U.S. Securities and Exchange Commission
Washington, D. C. 20549
Form 10-K
[ X ]Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2003
[ ]Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________.
Commission file number 1-12053
Southwest Georgia Financial Corporation
(Exact Name of Corporation as specified in its charter)
Georgia 58-1392259
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
201 First Street, S.E., Moultrie, Georgia 31768
(Address of principal executive offices) (Zip Code)
(Corporation's telephone number, including area code) (229) 985-1120
Securities registered pursuant to Section 12(b) of this Act:
Common Stock $1 Par Value American Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ]
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of June 30, 2003: $40,056,120 based on 1,978,080 shares at the price of
$20.25 per share.
As of March 24, 2004, 3,543,850 shares of the $1.00 par value Common Stock of
Southwest Georgia Financial Corporation were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2004 annual
meeting of shareholders, to be filed with the Commission are incorporated by
reference into Part III.
SOUTHEST GEORGIA FINANCIAL CORPORATION
Form 10-K
For the year ended December 31, 2003
CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
-2-
PART I
Item 1. Business
Southwest Georgia Financial Corporation (the "Corporation") is a Georgia bank
holding company organized in 1980, which, in 1981, acquired 100% of the
outstanding shares of Southwest Georgia Bank (the "Bank"), the Corporation's
state non-member bank subsidiary formerly known as Moultrie National Bank.
The Bank commenced operations as a national banking association in 1928.
Currently, it is a FDIC insured, state-chartered bank.
The Corporation's primary business is providing banking services to
individuals and businesses principally in Colquitt County, Baker County,
Thomas County, Worth County, and the surrounding counties of southwest
Georgia through the Bank. In December of 2001, the Bank acquired the
remaining 50 percent of the common stock of Empire Financial Services, Inc.
("Empire"), a commercial mortgage banking firm. The Bank acquired half of
the common stock of Empire in May 1997 and owned the firm jointly until the
fourth quarter of 2001. Effective February 27, 2004, the Corporation
acquired and merged with First Bank Holding Company, Inc. (the "First Bank").
First Bank's subsidiary bank, Sylvester Banking Company, is a full service
commercial bank with its office in Sylvester, Worth County, Georgia. This
office is a full service branch serving an area approximately 30 miles in
radius. Sylvester Banking Company has approximately 25 percent of the Worth
County deposit market.
The Corporation's executive office is located at 201 First Street, S. E.,
Moultrie, Georgia 31768, and its telephone number is (229) 985-1120.
All references herein to the Corporation include Southwest Georgia Financial
Corporation, the Bank, and Empire unless the context indicates a different
meaning.
General
The Corporation is a registered bank holding company. All of the
Corporation's activities are currently conducted by the Bank and Empire. The
Bank is community-oriented and offers such customary banking services as
consumer and commercial checking accounts, NOW accounts, savings accounts,
certificates of deposit, lines of credit, Mastercard and VISA accounts, and
money transfers. The Bank finances commercial and consumer transactions,
makes secured and unsecured loans, and provides a variety of other banking
services. The Bank has a trust department that performs corporate, pension,
and personal trust services and acts as trustee, executor, and administrator
for estates and as administrator or trustee of various types of employee
benefit plans for corporations and other organizations. The Bank operates
Southwest Georgia Insurance Services Division, an insurance agency that
offers property and casualty insurance, life, health, and disability
insurance. Empire, a subsidiary of the Bank, is a commercial mortgage
banking firm that offers commercial mortgage banking services.
-3-
Markets
The Corporation conducts banking activities in multiple counties in southwest
Georgia. Agriculture plays an important part in the economy of the Bank's
market area. A large portion of Georgia's produce crops, including turnips,
cabbage, sweet potatoes, and squash, and producers of tobacco, peanuts, and
cotton are in the Bank's market. In addition, manufacturing firms, service
industries, and retail stores employ a large number of residents, and
apparel, lumber and wood products, and textile manufacturers are also located
in the Bank's market. Empire provides mortgage banking services which
includes underwriting, construction, and long-term financing of commercial
properties throughout the Southeastern United States.
Deposits
The Bank offers a full range of depository accounts and services to both
consumers and businesses. At December 31, 2003, the Corporation's deposit
base, totaling $182,875,751, consisted of $27,904,580 in noninterest-bearing
demand deposits (15.3% of total deposits), $49,146,828 in interest-bearing
demand deposits including money market accounts (26.9% of total deposits),
$18,200,946 in savings deposits (9.9% of total deposits), $62,387,796 in time
deposits in amounts less than $100,000 (34.1% of total deposits), and
$25,235,601 in time deposits of $100,000 or more (13.8 % of total deposits).
Loans
The Bank makes both secured and unsecured loans to individuals, firms, and
corporations; and both consumer and commercial lending operations include
various types of credit for the Bank's customers. Secured loans include
first and second real estate mortgage loans. The Bank also makes direct
installment loans to consumers on both a secured and unsecured basis. At
December 31, 2003, consumer installment, real estate (including construction
and mortgage loans), and commercial (including financial and agricultural)
loans represented approximately 9.8%, 80.3% and 9.9%, respectively, of the
Bank's total loan portfolio.
Lending Policy
The current lending policy of the Bank is to offer consumer and commercial
credit services to individuals and entities that meet the Bank's credit
standards. The Bank provides each lending officer with written guidelines
for lending activities. Lending authority is delegated by the Board of
Directors of the Bank to loan officers, each of whom is limited in the amount
of secured and unsecured loans which can be made to a single borrower or
related group of borrowers.
The Loan Committee of the Bank's Board of Directors is responsible for
approving and monitoring the loan policy and providing guidance and counsel
to all lending personnel. It also approves all extensions of credit over
$200,000. The Loan Committee is composed of the Chief Executive Officer and
President, and other executive officers of the Bank, as well as certain Bank
Directors.
-4-
Servicing and Origination Fees on Loans
The Corporation through its subsidiary, Empire, recognizes as income in the
current period all loan origination and brokerage fees collected on loans
originated and closed for investing participants. Loan servicing fees are
based on a percentage of loan interest paid by the borrower and recognized
over the term of the loan as loan payments are received. Empire does not
directly fund any mortgages and acts as a service-oriented broker for
participating mortgage lenders. Fees charged for continuing servicing fees
are comparable with market rates charged in the industry. In 2003, Bank
income received from mortgage banking services was $3,446,658 compared with
$3,021,047 in 2002. Most of this income was from Empire except for $69,659
in 2003 and $51,083 in 2002, which was mortgage banking income from the Bank.
Loan Review and Nonperforming Assets
The Bank regularly reviews its loan portfolio to determine deficiencies and
corrective action to be taken. Loan reviews are prepared by the Bank's loan
review officer and presented periodically to the Board's Loan Committee and
the Audit Committee. Also, the Bank's external auditors conduct independent
loan review adequacy tests and include their findings annually as part of
their overall report to the Audit Committee and to the Board of Directors.
Certain loans are monitored more often by the loan review officer and the
Loan Committee. These loans include non-accruing loans, loans more than 90
days past due, and other loans, regardless of size, that may be considered
high risk based on factors defined within the Bank's loan review policy.
Asset/Liability Management
The Loan Committee is charged with establishing policies to manage the assets
and liabilities of the Bank. Its task is to manage asset growth, net
interest margin, liquidity, and capital in order to maximize income and
reduce interest rate risk. To meet these objectives while maintaining
prudent management of risks, the Loan Committee directs the Bank's overall
acquisition and allocation of funds. At its monthly meetings, the Loan
Committee reviews and discusses the monthly asset and liability funds budget
and income and expense budget in relation to the actual composition and flow
of funds; the ratio of the amount of rate sensitive assets to the amount of
rate sensitive liabilities; the ratio of loan loss reserve to outstanding
loans; and other variables, such as expected loan demand, investment
opportunities, core deposit growth within specified categories, regulatory
changes, monetary policy adjustments, and the overall state of the local,
state, and national economy.
Investment Policy
The Bank's investment portfolio policy is to maximize income consistent with
liquidity, asset quality, and regulatory constraints. The policy is reviewed
periodically by the Board of Directors. Individual transactions, portfolio
composition, and performance are reviewed and approved monthly by the Board
of Directors.
-5-
Employees
The Bank had 120 full-time employees at February 27, 2004, including 15 added
in conjunction with the acquisition of Sylvester Banking Company. The Bank
is not a party to any collective bargaining agreement, and the Bank believes
that its employee relations are good.
Competition
The banking business is highly competitive. The Bank competes with other
depository institutions and other financial service organizations, including
brokers, finance companies, credit unions and certain governmental agencies.
To the extent that banks must maintain noninterest earning reserves against
deposits, they may be at a competitive disadvantage when compared with other
financial service organizations that are not required to maintain reserves
against substantially equivalent sources of funds. Further, changes in the
laws applicable to banks, savings and loan associations, and other financial
institutions and the increased competition from investment bankers, brokers,
and other financial service organizations may have a significant impact on
the competitive environment in which the Bank operates. See "Supervision and
Regulation."
The Bank ranks first in market share in two of the counties in which it
competes, third in another, and has a growing presence in the fourth.
Monetary Policies
The results of operations of the Bank are affected by credit policies of
monetary authorities, particularly the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). The instruments of monetary policy
employed by the Federal Reserve include open market operations in
U. S. Government securities, changes in the discount rate on bank borrowings,
and changes in reserve requirements against bank deposits. In view of
changing conditions in the national economy and in the money markets, as well
as the effect of action by monetary and fiscal authorities, including the
Federal Reserve, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand, or the business and earnings of
the Bank.
Payment of Dividends
The Corporation is a legal entity separate and distinct from the Bank. Most
of the revenues of the Corporation result from dividends paid to it by the
Bank. Statutory and regulatory restrictions exist that are applicable to the
payment of dividends by the Bank as well as by the Corporation to its
shareholders.
-6-
Payment of Dividends (continued)
The Bank is a state chartered bank regulated by the Department of Banking and
Finance (the "DBF") and the Federal Deposit Insurance Corporation (the
"FDIC"). Under the regulations of the DBF, dividends may not be declared out
of the retained earnings of a state bank without first obtaining the written
permission of the DBF unless such bank meets all the following requirements:
(a) Total classified assets as of the most recent examination of the bank
do not exceed 80% of equity capital (as defined by regulation);
(b) The aggregate amount of dividends declared or anticipated to be
declared in the calendar year does not exceed 50% of the net profits
after taxes but before dividends for the previous calendar year; and,
(c) The ratio of equity capital to adjusted assets is not less than 6%.
The payment of dividends by the Corporation and the Bank may also be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which, depending upon
the financial condition of the bank, could include the payment of dividends),
such authority may require, after notice and hearing, that such bank cease
and desist from such practice. In addition to the formal statutes and
regulations, regulatory authorities consider the adequacy of the Bank's total
capital in relation to its assets, deposits, and other such items. Capital
adequacy considerations could further limit the availability of dividends to
the Bank. At December 31, 2003, retained earnings of the Bank totaled $23.6
million of which $10.5 million has been appropriated in order for the Bank to
provide adequate lending limits. The remaining $13.1 million of retained
earnings are available from the Bank to pay dividends. For 2003 the
Corporation's cash dividend payout to stockholders was 53.6% of net income.
Supervision and Regulation
The following is an explanation of the supervision and regulation of the
Corporation and the Bank as financial institutions. This explanation does
not purport to describe state, federal or American Stock Exchange (the
"Amex") supervision and regulation of general business corporations or Amex
listed companies.
The Corporation is a registered bank holding company subject to regulation by
the Federal Reserve under the Bank Holding Company Act of 1956, as amended
(the "Act"). The Corporation is required to file financial information with
the Federal Reserve periodically and is subject to periodic examination by
the Federal Reserve.
The Act requires every bank holding company to obtain the Federal Reserve's
prior approval before (1) it may acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank that it does not
already control; (2) it or any of its non-bank subsidiaries may acquire all
or substantially all of the assets of a bank; and (3) it may merge or
consolidate with any other bank holding company.
-7-
Supervision and Regulation (continued)
In addition, a bank holding company is generally prohibited from engaging in,
or acquiring, direct or indirect control of the voting shares of any company
engaged in non-banking activities. This prohibition does not apply to
activities listed in the Act or found by the Federal Reserve, by order or
regulation, to be closely related to banking or managing or controlling banks
as to be a proper incident thereto. Some of the activities that the Federal
Reserve has determined by regulation or order to be closely related to
banking include:
making or servicing loans and certain types of leases;
performing certain data processing services;
acting as fiduciary or investment or financial advisor;
providing brokerage services;
underwriting bank eligible securities;
underwriting debt and equity securities on a limited basis through
separately capitalized subsidiaries; and
making investments in corporations or projects designed primarily to promote
community welfare.
Although the activities of bank holding companies have traditionally been
limited to the business of banking and activities closely related or
incidental to banking (as discussed above), the Gramm-Leach-Bliley Act
relaxed the previous limitations thus permitting bank holding companies to
engage in a broader range of financial activities. Specifically, bank
holding companies may elect to become financial holding companies which may
affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature. Among the activities that are
deemed "financial in nature" include:
lending, exchanging, transferring, investing for others or safeguarding
money or securities;
insuring, guaranteeing, or indemnifying against loss, harm, damage, illness,
disability, or death, or providing and issuing annuities, and acting as
principal, agent, or broker with respect thereto;
providing financial, investment, or economic advisory services, including
advising an investment company;
issuing or selling instruments representing interests in pools of assets
permissible for a bank to hold directly; and
underwriting, dealing in or making a market in securities.
-8-
Supervision and Regulation (continued)
A bank holding company may become a financial holding company under this
statute only if each of its subsidiary banks is well capitalized, is well
managed and has at least a satisfactory rating under the Community
Reinvestment Act. A bank holding company that falls out of compliance with
such requirement may be required to cease engaging in certain activities.
Any bank holding company that does not elect to become a financial holding
company remains subject to the current restrictions of the Bank Holding
Company Act.
Under this legislation, the Federal Reserve Board serves as the primary
"umbrella" regulator of financial holding companies with supervisory
authority over each parent company and limited authority over its
subsidiaries. The primary regulator of each subsidiary of a financial
holding company will depend on the type of activity conducted by the
subsidiary. For example, broker-dealer subsidiaries will be regulated
largely by securities regulators and insurance subsidiaries will be regulated
largely by insurance authorities.
The Corporation has no immediate plans to register as a financial holding
company.
The Corporation is an "affiliate" of the Bank under the Federal Reserve Act,
which imposes certain restrictions on (1) loans by the Bank to the
Corporation (2) investments in the stock or securities of the Corporation by
the Bank, (3) the Bank's taking the stock or securities of an "affiliate" as
collateral for loans by the Bank to a borrower, and (4) the purchase of
assets from the Corporation by the Bank. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit, lease or sale of property or
furnishing of services.
The Corporation must also register with the Georgia Department of Banking and
Finance ("DBF") and file periodic information with the DBF. As part of such
registration, the DBF requires information with respect to the financial
condition, operations, management and intercompany relationships of the
Corporation and the Bank and related matters. The DBF may also require such
other information as is necessary to keep itself informed as to whether the
provisions of Georgia law and the regulations and orders issued thereunder by
the DBF have been complied with, and the DBF may examine the Corporation and
the Bank.
The Bank, as a non-member of the Federal Reserve System, is subject to the
supervision of, and is regularly examined by, the FDIC and DBF. In addition,
both the FDIC and the DBF must grant prior approval of any merger,
consolidation, or other corporate reorganization involving the Bank. A bank
can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with the default of a commonly-controlled
institution.
-9-
Capital Adequacy
The Federal Reserve and the FDIC have implemented substantially identical
risk-based rules for assessing bank and bank holding company capital
adequacy. These regulations establish minimum capital standards in relation
to assets and off-balance sheet exposures as adjusted for credit risk. Banks
and bank holding companies are required to have (1) a minimum level of total
capital to risk-weighted assets of eight percent; (2) a minimum Tier I
Capital to risk-weighted assets of four percent; and (3) a minimum
stockholders' equity to risk-weighted assets of four percent. In addition,
the Federal Reserve and the FDIC have established a minimum three percent
leverage ratio of Tier I Capital to total assets for the most highly rated
banks and bank holding companies. "Tier I Capital" generally consists of
common equity not including unrecognized gains and losses on securities,
minority interests in equity accounts of consolidated subsidiaries and
certain perpetual preferred stock less certain intangibles. The Federal
Reserve and the FDIC will require a bank holding company and a bank,
respectively, to maintain a leverage ratio greater than three percent if
either is experiencing or anticipating significant growth or is operating
with less than well-diversified risks in the opinion of the Federal Reserve.
The Federal Reserve and the FDIC use the leverage ratio in tandem with the
risk-based ratio to assess the capital adequacy of banks and bank holding
companies. The FDIC, the Office of the Comptroller of the Currency (the
"OCC") and the Federal Reserve have amended, effective January 1, 1997, the
capital adequacy standards to provide for the consideration of interest rate
risk in the overall determination of a bank's capital ratio, requiring banks
with greater interest rate risk to maintain adequate capital for the risk.
