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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, 2003
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from __________ to __________
Commission file number 0-20099
SOUTHWEST GEORGIA FINANCIAL CORPORATION
(Exact Name Of Small Business Issuer as specified in its Charter)
Georgia 58-1392259
(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
201 FIRST STREET, S.E., MOULTRIE, GEORGIA 31768
Address Of Principal Executive Offices
(229) 985-1120
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ___________
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding At April 15, 2003
Common Stock, $1 Par Value 3,300,000
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE #
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are provided for Southwest Georgia Financial
Corporation as required by this Item 1.
a. Consolidated balance sheets (unaudited) - March 31, 2003 and
December 31, 2002. 2
b. Consolidated statements of income (unaudited) - for the three
months ended March 31, 2003 and 2002. 3
c. Consolidated statements of comprehensive income (unaudited) -
for the three months ended March 31, 2003 and 2002. 4
d. Consolidated statements of cash flows (unaudited) for the three
months ended March 31, 2003 and 2002. 5
e. Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 16
ITEM 4. CONTROLS AND PROCEDURES 17
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS(UNAUDITED)
March 31, 2003 and December 31, 2002
March 31, December 31,
2003 2002
ASSETS
Cash and due from banks $ 11,361,038 $ 11,880,622
Interest-bearing deposits with banks 2,504,071 3,996,485
Federal funds sold 0 2,000,000
Investment securities available for sale,
at fair value 56,352,372 40,055,321
Securities to be held to maturity (estimated
fair value of $63,124,729 and $68,492,520) 60,145,651 65,150,087
Total investment securities 116,498,023 105,205,408
Loans 102,013,131 105,987,365
Less: Unearned income (49,301) (54,066)
Allowance for loan losses (2,016,907) (1,899,738)
Net loans 99,946,923 104,033,561
Premises and equipment, net 5,420,294 5,434,115
Foreclosed assets, net 2,135,966 1,982,467
Intangible assets 2,280,489 2,361,477
Other assets 3,614,112 3,573,504
Total assets $243,760,916 $240,467,639
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 25,144,707 $ 28,924,659
NOW accounts 38,371,232 36,113,124
Money market 14,205,939 12,514,257
Savings 18,984,020 18,193,291
Certificates of deposit $100,000 and over 23,499,420 26,097,720
Other time accounts 67,638,130 68,080,299
Total deposits 187,843,448 189,923,350
Other borrowed funds 2,400,000 2,400,000
Long-term debt 15,977,360 11,041,252
Other liabilities 3,941,395 3,781,026
Total liabilities 210,162,203 207,145,628
Stockholders' equity:
Common stock - par value $1; authorized
5,000,000 shares; issued 3,300,000 shares 3,300,000 3,300,000
Capital surplus 7,133,551 7,133,551
Retained earnings 28,948,597 28,403,347
Accumulated other comprehensive income 1,125,585 1,188,733
Treasury stock 722,575 shares for 2003
and 711,075 for 2002, at cost ( 6,909,020) ( 6,703,620)
Total stockholders' equity 33,598,713 33,322,011
Total liabilities and stockholders' equity $243,760,916 $240,467,639
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Three Months
Ended March 31,
2003 2002
Interest income:
Interest and fees on loans $ 1,924,254 $ 2,512,561
Interest and dividends on securities
available for sale 337,023 238,950
Interest on taxable securities held to maturity 870,126 872,099
Interest on tax exempt securities
available for sale 153,123 143,538
Interest on tax exempt securites held to maturity 38,339 33,720
Interest on federal funds sold 1,546 6,019
Interest on deposits with banks 18,720 12,773
Total interest income 3,343,131 3,819,660
Interest expense:
Interest on deposits 801,788 1,173,197
Interest on other borrowings 18,700 28,938
Interest on long-term debt 121,285 30,444
Total interest expense 941,773 1,232,579
Net interest income 2,401,358 2,587,081
Provision for loan losses 150,000 150,000
Net interest income after provision for loan losses 2,251,358 2,437,081
Noninterest income:
