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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, 2005
[ ] 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, 2005
Common Stock, $1 Par Value 4,263,520
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
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 - March 31, 2005 (unaudited) and
December 31, 2004. 2
b. Consolidated statements of income (unaudited) - for the
three months ended March 31, 2005 and 2004. 3
c. Consolidated statements of comprehensive income (unaudited) -
for the three months ended March 31, 2005 and 2004. 4
d. Consolidated statements of cash flows (unaudited) for the
three months ended March 31, 2005 and 2004. 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 21
ITEM 4. CONTROLS AND PROCEDURES 22
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS 24
SIGNATURE 25
-1-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2005 and December 31, 2004
(Unaudited)
March 31, December 31,
2005 2004
ASSETS
Cash and due from banks $ 11,173,297 $ 13,366,631
Interest-bearing deposits with banks 6,430,288 5,966,691
Federal funds sold 0 0
Investment securities available for sale,
at fair value 55,519,758 56,852,442
Investment securities held to maturity (estimated
fair value of $111,961,916 and $116,029,346) 114,044,168 116,045,657
Total investment securities 169,563,926 172,898,099
Loans 100,927,494 99,957,260
Less: Unearned income (39,826) (42,531)
Allowance for loan losses (2,474,377) (2,506,837)
Loans, net 98,413,291 97,407,892
Premises and equipment 6,783,917 6,830,392
Foreclosed assets, net 0 14,200
Intangible assets 3,083,161 3,205,882
Other assets 5,862,278 5,534,903
Total assets $301,310,158 $305,224,690
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 34,304,839 $ 36,399,339
NOW accounts 59,466,657 52,913,461
Money Market 12,472,718 11,851,177
Savings 29,051,701 28,080,860
Certificates of deposit $100,000 and over 24,030,141 27,342,827
Other time accounts 65,856,600 65,900,438
Total deposits 225,182,656 222,488,102
Federal funds purchased 0 0
Other borrowed funds 3,000,000 8,000,000
Long-term debt 30,457,143 30,517,143
Other liabilities 3,514,971 4,775,688
Total liabilities 262,154,770 265,780,933
Stockholders' equity:
Common stock - par value $1; authorized
5,000,000 shares; issued 4,263,520 shares 4,263,520 4,262,520
Capital surplus 31,206,040 31,187,722
Retained earnings 13,209,743 12,627,466
Accumulated other comprehensive income (177,098) 525,191
Treasury stock 992,112 shares for 2005 and
983,912 shares for 2004, at cost (9,346,817) (9,159,142)
Total stockholders' equity 39,155,388 39,443,757
Total liabilities and stockholders' equity $301,310,158 $305,224,690
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Three Months
Ended March 31,
2005 2004
Interest income:
Interest and fees on loans $1,711,828 $1,715,380
Interest and dividend on securities available for sale 429,973 544,244
Interest on taxable securities held to maturity 1,165,078 712,168
Interest on tax exempt securities available for sale 156,301 156,269
Interest on tax exempt securities held to maturity 57,201 56,663
Interest on federal funds sold 0 30,307
Interest on deposits with banks 52,394 16,120
Total interest income 3,572,775 3,231,151
Interest expense:
Interest on deposits 719,197 583,126
Interest federal funds purchased 0 65
Interest on other borrowings 20,387 59,285
Interest on long-term debt 257,083 114,491
Total interest expense 996,667 756,967
Net interest income 2,576,108 2,474,184
Provision for loan losses 20,000 7,018
Net interest income after provision for loan losses 2,556,108 2,467,166
Noninterest income:
Service charges on deposit accounts 337,610 350,090
Income from trust services 72,223 73,446
Income from retail brokerage services 59,490 55,848
Income from insurance services 309,074 294,838
Income from mortgage banking services 872,457 1,097,028
Net gain (loss) on disposition of assets 2,600 (186,202)
Net gain on sale of securities 0 2,914
Other income 97,801 89,651
Total noninterest income 1,751,255 1,777,613
Noninterest expense:
Salaries and employee benefits 1,759,287 1,613,641
Occupancy expense 208,200 183,040
Equipment expense 167,505 153,408
Data processing expense 193,417 174,336
Amortization of intangible assets 122,721 95,116
Other operating expenses 599,210 839,762
Total noninterest expenses 3,050,340 3,059,303
Income before income taxes 1,257,023 1,185,476
Provision for income taxes 249,463 107,909
Net income $1,007,560 $1,077,567
Earnings per share of common stock:
Net income, basic $ 0.31 $ 0.34
Net income, diluted $ 0.30 $ 0.34
Dividends paid, basic & diluted $ 0.13 $ 0.11