The revised standards have not had a significant effect on the Corporation's
capital requirements.
In addition, Section 38 to the Federal Deposit Insurance Act implemented the
prompt corrective action provisions that Congress enacted as a part of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991
Act"). The "prompt corrective action" provisions set forth five regulatory
zones in which all banks are placed largely based on their capital positions.
Regulators are permitted to take increasingly harsh action as a bank's
financial condition declines. Regulators are also empowered to place in
receivership or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches 2%. Better-capitalized
institutions are generally subject to less onerous regulation and supervision
than banks with lesser amounts of capital.
The Federal Reserve has adopted regulations implementing the prompt
corrective action provisions of the 1991 Act which place financial
institutions in the following five categories based upon capitalization
ratios: (1) a "well capitalized" institution has a total risk-based capital
ratio of at least 10 percent, a Tier I risk-based ratio of at least 6
percent, and a leverage ratio of at least 5 percent; (2) an "adequately
capitalized" institution has a total risk-based ratio of at least 8 percent,
a Tier I risk-based ratio of at least 4 percent, and a leverage ratio of at
least 4 percent; (3) an "undercapitalized" institution has a total risk-based
capital ratio of under 8 percent, a Tier I risk-based capital ratio of under
4 percent, or a leverage ratio of under 4 percent; (4) a "significantly
undercapitalized" institution has a total risk-based capital ratio of under 6
percent, a Tier I risk-based ratio of under 3 percent, or a leverage ratio of
under 3 percent; and (5) a "critically undercapitalized" institution has a
leverage ratio of 2 percent or less. An institution in any of the three
undercapitalized categories would be prohibited
-10-
Capital Adequacy (continued)
from declaring dividends or making capital distributions. The regulations
also establish procedures for "downgrading" an institution to a lower capital
category based on supervisory factors other than capital. The Bank, at
December 31, 2003, would be considered to be a "well capitalized" institution
if solely viewed on the basis of capital ratios.
After the Bank's withdrawal from the Federal Reserve, it became subject to
FDIC regulations regarding capital adequacy rather than Federal Reserve
regulations. The FDIC regulations are not materially different from the
Federal Reserve regulations.
Available Information
The Corporation is subject to the information requirements of the Securities
Exchange Act of 1934, which means that it is required to file certain
reports, proxy statements, and other information, all of which are available
at the Public Reference Section of the Securities and Exchange Commission at
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. You may also obtain
copies of the reports, proxy statements, and other information from the
Public Reference Section of the SEC, at prescribed rates, by calling 1-800-
SEC-0330. The SEC maintains a World Wide Web site on the Internet at
www.sec.gov where you can access reports, proxy, information and registration
statements, and other information regarding Corporations that file
electronically with the SEC through the EDGAR system.
The Corporation's Internet website address is www.sgfc.com.
Executive Officers of the Corporation
Executive officers are elected by the Board of Directors annually in May and
hold office until the following May unless they resign or are removed from
office by the Board of Directors.
The principal executive officers of the Corporation and their ages, positions
with the Corporation, and terms of office as of January 31, 2004, are as
follows:
Officer Of The
Name (Age) Principal Position Corporation Since
DeWitt Drew Chief Executive Officer and President 1999
(47) of the Corporation and Bank
John J. Cole, Jr. Executive Vice President of the 1984
(53) Corporation and Executive Vice President
and Cashier of the Bank
J. David Dyer, Jr. Senior Vice President of the Corporation 2002
(56) and Bank
-11-
Executive Officers of the Corporation (continued)
Officer Of The
Name (Age) Principal Position Corporation Since
George R. Kirkland Senior Vice President and Treasurer 1991
(53) of the Corporation and Senior Vice
President and Comptroller of the Bank
The following is a brief description of the business experience of the
principal executive officers of the Corporation. Except as otherwise
indicated, each principal executive officer has been engaged in their present
or last employment, in the same or similar position, for more than five
years.
Mr. Drew is a director of Southwest Georgia Financial Corporation and
Southwest Georgia Bank and was named President and Chief Executive Officer in
May 2002. Previously he served as President and Chief Operating Officer
since 2001 and Executive Vice President in 1999 of Southwest Georgia
Financial Corporation and Southwest Georgia Bank. Prior to employment with
Southwest Georgia Financial Corporation, Mr. Drew was employed by Citizens
Bank and Savings Corporation in Russellville, Alabama as Senior Vice
President and Loan Administrator since 1993.
Mr. Cole became Executive Vice President and Cashier of the Bank and
Executive Vice President of the Corporation in 2002. Previously, he had been
Senior Vice President and Cashier of the Bank and Senior Vice President of
the Corporation since 1992. Also, he had served as Senior Vice President and
Comptroller of the Bank from 1986 to 1992 and Vice President and Treasurer of
the Corporation since 1984.
Mr. Dyer became Senior Vice President of the Bank and Corporation in 2002.
Previously, he has served and continues to serve as Chief Executive Officer
and President of Empire, now a wholly owned subsidiary of the Bank acquired
in December 2001. Mr. Dyer has served as Chief Executive Officer and
President of Empire since forming the firm in 1985.
Mr. Kirkland became Senior Vice President and Treasurer of the Corporation
and Senior Vice President and Comptroller of the Bank in 1993. Previously he
had been Vice President and Comptroller of the Bank and Vice President and
Treasurer of the Corporation since 1991.
-12-
Table 1 - Distribution of Assets, Liabilities, and Shareholders' Equity;
Interest Rates and Interest Differentials
The following tables set forth, for the fiscal years ended December 31, 2003,
2002, and 2001, the daily average balances outstanding for the major
categories of earning assets and interest-bearing liabilities and the average
interest rate earned or paid thereon. Except for percentages, all data is in
thousands of dollars.
Year Ended December 31, 2003
-----------------------------
Average
Balance Interest Rate
-------- -------- -----
(Dollars in thousands)
ASSETS
Cash and due from banks $ 9,582 $ - - %
------- ------ ----
Earning assets:
Interest-bearing deposits 4,071 43 1.06%
Loans, net (a) (b) (c) 97,464 7,309 7.50%
Taxable investment securities
held to maturity 98,408 4,946 5.03%
Nontaxable investment securities
held to maturity (c) 3,738 247 6.61%
Nontaxable investment securities
available for sale (c) 14,709 928 6.31%
Other investment securities
available for sale 1,173 46 3.92%
Federal funds sold 135 2 1.48%
------- ------
Total earning assets 219,698 13,521 6.15%
Premises and equipment 5,352 ------ ----
Other assets 7,229
-------
Total assets $241,861
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 25,844 $ - - %
------- ------
Interest-bearing liabilities:
Savings deposits 69,079 660 0.96%
Time deposits 90,999 2,062 2.27%
Federal funds purchased 249 3 1.20%
Other borrowings 19,121 663 3.47%
------- ------
Total interest-bearing liabilities 179,448 3,388 1.89%
------ ----
Other liabilities 3,332
-------
Total liabilities 208,624
-------
Common stock 3,301
Surplus 7,149
Retained earnings 30,021
Less treasury stock ( 7,234)
-------
Total shareholders' equity 33,237
-------
Total liabilities and shareholders' equity $241,861
=======
Net interest income and margin $10,133 4.61%
====== ====
-13-
Table 1 - Distribution of Assets, Liabilities, and Shareholders' Equity;
Interest Rates and Interest Differentials (continued)
Year Ended December 31, 2002
-----------------------------
Average
Balance Interest Rate
-------- -------- -----
(Dollars in thousands)
ASSETS
Cash and due from banks $ 8,966 $ - - %
------- ------ ----
Earning assets:
Interest-bearing deposits 3,661 56 1.53%
Loans, net (a) (b) (c) 112,618 9,280 8.24%
Taxable investment securities
held to maturity 78,031 4,596 5.89%
Nontaxable investment securities
held to maturity (c) 3,130 220 7.03%
Nontaxable investment securities
available for sale (c) 13,340 875 6.56%
Other investment securities
available for sale 1,352 61 4.51%
Federal funds sold 1,399 22 1.57%
------- ------
Total earning assets 213,531 15,110 7.08%
Premises and equipment 5,539 ------ ----
Other assets 8,333
-------
Total assets $236,369
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 26,521 $ - - %
------- ------
Interest-bearing liabilities:
Savings deposits 64,617 961 1.49%
Time deposits 97,354 3,007 3.09%
Federal funds purchased 99 2 2.02%
Other borrowings 12,749 459 3.60%
------- ------
Total interest-bearing liabilities 174,819 4,429 2.53%
Other liabilities 2,837 ------ ----
-------
Total liabilities 204,177
-------
Common stock 3,051
Surplus 2,900
Retained earnings 32,364
Less treasury stock ( 6,123)
-------
Total shareholders' equity 32,192
-------
Total liabilities and shareholders' equity $236,369
=======
Net interest income and margin $10,681 5.00%
====== ====
-14-
Table 1 - Distribution of Assets, Liabilities, and Shareholders' Equity;
Interest Rates and Interest Differentials (continued)
Year Ended December 31, 2001
-----------------------------
Average
Balance Interest Rate
-------- -------- -----
(Dollars in thousands)
ASSETS
Cash and due from banks $ 6,424 $ - - %
------- ------ ----
Earning assets:
Interest-bearing deposits 4,478 225 5.02%
Loans, net (a) (b) (c) 121,787 11,751 9.65%
Taxable investment securities
held to maturity 77,313 4,742 6.13%
Nontaxable investment securities
held to maturity (c) 3,481 226 6.49%
Nontaxable investment securities
available for sale (c) 12,702 866 6.82%
Other investment securities
available for sale 1,159 76 6.56%
Federal funds sold 965 48 4.97%
------- ------
Total earning assets 221,885 17,934 8.08%
Premises and equipment 5,080 ------ ----
Other assets 6,539
-------
Total assets $239,928
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 26,647 $ - - %
------- ------ ----
Interest-bearing liabilities:
Savings deposits 63,403 1,359 2.14%
Time deposits 108,477 6,072 5.60%
Federal funds purchased 324 11 3.40%
Other borrowings 8,131 484 5.95%
------- ------
Total interest-bearing liabilities 180,335 7,926 4.40%
Other liabilities 2,253 ------ ----
-------
Total liabilities 209,235
-------
Common stock 3,000
Surplus 2,034
Retained earnings 30,751
Less treasury stock ( 5,092)
-------
Total shareholders' equity 30,693
-------
Total liabilities and shareholders' equity $239,928
=======
Net interest income and margin $10,008 4.51%
====== ====
(a) Average loans are shown net of unearned income and the allowance for loan
losses. Nonperforming loans are included.
(b) Interest income includes loan fees as follows: 2003 - $385,000, 2002 -
$444,000, and 2001 - $544,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 percent for
2003, 2002, and 2001.
-15-
Table 2 - Rate/Volume Analysis
The following table sets forth, for the indicated years ended December 31, a
summary of the changes in interest paid resulting from changes in volume and
changes in rate. The change due to volume is calculated by multiplying the
change in volume by the prior year's rate. The change due to rate is
calculated by multiplying the change in rate by the prior year's volume. The
change attributable to both volume and rate is calculated by multiplying the
change in volume by the change in rate.
Due To
Changes In (a)
Increase ------------------
2003 2002 (Decrease) Volume Rate
------- ------- -------- ------- --------
(Dollars in thousands)
Interest earned on:
Interest-bearing deposits $ 43 $ 56 $( 13) $ 7 $( 20)
Loans, net (b) 7,309 9,280 (1,971) (1,182) ( 789)
Taxable investment
securities held to maturity 4,946 4,596 350 794 ( 444)
Nontaxable investment
securities held to
maturity (b) 247 220 27 39 ( 12)
Nontaxable investment
securities available
for sale (b) 928 875 53 84 ( 31)
Other securities available for sale 46 61 ( 15) ( 8) ( 7)
Federal funds sold 2 22 ( 20) ( 19) ( 1)
------ ------ ----- ----- -----
Total interest income 13,521 15,110 (1,589) ( 285) (1,304)
------ ------ ----- ----- -----
Interest paid on:
Savings deposits 660 961 ( 301) 72 ( 373)
Time deposits 2,062 3,007 ( 945) ( 186) ( 759)
Federal funds purchased 3 2 1 2 ( 1)
Other borrowings 663 459 204 220 ( 16)
------ ------ ----- ----- -----
Total interest expense 3,388 4,429 (1,041) 108 (1,149)
------ ------ ----- ----- -----
Net interest earnings $10,133 $10,681 $( 548) $( 393) $( 155)
====== ====== ===== ===== =====
-16-
Table 2 - Rate/Volume Analysis (continued)
Due To
Changes In (a)
Increase ------------------
2002 2001 (Decrease) Volume Rate
------- ------- -------- ------- --------
(Dollars in thousands)
Interest earned on:
Interest-bearing deposits $ 56 $ 225 $( 169) $( 35) $( 134)
Loans, net (b) 9,280 11,751 (2,471) ( 840) (1,631)
Taxable investment
securities held to maturity 4,596 4,742 ( 146) 45 ( 191)
Nontaxable investment
securities held to
maturity (b) 220 226 ( 6) ( 35) 29
Nontaxable investment
securities available
for sale (b) 875 866 9 36 ( 27)
Other securities available for sale 61 76 ( 15) 18 ( 33)
Federal funds sold 22 48 ( 26) 52 ( 78)
------ ------ ----- ----- -----
Total interest income 15,110 17,934 (2,824) ( 759) (2,065)
------ ------ ----- ----- -----
Interest paid on:
Savings deposits 961 1,359 ( 398) 27 ( 425)
Time deposits 3,007 6,072 (3,065) ( 571) (2,494)
Federal funds purchased 2 11 ( 9) ( 6) ( 3)
Other borrowings 459 484 ( 25) ( 82) 57
------ ------ ----- ----- -----
Total interest expense 4,429 7,926 (3,497) ( 632) (2,865)
------ ------ ----- ----- -----
Net interest earnings $10,681 $10,008 $ 673 $( 127) $ 800
====== ====== ===== ===== =====
(a) Volume and rate components are in proportion to the relationship of the
absolute dollar amounts of the change in each.
(b) Reflects taxable equivalent adjustments using a tax rate of 34 percent
for 2003, 2002, and 2001 in adjusting interest on nontaxable loans and
securities to a fully taxable basis.
-17-
Table 3 - Investment Portfolio
The carrying values of investment securities for the indicated years are
presented below:
Year Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Securities held to maturity:
U. S. Government Agencies $ 47,542 $ 59,541 $ 55,478
State and municipal 7,153 5,609 4,995
------ ------ ------
Total securities held to maturity $ 54,695 $ 65,150 $ 60,473
====== ====== ======
Securities available for sale:
Equity securities $ 2,225 $ 2,179 $ 1,537
U. S. Government Agencies 53,998 21,024 9,313
State and municipal 13,922 13,311 12,468
Mortgage backed 1,399 3,541 4,594
------ ------ ------
Total securities available for sale $ 71,544 $ 40,055 $ 27,912
====== ====== ======
The following table shows the maturities of debt securities at December 31,
2003, and the weighted average yields (for nontaxable obligations on a fully
taxable basis assuming a 34% tax rate) of such securities.
MATURITY
-------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Debt Securities:
U. S.
Government
Agencies $11,006 6.19% $46,963 5.04% $43,571 4.19% $ - - %
State and
municipal 610 5.97% 2,234 6.73% 8,399 6.88% 9,832 6.50%
Mortgage
backed - - % 83 5.41% 868 6.00% 448 6.22%
------ ---- ------ ---- ------ ---- ------ ----
Total $11,616 6.18% $49,280 5.12% $52,838 4.65% $10,280 6.49%
====== ==== ====== ==== ====== ==== ====== ====
-18-
Table 3 - Investment Portfolio (continued)
The calculation of weighted average yields is based on the cost and effective
yields of each security weighted for the scheduled maturity of each security.
At December 31, 2003 and 2002, securities carried at approximately
$41,988,000 and $34,934,000, respectively, were pledged to secure public and
trust deposits, as required by law.
Table 4 - Loan Portfolio
The following table sets forth the amount of loans outstanding for the
indicated years according to type of loan.
Year Ended December 31,
---------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(Dollars in thousands)
Commercial, financial and
agricultural $ 9,547 $ 9,273 $ 11,142 $ 16,871 $ 19,144
Real estate - mortgage 78,064 86,452 100,453 95,959 80,558
Other 98 40 35 91 176
Installment 9,452 10,223 9,979 11,092 10,870
------- ------- ------- ------- -------
Total loans 97,161 105,988 121,609 124,013 110,748
Less:
Unearned income 46 54 60 123 129
Allowance for loan losses 2,338 1,900 1,883 1,795 1,944
------- ------- ------- ------- -------
Net loans $ 94,777 $104,034 $119,666 $122,095 $108,675
======= ======= ======= ======= =======
The following table shows maturities and interest sensitivity of the
commercial, financial and agricultural loan portfolio, excluding real estate
mortgage and consumer loans at December 31, 2003.
