using the specific
identification method.
Long-Lived Assets
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation has been calculated primarily using the
straight-line method for buildings and building improvements over the
assets estimated useful lives. Equipment and furniture are depreciated
using the modified accelerated recovery system method over the assets
estimated useful lives for financial reporting and income tax purposes.
The following estimated useful lives are used for financial statement
purposes:
Land improvements 5 - 31 years
Building and improvements 10 - 40 years
Machinery and equipment 5 - 10 years
Computer equipment 3 - 5 years
Office furniture and fixtures 5 - 10 years
Certain leases are capitalized as assets for financial reporting
purposes. Such capitalized assets are amortized, using the straight-line
method, over the terms of the leases. Maintenance and repairs are
charged to expense and betterments are capitalized.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired
and the write-down would be material, an assessment of recoverability is
performed prior to any write-down of the asset. Impairment on
intangibles is evaluated at each balance sheet date or whenever events or
changes in circumstances indicate that the carrying amount should be
assessed. Impairment, if any, is recognized through a valuation
allowance with a corresponding charge recorded in the income statement.
Loans and Allowances for Loan Losses
Loans are stated at principal amounts outstanding less unearned income
and the allowance for loan losses. Interest income is credited to income
based on the principal amount outstanding at the respective rate of
interest except for interest on certain installment loans made on a
discount basis which is recognized in a manner that results in a level-
yield on the principal outstanding.
Accrual of interest income is discontinued on loans when, in the opinion
of management, collection of such interest income becomes doubtful.
Accrual of interest on such loans is resumed when, in management's
judgment, the collection of interest and principal becomes probable.
Fees on loans and costs incurred in origination of most loans are
recognized at the time the loan is placed on the books. Because loan
fees are not significant, the results on operations are not materially
different from the 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.
-9-
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower's prior payment
record, and the amount of the shortfall in relation to the principal and
interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not
separately identify individual consumer and residential loans for
impairment disclosures.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes the collection of the principal is
unlikely. The allowance is an amount which management believes will be
adequate to absorb estimated losses on existing loans that may become
uncollectible based on evaluation of the collectibility of loans and
prior loss experience. This evaluation takes into consideration such
factors as changes in the nature and volume of the loan portfolios,
current economic conditions that may affect the borrowers' ability to
pay, overall portfolio quality, and review of specific problem loans.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based upon changes in
economic conditions. Also, various regulatory agencies, as an integral
part of their examination process, periodically review the Corporation's
allowance for loan losses. Such agencies may require the Corporation to
recognize additions to the allowance based on their judgments of
information available to them at the time of their examination.
Foreclosed Assets
Properties acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at the lower of cost or fair value at the
date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value less
cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in net expenses from foreclosed assets.
-10-
Credit Related Financial Instruments
In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit, and standby letters of
credit. Such financial instruments are recorded when they are funded.
Retirement Plans
The Corporation and its subsidiaries have pension plans covering
substantially all employees. The Corporation makes annual contributions
to the plans in amounts not exceeding the regulatory requirements.
Income Taxes
The Corporation and its subsidiaries file a consolidated income tax
return. The subsidiaries provide for income taxes based on its
contribution to income taxes (benefits) of the consolidated group.
Deferred income tax assets and liabilities result from temporary
differences between the tax basis of assets and liabilities and their
reportable amounts in the financial statements that will result in
taxable or deductible amounts in future years.
Recent Accounting Pronouncements
The Corporation adopted FASB Statement No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002. This standard requires,
among other things, that goodwill will not be amortized from the
effective date of its adoption. Instead, goodwill and other intangibles
will be subjected to an annual test for impairment of value. This will
not only effect goodwill arising from acquisitions completed after the
effective date, but will also effect any unamortized balance of goodwill
and other intangible assets.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Corporation considers cash and
cash equivalents to include cash on hand, noninterest-bearing deposit
amounts due from banks, and highly liquid debt instruments purchased with
an original maturity of three months or less.