Weighted average shares outstanding 3,275,464 3,150,775
Diluted average shares outstanding 3,307,589 3,165,362
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Three Months
Ended March 31,
2005 2004
Net income $1,007,560 $1,077,567
Other comprehensive income, net of tax:
Unrealized holding gains(losses) arising
during the period (1,064,074) 861,485
Federal income tax expense (361,785) 292,627
Other comprehensive income, net of tax: (702,289) 568,858
Total comprehensive income $ 305,271 $1,646,425
-4-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Three Months
Ended March 31,
2005 2004
Cash flows from operating activities:
Net income $ 1,007,560 $ 1,077,567
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 20,000 7,018
Depreciation 194,761 170,962
Net amortization and accretion of
investment securities 3,833 7,813
Amortization of intangibles 122,721 95,116
Net loss (gain) on sale and disposal of assets (2,600) 183,288
Changes in:
Other assets (327,693) 198,626
Other liabilities (898,615) (742,216)
Net cash provided by operating activities 119,967 998,174
Investing activities:
Proceeds from maturities of securities
held to maturity 4,000,000 12,000,000
Proceeds from maturities of securities
available for sale 296,667 14,445,740
Proceeds from sale of securities available for sale 0 5,157
Purchase of securities held to maturity (2,000,000) (21,125,118)
Purchase of securities available for sale (30,400) 0
Net change in other short-term investments 0 (10,665,000)
Net change in loans (1,025,399) 2,022,985
Purchase of premises and equipment (148,286) (520,131)
Proceeds from sales of other assets 16,800 352,133
Net change in interest-bearing deposits with banks (463,597) (31,327)
Acquisition, net of cash acquired 0 3,352,364
Net cash provided(used) for investing activities 645,785 (163,197)
Financing activities:
Net change in deposits 2,694,554 7,292,245
Net change in federal funds purchased 0 (2,000,000)
Net change in short-term borrowings (5,000,000) (5,000,000)
Net change in long-term borrowings (60,000) (60,000)
Cash dividends declared (425,283) (360,266)
Proceeds from the exercise of stock options 19,318 15,687
Payment for common stock (187,675) (207,925)
Net cash provided(used) for financing activities (2,959,086) (320,259)
Increase(decrease) in cash and due from banks (2,193,334) 514,718
Cash and due from banks - beginning of period 13,366,631 10,959,728
Cash and due from banks - end of period $11,173,297 $11,474,446
NONCASH ITEMS:
Increase in foreclosed properties and decrease in loans $ 0 $ 76,145
Unrealized gain(loss) on securities available for sale $ (702,289) $ 568,858
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(UNAUDITED)
For The Three Months
Ended March 31,
2005 2004
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 $ 0 $ 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 $ 0 $ 4,200,000
-6-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
Southwest Georgia Financial Corporation (the "Corporation"), a bank-holding
company organized under the laws of Georgia, provides deposit, lending, and
other financial services to businesses and individuals primarily in the
Southwest region of Georgia. The Corporation and its subsidiaries are subject
to regulation by certain federal and state agencies.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and changes in financial position in
conformity with generally accepted accounting principles. The interim
financial statements furnished reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented. The interim consolidated financial statements
should be read in conjunction with the Corporation's 2004 Annual Report on Form
10K.
-7-
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries conform to generally accepted accounting
principles and to general practices within the banking industry. The following
is a description of the more significant of those policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest Georgia
Financial Corporation and its wholly-owned Subsidiaries, Southwest Georgia Bank
(the "Bank") and Empire Financial Services, Inc. ("Empire"). All significant
intercompany accounts and transactions have been eliminated in the
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with these evaluations, management obtains independent
appraisals for significant properties.
A substantial portion of the Corporation's loans are secured by real estate
located primarily in Georgia. Accordingly, the ultimate collection of these
loans may be susceptible to changes in the real estate market conditions of
this market area.
Interest Bearing Deposits in Banks
Interest bearing deposits in banks mature within one year and are carried at
cost.