Commercial,
Financial and
Agricultural
----------------------
(Dollars in thousands)
Distribution of loans which are due:
In one year or less $ 5,819
After one year but within five years 2,994
After five years 734
-----
Total $ 9,547
=====
-19-
Table 4 - Loan Portfolio (continued)
The following table shows, for the selected loans above due after one year,
the amounts which have predetermined interest rates and the amounts which
have floating or adjustable interest rates at December 31, 2003.
Loans With
Predetermined Loans With
Rates Floating Rates Total
------------- -------------- ------------
(Dollars in thousands)
Commercial, financial
and agricultural $ 2,410 $ 1,318 $ 3,728
The following table presents information concerning outstanding balances of
nonperforming loans and foreclosed assets for the indicated years.
Nonperforming loans comprise: (a) loans accounted for on a nonaccrual basis
("nonaccrual loans"); (b) loans which are contractually past due 90 days or
more as to interest or principal payments and still accruing ("past-due
loans"); (c) loans for which the terms have been renegotiated to provide a
reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower ("renegotiated loans"); and (d) loans
now current but where there are serious doubts as to the ability of the
borrower to comply with present loan repayment terms ("potential problem
loans").
Nonperforming loans
--------------------------------------------------
Past- Potential
Nonaccrual Due Renegotiated Problem Foreclosed
Loans Loans Loans Loans Total Assets
------- ------- ------- ------- ------- --------
(Dollars in thousands)
December 31, 2003 $1,012 $ 0 $ 60 $ 414 $1,486 $1,203
December 31, 2002 $1,529 $ 3 $ 0 $ 408 $1,940 $1,982
December 31, 2001 $ 424 $ 178 $ 0 $ 52 $ 654 $3,545
December 31, 2000 $ 742 $1,402 $ 0 $1,464 $3,608 $2,097
December 31, 1999 $ 858 $ 488 $ 0 $ 287 $1,633 $2,009
The Corporation follows a policy of continuing to accrue interest on consumer
and bank card loans that are contractually past due up to the time of
charging the loan amount against the allowance for loan losses.
-20-
Table 4 - Loan Portfolio (continued)
Summary of Loan Loss Experience
The following table is a summary of average loans outstanding during the
reported periods, changes in the allowance for loan losses arising from loans
charged off and recoveries on loans previously charged off by loan category,
and additions to the allowance which have been charged to operating expenses.
Year Ended December 31,
-------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(Dollars in thousands)
Average loans outstanding $ 99,589 $114,586 $123,668 $118,809 $113,211
====== ======= ======= ======= =======
Amount of allowance for
loan losses at beginning
of period $ 1,900 $ 1,883 $ 1,795 $ 1,944 $ 2,003
------ ------- ------- ------- -------
Amount of loans charged off
during period:
Commercial, financial and
agricultural 37 226 69 360 174
Real estate - mortgage 71 113 18 27 13
Installment 169 258 261 112 123
------ ------- ------- ------- -------
Total loans charged off 277 597 348 499 310
------ ------- ------- ------- -------
Amount of recoveries during period:
Commercial, financial, and
agricultural 147 25 18 81 9
Real estate - mortgage 14 5 2 5 4
Installment 37 50 36 44 58
------ ------- ------- ------- -------
Total loans recovered 198 80 56 130 71
------ ------- ------- ------- -------
Net loans charged off
during period 79 517 292 369 239
------ ------- ------- ------- -------
Additions to allowance for
loan losses charged to operating
expense during period 517 534 380 220 180
------ ------- ------- ------- -------
Amount of allowance for
loan losses at end
of period $ 2,338 $ 1,900 $ 1,883 $ 1,795 $ 1,944
====== ======= ======= ======= =======
Ratio of net charge-offs
during period to average
loans outstanding for
the period .08% .45% .24% .31% .21%
====== ======= ======= ======= =======
The allowance is based upon management's analysis of the portfolio under
current and expected economic conditions. This analysis includes a study of
loss experience, a review of delinquencies, and an estimate of the
possibility of loss in view of the risk characteristics of the portfolio.
Based on the above factors, management considers the current allowance to be
adequate.
-21-
Table 4 - Loan Portfolio (continued)
Allocation of Allowance for Loan Losses
Management has allocated the allowance for loan losses within the categories
of loans set forth in the table below according to amounts deemed reasonably
necessary to provide for possible losses. The amount of the allowance
applicable to each category and the percentage of loans in each category to
total loans are presented below.
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ----------------- -----------------
% of % of % of
Total Total Total
Category Allocation Loans Allocation Loans Allocation Loans
---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
Domestic:
Commercial, financial
and agricultural $ 229 9.8% $ 166 8.7% $ 173 9.2%
Real estate - mortgage 1,878 80.3% 1,550 81.6% 1,555 82.6%
Installment 231 9.9% 184 9.7% 155 8.2%
------- ----- ------- ----- ------- -----
Total $ 2,338 100.0% $ 1,900 100.0% $ 1,883 100.0%
======= ===== ======= ===== ======= =====
December 31, 2000 December 31, 1999
----------------- -----------------
% of % of
Total Total
Category Allocation Loans Allocation Loans
---------- ----- ---------- -----
(Dollars in thousands)
Domestic:
Commercial, financial
and agricultural $ 244 13.6% $ 336 17.3%
Real estate - mortgage 1,389 77.4% 1,413 72.7%
Installment 162 9.0% 195 10.0%
------- ----- ------- -----
Total $ 1,795 100.0% $ 1,944 100.0%
======= ===== ======= =====
The calculation is based upon total loans including unearned interest.
Management believes that the portfolio is well diversified and, to a large
extent, secured without undue concentrations in any specific risk area.
Control of loan quality is regularly monitored by management and is reviewed
by the Bank's Board of Directors which meets monthly. Independent external
review of the loan portfolio is provided by examinations conducted by
regulatory authorities. The amount of additions to the allowance for loan
losses charged to operating expense for the periods indicated were based upon
many factors, including actual charge offs and evaluations of current and
prospective economic conditions in the market area. Management believes the
allowance for loan losses is adequate to cover any potential loan losses.
-22-
Table 5 - Deposits
The average amounts of deposits for the last three years are presented below.
Year Ended December 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
(Dollars in thousands)
Noninterest-bearing
demand deposits $ 25,844 $ 26,521 $ 26,647
--------- --------- ---------
NOW accounts 35,831 34,198 34,998
Money market deposit
accounts 14,386 14,153 16,262
Savings 18,862 16,266 12,143
Time deposits 90,999 97,354 108,477
--------- --------- ---------
Total interest-bearing 160,078 161,971 171,880
--------- --------- ---------
Total average deposits $ 185,922 $ 188,492 $ 198,527
========= ========= =========
The maturity of certificates of deposit of $100,000 or more as of December
31, 2003, are presented below.
(Dollars in thousands)
3 months or less $ 7,651
Over 3 months through 6 months 5,250
Over 6 months through 12 months 6,522
Over 12 months 5,813
--------
Total outstanding certificates of
deposit of $100,000 or more $ 25,236
========
-23-
Return On Equity and Assets
Certain financial ratios are presented below.
Year Ended December 31,
------------------------------
2003 2001 2000
------ ------ ------
Return on average assets 1.03% 1.52% 1.34%
----- ----- -----
Return on average equity 7.46% 11.19% 10.49%
----- ----- -----
Dividend payout ratio
(dividends declared
divided by net income) 53.57% 35.13% 39.30%
----- ----- -----
Average equity to average
assets ratio 13.74% 13.62% 12.79%
----- ----- -----
Item 2. Property
The executive offices of the Corporation and the main banking office of the
Bank are located in a 19,000 square foot facility at 201 First Street, S. E.,
Moultrie, Georgia. The Bank's Operations Center is located in a 5,000 square
foot building at 10 Second Avenue, Moultrie, Georgia. The Trust and
Investment Division of the Bank is located in an 11,000 square foot office
building located at 25 Second Avenue, Moultrie, Georgia. A vacant building
located across the street from the main office at 205 Second Street, S. E.,
Moultrie, Georgia, has been renovated for the Bank's Administrative Services
offices, training and meeting rooms, record storage, and the drive-thru
teller facility.
The Corporation occupies a 4,400 square foot Baker County branch banking
office located at the intersection of Highways 91 and 200, Newton, Georgia.
The Corporation acquired a 3,900 square foot branch banking office located at
1102 West Harris Street, Pavo, Thomas County, Georgia. Southwest Georgia
Insurance Services Division occupies a 5,600 square-foot building located at
501 South Main Street, Moultrie, Georgia. Empire operates from its
headquarters located at 121 Executive Parkway, Milledgeville, Georgia. In
connection with the Corporation's February 2004 acquisition of Sylvester
Banking Company, the Corporation acquired a 12,000 square foot full service
branch office located at 300 North Main Street, Sylvester, Georgia. All of
these facilities are adequate for present operations.
All the buildings and land, which include parking and ten drive-in teller
stations, are owned by the Bank. There are two automated teller machines on
the Bank's main office premises, one in the Baker County branch office and
the Thomas County branch office, and one additional automated teller machine
located in Doerun, Georgia. These automated teller machines are linked to
the STAR network of automated teller machines.
-24-
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Corporation or
the Bank is a party or to which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of 2003 for a vote
of the security holders through the solicitation of proxies or otherwise.
-25-
PART II
Item 5. Market for Corporation's Common Equity and Related Stockholder
Matters
Common Stock Market Prices
As set forth in the table below, in 2003 the Corporation's stock traded as
high as $23.85, and the closing price at year-end was $22.75 per share.
2003
--------------------------------------------------
For The
Quarter Fourth Third Second First
------- ------ ------ ------ ------
High $23.85 $23.75 $20.50 $19.25
Low $22.00 $19.00 $18.00 $17.80
2002
--------------------------------------------------
For The
Quarter Fourth Third* Second* First*
------- ------ ------ ------ ------
High $18.75 $17.50 $17.26 $15.63
Low $17.30 $16.36 $15.32 $14.77
*Adjusted for the 10% stock dividend.
The principal market for trading of the common stock is the American Stock
Exchange under the symbol SGB.
As of December 31, 2003, we had 523 record holders of the Corporation's
common stock. Cash dividends paid on the Corporation's common stock were
$.52 in 2003 and $.47 in 2002. In total, we declared $1.329 million in cash
dividends in 2003 and $1.265 million in 2002.
Our dividend policy objective is to pay out a portion of earnings in
dividends to our shareholders in a consistent manner over time and we intend
to continue paying dividends. However, no assurance can be given that
dividends will be declared in the future. The amount and frequency of
dividends is determined by the Corporation's Board of Directors in light of
the expected earnings, capital requirements and financial condition of the
Corporation. The primary source of funds available to the parent company is
the payment of dividends by its subsidiary bank. Federal and State banking
laws restrict the amount of dividends that can be paid without regulatory
approval. The Corporation and its predecessors have paid cash dividends for
the past seventy-six consecutive years.
The Corporation's management is not aware of any current recommendation by
the regulatory authorities that if they were to be implemented would have a
material effect on the Corporation's capital resources.
-26-
Item 6. Selected Financial Data
Five-Year Selected Financial Data
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
For The Year:
Earnings & Share Data
Interest income $ 13,126 $ 14,738 $ 17,562 $ 18,403 $ 17,983
Interest expense 3,387 4,429 7,926 7,894 6,750
Non-interest income 4,545 5,596 5,156 2,518 2,577
Non-interest expense 10,267 10,299 9,884 8,371 8,475
Net income 2,480 3,602 3,219 3,359 3,801
Earnings per share -
basic & diluted $ 0.97 $ 1.37 $ 1.20 $ 1.18 $ 1.32
Weighted average shares
outstanding - basic 2,560 2,620 2,690 2,852 2,881
Dividends declared
per share $ 0.52 $ 0.47 $ 0.47 $ 0.47 $ 0.44
At Year End:
Balance Sheet Data
Total assets $246,153 $240,468 $234,844 $240,380 $223,060
Loans, net 94,777 104,034 119,666 122,094 108,675
Deposits 182,876 189,923 192,901 199,485 182,072
Shareholders' equity 32,988 33,322 30,957 30,641 29,657
Book value per share 12.99 12.87 11.69 11.07 10.29
Tangible book value
per share $ 12.19 $ 11.96 $ 10.68 $ 10.84 $ 10.21
Common shares outstanding
(including treasury shares) 3,303 3,300 3,300 3,300 3,300
Selected Average Balances
Average total assets $241,861 $236,369 $239,928 $232,530 $225,061
Average loans 99,589 114,586 123,668 118,809 113,211
Average deposits 185,921 188,492 198,527 188,874 184,705
Average shareholders'
equity $ 33,237 $ 32,193 $ 30,693 $ 30,331 $ 28,665
Asset Quality
Non-performing assets
to total assets .90% 1.46% 1.77% 1.76% 1.50%
Non-performing assets $ 2,215 $ 3,515 $ 4,146 $ 4,238 $ 3,342
Net loan charge-offs
(recoveries) $ 79 $ 517 $ 351 $ 499 $ 310
Net loan charge-offs
(recoveries)
to average loans 0.08% 0.45% 0.24% 0.31% 0.21%
Reserve for loan
losses to loans 2.41% 1.79% 1.55% 1.45% 1.76%
Performance Ratios
Return on average
total assets 1.03% 1.52% 1.34% 1.44% 1.69%
Return on average
shareholders' equity 7.46% 11.19% 10.49% 11.08% 13.26%
Average shareholders'
equity to average total
assets 13.74% 13.62% 12.79% 13.04% 12.74%
Efficiency ratio 69.94% 63.27% 65.13% 61.48% 58.73%
Net interest margin 4.61% 5.00% 4.51% 5.17% 5.66%
Dividend payout ratio 53.57% 35.13% 39.30% 39.91% 33.60%
-27-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
For further information about the Corporation, see selected statistical
information on pages 13 - 24 of this report on Form 10-K.
Overview
The Corporation is a full-service community bank holding company
headquartered in Moultrie, Georgia. The community of Moultrie has been
served by the 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 and Thomas Counties, both contiguous with Colquitt County. We
recently completed the acquisition of Sylvester Banking Company, adding Worth
County into our market territory. Worth County is also contiguous to
Colquitt County to the north. Including the recent acquisition, we have four
full service banking facilities and five automated teller machines.
Our strategy is
* to diversify our business base in order to broaden our revenue sources,
* to strengthen our sales and marketing efforts while developing our employees
in order to provide the best possible service to our customers,
* to maintain our strong market share, and
* to grow outside of our current geographic market through acquisitions into
areas proximate to our current market area.
The Corporation's profitability, like most financial institutions, is
dependent to a large extent upon net interest income, which is the difference
between the interest received on earning assets, such as loans, securities
and federal funds sold, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings. Net interest income is
highly sensitive to the fluctuations in interest rates. During 2003, the
U.S. economy was marked by steady low interest rates.
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, we manage our balance sheet in an
effort to diminish the impact should interest rates suddenly change. In
addition, broadening our revenue sources helps to reduce the risk and
exposure of our financial results to the impact of changes in interest rates,
which is outside of our control.
As a result of our strategy to diversify revenue, noninterest income has
grown over the last few years. Particularly, the Corporation has fully
integrated its insurance agency and Empire, the Corporation's commercial
mortgage banking subsidiary, into its operations.
-28-
We made significant improvements with respect to overall asset quality in
2003. Specifically, during the second quarter of 2003, the Corporation made
the decision to transfer the Colquitt Retirement Inn, the Corporation's
largest nonperforming asset, for a nominal fee of $200,000 to the Georgia
Trust for Historic Preservation. As a result of the transfer, we reduced
operating costs approximately $300,000 per year which will be realized in
full in 2004.
On February 27, 2004, the Corporation completed its acquisition of First Bank
Holding Company and merged its operating subsidiary, Sylvester Banking
Company, into Southwest Georgia Bank.
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 December 31,
2003 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.
RESULTS OF OPERATIONS
Performance Summary
Net income for 2003 was $2.5 million, a decrease of approximately $1.1
million, or 31.1 percent, when compared with $3.6 million in 2002. The
primary factors contributing to the decline included the $1.7 million pre-tax
charge for the transfer of the Colquitt Retirement Inn and a decrease of 10.9
percent, or $1.6 million, in interest income. Partially offsetting the
decline was a gain of $426 thousand in mortgage banking services income, a
14.1 percent increase over the previous year, and a reduction from 2002 of
$1.0 million, or 23.5 percent, in interest expense.