Service charges on deposit accounts 261,847 240,587
Income from trust services 67,728 50,828
Income from retail brokerage services 56,423 87,066
Income from insurance services 264,541 239,234
Income from mortgage banking services 879,910 627,052
Net gain(loss) on disposition of assets ( 2,100) 40,715
Other income 72,502 78,035
Total noninterest income 1,600,851 1,363,517
Noninterest expense:
Salaries and employee benefits 1,475,869 1,615,157
Occupancy expense 149,507 132,487
Equipment expense 134,918 115,823
Data processing expense 132,524 136,177
Amortization of intangible assets 80,988 80,981
Other operating expenses 579,255 556,079
Total noninterest expenses 2,553,061 2,636,704
Income before income taxes 1,299,148 1,163,894
Provision for income taxes 418,963 333,234
Net income $ 880,185 $ 830,660
Earnings per share of common stock:
Net income, basic and diluted $ 0.34 $ 0.32
Dividends paid, basic and diluted 0.13 0.12
Weighted average shares outstanding 2,583,186 2,639,546
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For The Three Months
Ended March 31,
2003 2002
Net income $ 880,185 $ 830,660
Other comprehensive income, net of tax:
Unrealized gains on securities
available for sale:
Unrealized holding gains(losses)
arising during the period ( 95,633) ( 107,818)
Federal income tax expense(benefit) ( 32,515) ( 36,658)
Other comprehensive income (loss),
net of tax ( 63,118) ( 71,160)
Total comprehensive income $ 817,067 $ 759,500
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Three Months
Ended March 31,
2003 2002
Cash flows from operating activities:
Net income $ 880,185 $ 830,660
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 150,000 150,000
Depreciation 147,926 127,164
Net amortization and accretion
of investment securities 21,381 12,420
Amortization of intangibles 80,988 80,981
Net loss (gain) on sale and disposal of assets 2,100 ( 40,715)
Changes in:
Other assets ( 30,074) ( 444,102)
Other liabilities 192,884 177,714
Net cash provided by operating activities 1,445,390 894,122
Investing activities:
Proceeds from maturities of securities held
to maturity 8,000,000 2,000,000
Proceeds from maturities of securities
available for sale 2,587,842 576,020
Purchase of securities held to maturity ( 2,997,500) ( 1,993,750)
Purchase of securities available for sale (19,000,000) ( 4,972,487)
Net change in other short-term investments 2,000,000 630,000
Net change in loans 3,766,503 3,713,351
Purchase of premises and equipment ( 133,104) ( 81,548)
Proceeds from sales of other assets 3,000 1,251,639
Net change in interest-bearing deposits with banks 1,492,414 ( 516,578)
Net cash provided(used) for investing activities ( 4,280,845) 606,647
Financing activities:
Net change in deposits ( 2,079,902) ( 32,152)
Increase in long-term borrowings 4,936,108 176,178
Cash dividends declared ( 334,935) ( 311,167)
Payment for common stock ( 205,400) ( 235,375)
Net cash provided(used) for financing activities 2,315,871 ( 402,516)
Increase(decrease) in cash and due from banks ( 519,584) 1,098,253
Cash and due from banks - beginning of period 11,880,622 9,211,645
Cash and due from banks - end of period $11,361,038 $10,309,898
NONCASH ITEMS:
Increase in foreclosed properties
and decrease in loans $ 170,135 $ 150,004
Unrealized gain(loss) on securities
available for sale $( 63,118) $( 71,160)
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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.
-6-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries (the "Corporation") conform to generally
accepted accounting principles and to general practices within the banking
industry. The following is a description of the more significant of those
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest
Georgia Financial Corporation and its wholly-owned Subsidiaries, Southwest
Georgia Bank (the "Bank") and Empire Financial Services, Inc. (the
"Empire"). All significant intercompany accounts and transactions have been
eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with these evaluations, management
obtains independent appraisals for significant properties.