Trust Department
Trust income is included in the accompanying consolidated financial
statements on the cash basis in accordance with established industry
practices. Reporting of such fees on the accrual basis would have no
material effect on reported income.
-11-
Servicing and Origination Fees on Loans
The Corporation from its subsidiary, Empire, recognizes as income in the
current period all loan origination and brokerage fees collected on loans
originated and closed for investing participants. Loan servicing fees
are based on a percentage of loan interest paid by the borrower and
recognized over the term of the loan as loan payments are received.
Empire does not directly fund any mortgages and acts as a service-
oriented broker for participating mortgage lenders. Fees charged for
continuing servicing fees are comparable with market rates charged in the
industry. Based on these facts, deferred mortgage servicing rights as
defined under FASB 65 and FASB 122, are not required to be recognized.
Late charges assessed on past due payments are recognized as income by
the Corporation when collected.
Advertising Costs
It is the policy of the Corporation to expense advertising costs as they
are incurred. The Corporation does not engage in any direct-response,
advertising and accordingly has no advertising costs reported as assets
on its balance sheet.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Form 10-Q report contains
forward-looking statements within the meaning of the federal securities
laws. The Corporation cautions that there are various factors that could
cause actual results to differ materially from the anticipated results or
other expectations expressed in the Corporation's forward-looking
statements; accordingly, there can be no assurance that such indicated
results will be realized.
These factors include legislative and regulatory initiatives regarding
deregulation and restructuring of the banking industry; the extent and
timing of the entry of additional competition in the Corporation's
markets; potential business strategies, including acquisitions or
dispositions of assets or internal restructuring, that may be pursued by
the Corporation; the Corporation's effectiveness with implementing its
strategies; state and federal banking regulations; changes in or
application of environmental and other laws and regulations to which the
Corporation is subject; political, legal and economic conditions and
developments; financial market conditions and the results of financing
efforts; changes in commodity prices and interest rates; weather, natural
disasters and other catastrophic events; and other factors discussed in
the Corporation's filings with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of the Corporation. Any such statement
speaks only as of the date the statement was made. The Corporation
undertakes no obligation to update or revise any forward-looking
statements. Additional information with respect to factors that may
cause results to differ materially from those contemplated by such
forward-looking statements is included in the Corporation's current and
subsequent filings with the Securities and Exchange Commission.
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow
requirements of customers who may be either depositors wanting to
withdraw their funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. In the ordinary course of
business, the Corporation's cash flows are generated from interest and
fee income as well as from loan repayments and the maturity or sale of
other earning assets. In addition, liquidity is continuously provided
through the acquisition of new deposits and borrowings or the rollover of
maturing deposits and borrowings. The Corporation strives to maintain an
adequate liquidity position by managing the balances and maturities of
interest-earning assets and interest-earning liabilities so that the
balance it has in short-term investments at any given time will
adequately cover any reasonably anticipated immediate need for funds.
Additionally, the subsidiary Southwest Georgia Bank (the "Bank")
maintains relationships with correspondent banks which could provide
funds to it on short notice, if needed.
-13-
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 March 31, 2004, were considered
satisfactory. At that date, the Bank's short-term investments were
adequate to cover any reasonably anticipated immediate need for funds.
The Corporation is aware of no events or trends likely to result in a
material change in liquidity. At March 31, 2004, the Corporation's and
the Bank's risk-based capital ratios were considered adequate based on
guidelines established by regulatory authorities. During the three
months ended March 31, 2004, total capital increased $6.6 million to
$39.6 million. Under a share repurchase program adopted by the Board in
January 2000, the Corporation repurchased 9,000 shares of its common
stock during the first three months of 2004 at an average price of $23.10
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 13.35 percent as of March 31, 2004. The Corporation is
aware of no events or trends likely to result in a material change in
capital resources other than normal operations resulting in the retention
of net earnings, repurchasing shares, 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.