On a per share basis, net income for 2003 was $0.97 per diluted share
compared with $1.37 per share for 2002. The weighted average common shares
outstanding for the year ended December 31, 2003, were 2.5 million, down 2.3
percent or 59,357 average shares from the previous year. The decrease in the
average shares outstanding is primarily attributed to the Corporation's stock
repurchase program. Because of our strong capital condition, we continued
through 2003 the stock repurchase program that began in January 2000. In
2003, 52,500 shares were repurchased. Through the end of 2003, a total of
350,500 shares have been repurchased since the beginning of the program. The
share repurchase program was extended again by the Board of Directors at
their meeting in January 2004 through the end of January 2005. The
Corporation is authorized to purchase 150,000 shares under the plan.
Net income in 2002 increased 11.9 percent over 2001 results. The $383
thousand increase was primarily attributable to improvement in net interest
income caused by an increase in net interest margin. The net margin in 2002
was 5.00 percent up from 4.51 percent in 2001. Also contributing to the
growth in net income in 2002 was an increase in income from mortgage banking
services from $2.4 million in 2001 to $3.0 million in 2002. Partially
offsetting the increases were provisions for loan losses that were $154
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thousand higher and a decline in retail brokerage fees, which decreased from
$390 thousand in 2001 to $267 thousand in 2002.
We measure our performance on selected key ratios, which are provided for the
last three years in the following table:
2003 2002 2001
------ ------ ------
Return on average total assets 1.03% 1.52% 1.34%
Return on average shareholders' equity 7.46% 11.19% 10.49%
Average shareholders' equity to average total assets 13.74% 13.62% 12.79%
Net Interest Income
Net interest income for 2003 decreased $571 thousand, or 5.5 percent,
compared with 2002. The decrease was influenced by the mix of earning assets
and interest-bearing liabilities. Interest income from earning assets
decreased $1.6 million, or 10.9 percent, in 2003 compared with 2002, while
interest expenses decreased $1.0 million or 23.5 percent for the same period.
The majority of the $1.6 million decrease in interest income for the year
resulted from reduced yields and volume primarily on loans. Average loan
volume decreased $15.0 million, or 13.1 percent, in 2003 compared with 2002
while the average yield decreased 74 basis points.
The decrease of $1.0 million of interest expense in 2003 compared with 2002
primarily resulted from an 82 basis point decline in the average rate paid on
time deposits. During 2003, while the level of average core deposits
remained relatively stable, average time deposits decreased $6.4 million, or
6.5 percent. The deposit mix changed slightly due to the lower rate
environment causing a shift from time to savings deposits. Interest expense
on deposits continues to closely follow interest rate trends.
Net interest income for 2002 increased $674 thousand, or 7.0 percent,
compared with 2001. The main contributing factor for this increase is a
result of lower time deposit rates in 2002, down 251 basis points compared
with the rates in 2001. Interest income in 2002 declined $2.8 million to
$14.7 million compared with 2001. The majority of this decrease resulted
from reduced yields primarily on loans. The prime lending rate in 2001
decreased 450 basis points to 4.75 percent and remained at that level until
the latter part of 2002. In November 2002, the prime lending rate declined
another 50 basis points to 4.25 percent and the Corporation's base lending
rate dropped to 6.00 percent. Comparing 2002 with 2001, the change in loan
interest rates had a greater impact on the decline in interest income than
the $9.2 million, or 7.5 percent, decline in the volume of average loans.
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Net Interest Margin
Net interest margin, which is the net return on earning assets, is a key
performance ratio for evaluating net interest income. It is computed by
dividing net interest income by average total earning assets.
Net interest margin was 4.61 percent for 2003, a 39 basis point decrease from
5.00 percent in 2002. The net interest margin in 2002 was up 49 basis points
compared with the net interest margin of 4.51 percent in 2001. We have
maintained a relatively strong net interest margin compared with peers
considering the very low interest rate environment during the last few years.
Noninterest Income
Noninterest income is an important contributor to net earnings. The largest
component of the Corporation's noninterest income in recent years has been
mortgage banking services fees. The following table summarizes the changes in
noninterest income during the past three years (dollars in thousands):
2003 2002 2001
-------------- -------------- ------
% %
Amount Change Amount Change Amount
------ ------ ------ ------ ------
Service charges on deposit accounts $1,290 18.1% $1,092 13.9% $ 959
Income from trust services 262 21.3 216 (15.3) 255
Income from retail brokerage services 261 (2.2) 267 (31.5) 390
Income from insurance services 1,002 8.7 922 (0.5) 927
Income from mortgage banking services 3,447 14.1 3,021 23.7 2,442
Gain (loss) on the sale or
abandonment of assets (1,846) n/m (214) n/m 3
Gain (loss) on the sale of securities 0 n/m 121 n/m 0
Other income 129 (24.1) 170 (5.6) 180
------ ------ ------ ----- ------
Total noninterest income $4,545 (18.8)% $5,595 8.5% $5,156
n/m = not meaningful
Service charges on deposit accounts were positively impacted by a new bounce
protection plan service implemented in 2003 for customers on their checking
account. The increases in fees from deposit accounts trust and insurance
services and mortgage banking services was not enough to fully offset the
$1.7 million pre-tax charge for the transfer of our one major nonperforming
asset (the Colquitt Retirement Inn) to the Georgia Trust for Historic
Preservation during the second quarter of 2003.
Mortgage banking income increased as loan origination fees on commercial
mortgages increased over the prior year. The mortgage banking servicing
portfolio is comprised of all non-recourse loans which we service for
participating commercial mortgage lenders.
The majority of the increase in noninterest income in 2002 was due to income
from mortgage banking services. We acquired 100 percent of Empire at the end
of 2001 and the Corporation changed its method of accounting for Empire. In
2001, Empire's operations were consolidated with the Bank's operations.
Consolidating Empire's operation with the Bank reflected a significant
increase in income from mortgage banking services. Excluding income from
mortgage banking services, noninterest income decreased $140 thousand for
2002 compared with 2001. This decrease related primarily to the loss on the
disposition of assets and lower income from retail brokerage services.
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Noninterest Expense
Noninterest expense includes all expenses of the Corporation other than
interest expense, provision for loan losses and income tax expense. The
following table summarizes the changes in the noninterest expenses for the
past three years (dollars in thousands):
2003 2002 2001
-------------- -------------- ------
% %
Amount Change Amount Change Amount
------ ------ ------ ------ ------
Salaries and employee benefits $ 5,749 (4.9)% $ 6,045 7.1% $5,642
Occupancy expense 563 1.8 553 2.0 542
Equipment expense 582 12.2 518 2.4 506
Data processing expense 541 1.7 532 (3.1) 549
Amortization of intangible assets 324 0.0 324 88.4 172
Other operating expense 2,508 7.8 2,327 (5.9) 2,473
------- ----- ------- ---- ------
Total noninterest expense $10,267 (0.3)% $10,299 4.2% $9,884
Total noninterest expense decreased $32 thousand or .3 percent in 2003
compared with 2002 primarily as a result of the Corporation's implementation
of improved processes and technology. Salaries and employee benefits expense
declined 4.9 percent due to a decline in full-time equivalent employees of
6.2 percent to a total of 106 at December 31, 2003 compared with the prior
year end. In addition, both executive and staff employee bonus awards were
less in 2003 than 2002.
The improvement in salaries and employee benefits was somewhat offset by an
increase of $181 thousand in other operating expenses from higher consulting
services fees and pension and ESOP administrative expenses. These also
included higher legal fees related to the acquisition of Sylvester Banking
Company.
For 2002, the majority of the increase in noninterest expense compared with
the prior year was attributable to normal salary and performance compensation
increases due to the Corporation's normal merit salary increases. The
decrease in other operating expenses was from lower expenses related to other
real estate property held for sale and employee training and education. The
largest increase was in legal fees which relates to legal fees in 2001 being
lower than normal due to a reimbursement of fees previously expensed.
The "efficiency ratio" (noninterest expenses divided by total noninterest
income plus net interest income), a measure of productivity, was 69.94
percent for 2003 and 63.27 percent and 65.13 percent for 2002 and 2001
respectively.
Federal Income Tax Expense
The Corporation expensed $1.02 million, $1.47 million and $1.31 million for
federal income taxes for the years ending December 31, 2003, 2002 and 2001,
respectively. These amounts resulted in an effective tax rate of 29.1% for
2003, 29.0% for 2002 and 28.9% for 2001. See Note 9 of the Corporation's
Notes to Consolidated Financial Statements for further details of tax
expense.
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USES AND SOURCES OF FUNDS
The Corporation, primarily through the Bank, acts as a financial
intermediary. As such, our financial condition should be considered in terms
of how we manage our sources and uses of funds. Our primary sources of funds
are deposits and borrowings. We invest our funds in assets, and our earning
assets are what provide us income.
During 2003, total average assets of $241.9 million increased $5.5 million,
or 2.3 percent, compared with 2002. The Corporation's earning assets, which
include loans, investment securities, deposits at the Federal Home Loan Bank,
and federal funds sold averaged $221.9 million in 2003, a 2.9 percent
increase over $215.7 million in 2002. The earning asset mix remained
relatively stable during the year. For 2003, average earning assets were
comprised of 45 percent loans, 53 percent investment securities, and 2
percent federal funds sold and funds at the Federal Home Loan Bank. The ratio
of average earning assets to average total assets increased to 91.7 percent
for 2003 compared with 91.2 percent for 2002. This increase was primarily
related to the decreased level of intangible assets and foreclosed assets.
Loans
Loans are the one of the Corporation's largest earning assets and users of
funds. Because of the importance of loans, most of the other assets and
liabilities are managed to accommodate the needs of the loan portfolio.
During 2003, average net loans represented 45 percent of average earning
assets and 41 percent of average total assets.
The composition of the Corporation's loan portfolio at December 31, 2003,
2002 and 2001 was as follows (dollars in thousands):
2003 2002 2001
-------------- -------------- ------
% %
Amount Change Amount Change Amount
------ ------ ------ ------ ------
Real estate - commercial mortgage $42,968 (9.0)% $ 47,218 (12.8)% $ 54,178
Real estate-residential 30,245 (10.8)% 33,901 (12.5)% 38,751
Real estate-agricultural 4,851 (9.0)% 5,333 (29.1)% 7,524
Commercial, financial, and
agricultural loans 9,547 3.0% 9,272 (16.8)% 11,142
Consumer loans 9,504 (6.9)% 10,209 2.5% 9,954
------- ----- -------- ------ --------
Total loans $97,115 (8.3)% $105,933 (12.8)% $121,549
Average total loans decreased in 2003 due to a decline in loan demand in our
primary markets. Despite the decrease in demand, we continued to apply
stringent credit criteria on all loan applications. As a result of the
decrease in average loans, the ratio of total loans to total deposits at year
end declined to 53.1 percent in 2003 compared with 55.8 percent in 2002. The
loan portfolio mix at year end 2003 consisted of 44.3 percent loans secured
by commercial real estate, 31.1 percent of loans secured by residential real
estate, and 5.0 percent of loans secured by agricultural real estate. The
loan portfolio also included 9.8 percent of loans for other commercial,
financial, and agricultural purposes and 9.8 percent of loans to individuals
for consumer expenditures.
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Allowance and Provision for Possible Loan Losses
The allowance for loan losses represents our estimate of the amount required
for probable loan losses in the Corporation's loan portfolio. Loans, or
portions thereof, which are considered to be uncollectible, are charged
against this allowance and subsequent recoveries, if any, are credited to the
allowance. We have not changed the lending practices and philosophy which
has provided us with an exceptionally low charge-off record over the past
several years. There can be no assurance, however, that the Corporation will
not sustain losses in future periods, which could be substantial in relation
to the size of the allowance for loan losses at December 31, 2003.
We have an extensive loan review program in place which provides for the
regular examination and evaluation of the risk elements within the loan
portfolio. The adequacy of the allowance for loan losses is regularly
evaluated based on the review of all significant loans with particular
emphasis on nonaccruing, past due, and other impaired loans that have been
identified as potential problems.
The allowance for possible loan losses was $2.3 million, or 2.4 percent of
total loans outstanding, as of December 31, 2003. This level represented a
$438 thousand increase from the corresponding 2002 year-end amount, which was
1.79 percent of total loans outstanding.
The provision for loan losses was $517 thousand in 2003, a $17 thousand
decrease from the prior year's provision. This provision reflected our
assessment of the adequacy of the allowance to absorb possible losses in the
loan portfolio. See Note 3 of the Corporation's Notes to Consolidated Financial
Statements for details of the changes in the allowances for loan losses.
Investment Securities
The Corporation's investment securities consist primarily of U.S. Government
agency securities. The investment portfolio serves several important
functions for the Corporation. Investments in debt securities are used as a
source of income, to complement loan demand and to satisfy pledging
requirements in the most profitable way possible. The investment portfolio
is a source of liquidity when loan demand exceeds funding availability. It
is a vehicle for adjusting balance sheet sensitivity to cushion against
adverse rate movements and is a means of improving profitability. Our
investment policy provides adequate liquidity by maintaining a portfolio with
staggered maturities ranging from one to five years.
The following table summarizes the contractual maturity of investment
securities on an amortized cost basis as of December 31, 2003 (dollars in
thousands):
Securities Securities
Amounts Maturing In: Available for Sale Held to Maturity
- ----------------------------------- ------------------ ----------------
One year or less $ 0 $11,616
After one through five years 21,276 27,921
After five through ten years 41,015 10,955
After ten years 5,629 4,203
Equity & mortgage-backed securities 3,624 0
------- -------
Total investment securities $71,544 $54,695
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The total investment portfolio increased to $126.2 million from $105.2
million at year-end 2003 compared with 2002, an increase of $21.0 million, or
20 percent. This increase was due to a decrease in loan demand. The average
total investment portfolio increased to $118.0 million in 2003 compared with
$95.9 million for 2002. The growth in securities available for sale was
primarily attributed to a $31.5 million investment in U.S. Government agency
securities.
We will continue to actively manage the size, components, and maturity
structure of the investment securities portfolio. Future investment
strategies will continue to be based on profit objectives, economic
conditions, interest rate risk objectives, and balance sheet liquidity
demands.
Nonperforming Assets
Nonperforming assets are defined as being all nonaccrual loans, loans that
are 90 days past due, and property acquired by foreclosure. The level of
nonperforming assets decreased $1.3 million at year-end 2003 compared with
year-end 2002. This decrease primarily resulted from less property in real
estate being acquired through foreclosure during the year. The majority of
the nonperforming asset balance for 2002 and 2001 was from one large
property, the Colquitt Retirement Inn, that was acquired by foreclosure in
1999 and disposed of in 2003. Nonperforming assets were approximately $2.2
million, or 2.25 percent of total loans and other real estate as of December
31, 2003, compared with $3.5 million, or 3.26 percent of total loans and
other real estate at year-end 2002.
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds is from deposits. The Corporation offers a
variety of deposit accounts having a wide range of interest rates and terms.
We rely primarily on competitive pricing policies and customer service to
attract and retain these deposits.
In 2003, average deposits decreased 1.4 percent compared with 2002. This
decline in deposits was primarily due to public deposits held for special
projects that were withdrawn in 2003. The average total deposits of $185.9
million decreased from the 2002 level of $188.5 million. The majority of the
decrease in average deposits occurred in average time deposits. Lower
interest rates during 2003 resulted in a slight change in the deposit mix.
Some customers shifted money from certificates of deposit to savings accounts
due to lower rates paid on time certificates of deposit. As of December 31,
2003, the Corporation had a total of $25.2 million in certificates of deposit
with a value of $100 thousand or more each. This was a 3.4 percent decrease
from the $26.1 million total in 2002.
We have used borrowings from the Federal Home Loan Bank to support our
residential mortgage lending activities. During 2003, the Corporation repaid
short-term advances with the Federal Home Loan Bank of $2.4 million leaving
$5.0 million to be paid in February 2004 and $5.0 million to be paid in April
2004. Also, in 2003 the Corporation borrowed an additional $8.0 million in
long-term advances from the Federal Home Loan Bank. One of these two long-
term advances was a $3.0 million fixed rate advance which will mature August
2005. The other $5.0 million advance has a fixed rate for 5 years with a
maturity of March 2013 with the issuer having an option to convert the
advance to a variable rate after the five-year period.
Liquidity
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. Many factors affect the ability to accomplish
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liquidity objectives successfully. Those factors include the economic
environment, our asset/liability mix and our overall reputation and credit
standing in the marketplace. In the ordinary course of business, our cash
flows are generated from 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 Consolidated Statement of Cash Flow details the Corporation's cash flow
from operating, investing, and financing activities. During 2003, both the
operating and financing activities generated cash flow of $9.9 million, while
investing activities used $10.8 million of this and reduced the cash and due
from banks balances by $900 thousand. Cash produced from operations continues
to provide cash primarily for the payment of dividends and common stock
repurchases.