A substantial portion of the Corporation's loans are secured by real estate
located primarily in Georgia. Accordingly, the ultimate collection of these
loans is susceptible to changes in the real estate market conditions of this
market area.
Interest Bearing Deposits in Banks
Interest bearing deposits in banks mature within one year and are carried at
cost.
Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized
cost. Securities not classified as held to maturity or trading, including
equity securities with readily determinable fair values, are classified as
"available for sale" and recorded at fair value with unrealized gains and
losses reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair
value of held-to-maturity and available-for-sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as
-7-
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.
-8-
A loan is considered impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collection of the principal is unlikely.
The allowance is an amount which management believes will be adequate to
absorb estimated losses on existing loans that may become uncollectible
based on evaluation of the collectibility of loans and prior loss
experience. This evaluation takes into consideration such factors as
changes in the nature and volume of the loan portfolios, current economic
conditions that may affect the borrowers' ability to pay, overall portfolio
quality, and review of specific problem loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based upon changes in economic
conditions. Also, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for
loan losses. Such agencies may require the Corporation to recognize
additions to the allowance based on their judgments of information available
to them at the time of their examination.
Foreclosed Assets
Properties acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at the lower of cost or fair value at the
date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value less cost
to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
-9-
Credit Related Financial Instruments
In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit, and standby letters of credit.
Such financial instruments are recorded when they are funded.
Retirement Plans
The Corporation and its subsidiaries have pension plans covering
substantially all employees. The Corporation makes annual contributions to
the plans in amounts not exceeding the regulatory requirements.
Income Taxes
The Corporation and its subsidiaries file a consolidated income tax return.
The subsidiaries provide for income taxes based on its contribution to
income taxes (benefits) of the consolidated group.
Deferred income tax assets and liabilities result from temporary differences
between the tax basis of assets and liabilities and their reportable amounts
in the financial statements that will result in taxable or deductible
amounts in future years.
Recent Accounting Pronouncements
The Corporation adopted FASB Statement No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002. This standard requires,
among other things, that goodwill will not be amortized from the effective
date of its adoption. Instead, goodwill and other intangibles will be
subjected to an annual test for impairment of value. This will not only
effect goodwill arising from acquisitions completed after the effective
date, but will also effect any unamortized balance of goodwill and other
intangible assets.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Corporation considers cash and
cash equivalents to include cash on hand, noninterest-bearing deposit
amounts due from banks, and highly liquid debt instruments purchased with an
original maturity of three months or less.
Trust Department
Trust income is included in the accompanying consolidated financial
statements on the cash basis in accordance with established industry
practices. Reporting of such fees on the accrual basis would have no
material effect on reported income.
-10-
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.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Form 10-Q report contains forward-looking statements in addition to
historical information. The Corporation cautions that there are various
factors that could cause actual results to differ materially from those
indicated in the forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995; accordingly, there can be
no assurance that such indicated results will be realized.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. There are a variety of factors that could
cause the Corporation's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the
Corporation's forward-looking statements. These factors include legislative
and regulatory initiatives regarding deregulation and restructuring of the
banking industry; the extent and timing of the entry of additional
competition in the Corporation's markets; potential business strategies,
including acquisitions or dispositions of assets or internal restructuring,
that may be pursued by the Corporation; the Corporation's effectiveness with
implementing its strategies; state and federal banking regulations; changes
in or application of environmental and other laws and regulations to which
the Corporation is subject; political, legal and economic conditions and
developments; financial market conditions and the results of financing
efforts; changes in commodity prices and interest rates; weather, natural
disasters and other catastrophic events; and other factors discussed in the
Corporation's filings with the Securities and Exchange Commission. The
words "believe", "expect", "anticipate", "project", and similar expressions
signify such forward-looking statements.
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of the Corporation. Any such statement
speaks only as of the date the statement was made. The Corporation
undertakes no obligation to update or revise any forward-looking statements.
Additional information with respect to factors that may cause results to
differ materially from those contemplated by such forward-looking statements
is included in the Corporation's current and subsequent filings with the
Securities and Exchange Commission.