Acquisition
In February 2004, the Corporation acquired ownership of First Bank
Holding Company and its sole subsidiary, Sylvester Banking Company, which
are located in Sylvester, Georgia. The Corporation acquired all of the
common shares of First Bank Holding Company and Sylvester Banking Company
for $4.2 million in cash and 240,000 shares of Southwest Georgia
Financial Corporation common stock. The approximate total value of the
transaction was $9.7 million. Sylvester Banking Company was merged into
Southwest Georgia Bank, which is a subsidiary of the Corporation.
Sylvester Banking Company, which has been in business since 1898, has
about $45 million in assets. It is a one office, full service community
bank that holds approximately 25 percent of the deposits of Worth County,
Georgia. Sylvester Banking Company is located is Worth County, Georgia,
contiguous with Colquitt County.
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.
-14-
Comparison of Statements of Income
The Corporation's net income after taxes for the three-month period
ending March 31, 2004, was $1.078 million compared with a net income
of $880 thousand for the same period in 2003, representing an increase
of $198 thousand, or 22.5 percent. The earnings improvement was
primarily a result of a 11 percent increase in noninterest income
combined with reduced income taxes and lower provisions for loan
losses.
Total noninterest income increased $177 thousand for the three months
ended March 31, 2004, compared with the same period in 2003. For the
quarter ended March 31, 2004, mortgage banking income, the largest
component of noninterest income, was $1.097 million, up from $880
thousand in 2003, service charges on deposit accounts increased $88
thousand to $350 thousand, and income from insurance services increased
to $295 thousand compared to $264 thousand in the first quarter of 2003.
These increases were partially offset by a loss on the sale of bank
property. All significant lines of noninterest income showed increases
for the first quarter of 2004 when compared with the same period from
the prior year
Total interest income decreased $112 thousand comparing the three months
ended March 31, 2004 with the same period in 2003. The decrease for the
three-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 48 basis points comparing the three-month period
with the same period in 2003. The average volume of loans decreased $5.9
million for the three-month period compared with the same period last
year.
The total interest expense decreased $185 thousand, or 19.6 percent, in
the first quarter of 2004 compared with the same period in 2003. The
decrease in interest expense is primarily related to decreases in the
rate on interest-bearing deposits. The rate on average time deposits
decreased 65 basis points and the rate on average savings deposits
dropped 50 basis points comparing the first three months of 2004 with the
same period in 2003. Interest on long-term debt decreased $7 thousand,
or 5.8 percent, while interest on other short-term borrowings increased
$41 thousand during the first quarter of 2004 compared with the same
periods in 2003.
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 first quarter of 2004 increased $73 thousand, or 3.0
percent, compared with the same period in 2003. Net interest income for
the first three months of 2004 was $2.5 million compared with $2.4
million for the same period in 2003. Net interest income is determined
primarily by the volume of earning assets and the various rate spreads
between these assets and their funding sources. The Corporation's net
interest margin was 4.30 percent and 4.63 percent during the first
quarter of 2004 and 2003, respectively. The decreased net interest
margin is primarily due to lower yields on earning assets. However, the
decrease in margin was more than offset by higher volume of earning
assets and an improved mix in deposit liabilities.
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Total noninterest expenses increased by $506 thousand, or 19.8 percent,
for the three months ended March 31, 2004 compared with the same period
in 2003. The majority of this increase in noninterest expense was
related to the merger of Sylvester Banking Company. 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 three months of 2004, total assets increased $51
thousand, or 20.5 percent, from December 31, 2003. The majority of the
increase in assets is a result of the acquisition of Sylvester Banking
Company.
The Corporation's loan portfolio of $105.5 million increased 8.6 percent
from the December 31, 2003, level of $97.2 million. The Corporation
continues to be conservative in its lending practices in order to
maintain a quality loan portfolio. Loans, a major use of funds,
represent 35.6 percent of total assets.