Liability liquidity represents our ability to renew or replace our short-term
borrowings and deposits as they mature or are withdrawn. The Corporation's
deposit mix includes a significant amount of core deposits. Core deposits
are defined as total deposits less public funds and time deposits of $100
thousand or more. These funds are relatively stable because they are
generally accounts of individual customers who are concerned not only with
rates paid, but with the value of the services they receive, such as
efficient operations performed by helpful personnel. Total core deposits
remained stable representing 80.9 percent of total deposits on December 31,
2003, compared with 80.5 percent in 2002.
Asset liquidity is provided through ordinary business activity such as cash
which is received from interest and fee payments as well as from maturing
loans and investments. Additional sources include marketable securities and
short-term investments which can be easily converted to cash without
significant loss. The Corporation's investment securities maturing within
one year or less were $11.6 million on December 31, 2003, which represented
9.3 percent of the investment debt securities portfolio. Also, the
Corporation had $26 million of investment securities callable at the option
of the issuer and that are reasonably likely to be called during 2004. These
maturing and callable investment securities are sources for repayment of our
short-term and long-term debt obligations.
We are not aware of any known trends, events, or uncertainties that will have
or that are reasonably likely to have a material effect on the Corporation's
liquidity or operations.
Contractual Obligations
The chart below shows the Corporation's contractual obligations and
commercial commitments, and its scheduled future cash payments under those
commitments as of December 31, 2003.
The majority of the Corporation's outstanding contractual obligations were
long-term debt. The remaining contractual obligations were comprised of
telephone operating leases and purchase obligations for data processing
services with our primary service bureau. We have no capital lease
obligations.
Payments Due by Period
------------------------------------------------
Contractual Less
Obligations than 1 1-3 4-5 After 5
(Dollars in thousands) Total year years years Years
- ----------------------------- ------- ---- ------ ---- -------
Long-term debt $13,691 $174 $3,288 $229 $10,000
Operating leases 63 23 24 16 0
------- ---- ------ ---- -------
Total contractual obligations $13,754 $197 $3,312 $245 $10,000
======= ==== ====== ==== =======
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Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of our customers and to
reduce risk exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit in the form of loans or
through letters of credit. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the financial statements. Since many of the commitments to extend credit
and standby letters of credit are expected to expire without being drawn
upon, the contractual or notional amounts do not represent future cash
requirements.
Financial instruments whose contract amounts
represent credit risk (dollars in thousands): 2003 2002
- -------------------------------------------------- -------- --------
Commitments to extend credit $ 12,171 $ 19,550
Standby letters of credit and financial guarantees $ 52 $ 104
The Corporation does not have any special purpose entities or off-balance
sheets financing arrangements.
CAPITAL RESOURCES AND DIVIDENDS
We continue to maintain a healthy level of capital adequacy as measured by our
average equity to average assets ratio of 13.74 percent in 2003 and 13.62
percent in 2002.
The Federal Reserve Board has issued guidelines regarding risk-based capital
requirements for U.S. banks and bank holding companies. Overall, these
guidelines define the components of capital, require higher levels of capital
for higher risk assets and lower levels of capital for lower risk assets, and
include certain off-balance sheet items in the calculation of capital
requirements. The risk-based capital regulations require banks to maintain an
8 percent ratio, of which 4 percent must consist primarily of tangible common
shareholders' equity (tier I capital) or its equivalent. Also, the
regulations require a financial institution to maintain a 4 percent leverage
ratio in tandem with the risk-based ratios. At year-end 2003, we were well in
excess of the minimum requirements under the guidelines with a total risk-
based capital ratio of 26.80 percent, a tier I risk-based capital ratio of
25.55 percent, and a leverage ratio of 13.11 percent.
The following table presents the risk-based capital and leverage ratios for
year-end 2003 and 2002 in comparison to the minimum regulatory guidelines:
Minimum
Regulatory
Risk Based Capital Ratios Dec. 31, 2003 Dec. 31, 2002 Guidelines
- ------------------------- ------------- ------------- ----------
Tier I capital 25.55% 24.89% 4.00%
Total risk-based capital 26.80% 26.14% 8.00%
Leverage 13.11% 13.36% 4.00%
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this 2003 Annual Report contains
forward-looking statements within the meaning of the federal securities laws.
The Corporation cautions that there are various factors that could cause
actual results to differ materially from the anticipated results or other
expectations expressed in the Corporation's forward-looking statements;
accordingly, there can be no assurance that such indicated results will be
realized.
These factors include legislative and regulatory initiatives regarding
deregulation and restructuring of the banking industry; the extent and timing
of the entry of additional competition in the Corporation's markets;
potential business strategies, including acquisitions or dispositions of
assets or internal restructuring, that may be pursued by the Corporation; the
Corporation's effectiveness with implementing its strategies; state and
federal banking regulations; changes in or application of environmental and
other laws and regulations to which the Corporation is subject; political,
legal and economic conditions and developments; financial market conditions
and the results of financing efforts; changes in commodity prices and
interest rates; weather, natural disasters and other catastrophic events; and
other factors discussed in the Corporation's 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.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
The Corporation's primary market risk lies within our exposure to interest
rate movement. We have no foreign currency exchange rate risk, commodity
price risk, or any other material market risk. The Corporation has no
trading investment portfolio, nor do we have any interest rate swaps or other
derivative instruments.
Our primary source of earnings, net interest income, can fluctuate with
significant interest rate movements. To lessen the impact of these
movements, we seek to maximize net interest income while remaining within
prudent ranges of risk by practicing sound interest rate sensitivity
management. We attempt to accomplish this objective by structuring the
balance sheet so that the differences in repricing opportunities between
assets and liabilities are minimized. Interest rate sensitivity refers to
the responsiveness of earning assets and interest-bearing liabilities to
changes in market interest rates. The Corporation's interest rate risk
management is carried out by the Asset/Liability Management Committee which
operates under policies and guidelines established by management. The
principal objective of asset/liability management is to manage the levels of
interest-sensitive assets and liabilities to minimize net interest income
fluctuations in times of fluctuating market interest rates. To effectively
measure and manage interest rate risk, the Corporation uses computer
simulations that determine the impact on net interest income of numerous
interest rate scenarios, balance sheet trends and strategies. These
simulations cover the following financial instruments: short-term financial
instruments, investment securities, loans, deposits, and borrowings. These
simulations incorporate assumptions about balance sheet dynamics, such as
loan and deposit growth and pricing, changes in funding mix, and asset and
liability repricing and maturity characteristics. Simulations are run under
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various interest rate scenarios to determine the impact on net income and
capital. From these computer simulations, interest rate risk is quantified
and appropriate strategies are developed and implemented. The Corporation
also maintains an investment portfolio that staggers maturities and provides
flexibility over time in managing exposure to changes in interest rates. Any
imbalances in the repricing opportunities at any point in time constitute a
financial institution's interest rate sensitivity.
The table below provides information about the Corporation's financial assets
and liabilities that are sensitive to changes in interest rates. For each
rate-sensitive asset and liability listed, the table presents principal
balances and weighted average interest rates by expected maturity or the
earliest possible repricing opportunity dates. We use a number of tools to
measure interest rate risk.
One of the indicators for our interest rate sensitivity position is the
measurement of the difference between its rate-sensitive assets and rate-
sensitive liabilities, which is referred to as the "gap." A gap analysis
displays the earliest possible repricing opportunity for each asset and
liability category based upon contractual maturities and repricing.
At year-end 2003, our sensitivity ratio, or one-year cumulative rate-
sensitive assets relative to cumulative rate-sensitive liabilities, was 91
percent compared with 83 percent for 2002. This change in the sensitivity
ratio was a result of the Corporation's management of its exposure to
interest rate risk. We are slightly less liability-sensitive at the one year
gap position because we borrowed some longer-term funds to take advantage of
lower rates and to reduce our interest rate risk from increasing short-term
rates.
All interest rates and yields do not adjust at the same velocity; therefore,
the sensitivity ratio is only a general indicator of the potential effects of
interest rate changes on net interest income. We monitor our asset and
liability mix to ensure that the effects of interest rate movements in either
direction are not significant over time.
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Interest Rate Sensitivity December 31, 2003
------------------------------------------------------------------------
Expected Maturity/Repricing Dates
--------------------------------------------------------------
(Dollars in thousands) 2009 Fair
Rate-sensitive Assets: * 2004 2005 2006 2007 2008 & Beyond Total Value
------- ------- ------- ------- ------- ------- -------- --------
Short-term Investments $ 44 $ $ $ $ $ $ 44 $ 44
Average interest rate 0.85% 0.85%
Securities available
for sale 9,060 8,399 1,142 1,470 16,697 34,776 71,544 71,544
Average interest rate 4.33% 5.43% 5.09% 5.13% 4.47% 4.69% 4.70%
Securities held to
maturity** 28,611 10,573 6,583 3,010 2,000 3,918 54,695 56,456
Average interest rate 5.64% 5.99% 5.91% 5.38% 4.08% 5.85% 5.68%
Fixed-rate loans 4,205 3,491 3,831 4,664 4,226 26,341 46,758 48,157
Average interest rate 7.30% 8.76% 8.36% 7.34% 7.07% 8.15% 7.96%
Variable-rate loans 44,840 3,001 627 1,669 220 50,357 50,373
Average interest rate 5.63% 6.23% 6.12% 4.40% 4.00% 5.62%
------- ------- ------- ------- ------- ------- -------- --------
Total Rate-sensitive
Assets $86,760 $25,464 $12,183 $9,144 $24,592 $65,255 $223,398 $226,574
Average interest rate 5.58% 6.21% 6.61% 6.34% 4.88% 6.15% 5.83%
Rate-sensitive
Liabilities:
Time deposits $76,741 $ 5,556 $ 1,497 $ 585 $ 3,245 $ $ 87,624 $ 88,589
Average interest rate 1.89% 2.54% 3.63% 4.29% 3.21% 2.03%
Other interest-
bearing deposits *** 6,914 19,513 19,513 5,352 5,352 10,704 67,348 67,347
Average interest rate 0.78% 0.62% 0.62% 0.59% 0.59% 0.59% 0.63%
Short-term borrowings 12,000 12,000 12,036
Average interest rate 2.46% 2.46%
Long-term borrowings 174 3,174 114 114 10,115 13,691 13,705
Average interest rate 6.17% 2.71% 5.21% 5.21% 3.44% 3.33%
------- ------- ------- ------- ------- ------- -------- --------
Total Rate-
sensitive Liabilities $95,829 $28,243 $21,124 $6,051 $18,712 $10,704 $180,663 $181,677
Average interest rate 1.89% 1.23% 0.86% 1.03% 2.58% 0.59% 1.63%
GAP $(9,069) $(2,779) $(8,941) $3,093 $ 5,880 $54,551 $ 42,735
Sensitivity Ratio 91% 90% 86% 88% 93% 124%
* All rates are tax-equivalent rates
** Repricing date is call date
*** Interest-bearing deposits with no maturity
Item 8. Financial Statements and Supplementary Data
The information required by this item is file herewith.
-40-
T Thigpen, Jones, Seaton & Co., Robert E. Thigpen, Jr., CPA
J P.C. Scotty C. Jones, CPA
S CERTIFIED PUBLIC ACCOUNTANTS Frank W. Seaton, Jr., CPA
BUSINESS CONSULTANTS Tracy G. Smith, CPA
1004 Hillcrest Parkway - P.O. Box 400 Grayson Dent, CPA
Dublin, Georgia 31040-0400
Tel 478-272-2030 Fax 478-272-3318
E-mail [email protected]
INDEPENDENT AUDITOR'S REPORT
The Directors and Stockholders of Southwest
Georgia Financial Corporation
We have audited the consolidated balance sheets of Southwest Georgia
Financial Corporation and Subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of income, comprehensive income, retained
earnings and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. The financial statements of Southwest
Georgia Financial Corporation and Subsidiary as of December 31, 2001, were
audited by other auditors whose report dated February 1, 2002, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Southwest Georgia Financial Corporation and Subsidiaries as of
December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the two years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Thigpen, Jones, Seaton & Co., P.C
Dublin, Georgia
January 14, 2004
-41-
Draffin
& Tucker, LLP
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
The Directors and Stockholders of Southwest
Georgia Financial Corporation
We have audited the consolidated balance sheets of Southwest Georgia
Financial Corporation and Subsidiary as of December 31, 2001 and 2000, and
the related consolidated statements of income, statements of comprehensive
income, changes in stockholders' equity and cash flows for each of the years
in the three year period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Southwest Georgia Financial Corporation and Subsidiary at December 31,
2001 and 2000, and the results of their operations and their cash flows for
each of the years in the three year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States
of America.
/S/Draffin & Tucker, LLP
Albany, Georgia
February 1, 2002
P.O. Box 6 Members:
2617 Gillion Road The American Institute of
Albany, Georgia 31702-0006 Cerfified Public Accountants
(229) 883-7878
FAX (229) 435-3152 The Georgia Society of
Certified Public Accountants
-42-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
------------ ------------
ASSETS
Cash and due from banks $ 10,959,728 $ 11,880,622
Interest-bearing deposits with banks 43,942 3,996,485
Federal funds sold 0 2,000,000
Investment securities available for sale,
at fair value 71,544,353 40,055,321
Securities to be held to maturity (estimated
fair value of $56,456,044 and $68,492,520) 54,695,369 65,150,087
Loans, less allowance for loan losses of
$2,337,811 and $1,899,738 94,777,405 104,033,561
Premises and equipment, net 5,655,415 5,434,115
Foreclosed assets, net 1,203,386 1,982,467
Intangible assets 2,037,526 2,361,477
Other assets 5,235,873 3,573,504
------------ ------------
Total assets $246,152,997 $240,467,639
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 27,904,580 $ 28,924,659
NOW accounts 35,319,083 36,113,124
Money market 13,827,745 12,514,257
Savings 18,200,946 18,193,291
Certificates of deposit $100,000 and over 25,235,601 26,097,720
Other time accounts 62,387,796 68,080,299
------------ ------------
Total deposits 182,875,751 189,923,350
Federal funds purchased 2,000,000 0
Other borrowed funds 10,000,000 2,400,000
Long-term debt 13,691,429 11,041,252
Other liabilities 4,597,711 3,781,026
------------ ------------
Total liabilities 213,164,891 207,145,628
------------ ------------
Stockholders' equity:
Common stock - par value $1; authorized
5,000,000 shares; issued 3,302,750 shares 3,302,750 3,300,000
Capital surplus 7,172,051 7,133,551
Retained earnings 29,554,946 28,403,347
Accumulated other comprehensive income 720,866 1,188,733
Treasury stock 763,575 shares for
2003 and 711,075 for 2002, at cost (7,762,507) (6,703,620)
------------ ------------
Total stockholders' equity 32,988,106 33,322,011
------------ ------------
Total liabilities and stockholders' equity $246,152,997 $240,467,639
============ ============
See accompanying notes to consolidated financial statements.
-43-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 2003, 2002, and 2001
2003 2002 2001
----------- ----------- -----------
Interest income:
Interest and fees on loans $ 7,309,455 $ 9,279,689 $11,748,852
Interest and dividends on securities:
Taxable 4,991,575 4,657,118 4,817,051
Tax exempt 779,650 722,895 722,979
Interest on deposits in banks 43,285 56,306 224,556
Interest on other short-term investments 1,569 22,107 48,246
---------- ---------- ----------
Total interest income 13,125,534 14,738,115 17,561,684
---------- ---------- ----------
Interest expense:
Deposits 2,721,244 3,967,799 7,431,375
Other borrowings 666,119 461,426 494,872
---------- ---------- ----------
Total interest expense 3,387,363 4,429,225 7,926,247
---------- ---------- ----------
Net interest income 9,738,171 10,308,890 9,635,437
Provision for loan losses 517,104 534,000 380,000
---------- ---------- ----------
Net interest income after provision
for loan losses 9,221,067 9,774,890 9,255,437
---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 1,290,372 1,091,712 959,390
Income from trust services 261,570 215,803 254,802
Income from security sales 261,441 267,042 389,612
Income from insurance services 1,002,223 921,828 926,856
Income from mortgage banking services 3,446,658 3,021,047 2,441,945
Net gain (loss) on disposition of assets (1,845,877) (213,503) 2,622
Net gain (loss) on sale of securities 0 121,270 0
Other income 128,403 170,485 180,333
---------- ---------- ----------
Total noninterest income 4,544,790 5,595,684 5,155,560
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 5,749,217 6,044,833 5,641,555
Occupancy expense 562,725 553,192 541,862
Equipment expense 582,078 517,845 505,844
Data processing expense 541,188 532,018 549,460
Amortization of intangible assets 323,951 323,868 171,745
Other operating expenses 2,507,687 2,327,405 2,473,408
---------- ---------- ----------
Total noninterest expenses 10,266,846 10,299,161 9,883,874
---------- ---------- ----------
Income before income taxes 3,499,011 5,071,413 4,527,123
Provision for income taxes 1,018,851 1,469,312 1,308,597
---------- ---------- ----------
Net income $ 2,480,160 $ 3,602,101 $ 3,218,526
========== ========== ==========
Basic earnings per share:
Net income $ 0.97 $ 1.37 $ 1.20
========== ========== ==========
Weighted average shares outstanding 2,560,202 2,619,559 2,690,135
========== ========== ==========
Diluted earnings per share:
Net income $ 0.97 $ 1.37 $ 1.20
========== ========== ==========
Weighted average shares outstanding 2,570,020 2,623,476 2,690,807
========== ========== ==========
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 2003, 2002, and 2001
2003 2002 2001
----------- ----------- -----------
Net income $ 2,480,160 $ 3,602,101 $ 3,218,526
----------- ---------- ----------
Other comprehensive income, net of tax:
Unrealized gains on securities
available for sale:
Unrealized holding gains(losses)
arising during the period (708,469) 1,556,565 104,655
Federal income tax expense(benefit) 240,602 (529,232) (35,583)
---------- ---------- ----------
Other comprehensive income (loss),
net of tax (467,867) 1,027,333 69,072
---------- ---------- ----------
Total comprehensive income $ 2,012,293 $ 4,629,434 $ 3,287,598
========== ========== ==========
See accompanying notes to consolidated financial statements.