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow requirements
of customers who may be either depositors wanting to withdraw their funds or
borrowers needing assurance that sufficient funds will be available to meet
their credit needs. In the ordinary course of business, Southwest Georgia
Financial Corporation's (the "Corporation") cash flows are generated from
interest and fee income as well as from loan repayments and the maturity or
sale of other earning assets. In addition, liquidity is continuously
provided through the acquisition of new deposits and borrowings or the
rollover of maturing deposits and borrowings. The Corporation strives to
maintain an adequate liquidity position by managing the balances and
maturities of interest-earning assets and interest-earning liabilities so
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that the balance it has in short-term investments at any given time will
adequately cover any reasonably anticipated immediate need for funds.
Additionally, the subsidiary Southwest Georgia Bank (the "Bank") maintains
relationships with correspondent banks which could provide funds to it on
short notice, if needed.
The liquidity and capital resources of the Corporation are monitored on a
periodic basis by state and Federal regulatory authorities. As determined
under guidelines established by these regulatory authorities, the Bank's
liquidity ratios at March 31, 2003, were considered satisfactory. At that
date, the Bank's short-term investments were adequate to cover any
reasonably anticipated immediate need for funds. The Corporation is aware
of no events or trends likely to result in a material change in liquidity.
At March 31, 2003, 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, 2003, total
capital increased $277 thousand to $33.6 million. Under a share repurchase
program adopted by the Board in January 2000, the Corporation repurchased
11,500 shares of its common stock during the first three months of 2003 at an
average price of $18.68 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 13.78 percent as of March 31, 2003. The Corporation
is aware of no events or trends likely to result in a material change in
capital resources other than normal operations resulting in the retention of
net earnings, repurchasing shares, and paying dividends to shareholders. Also,
the Corporation's management is not aware of any current recommendations by the
regulatory authorities which, if they were to be implemented, would have a
material effect on the Corporation's capital resources.
Results of Operations
The Corporation's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and
investment losses, to generate noninterest income, and to control
noninterest expense. Since interest rates are determined by market forces
and economic conditions beyond the control of the Corporation, the ability
to generate net interest income is dependent upon the Bank's ability to
obtain an adequate spread between the rate earned on interest-earning assets
and the rate paid on interest-bearing liabilities. Thus, the key
performance measure for net interest income is the interest margin or net
yield, which is taxable-equivalent net interest income divided by average
earning assets.
Comparison of Statements of Income
The Corporation's net income after taxes for the three-month period
ending March 31, 2003, was $880 thousand compared with $831 thousand for
the same period in 2002, representing an increase of $49 thousand, or 5.9
percent. The increase in 2003 net income for the quarter is primarily
due to increases in income from mortgage banking services and decreases
in salary and employee benefits expenses which were partially offset by
decreases in net interest income.
Noninterest income for the first quarter of 2003 increased to $1.6 million,
up $237 thousand from the same period a year ago. Its largest component,
revenue from the mortgage banking business, was $880 thousand, up from $627
thousand, or 40% more than the same period last year. This, combined with
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year-to-date increases in service charges on deposit accounts, income from
trust services, and income from insurance services more than offset declines
in income from retail brokerage services, and net gains on the sale or
abandonment of assets.
Total interest income decreased $477 thousand comparing the three months
ended March 31, 2003 with the same period in 2002. 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
104 basis points comparing the three-month period with the same period in
2002. For the three-month period, the average volume of loans decreased
$15.2 million compared with the same period last year.
The total interest expense decreased $291 thousand, or 23.6 percent, in the
first quarter of 2003 compared with the same period in 2002. Over this
period, the average balances on interest-bearing deposits decreased $4.0
million, or 2.4 percent. The decrease in interest expense is primarily
related to decreases in the rate on interest-bearing deposits, partially
offset by an increase in interest expense on long-term debt. The rate on
time deposits decreased 140 basis points comparing the first three months of
2003 with the same period in 2002.