Investment securities and other short-term investments represent 55.9
percent of total assets. Investment securities increased $22.5 million
since December 31, 2003. Other short-term investments increased $17.2
million since December 31, 2003. This resulted in an overall increase in
investments of $39.7 million. This increase in investment securities was
due to the acquisition mentioned earlier.
Deposits, the primary source of the Corporation's funds, increased from
$182.9 million at December 31, 2003, to $230.0 million at March 31, 2004.
This increase reflected the above mentioned acquisition. The Corporation
believes its share of total deposits in Colquitt County remains
relatively stable. At March 31, 2004, total deposits represented 77.5
percent of total assets.
The Corporation decreased its level of short-term borrowings with the
Federal Home Loan Bank while long-term borrowings remained stable during
the first quarter. Short-term borrowings were reduced $7 million
comparing the first quarter with December 31, 2003.
The allowance for loan losses represents a reserve for potential losses
in the loan portfolio. The adequacy of the allowance for loan losses is
evaluated monthly based on a review of all significant loans, with a
particular emphasis on nonaccruing, past due, and other loans that
management believes require attention. Other factors used in determining
the adequacy of the reserve are management's judgment about factors
affecting loan quality and management's assumptions about the local and
national economy. The allowance for loan losses was 2.38 percent of
total loans outstanding at March 31, 2004, compared with 2.41 percent of
loans outstanding at December 31, 2003. Non-performing assets as a
percentage of total loans was .71%, down from 1.51% 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 of 2003. Management considers the allowance for
loan losses as of March 31, 2004, 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 March 31, 2004, the Corporation's one-year cumulative
rate-sensitive assets represented 133 percent of the cumulative rate-
sensitive liabilities compared with 107 percent for the same period in
2003. 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 more asset-sensitive at the one-year gap position resulting from
management holding more liquid earning assets to take advantage of rising
rates and to reduce the Corporation's interest rate risk from possible
increasing short-term rates. All interest rates and yields do not adjust
at the same velocity; therefore, the interest rate sensitivity gap is
only a general indicator of the potential effects of interest rate
changes on net interest income. The Corporation's asset and liability
mix is monitored to ensure that the effects of interest rate movements in
either direction are not significant over time.
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ITEM 4. CONTROLS AND PROCEDURES
The Corporation's management, including the Chief Executive Officer and
Chief Financial Officer, supervised and participated in an evaluation of
the effectiveness of its disclosure controls and procedures (as defined
in federal securities rules) as of the end of the period covered by this
report. Based on, and as of the date of, that evaluation, the
Corporation's Chief Executive Officer and Chief Financial Officer have
concluded that the Corporation's disclosure controls and procedures were
effective in accumulating and communicating information to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures of
that information under the Securities and Exchange Commission's rules and
forms and that the Corporation's disclosure controls and procedures are
designed to ensure that the information required to be disclosed in
reports that are filed or submitted by the Corporation under the
Securities Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms.
Based on this evaluation, management believes there were no significant
changes in the Corporation's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
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PART II. - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 31.1 Section 302 Certification of Periodic Financial Report
by Chief Executive Officer.
Exhibit 31.2 Section 302 Certification of Periodic Financial Report
by Chief Financial Officer.
Exhibit 32.1 Section 906 Certification of Periodic Financial Report
by Chief Executive Officer.
Exhibit 32.2 Section 906 Certification of Periodic Financial Report
by Chief Financial Officer.
B. Reports on Form 8-K
On January 23, 2004, the Corporation furnished an 8-K to report the
following event: issuance of a press release to report earnings for
the quarter ended December 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
BY: /s/George R. Kirkland
---------------------------------
GEORGE R. KIRKLAND
SENIOR VICE-PRESIDENT AND TREASURER
(FINANCIAL AND ACCOUNTING OFFICER)
Date: May 14, 2004
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