-45-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
for the years ended December 31, 2003, 2002, and 2001
Accumulated
Other Total
Common Capital Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Income Stock Equity
---------- ---------- ----------- ---------- ----------- ----------
Balance at Dec. 31, 2000 $3,000,000 $2,033,551 $29,513,113 $ 92,328 $(3,998,039) $30,640,953
Net Income - - 3,218,526 - - 3,218,526
Common stock acquired
through purchase program - - - - (1,706,496) (1,706,496)
Cash dividend declared
$.47 per share - - (1,264,949) - - (1,264,949)
Unrealized holding gain - - - 69,072 - 69,072
--------- --------- ---------- --------- ---------- ----------
Balance at Dec. 31, 2001 3,000,000 2,033,551 31,466,690 161,400 (5,704,535) 30,957,106
Net Income - - 3,602,101 - - 3,602,101
Common stock acquired
through purchase program - - - - (999,085) (999,085)
Cash dividend declared
$.47 per share - - (1,265,444) - - (1,265,444)
Stock dividend declared 300,000 5,100,000 (5,400,000) - - -
Unrealized holding gain - - - 1,027,333 - 1,027,333
--------- --------- ---------- --------- ---------- ----------
Balance at Dec. 31, 2002 3,300,000 7,133,551 28,403,347 1,188,733 (6,703,620) 33,322,011
Net Income - - 2,480,160 - - 2,480,160
Common stock acquired
through purchase program - - - - (1,058,887) (1,058,887)
Cash dividend declared
$.52 per share - - (1,328,561) - - (1,328,561)
Exercise of stock options 2,750 38,500 - - - 41,250
Unrealized holding gain - - - (467,867) - (467,867)
--------- --------- ---------- --------- ---------- ----------
Balance at Dec. 31, 2003 $3,302,750 $7,172,051 $29,554,946 $ 720,866 $(7,762,507) $32,988,106
========= ========= ========== ========= ========== ==========
See accompanying notes to consolidated financial statements.
-46-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2003, 2002, and 2001
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 2,480,160 $ 3,602,101 $ 3,218,526
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 517,104 534,000 380,000
Depreciation 590,300 553,622 537,716
Net amortization and accretion of
investment securities 89,353 70,220 44,281
Amortization of intangibles 323,951 323,868 171,745
Net loss (gain) on sale and
disposal of assets 1,845,876 95,638 (2,622)
Changes in:
Other assets 107,505 (458,246) 627,239
Other liabilities 1,057,288 456,549 505,144
---------- ---------- ----------
Net cash provided by operating activities 7,011,537 5,177,752 5,482,029
---------- ---------- ----------
Investing activities:
Proceeds from maturities of securities
held to maturity 23,905,000 14,855,000 14,645,000
Proceeds from maturities of securities
available for sale 34,038,989 3,102,297 3,202,282
Proceeds from sale of securities
available for sale 242,000 483,270 0
Purchase of securities held to maturity (13,442,500) (17,589,712) (8,037,615)
Purchase of securities available for sale (66,575,625) (16,064,308) (8,130,631)
Net change in other short-term investments 2,000,000 (870,000) 870,000
Net change in loans 7,305,760 14,843,713 334,685
Purchase of premises and equipment (1,115,629) (451,876) (900,348)
Proceeds from sales of other assets 707,324 2,028,139 280,162
Net change in interest-bearing deposits
with banks 3,952,543 (2,853,274) 3,867,113
Purchase of bank-owned life insurance (1,806,673) 0 0
Payment for business acquisition 0 0 (1,800,000)
---------- ---------- ----------
Net cash provided(used) for
investing activities (10,788,811) (2,516,751) 4,330,648
---------- ---------- ----------
Financing activities:
Net change in deposits (7,047,599) (2,977,236) (6,584,224)
Net change in federal funds purchased 2,000,000 0 0
Net change in short-term borrowings 7,600,000 (2,400,000) (3,200,000)
Increase in long-term borrowings 2,650,177 7,649,741 3,391,511
Cash dividends declared (1,328,561) (1,265,444) (1,264,949)
Proceeds from the exercise of
stock options 41,250 0 0
Payment for common stock (1,058,887) (999,085) (1,706,496)
---------- ---------- ----------
Net cash provided(used) for
financing activities 2,856,380 7,976 (9,364,158)
---------- ---------- ----------
Increase (decrease) in cash and
due from bank (920,894) 2,668,977 448,519
Cash and due from banks -
beginning of year 11,880,622 9,211,645 8,763,126
---------- ---------- ----------
Cash and due from banks - end of year $10,959,728 $11,880,622 $ 9,211,645
========== ========== ==========
Cash paid during the year for:
Income taxes $ 1,060,000 $ 1,476,671 $ 1,419,337
========== ========== ==========
Interest paid $ 3,496,933 $ 4,685,032 $ 8,097,201
========== ========== ==========
NONCASH ITEMS:
Increase in foreclosed properties
and decrease in loans $ 1,433,292 $ 254,447 $ 1,669,682
========== ========== ==========
Unrealized gain(loss) on securities AFS $ (467,867) $ 1,027,333 $ 69,072
========== ========== ==========
See accompanying notes to consolidated financial statements.
-47-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries (the "Corporation") conform to generally
accepted accounting principles and to general practices within the banking
industry. The following is a description of the more significant of those
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest
Georgia Financial Corporation and its wholly-owned Subsidiaries, Southwest
Georgia Bank (the "Bank") and Empire Financial Services, Inc. ("Empire").
All significant intercompany accounts and transactions have been eliminated
in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with these evaluations, management
obtains independent appraisals for significant properties.
A substantial portion of the Corporation's loans are secured by real estate
located primarily in Georgia. Accordingly, the ultimate collection of these
loans is susceptible to changes in the real estate market conditions of this
market area.
Interest Bearing Deposits in Banks
Interest bearing deposits in banks mature within one year and are carried at
cost.
Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized
cost. Securities not classified as held to maturity or trading, including
equity securities with readily determinable fair values, are classified as
"available for sale" and recorded at fair value with unrealized gains and
losses reported in other comprehensive income.
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. Gains and losses on the sale of securities are recorded on the trade
date and are determined using the specific identification method.
-48-
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.
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
-49-
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.
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.
-50-
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.
Servicing and Origination Fees on Loans
The Corporation from its subsidiary, Empire, recognizes as income in the
current period all loan origination and brokerage fees collected on loans
originated and closed for investing participants. Loan servicing fees are
based on a percentage of loan interest paid by the borrower and recognized
over the term of the loan as loan payments are received. Empire does not
directly fund any mortgages and acts as a service-oriented broker for
participating mortgage lenders. Fees charged for continuing servicing fees
are comparable with market rates charged in the industry. Based on these
facts, deferred mortgage servicing rights as defined under FASB 65 and FASB
122, are not required to be recognized. Late charges assessed on past due
payments are recognized as income by the Corporation when collected.
Advertising Costs
It is the policy of the Corporation to expense advertising costs as they are
incurred. The Corporation does not engage in any direct-response,
advertising and accordingly has no advertising costs reported as assets on
its balance sheet.
2. INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities as
shown in the consolidated balance sheets and their estimated fair values at
December 31 were as follows:
-51-
Securities Available For Sale:
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- -------- -----------
December 31, 2003
- -----------------
Equity securities $ 2,210,808 $ 13,787 $ 0 $ 2,224,595
State and municipal securities 12,906,261 1,016,191 0 13,922,452
Agency securities 54,000,738 574,678 577,251 53,998,165
Mortgage backed securities 1,333,905 65,236 0 1,399,141
---------- --------- ------- ----------
Total $70,451,712 $1,669,892 $577,251 $71,544,353
========== ========= ======= ==========
December 31, 2002
- -----------------
Equity securities $ 2,172,807 $ 7,000 $ 665 $ 2,179,142
State and municipal securities 12,573,581 737,620 0 13,311,201
Agency securities 20,121,853 901,928 0 21,023,781
Mortgage backed securities 3,385,969 155,228 0 3,541,197
---------- --------- ------- ----------
Total $38,254,210 $1,801,776 $ 665 $40,055,321
========== ========= ======= ==========
Securities Held to Maturity:
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- -------- -----------
December 31, 2003
- -----------------
U. S. Treasury and U.S.
Government Agency Securities $47,542,062 $1,463,768 $ 966 $49,004,864
State and Municipal Securities 7,153,307 298,077 204 7,451,180
---------- --------- ------- ----------
Total $54,695,369 $1,761,845 $ 1,170 $56,456,044
========== ========= ======= ==========
December 31, 2002
- -----------------
U. S. Treasury and U.S.
Government Agency Securities $59,540,876 $3,015,199 $ 0 $62,556,075
State and Municipal Securities 5,609,211 327,234 0 5,936,445
---------- --------- ------- ----------
Total $65,150,087 $3,342,433 $ 0 $68,492,520
========== ========= ======= ==========
At December 31, 2003 and 2002, securities with a carrying value of
$41,988,000 and $34,394,000, respectively were pledged as collateral for
public deposits and other purposes as required by law.
There were no investments in obligations of state and municipal subdivisions
which exceeded 10 percent of the Corporation's stockholders' equity at
December 31, 2003.
-52-
The amortized cost and estimated fair value of securities at December 31,
2003, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
Amortized Estimated
Available for Sale: Cost Fair Value
- ------------------- ------------ ------------
Amounts maturing in:
One year or less $ 0 $ 0
After one through five years 20,807,803 21,276,391
After five through ten years 40,851,085 41,015,083
After ten years 5,248,111 5,629,144
---------- ----------
Total debt securities $ 66,906,999 $ 67,920,618
Mortgage-backed securities 1,333,905 1,399,140
Equity securities 2,210,808 2,224,595
---------- ----------
Total AFS securities $ 70,451,712 $ 71,544,353
========== ==========
Amortized Estimated
Held to Maturity: Cost Fair Value
- ----------------- ------------ ------------
Amounts maturing in:
One year or less $ 11,616,293 $ 11,895,602
After one through five years 27,920,570 29,131,378
After five through ten years 10,955,030 11,093,032
After ten years 4,203,476 4,336,032
---------- ----------
Total HTM securities $ 54,695,369 $ 56,456,044
========== ==========
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the Corporation's loan portfolio at December 31, 2003,
2002, and 2001 was as follows:
2003 2002 2001
------------ ------------ ------------
Commercial, financial and
agricultural loans $ 9,546,904 $ 9,272,312 $ 11,141,681
Real estate mortgage loans 78,064,179 86,451,963 100,453,113
Other loans 98,343 40,314 34,895
Consumer loans 9,452,255 10,222,776 9,979,001
---------- ----------- -----------
Loans Outstanding 97,161,681 105,987,365 121,608,690
Unearned discount (46,465) (54,066) (59,798)
Allowance for loan losses (2,337,811) (1,899,738) (1,883,171)
---------- ----------- -----------
Net loans $94,777,405 $104,033,561 $119,665,721
========== =========== ===========
The Corporation's only significant concentration of credit at December 31,
2003, occurs in real estate loans which totaled approximately $78 million.
However, this amount is not concentrated in any specific segment within the
market or geographic area.
At December 31, 2003 and 2002, impaired loans amounted to $446,975 and
$468,703, respectively. Included in the allowance for loan losses is $77,309
related to impaired loans at December 31, 2003, and $90,579 related to
impaired loans at December 31, 2002. The amounts in the allowance for loan
losses for impaired loans were primarily determined using the fair value of
the loans' collateral.
-53-
For the years ended December 31, 2003 and 2002, the average recorded
investment in impaired loans was $457,839 and $537,304 respectively.
Interest income was recognized for cash payments received on loans while they
were impaired of $29,499 for 2003 and $40,490 for 2002.
Loans placed on nonaccrual status amounted to $1,012,154 and $1,529,158 at
December 31, 2003 and 2002, respectively. Past due loans over ninety days
and still accruing at December 31, 2003 and 2002, were $0 and $3,551,
respectively.
Changes in the allowance for loan losses are as follows:
2003 2002 2001
----------- ----------- -----------
Balance, January 1 $ 1,899,738 $ 1,883,171 $ 1,795,192
Provision charged to operations 517,104 534,000 380,000
Loans charged off (277,231) (597,783) (348,470)
Recoveries 198,200 80,350 56,449
--------- --------- ---------
Balance, December 31 $ 2,337,811 $ 1,899,738 $ 1,883,171
========= ========= =========
4. BANK PREMISES AND EQUIPMENT
The amounts reported as bank premises and equipment are as follows:
2003 2002
----------- -----------
Land $ 1,166,159 $ 1,239,598
Building 5,835,696 5,498,445
Furniture and equipment 5,000,328 4,735,758
---------- ----------
12,002,183 11,473,801
Less accumulated depreciation (6,346,768) (6,039,686)
---------- ----------
Total $ 5,655,415 $ 5,434,115
========== ==========
Depreciation of premises and equipment was $590,300; $553,622 and $537,716 in
2003, 2002, and 2001, respectively.
5. DEPOSITS
At December 31, 2003, the scheduled maturities of certificates of deposit are
as follows:
$ Amount
------------
2004 $ 75,622,000
2005 5,556,000
2006 1,497,000
2007 585,000
2008 and thereafter 4,364,000
----------
Total $ 87,624,000
==========
-54-
6. SHORT-TERM BORROWINGS
Federal funds purchased generally mature within one to four days. On
December 31, 2003, federal funds purchased were $2,000,000 with interest at
1.15 percent. Other borrowed funds consist of Federal Home Loan Bank
advances of $10,000,000 with interest at 2.71 percent as of December 31, 2003
and $2,400,000 million with interest at 3.16 percent as of December 31, 2002.
Information concerning federal funds purchased and Federal Home Loan Bank
short-term advances are summarized as follows:
2003 2002 2001
----------- ----------- -----------
Average balance during the year $ 6,621,027 $ 4,708,288 $ 8,323,132
Average interest rate during the year 3.10% 2.49% 5.79%
Maximum month-end bal. during the year $12,000,000 $ 5,865,000 $13,163,000
7. LONG-TERM DEBT
Long-term debt consist of the following:
December 31,
------------------------------
2003 2002
----------- -----------
Advance from Federal Home Loan Bank with
a 4.06% fixed rate of interest maturing
April 2, 2004. (transferred to short-
term borrowings) $ 0 $ 5,000,000
Advance from Federal Home Loan Bank with
a 2.51% fixed rate of interest maturing
August 18, 2005. 3,000,000 0
Advance from Federal Home Loan Bank with
a 2.85% fixed rate of interest maturing
March 11, 2013. (convertible to a
variable rate at option of Federal Home
Loan Bank on March 11, 2008). 5,000,000 0
Advance from Federal Home Loan Bank with
a 4.00% fixed rate of interest maturing
August 6, 2012, (convertible to a
variable rate at option of Federal Home
Loan Bank on August 6, 2007). 5,000,000 5,000,000
Advance from Federal Home Loan Bank with
a 5.21% fixed rate of interest due in
annual installments maturing
December 17, 2008. 571,429 685,453
Note payable to First Community Bank of
Southwest Georgia with interest based on
the prime rate and adjusted quarterly;
maturing December 1, 2010. (4.25% as of
December 31, 2002 and 4.75% as of
December 31, 2001) (Paid in full in 2003.) 0 175,799
Note payable to MIA Company with an 8.00%
fixed rate of interest due in annual
installments maturing January 31, 2005. 120,000 180,000
---------- ----------
Total long-term debt $13,691,429 $11,041,252
========== ==========
The advances from Federal Home Loan Bank are collateralized by the pledging
of investment securities.
-55-
The following are maturities of long-term debt for the next five years. At
December 31, 2003, there was no floating rate long-term debt.