The primary source of revenue for the Corporation is net interest income,
which is the difference between total interest income on earning assets and
interest expense on interest-bearing sources of funds. Net interest income
for the first quarter of 2003 decreased $186 thousand, or 7.2 percent,
compared with the same period in 2002. Net interest income for the quarter
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 4.63 percent and 5.10 percent during the first
quarter of 2003 and 2002, respectively.
Total noninterest expenses decreased by $84 thousand, or 3.2 percent, for
the three months ended March 31, 2003 compared with the same periods in
2002. The majority, $139 thousand, of this decrease in noninterest expense
was attributable to a reduction in salary and employee benefits and was
partially offset by increases in expenses related to occupancy and equipment
expenses. Other 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 2003, total assets increased $3.3 million,
or 1.4 percent, from December 31, 2002, and increased $8.4 million, or 3.6
percent, from March 31, 2002.
The Corporation's loan portfolio of $102.0 million decreased 3.7 percent
from the December 31, 2002, level of $105.9 million. The Corporation's
continued focus on high credit standards combined with a soft economy has
contributed to the decrease in loans. Loans, the major use of funds,
represent 41.8 percent of total assets.
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Investment securities and other short-term investments represent 48.8
percent of total assets. Investment securities increased $11.3 million
since December 31, 2002. Other short-term investments decreased $3.5
million since December 31, 2002. This resulted in an overall increase in
investments of $7.8 million. This increase in investment securities was due
to the additional long-term borrowings from the Federal Home Loan Bank and
better utilization of funds from loan pay-offs and shorter-term investments.
Deposits, the primary source of the Corporation's funds, decreased from
$189.9 million at December 31, 2002, to $187.8 million at March 31, 2003.
This decrease reflected a combination of the weaker economy reducing
individual's cash assets and the increasingly competitive banking
environment in the Corporation's territory. The Corporation believes its
share of total deposits in Colquitt County remains relatively stable. At
March 31, 2003, total deposits represented 77.1 percent of total assets.
The Corporation has increased its level of long-term borrowings with the
Federal Home Loan Bank during the first quarter. These funds will replace
some short-term advances to be paid back to the Federal Home Loan Bank in
the second quarter of 2003, and these advances will be used to fund some
long-term investments.
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan losses is
evaluated monthly based on a review of all significant loans, with a
particular emphasis on nonaccruing, past due, and other loans that
management believes require attention. Other factors used in determining
the adequacy of the reserve are management's judgment about factors
affecting loan quality and management's assumptions about the local and
national economy. The allowance for loan losses improved to 1.98 percent of
total loans outstanding at March 31, 2003, compared with 1.79 percent of
loans outstanding at December 31, 2002. This increase reflected a
strengthening of reserves, while non-performing assets as a percentage of
total loans was 3.36%, down from 3.45% a year ago, as the quantity of non-
performing loans declined. The majority of the non-performing asset balance
was from one large property that was acquired by foreclosure. Management
considers the allowance for loan losses as of March 31, 2003, adequate to
cover potential losses in the loan portfolio.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risk lies within its exposure to interest
rate movement. The Corporation has no foreign currency exchange rate risk,
commodity price risk, or any other material market risk. The Corporation
has no trading investment portfolio. As a result, it does not hold any
market risk-sensitive instruments, which would be subject to a trading
environment which is characterized by volatile short-term movements in
interest rates. Also, the Corporation has no interest rate swaps or other
derivative instruments that are either designated and effective as hedges or
which modify the interest rate characteristics of specified assets or
liabilities. The Corporation's primary source of earnings, net interest
income, can fluctuate with significant interest rate movements. To lessen
the impact of these movements, the Corporation seeks to maximize net interest
income while remaining within prudent ranges of risk by practicing sound
interest rate sensitivity management. The Corporation attempts to accomplish
this objective by structuring the balance sheet so that the differences in
repricing opportunities between assets and liabilities are minimized.