Securities
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity or trading, including equity
securities with readily determinable fair values, are classified as "available
for sale" and recorded at fair value with unrealized gains and losses reported
in other comprehensive income.
-8-
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
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 after December 31, 2003, 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.
-9-
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.
-10-
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
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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.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Form 10-Q report contains forward-
looking statements within the meaning of the federal securities laws. The
Corporation cautions that there are various factors that could cause actual
results to differ materially from the anticipated results or other expectations
expressed in the Corporation's forward-looking statements; accordingly, there
can be no assurance that such indicated results will be realized.
These factors include legislative and regulatory initiatives regarding
deregulation and restructuring of the banking industry; the extent and timing
of the entry of additional competition in the Corporation's markets; potential
business strategies, including acquisitions or dispositions of assets or
internal restructuring, that may be pursued by the Corporation; the
Corporation's effectiveness with implementing its strategies; state and federal
banking regulations; changes in or application of environmental and other laws
and regulations to which the Corporation is subject; political, legal and
economic conditions and developments; financial market conditions and the
results of financing efforts; changes in commodity prices and interest rates;
weather, natural disasters and other catastrophic events; and other factors
discussed in the Corporation's filings with the Securities and Exchange
Commission.
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of the Corporation. Any such statement speaks
only as of the date the statement was made. The Corporation undertakes no
obligation to update or revise any forward-looking statements. Additional
information with respect to factors that may cause results to differ materially
from those contemplated by such forward-looking statements is included in the
Corporation's current and subsequent filings with the Securities and Exchange
Commission.
Overview
The Corporation is a full-service community bank holding company headquartered
in Moultrie, Georgia. The community of Moultrie has been served by the
Corporation and its predecessors since 1928. We provide comprehensive financial
services to consumer, business and governmental customers, which, in addition
to conventional banking products, include a full range of mortgage banking,
trust, investment and insurance services. Our primary market area incorporates
Colquitt County, where we are headquartered, and Baker, Thomas, and Worth
Counties, each contiguous with Colquitt County. In 2004, we completed the
acquisition of Sylvester Banking Company, adding Worth County into our market
territory. Including this acquisition, we have four full service banking
facilities and six automated teller machines.
-13-
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 our customers with quality service,
* to expand our market share where opportunity exists, and
* to grow outside of our current geographic footprint, through acquisitions,
into adjacent market areas.
The Corporation's profitability, like most financial institutions, is dependent
to a large extent upon net interest income, which is the difference between the
interest received on earning assets, such as loans, securities and federal
funds sold, and the interest paid on interest-bearing liabilities, principally
deposits and borrowings. Net interest income is highly sensitive to the
fluctuations in interest rates. During 2004 and the first three months of
2005, the U.S. economy continues to be marked by historically low interest
rates. Since July 2004, short-term rates increased 1.75% by March 31, 2005.
Our profitability, as in any business, is impacted as well by operating
expenses such as salaries and employee benefits, occupancy and other operating
expenses, including income taxes.
Our lending activities are significantly influenced by regional and local
economic factors. Some specific factors include changes in population,
demographics of the population, competition among lenders, interest rate
conditions and prevailing market rates on competing investments, customer
preferences and levels of personal income and savings in the Corporation's
primary market area.
To address interest rate fluctuations out of our control, we manage our balance
sheet in an effort to diminish the impact of sudden interest rates changes by
broadening our revenue sources to reduce the risk and exposure of our financial
results.
As a result of our strategy to diversify revenue, noninterest income has grown
over the last few years and was 68% of first quarter 2005 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.
Acquisition
On February 27, 2004, the Corporation acquired ownership of First Bank Holding
Company and its sole subsidiary, Sylvester Banking Company, which are located
in Sylvester, Georgia. The Corporation acquired all of the common shares of
First Bank Holding Company and Sylvester Banking Company for $4.2 million in
cash and 240,000 shares of Southwest Georgia Financial Corporation common stock
valued at $5.5 million. The approximate total value of the transaction was
$9.7 million. Sylvester Banking Company was merged into Southwest Georgia
Bank, a subsidiary of the Corporation. Sylvester Banking Company, which has
been in business since 1898, had $49.6 million in assets at the time of the
acquisition. The business combination was accounted for by the purchase method
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of accounting and the results of operations of the Sylvester Banking Company
office since the date of acquisition are included in the Consolidated Financial
Statements. Total assets of $49.6 million and liabilities of $39.9 million were
booked at fair value including booking a core deposit intangible of $1.7
million. This core deposit intangible is being amortized over a 10-year period.