Fixed Rate
Due in: $ Amount
- ----------- -----------
2004 $ 174,286
2005 3,174,286
2006 114,286
2007 114,286
2008 114,285
Later Years 10,000,000
----------
Total long-term debt $13,691,429
==========
8. EMPLOYEE BENEFITS PLAN
Pension Plan
The Corporation has a noncontributory defined benefit pension plan which
covers most all employees who have attained the age of 21 years and completed
one year of continuous service. The Corporation is providing for the cost of
this plan as benefits are accrued based upon actuarial determinations
employing the aggregate funding method.
The table of actuarially computed benefit obligations and net assets and the
related changes of the Plan at December 31, 2003, 2002, and 2001 is presented
below.
2003 2002 2001
----------- ----------- -----------
Change in Benefit Obligation
- ----------------------------------------
Benefit obligation at beginning of year $ 6,590,821 $ 6,316,759 $ 5,198,845
Service cost 300,735 235,049 329,953
Interest cost 476,944 417,378 407,917
Actuarial (gain)loss 838,502 (91,016) 655,766
Benefits paid (410,252) (287,349) (275,722)
--------- --------- ---------
Benefit obligation at end of year 7,796,750 6,590,821 6,316,759
--------- --------- ---------
Change in Plan Assets
- ----------------------------------------
Fair value of plan assets at
beginning of year $ 6,038,280 $ 5,780,395 $ 5,330,613
Actual return on plan assets 426,605 165,244 375,504
Employer contribution 652,175 379,990 350,000
Benefits paid (410,252) (287,349) (275,722)
--------- --------- ---------
Fair value of plan assets at end of year 6,706,808 6,038,280 5,780,395
--------- --------- ---------
Funded Status
- ----------------------------------------
Prepaid (accrued) benefit cost $(1,089,942) $ (552,541) $ (536,364)
========= ========= =========
At December 31, 2003, the plan assets included cash and cash equivalents, U.
S. Treasury bonds and notes, other government agency securities, and equity
securities.
-56-
Assumptions used to determine net periodic pension costs as of December 31,
2003, 2002, and 2001, respectively were:
2003 2002 2001
--------- --------- ---------
Weighted-Average Assumptions As of
December 31
- ----------------------------------------
Discount rate 6.50% 6.75% 7.25%
Expected return on plan assets 8.00% 7.25% 7.25%
Rate of compensation increase 5.00% 5.00% 5.00%
Components of Net Periodic Benefit Cost
- ----------------------------------------
Service cost $ 300,735 $ 235,049 $ 329,953
Interest cost 476,944 417,378 407,917
Expected return on plan assets (483,609) (419,663) (378,603)
Amortization 70,265 0 0
------- ------- -------
Net periodic benefit cost $ 364,335 $ 232,764 $ 359,267
======= ======= =======
Employee Stock Ownership Plan
The Corporation has a nondiscriminatory Employee Stock Ownership Plan and
Trust to be administered by a trustee. The plan was established to purchase
and hold Southwest Georgia Financial Corporation stock for all eligible
employees. Contributions to the plan are made solely by the Corporation and
are at the discretion of the Board of Directors. The contributions were
$159,725 in 2003, $390,605 in 2002, and $276,334 in 2001.
Directors Deferred Compensation Plan
The Corporation has a voluntary deferred compensation plan for the Board of
Directors administered by an insurance company. The plan stipulates that if
a director participates in the Plan for four years, the Corporation will pay
the Director future monthly income for ten years beginning at normal
retirement age, and the Corporation will make specified monthly payments to
the Director's beneficiaries in the event of his or her death prior to the
completion of such payments. The plan is funded by actual life insurance
policies with the Corporation as the named beneficiary.
Deferred Compensation Agreement
The Corporation has entered into an employment agreement with an executive
officer of Empire as of January 1, 2002. Under this employee agreement the
executive officer shall be credited with Deferred Compensation for his
service and covenants in the amount of $200,000 on December 31, 2002 and
$200,000 on each anniversary date thereafter to 2006. The executive officer
has irrevocably elected to waive participation in the Pension and Employee
Stock Ownership Plans.
-57-
Directors and Executive Officers Stock Purchase Plan
The Corporation has adopted a stock purchase plan for the executive officers
and directors of Southwest Georgia Financial Corporation. The stock offering
is exempt under the Securities Act of 1933 Regulation D and additionally
exempt under Georgia law.
Under the plan, participants may elect to contribute up to $500 monthly of
salary or directors' fees and receive corporate common stock with an
aggregate value of 1.5 times their contribution. The expense incurred during
2003, 2002, and 2001 on the part of the Corporation totaled $51,681, $52,283,
and $48,625, respectively.
Stock Option Plan
Effective March 19, 1997, the Corporation established a Key Individual Stock
Option Plan ("Plan") which provides for the issuance of options to key
employees and directors of the Corporation. In April 1997, the Plan was
approved by the Corporation's shareholders, and it will be effective for ten
years. A maximum of 150,000 shares of common stock have been authorized for
issuance with respect to options granted under the Plan. The Plan provides
for the grant of incentive stock options and nonqualified stock options to
key employees of the Corporation. The Plan is administered by the Personnel
Committee of the Board of Directors.
In 2003, no options were granted to the Corporation's key employees and
directors. In 2002 and 2001, the Corporation granted 4,400 and 8,250 stock
options, respectively. Under the Plan, the exercise price of each option
equals the market price of the Corporation's stock on the grant date for a
term of ten years. All of these options are fully vested. The fair value of
each option grant is estimated on the grant date using an option-pricing
model using weighted-average assumptions.
The following table sets forth the number of options granted, the average
fair value of options granted, and the weighted-average assumptions used to
determine the fair value of the option's granted.
2003 2002 2001
---- ------ ------
Number of options granted 0 4,400 8,250
Average fair value of options granted $ 0 $ 2.37 $ 2.89
Weighted-average assumptions:
Dividend yield 0 3.2% 3.3%
Risk-free interest rate 0 1.7% 3.3%
Volatility rate 0 24.0% 25.0%
Expected life 0 5 years 5 years
-58-
A summary of the status of the Corporation's Plan as of December 31, 2003,
2002 and 2001, and the changes during the year is presented below:
No. of Shares Average Price
- ----------------------------------------------------- -------------- -----------
Outstanding at Dec. 31, 2000 110,000 $ 21.22
Granted 8,250 14.25
Expired (550) 14.44
- ----------------------------------------------------- -------------- -----------
Outstanding at Dec. 31, 2001 117,700 20.76
Granted 4,400 15.00
Expired (550) 23.18
- ----------------------------------------------------- -------------- -----------
Outstanding at Dec. 31, 2002 121,550 20.54
Granted 0 0.00
Expired (5,500) 21.35
Exercised (2,750) 15.00
- ----------------------------------------------------- -------------- -----------
Outstanding at Dec. 31, 2003 113,300 $ 20.64
The number of shares and average price of options exercisable at December 31,
2003, 2002, and 2001 were 113,300; 121,550; and 112,200; and at $20.64,
$20.54, and $21.07, respectively. The average fair value of options granted
during 2003, 2002, and 2001 was $0, $2.37, and $2.89.
The following table summarizes information about fixed stock options
outstanding and exercisable at December 31, 2003.
Outstanding Options Exercisable Options
------------------------------------ -----------------------
Weighted-
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price Range At 12/31/03 Life Price At 12/31/03 Price
- ----------- ----------- ----------- -------- ----------- --------
$13 to $14 3,300 7.2 Years $ 13.73 3,300 $ 13.73
$14 to $15 13,200 6.8 Years 14.37 13,200 14.37
$15 to $23 18,700 6.6 Years 15.68 18,700 15.68
$23 to $24 78,100 4.4 Years 23.18 78,100 23.18
------- -------
$13 to $24 113,300 $ 20.64 113,300 $ 20.64
======= =======
If the Corporation had used the fair value based method of accounting for its
Plan, as prescribed by Statement of Financial Accounting Standard No. 123,
compensation cost in net income would have decreased by $27,000 in 2003, and
increased by $5,000 in 2002, and $23,000 in 2001. Net income would have been
$2,496,000 or $.97 per share in 2003; $3,597,000 or $1.37 per share in 2002;
and $3,205,000 or $1.19 per share in 2001. These options had no effect on
diluted earnings per share for these periods.
-59-
Dividend Reinvestment and Share Purchase Plan
In 1997, the Corporation's Board of Directors approved a dividend
reinvestment and share purchase plan. Also, the Board amended this plan on
September 16, 1998. The purpose of the plan is to provide shareholders of
record of the Corporation's common stock, who elect to participate in the
Plan, with a simple and convenient method of investing cash dividends and
voluntary cash contributions in shares of the common stock without payment of
any brokerage commissions or other charges. Eligible participants may
purchase common stock through automatic reinvestment of common stock
dividends on all or partial shares and make additional voluntary cash
payments of not less than $5 nor more than $5,000 per month. The
participant's price of common stock purchased with dividends or voluntary
cash payments will be the average price of all shares purchased in the open
market, or if issued from unissued shares or treasury stock the price will be
the average of the high and low sales prices of the stock on the American
Stock Exchange on the dividend payable date. During the years ended December
31, 2003, 2002, and 2001, 10,669; 11,016; and 13,617 shares were issued
through the plan at an average of $20.46, $18.05, and $15.65 per share,
respectively.
9. INCOME TAXES
Components of income tax expense for 2003, 2002, and 2001 are as follows:
2003 2002 2001
---------- ---------- ----------
Current payable $1,077,487 $1,406,412 $1,295,197
Deferred taxes (benefit) (58,636) 62,900 13,400
--------- --------- ---------
Total income taxes $1,018,851 $1,469,312 $1,308,597
========= ========= =========
The reasons for the difference between the federal income taxes in the
consolidated statements of income and the amount computed by the applying the
combine statutory federal and state income tax rate to income taxes are as
follows:
2003 2002 2001
---------- ---------- ----------
Taxes at statutory income tax rate $1,399,604 $2,028,565 $1,810,849
Reductions in taxes resulting from
exempt income (277,821) (264,193) (246,380)
Other timing differences (102,932) (295,060) (255,872)
--------- --------- ---------
Total income taxes $1,018,851 $1,469,312 $1,308,597
========= ========= =========
The sources of timing differences for tax reporting purposes and the related
deferred taxes recognized in 2003, 2002, and 2001 are summarized as follows:
2003 2002 2001
---------- ---------- ----------
Accretion of discount (net of maturities) $ 34,700 $ 32,800 $ 32,800
Nonqualified retirement plan contribution (151,000) (1,700) (10,900)
Gain on disposition of discounted bonds (16,100) (12,500) (8,500)
Book and tax depreciation difference 73,764 44,300 0
--------- --------- ---------
Total deferred taxes $ (58,636) $ 62,900 $ 13,400
========= ========= =========
-60-
December 31,
---------------------
2003 2002
-------- --------
Deferred tax liabilities:
Accretion on securities $ 95,500 $ 76,800
Depreciation on fixed assets 72,464 51,849
Unrealized gain on securities available for sale 371,775 612,378
------- -------
Total deferred tax liabilities 539,739 741,027
------- -------
Deferred tax assets:
Deferred compensation 226,600 75,600
------- -------
Total deferred tax assets 226,600 75,600
------- -------
Net deferred tax liabilities $313,139 $665,427
======= =======
10. RELATED PARTY TRANSACTIONS
The Employee Stock Ownership Plan and Trust of Southwest Georgia Financial
Corporation presently holds 390,254 shares of the Corporation's stock of
which 23,560 shares have been pledged. In the normal course of business,
the Corporation's banking subsidiary has made loans at prevailing interest
rates and terms to directors and executive officers of the Corporation and
its subsidiary, and to their affiliates. The aggregate indebtedness to the
Bank of these related parties approximated $2,022,000 and $1,771,000 at
December 31, 2003 and 2002, respectively. During 2003, approximately
$3,831,000 of such loans was made, and repayments totaled approximately
$3,579,000. None of these above mentioned loans were restructured, nor were
any related party loans charged off during 2003. Also, during 2003, directors
and executive officers had approximately $1,226,000 in deposits with the Bank.
11. COMMITMENTS, CONTINGENT LIABILITIES, AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In the normal course of business, various claims and lawsuits may arise
against the Corporation. Management, after reviewing with counsel all
actions and proceedings, considers that the aggregate liability or loss, if
any, resulting there from will not be material.
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own risk exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit in
the form of loans or through letters of credit. The instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the Consolidated Balance Sheets. The contract or
notional amounts of the instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments.
Commitments to extend credit are contractual obligations to lend to a
customer as long as all established contractual conditions are satisfied.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee by a customer.
-61-
Standby letters of credit and financial guarantees are conditional
commitments issued by the Corporation to guarantee the performance of a
customer to a third party. Standby letters of credit and financial
guarantees are generally terminated through the performance of a specified
condition or through the lapse of time.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to commitments to extend credit and standby letters of credit
is represented by the contractual or notional amounts of these instruments.
As these off-balance sheet financial instruments have essentially the same
credit risk involved in extending loans, the Corporation generally uses the
same credit and collateral policies in making these commitments and
conditional obligations as it does for on-balance sheet instruments. Since
many of the commitments to extend credit and standby letters of credit are
expected to expire without being drawn upon, the contractual or notional
amounts do not represent future cash requirements.
The contractual or notional amounts of financial instruments having credit
risk in excess of that reported in the Consolidated Balance Sheets are as
follows:
Dec. 31, 2003 Dec. 31, 2002
------------ ------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 12,171,121 $ 19,550,000
========== ==========
Standby letters of credit and financial guarantees $ 52,500 $ 104,000
========== ==========
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following information and tables present the carrying amounts and fair
values of the Corporation's financial instruments at December 31, 2003 and
2002. Where quoted prices are not available, fair values are based on
estimates using discounted cash flows and other valuation techniques. Those
techniques can be significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Corporation.
Cash and Short-Term Investments
For those short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities
For U. S. Government and U. S. Government Agency securities, fair values are
based on market prices or dealer quotes. For other investment securities,
fair value equals quoted market price if available. If a quoted market price
is not available, fair value is estimated using quoted market prices for
similar securities as the basis for a pricing matrix.
-62-
Loans
For all homogenous categories of loans, the fair value is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposits
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at December 31, 2003. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of
similar remaining maturities.
Short-Term Borrowings and Securities Sold Under Repurchase Agreements
For those short-term borrowings, the carrying amount is a reasonable estimate
of fair value. The fair value of securities sold under repurchase agreements
is estimated by discounting the future cash flow using the rates currently
offered for securities sold under repurchase agreements of similar remaining
maturities.
Long-Term Debt
Rates currently available to the Corporation for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements, and the present credit worthiness of the counter parties.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of guarantees and letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counter parties.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. Those
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a
particular instrument. Because no market exists for a significant portion of
the financial instruments, fair value estimates are based on many judgments.
These estimates are subjective in nature and involve matters of judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
-63-
The carrying amount and estimated fair values of the Corporation's financial
instruments are as follows:
December 31, 2003 December 31, 2002
------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- -------- -------- --------
(Dollars in thousands) (Dollars in thousands)
Financial assets:
Cash $ 10,960 $ 10,960 $ 11,881 $ 11,881
Securities available for sale 71,544 71,544 40,055 40,055
Securities held to maturity 54,695 56,456 65,150 68,493
Short-term investments 44 44 5,996 5,996
Loans 97,115 98,530 105,933 107,074
Less: allowance for loan losses 2,338 2,338 1,900 1,900
Financial liabilities:
Deposits 182,876 183,841 189,923 190,643
Short-term borrowings 12,000 12,036 2,400 2,416
Long-term debt 13,691 13,705 11,041 11,363
Unrecognized financial
instruments:
Commitments to extend credit 17,499 17,499 19,550 19,550
Standby letters of credit 52 52 104 104
13. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expense in excess of one percent of gross
revenue for the respective periods are as follows:
Years Ended December 31
----------------------------------
2003 2002 2001
-------- -------- --------
Advertising & promotion $195,316 $226,747 $263,466
Foreclosed assets expenses, net $409,346 $405,919 $614,406
14. STOCKHOLDER'S EQUITY / REGULATORY MATTERS
Dividends paid by the Bank subsidiary are the primary source of funds
available to the parent company for payment of dividends to its shareholders
and other needs. Banking regulations limit the amount of dividends that may
be paid without prior approval of the Bank's regulatory agency. At December
31, 2003, approximately $1,240,000 of the Bank's net assets were available
for payment of dividends without prior approval from the regulatory
authorities.
The Federal Reserve Board requires that banks maintain reserves based on
their average deposits in the form of vault cash and average deposit balances
at the Federal Reserve Banks. For the year ended December 31, 2003, the
Bank's reserve requirements averaged approximately $2,618,000.
-64-
Banking regulatory agencies have approved guidelines to implement a risk-
based capital framework that makes capital requirements more sensitive to the
risk profiles of individual banking companies. These guidelines define
capital as either core (Tier I) capital or supplementary (Tier II) capital.