Interest rate sensitivity refers to the responsiveness of earning assets and
interest-bearing liabilities to changes in market interest rates. The
Corporation's interest rate risk management is carried out by the
Asset/Liability Management Committee which operates under policies and
guidelines established by management. The Corporation maintains an investment
portfolio that staggers maturities and provides flexibility over time in
managing exposure to changes in interest rates. Any imbalances in the
repricing opportunities at any point in time constitute a financial
institution's interest rate sensitivity.
The Corporation uses a number of tools to measure interest rate risk. One
of the indicators for the Corporation's interest rate sensitivity position
is the measurement of the difference between its rate-sensitive assets and
rate-sensitive liabilities, which is referred to as the "gap." A gap
analysis displays the earliest possible repricing opportunity for each asset
and liability category based upon contractual maturities and repricing. As
of March 31, 2003, the Corporation's one-year cumulative rate-sensitive
assets represented 107 percent of the cumulative rate-sensitive liabilities
compared with 76 percent for the same period in 2002. This change in the
cumulative gap is a result of the Corporation's management of its exposure
to interest rate risk. The Corporation has become asset-sensitive at the
one-year gap position resulting from management borrowing some additional
long-term funds to take advantage of the lower rates and to reduce the
Corporation's interest rate risk from possible increasing short-term rates.
All interest rates and yields do not adjust at the same velocity; therefore,
the interest rate sensitivity gap is only a general indicator of the
potential effects of interest rate changes on net interest income. The
Corporation's asset and liability mix is monitored to ensure that the
effects of interest rate movements in either direction are not significant
over time.
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ITEM 4. CONTROLS AND PROCEDURES
The Corporation's management, including the Chief Executive Officer and
Chief Financial Officer, supervised and participated in an evaluation of its
disclosure controls and procedures (as defined in federal securities rules)
within 90 days prior to the filing of this report. Based on, and as of the
date of, that evaluation, the Corporation's Chief Executive Officer and
Chief Financial Officer have concluded that the Corporation's disclosure
controls and procedures were effective in accumulating and communicating
information to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosures of that information under the Securities and Exchange
Commission's rules and forms and that the Corporation's disclosure controls
and procedures are designed to ensure that the information required to be
disclosed in reports that are filed or submitted by the Corporation under
the Securities Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There were no significant changes in the Corporation's internal controls or
in other factors that could significantly affect these controls subsequent
to the date of their evaluation.
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PART II. - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In January of this year, the Corporation announced its decision to continue
with its share repurchase program where it may repurchase up to 150,000
shares, or approximately 6%, of its common stock from time to time through
January 31, 2004. The Board of Directors approved this common stock
repurchase program in view of the strong capital position of Southwest
Georgia Financial Corporation and its subsidiary, Southwest Georgia Bank.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. There have been no reports filed on Form 8-K for the quarter ended
March 31, 2003.
b. Exhibit 99.1 Certification of Periodic Financial Report by Chief Executive
Officer.
c. Exhibit 99.2 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 14, 2003
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CERTIFICATIONS
I, DeWitt Drew, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Southwest Georgia
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
corporation as of, and for, the periods presented in this quarterly report;
4. The Corporation's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Corporation and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Corporation, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Corporation's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Corporation's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Corporation's auditors and the audit
committee of the Corporation's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Corporation's ability to record,
process, summarize and report financial data and have identified for the
Corporation's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Corporation's internal
controls; and
6. The Corporation's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
By: /s/DeWitt Drew
DeWitt Drew
President and Chief Executive Officer
Southwest Georgia Financial Corporation
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CERTIFICATIONS
I, George R. Kirkland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Southwest Georgia
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
corporation as of, and for, the periods presented in this quarterly report;
4. The Corporation's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Corporation and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Corporation, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Corporation's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Corporation's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Corporation's auditors and the audit
committee of the Corporation's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Corporation's ability to record,
process, summarize and report financial data and have identified for the
Corporation's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Corporation's internal
controls; and
6. The Corporation's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
By: /s/George R. Kirkland
George R. Kirkland
Senior Vice-President and Treasurer
Southwest Georgia Financial Corporation
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