The following table shows the fair value of assets acquired and liabilities
assumed as of the acquisition date.
Dollars in
thousands
Cash, due from banks, and Federal funds sold $ 9,861
Investment securities 26,934
Loans, net 10,264
Bank premises and equipment 588
Core deposit intangible 1,670
Other assets 335
Deposits (39,834)
Other liabilities (98)
Net assets acquired $ 9,720
The following table shows selected pro forma information of the Corporation as
if the acquisition had occurred on January 1, 2003. The pro forma information
does not include any operating efficiencies that could be realized in a branch
acquisition.
Three Months Ended
March 31,
2005 2004 2003
(Dollars in thousands)
Net interest income $ 2,576 $ 2,705 $ 2,790
Net income $ 1,008 $ 1,141 $ 933
Basic earnings per share $ .31 $ .35 $ .27
Diluted earnings per share $ .30 $ .35 $ .27
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Critical Accounting Policies
In the course of the Corporation's normal business activity, management must
select and apply many accounting policies and methodologies that lead to the
financial results presented in the consolidated financial statements of the
Corporation. Management considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy because of the
uncertainty and subjectivity inherent in estimating the levels of allowance
needed to cover probable credit losses within the loan portfolio and the
material effect that these estimates can have on the Corporation's results of
operations. We believe that the allowance for loan losses as of March 31, 2005
is adequate, however, under adversely different conditions or assumptions,
future additions to the allowance may be necessary. There have been no
significant changes in the methods or assumptions used in our accounting
policies that require material estimates and assumptions. Note 1 to the
Consolidated Financial Statements provides a description of our significant
accounting policies and contributes to the understanding of how our financial
performance is reported.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be either depositors wanting to withdraw their funds or
borrowers needing assurance that sufficient funds will be available to meet
their credit needs. In the ordinary course of business, the Corporation's cash
flows are generated from interest and fee income as well as from loan
repayments and the maturity or sale of other earning assets. In addition,
liquidity is continuously provided through the acquisition of new deposits and
borrowings or the rollover of maturing deposits and borrowings. The
Corporation strives to maintain an adequate liquidity position by managing the
balances and maturities of interest-earning assets and interest-earning
liabilities so its short-term investments balance, at any given time, will
adequately cover any reasonably anticipated immediate need for funds.
Additionally, the Bank maintains relationships with correspondent banks that
could provide funds 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 March 31, 2005, 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, 2005,
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, 2005, total capital decreased $288 thousand to
$39.2 million. The majority of this decrease resulted from a decline in the
market value of investment securities available for sale. Under a share
repurchase program adopted by the Board in January 2000, the Corporation
repurchased 8,200 shares of its common stock during the first three months of
2005 at an average price of $22.89 per share. There are approximately 100,000
additional shares authorized to be repurchased under the current program.
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Also, the Corporation continues to maintain a healthy level of capital adequacy
as measured by its equity-to-asset ratio of 13.00 % as of March 31, 2005. The
Corporation is not aware of any events or trends likely to result in a material
change in capital resources other than the effects of normal operations on the
retention of net earnings, 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 implemented,
would have a material effect on the Corporation's capital resources.
RESULTS OF OPERATIONS
The Corporation's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and investment
losses, to generate noninterest income and to control noninterest expense.
Since interest rates are determined by market forces and economic conditions
beyond the control of the Corporation, the ability to generate net interest
income is dependent upon the Bank's ability to obtain an adequate spread
between the rate earned on interest-earning assets and the rate paid on
interest-bearing liabilities. Thus, the key performance measure for net
interest income is the interest margin or net yield, which is taxable-
equivalent net interest income divided by average earning assets.
Performance Summary
The Corporation's net income after taxes for the three-month period ending
March 31, 2005, was $1.008 million compared with a net income of $1.078 million
for the same period in 2004, representing a decrease of $70 thousand. The
quarterly decline in net earnings was primarily due to lower noninterest income
and increases in income tax expenses compared with last year's quarterly
results.
On a per share basis, net income for the first quarter was $.30 per diluted
share compared with $.34 per share for the same quarter in 2004. The lower
earnings on a per share basis were due to the increase in the weighted average
share count. The weighted average common shares outstanding for the quarter
were 3.275 million, up 4.0 % or 125,000 average shares from the previous
comparable quarter. This increase in average quarterly shares was due to the
bank acquisition in March of 2004 using a combination of cash and stock. This
increase was partially offset by the Corporation's stock repurchase program.
Because of our strong capital position, we continued with the stock repurchase
program that began in January 2000.
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We measure our performance on selected key ratios, which are provided for the
previous five quarterly periods ended March 31, 2005. While our overall
performance for the first quarter of 2005 is relatively the same as the first
quarter of last year, our return on average equity and return on average assets
have increased steadily during the past three quarters as the initial costs of
integrating our acquisition are behind us.
1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
2005 2004 2004 2004 2004
Return on average total assets 1.32% 1.20% 1.12% 1.46% 1.62%
Return on average total equity 10.18% 9.21% 8.43% 10.89% 12.16%
Average shareholders' equity to
Average total assets 12.97% 13.04% 13.30% 13.36% 13.32%
Net interest margin
(tax equivalent) 3.89% 3.90% 4.14% 4.26% 4.30%
Comparison of Statements of Income for the Quarter
Noninterest income, which continues to be about one-third of the Corporation's
total revenue, was $1.751 million for the first quarter, down 1.5 % from the
same period in 2004. The largest contributor to noninterest income, mortgage
banking services, was down $225 thousand, or 20.5 %, from last year's first
quarter. The decline is primarily related to the timing of loan closings on
projects in the pipeline. Currently, the mortgage banking business has a
strong pipeline of projects and continues to service a $577 million portfolio
of non-recourse loans. Helping to offset the decline in mortgage banking
services were increases in revenue from brokerage services, insurance services
and other income. The Corporation continues to reduce its dependence on net
interest income while focusing on growth in mortgage banking revenue and income
from insurance services and service charges on deposit accounts.
Total interest income increased $342 thousand for the three months ended March
31, 2005 compared with the same period in 2004. This improvement for the three-
month period resulted from increases in interest and dividends on an increased
volume of investment securities. During 2004, the Corporation borrowed $20
million long term from the Federal Home Loan Bank and purchased U.S. Government
agency bonds.
Total interest expense increased $240 thousand, or 31.7 %, in the first quarter
of 2005 compared with the same period in 2004. Most of this quarter's increase
was due to the Sylvester office operations. The first quarter of 2005 includes
a full quarter of Sylvester Banking Company's results, which was acquired at
the end of February last year. Interest on long-term debt increased $143
thousand, or 124.5 %, during the first quarter of 2005, while interest on other
short-term borrowings decreased $39 thousand during the period. We have been
challenged by lower yields on earning assets, and looking ahead, the challenge
will be to manage funding costs in a rising rate environment. Our continued
focus on cost discipline and maintaining relationships, the source of stable
core deposits, will be central to Southwest Georgia Financial Corporation's
ability to continuously deliver value to its shareholders.
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The primary source of revenue for the Corporation is net interest income, which
is the difference between total interest income on earning assets and interest
expense on interest-bearing sources of funds. Net interest income for the
first quarter of 2005 increased $102 thousand, or 4.1 %, compared with the same
period in 2004. 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 3.89% for the first
quarter of 2005, down 41 basis points from the same period a year ago. Much of
the decrease in the net interest margin can be attributed to two factors, the
merger with Sylvester Banking Company and leveraging transactions with the
Federal Home Loan Bank. Sylvester Banking Company's asset yields and net
interest margin at merger date were more than 100 basis points lower than the
Corporation's. The merger diluted net interest margin, but increased net
interest income. During 2004, the Corporation borrowed $20 million long term
from the Federal Home Loan Bank and purchased U.S. Government agency bonds.
The net spread on the leveraged transactions was 140 basis points, which
dilutes net interest margin but increases net interest income.
Provision for loan losses was $20 thousand for the first quarter compared with
$7 thousand in the same quarter of 2004.
Noninterest expense was relatively flat when compared with the first quarter of
last year. Improvement in other noninterest expense was attributed primarily
to the reduction in merger related expenses. All other major categories of
noninterest expense had increases in the first quarter of 2005 when compared
with the first quarter of 2004. However, year-to-date results in 2004 only
included one month of Sylvester Banking Company's operating costs compared with
a full quarter's costs in 2005.
Comparison of Financial Condition Statements
At March 31, 2005, total assets were $301.3 million, a 1.3 % decrease from
December 31, 2004. The majority of the decrease in assets was a result of the
Corporation reducing short-term borrowings by $5.0 million.
The Corporation's loan portfolio of $100.9 million increased nearly 1.0 % from
the December 31, 2004, level of $100.0 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 33.5 % of total assets.
Investment securities and other short-term investments represent 56.3 % of
total assets. Investment securities decreased $3.3 million since December 31,
2004, while other short-term investments increased $464 thousand. This
resulted in an overall decrease in investments of $2.9 million. A majority of
the decrease in investment securities was due to maturing and called U.S.
Government agency securities.
Deposits declined slightly to $225.2 million at the end of the first quarter of
2005, down $4.8 million from the same period in 2004 but increased $2.7 million
from the end of the year due to normal fluctuations in core deposit levels. At
March 31, 2005, total deposits represented 74.7 % of total assets.
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The Corporation decreased its level of short-term borrowings with the Federal
Home Loan Bank during the first three months of 2005. Short-term borrowings
were reduced by $5.0 million compared with the December 31, 2004 levels.
During the second, third, and fourth quarters of 2004, the Corporation shifted
into some longer term debt maturities to better position itself for rising
rates. This longer term debt was a $10 million advance from the Federal Home
Loan Bank with a fixed rate of 3.85 % maturing April 30, 2014, and is
convertible to a variable rate at the option of the Federal Home Loan Bank on
April 30, 2009. Also, in August 2004, the Corporation borrowed an additional
$5,000,000 advance from the Federal Home Loan Bank with a fixed rate of 3.08 %
maturing August 13, 2014, which is convertible to a variable rate at the option
of the Federal Home Loan Bank on August 13, 2007. In October 2004, the
Corporation borrowed an additional $5,000,000 advance from the Federal Home
Loan Bank with a fixed rate of 2.43% maturing October 28, 2014, which is
convertible to a variable rate at the option of the Federal Home Loan Bank on
October 30, 2006. These are the major contractual obligations' changes for the
Corporation during the last twelve months.
The allowance for loan losses represents a reserve for potential losses in the
loan portfolio. The adequacy of the allowance for loan losses is evaluated
monthly based on a review of all significant loans, with a particular emphasis
on nonaccruing, past due, and other loans that management believes require
attention. Other factors used in determining the adequacy of the reserve are
management's judgment about factors affecting loan quality and their
assumptions about the local and national economy. The allowance for loan
losses was 2.45 % of total loans outstanding at March 31, 2005, compared with
2.51 % of loans outstanding at December 31, 2004. Non-performing assets as a
percentage of total assets was .24 %, nearly a 50 basis point improvement over
last year. Management considers the allowance for loan losses as of
March 31, 2005, adequate to cover potential losses in the loan portfolio.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to financial instruments with
off-balance-sheet risk to meet the financing needs of our customers and reduce
risk exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit in the form of loans or through letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the financial
statements. Since many of the commitments to extend credit and standby letters
of credit are expected to expire without being drawn upon, the contractual or
notional amounts do not represent future cash requirements.
Financial instruments whose contract amounts March 31, March 31,
represent credit risk (dollars in thousands): 2005 2004
- -------------------------------------------------- -------- --------
Commitments to extend credit $ 27,289 $ 16,575
Standby letters of credit and financial guarantees $ 142 $ 117
The Corporation does not have any special purpose entities or off-balance
sheets financing arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risk lies within its exposure to interest rate
movement. The Corporation has no foreign currency exchange rate risk,
commodity price risk, or any other material market risk. The Corporation has
no trading investment portfolio. As a result, it does not hold any market risk-
sensitive instruments, which would be subject to a trading environment
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 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 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 operating 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. At any point in time,
any imbalances in the repricing opportunities 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, 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, 2005, the
Corporation's one-year cumulative rate-sensitive assets represented 108 % of
the cumulative rate-sensitive liabilities compared with 133 % for the same
period in 2004. This change in the cumulative gap is a result of the
Corporation's management of its exposure to interest rate risk. At the one
year gap, the Corporation has become less asset-sensitive by decreasing its
levels of short-term investments and increasing its levels of longer term
investments. 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 ensuring 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
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.
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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 9, 2005