Tier I capital consists primarily of tangible common stockholders' equity
while Tier II capital is comprised of certain debt instruments and a portion
of the reserve for loan losses. Risk-based capital regulations required
banks to maintain an eight percent total risk-based capital ratio of which
four percent must consist primarily of tangible common stockholders' equity
(Tier I capital). The Corporation's ratios under these rules at December 31,
2003 and 2002 are set forth in the following table. The Corporation's
leverage ratio at December 31, 2003 was 13.11 percent.
As a result of regulatory limitations at December 31, 2003, approximately
$29,487,000 of the parent company's investment in net assets of the
subsidiary bank of $30,727,000, as shown in the accompanying condensed
balance sheets, was restricted from transfer by the subsidiary bank to the
parent company in the form of cash dividends.
On September 25, 2002, the Corporation declared a 10 percent stock dividend
payable to shareholders of record on October 7, 2002. Share and per share
data for all periods presented have been retroactively restated to reflect
the additional shares outstanding resulting from the stock dividend.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ----- ----------- -----
As of
December 31, 2003:
Total capital (to
risk- weighted
assets) $33,164,036 26.80% $ 9,900,240 >= 8.00% $12,375,300 >=10.00%
Tier I capital (to
risk-weighted
assets) $31,617,124 25.55% $ 4,950,120 >= 4.00% $ 7,425,180 >= 6.00%
Tier I capital (to
average assets) $31,617,124 13.11% $ 7,236,332 >= 3.00% $12,060,553 >= 5.00%
As of
December 31, 2002:
Total capital (to
risk- weighted
assets) $33,181,026 26.14% $10,152,656 >= 8.00% $12,690,820 >=10.00%
Tier I capital (to
risk-weighted
assets) $31,590,805 24.89% $ 5,076,328 >= 4.00% $ 7,614,492 >= 6.00%
Tier I capital (to
average assets) $31,590,805 13.36% $ 7,091,076 >= 3.00% $11,818,460 >= 5.00%
-65-
15. PARENT COMPANY FINANCIAL DATA
Southwest Georgia Financial Corporation's condensed balance sheets as of
December 31, 2003 and 2002, and its related condensed statements of
operations and cash flows for the years ended are as follows:
Condensed Balance Sheets
as of December 31, 2003 and 2002
(Dollars in thousands)
2003 2002
--------- ---------
ASSETS
Cash $ 1,354 $ 1,965
Investment in consolidated wholly-owned bank
subsidiary, at equity 30,727 30,711
Investment securities available for sale 22 12
Loans 385 220
Other assets 766 724
------ ------
Total assets $ 33,254 $ 33,632
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 330 $ 337
Other liabilities (64) (27)
------ ------
Total liabilities 266 310
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized 5,000,000
Shares; issued 3,302,750 shares 3,303 3,300
Capital surplus 7,172 7,134
Retained earnings 30,276 29,592
Treasury stock, 763,575 for 2003 and 711,705
shares for 2002 (7,763) (6,704)
------ ------
Total stockholders' equity 32,988 33,322
------ ------
Total liabilities and stockholders' equity $ 33,254 $ 33,632
====== ======
-66-
15. PARENT COMPANY FINANCIAL DATA (continued)
Condensed Statements Of Income and Expense
for the years ended December 31, 2003, 2002, and 2001
(Dollars in thousands)
2003 2002 2001
------- ------- -------
Income:
Dividend received from bank subsidiary $ 2,000 $ 2,000 $ 2,000
Interest on loan 14 34 50
Gain on sale of equity securities 0 121 0
Other 51 62 79
------ ------ ------
Total income 2,065 2,217 2,129
------ ------ ------
Expenses:
Other 193 103 69
------ ------ ------
Income before income taxes and equity in
undistributed income of bank subsidiary 1,872 2,114 2,060
Income tax expense - allocated from
consolidated return (118) (27) (51)
------ ------ ------
Income before equity in undistributed
income of subsidiary 1,990 2,141 2,111
Equity in undistributed income of subsidiary 490 1,461 1,108
------ ------ ------
Net income 2,480 3,602 3,219
Retained earnings - beginning of year 29,592 31,628 29,605
Stock dividend declared 0 (5,400) 0
Net unrealized gains (losses) on available
for sale securities (458) 1,027 69
Cash dividend declared (1,338) (1,265) (1,265)
------ ------ ------
Retained earnings - end of year $30,276 $29,592 $31,628
====== ====== ======
-67-
15. PARENT COMPANY FINANCIAL DATA (continued)
Condensed Statements Of Cash Flows
for the years ended December 31, 2003, 2002, and 2001
(Dollars in thousands)
2003 2002 2001
------- ------- -------
Operating activities:
Net income $ 2,480 $ 3,602 $ 3,219
Adjustments to reconcile net income to net
Cash provided by operating activities:
Equity in undistributed earnings of
subsidiary (490) (1,461) (1,108)
Gain on sale of equity securities 0 (121) 0
Changes in:
Other assets (43) (34) (6)
Other liabilities (37) 46 (121)
----- ----- -----
Net cash provided of operating activities 1,910 2,032 1,984
----- ----- -----
Investing activities:
Sale of available for sale securities 0 483 0
Net change in loans (165) 497 (219)
----- ----- -----
Net cash provided (used) for investing
activities (165) 980 (219)
----- ----- -----
Financing activities:
Dividend declared to stockholders (1,338) (1,265) (1,265)
Purchase of treasury stock (1,059) (999) (1,706)
Proceeds from issuance of common stock 41 0 0
----- ----- -----
Net cash provided (used) for financing
Activities (2,356) (2,264) (2,971)
----- ----- -----
Increase (decrease) in cash (611) 748 (1,206)
Cash - beginning of year 1,965 1,217 2,423
----- ----- -----
Cash - end of year $ 1,354 $ 1,965 $ 1,217
===== ===== =====
-68-
16. BUSINESS CONSOLIDATION
Effective February 27, 2004, the Corporation completed the acquisition by
merger of 100% of the outstanding shares of First Bank Holding Company and
its sole subsidiary, Sylvester Banking Company. The approximate value of the
transaction was $9.7 million. The Corporation exchanged $4.2 million in cash
and 240,000 shares of its common stock for all of the common shares of First
Bank Holding Company and Sylvester Banking Company. Sylvester Banking
Company, with about $45 million in assets, has a full service bank operation
that holds approximately 25% of the deposits in Worth County, Georgia. This
acquisition transaction was accounted for as a purchase and is not expected
to materially impact the Corporation's earnings in 2004. The following table
shows selected pro forma information as if the acquisition had occurred
during the last three years. The pro forma information does not include any
operating efficiencies that could be realized in a branch acquisition.
Pro forma information for years ended:
2003 2002 2001
------ ------ ------
Net interest income 11,236 11,956 11,232
Net Income 2,606 3,830 3,347
Basic earnings per share .93 1.33 1.14
Diluted earnings per share .93 1.33 1.14
In December of 2001, the Bank, acquired the remaining 50 percent of the
common stock of Empire from First Community Bank of Southwest Georgia, a
subsidiary of PAB Bancshares, Inc. The bank acquired 50 percent of the
common stock of Empire in May 1997 and owned the firm jointly until the
fourth quarter 2001. Empire is a commercial mortgage banking firm located in
Milledgeville, Georgia. Due to acquiring 100 percent of Empire stock, the
Corporation changed its method of accounting for Empire. The stock
investment in Empire was accounted for by using the cost method prior to the
full acquisition. This acquisition was accounted for as a purchase and was
consolidated into the Corporation's financial statements. Empire's income
from mortgage banking services were $3,377,000 and $2,970,000 and it's
operating expenses were $1,848,000 and $1,744,000 for years 2003 and 2002,
respectively. Empire's net earnings after taxes contributed $942,000 to the
Corporation's 2003 net earnings compared with $766,000 in 2002 and $637,000
in 2001.
-69-
17. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
outstanding during the year.
Year Ended December 31, 2003
------------------------------------
Weighted Per
Average Share
Income Shares Amount
----------- --------- ------
Basic earnings per share:
Net income $ 2,480,160 2,560,202 $ 0.97
========= ========= ====
Diluted earnings per share:
Net income $ 2,480,160 2,570,020 $ 0.97
========= ========= ====
Year Ended December 31, 2002
------------------------------------
Weighted Per
Average Share
Income Shares Amount
----------- --------- ------
Basic earnings per share:
Net income $ 3,602,101 2,619,559 $ 1.37
Diluted earnings per share:
Net income $ 3,602,101 2,623,476 $ 1.37
Year Ended December 31, 2001
------------------------------------
Weighted Per
Average Share
Income Shares Amount
----------- --------- ------
Basic earnings per share:
Net income $ 3,218,526 2,690,135 $ 1.20
Diluted earnings per share:
Net income $ 3,218,526 2,690,807 $ 1.20
Options to purchase 113,300 shares of common stock at a weighted average
price of $20.64 per share were outstanding as of December 31, 2003. If
option holders were to exercise their options, only 9,818 shares must be
issued to satisfy them in year 2003. This small number of additional shares
included in the computation of diluted earnings per share had no effect on
earnings per share.
-70-
18. QUARTERLY DATA
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY DATA
(UNAUDITED)
For the Year 2003
-------------------------------------
Fourth Third Second First
------- ------- ------- -------
Interest and dividend income $ 3,200 $ 3,202 $ 3,380 $ 3,343
Interest expense 750 800 896 942
----- ----- ----- -----
Net interest income 2,450 2,402 2,484 2,401
Provision for loan losses 67 150 150 150
----- ----- ----- -----
Net interest income after provision
for loan losses 2,383 2,252 2,334 2,251
Noninterest income 1,632 1,669 (357) 1,601
Noninterest expenses 2,677 2,438 2,598 2,553
----- ----- ----- -----
Income before income taxes 1,338 1,483 (621) 1,299
Provision(benefit) for income taxes 319 531 (251) 419
----- ----- ----- -----
Net income $ 1,019 $ 952 $ (370) $ 880
===== ===== ===== =====
Earnings per share of common stock:
Basic $ .40 $ .37 $ (.14) $ .34
===== ===== ===== =====
Diluted $ .40 $ .37 $ (.14) $ .34
===== ===== ===== =====
For the Year 2002
-------------------------------------
Fourth Third Second First
------- ------- ------- -------
Interest and dividend income $ 3,572 $ 3,634 $ 3,713 $ 3,820
Interest expense 1,002 1,049 1,146 1,233
Net interest income 2,570 2,585 2,567 2,587
Provision for loan losses 159 120 105 150
Net interest income after provision
for loan losses 2,411 2,465 2,462 2,437
Noninterest income 1,470 1,428 1,335 1,364
Noninterest expenses 2,532 2,551 2,580 2,637
Income before income taxes 1,349 1,342 1,217 1,164
Provision(benefit) for income taxes 407 413 316 333
Net income $ 942 $ 929 $ 901 $ 831
Earnings per share of common stock:
Basic $ .36 $ .35 $ .34 $ .32
Diluted $ .36 $ .35 $ .34 $ .32
-71-
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On September 3, 2002, Draffin & Tucker, LLP ("Draffin") announced to the
Corporation that it would resign as the Corporation's independent auditors
after its completion of its review of the Form 10-Q for the period ended
September 30, 2002 because it did not expect to meet certain new requirements
which would allow it to audit companies that file reports with the Securities
and Exchange Commission. The reports of Draffin on the Corporation's
financial statements for the past two fiscal years did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with the
audits of the Corporation's financial statements for each of the two most
recent fiscal years, and through November 14, 2002, there were also no
disagreements with Draffin on any matters of accounting principles or
practices, financial statement disclosure or auditing scope and procedures
which, if not resolved to the satisfaction of Draffin, would have caused
Draffin to make reference to the matter in their report.
On October 23, 2002, the Audit Committee of the Board of Directors of the
Corporation approved the engagement of Thigpen, Jones, Seaton & Co., P.C.
("Thigpen"), and on October 25, 2002, the Corporation entered into an
agreement with Thigpen to engage them as its independent auditors.
During the two most recent fiscal years of the Corporation and through
November 14, 2002, the Corporation did not consult with Thigpen on matters
(i) regarding the application of accounting principles to a specified
transaction or the type of audit opinion that might be rendered on the
Corporation's financial statements, or (ii) which concerned the subject
matter of a disagreement or event identified in response to paragraph
(a)(1)(iv) of Item 304 of Regulation S-K with the former auditor.
The Corporation may have interacted from time to time with Thigpen with
respect to Empire, a wholly owned subsidiary of the Corporation which it
acquired one hundred percent of the stock on December 6, 2001. At the time
of the Corporation's acquisition of the subsidiary, Thigpen served as the
subsidiary's independent auditors and continues to serve the subsidiary in
that capacity.
Item 9A. Controls and Procedures
The Corporation's management, including the Chief Executive Officer and Chief
Financial Officer, supervised and participated in an evaluation of the
effectiveness of its disclosure controls and procedures (as defined in
federal securities rules) as of December 31, 2003. 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.
-72-
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.
-73-
PART III
Item 10. Directors and Executive Officers of the Corporation
The information contained under the heading "Information About Nominees For
Director" and "Code of Ethical Conduct" in the definitive Proxy Statement to
be used in connection with the solicitation of proxies for the Corporation's
annual meeting of shareholders to be held on May 25, 2004, to be filed with
the Commission, is incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Corporation's annual meeting of shareholders to be held on
May 25, 2004, to be filed with the Commission, is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Stock Related Matters
The information contained under the heading "Voting Securities and Principal
Holders" and "Equity Compensation Plan Information" in the definitive Proxy
Statement to be used in connection with the solicitation of proxies for the
Corporation's annual meeting of shareholders to be held on May 25, 2004, to
be filed with the Commission, is incorporated herein by reference. For
purposes of determining the aggregate market value of the Corporation's
voting stock held by nonaffiliates, shares held by all directors and
executive officers of the Corporation have been excluded. The exclusion of
such shares is not intended to, and shall not, constitute a determination as
to which persons or entities may be "affiliates" of the Corporation as
defined by the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Relationships and
Related Transactions" in the definitive Proxy Statement to be used in
connection with the solicitation of proxies for the Corporation's annual
meeting of shareholders to be held on May 25, 2004, to be filed with the
Commission, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information contained under the heading "Independent Public Accountants"
in the definitive Proxy Statement to be used in connection with the
solicitation of proxies for the Registrant's annual meeting of shareholders
to be held on May 25, 2004, to be filed with the Commission, is incorporated
herein by reference.
-74-
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1). Financial Statements
The following consolidated financial statements and supplementary
information for the fiscal years ended December 31, 2003, 2002, and 2001 are
included in Part II, Item 8 herein:
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets - December 31, 2003 and 2002
(iii) Consolidated Statements of Income - Years ended December 31, 2003,
2002, and 2001
(iv) Consolidated Statements of Shareholders' Equity - Years ended
December 31, 2003, 2002, and 2001
(v) Consolidated Statements of Cash Flows - Years ended December 31,
2003, 2002, and 2001
(vi) Notes to Consolidated Financial Statements - December 31, 2003
(a)(2). Financial Statement Schedules
All applicable financial statement schedules required have been included in
the Notes to the Consolidated Financial Statements.
(a)(3). Exhibits:
The exhibits filed as part of this registration statement are as follows:
Exhibit
Number Description Of Exhibit
- ------- ----------------------------------------------------------------------
3.1 Articles of Incorporation of Southwest Georgia Financial Corporation,
as amended and restated (included as Exhibit 3.1 to the Corporation's
Form 10-KSB dated December 31, 1996, previously filed with the
commission and incorporated herein by reference).
3.2 By-Laws of the Corporation as amended (included as Exhibit 3.2 to the
Corporation's Form 10-KSB dated December 31, 1995, previously filed
with the Commission and incorporated herein by reference).
10.1 Pension Retirement Plan of the Corporation, as amended and restated
(included as Exhibit 10.1 to the Corporation's Form 10-K dated
December 31, 2000, previously filed with the commission and
incorporated herein by reference).
-75-
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(continued)
10.2 Form of Directors' Deferred Compensation Plan of the Corporation
(included as Exhibit 10.3 to the Corporation's Form S-18 dated
January 23, 1990, previously filed with the Commission and
incorporated herein by reference).*
10.3 Directors' and Executive Officers' Stock Purchase Plan of the
Corporation dated March 18, 1992 (included as Exhibit 10.7 to the
Corporation's Form 10-KSB dated December 31, 1992, previously filed
with the Commission and incorporated herein by reference).*
10.4 Advances, specific collateral pledged, and security agreement between
the Federal Home Loan Bank of Atlanta and the Bank dated January 27,
1992, and confirmation of credit services transaction for new money
advances in the amount of $4,000,000 dated February 10, 1992,
$2,500,000 dated September 4, 1992, and $1,500,000 dated September 8,
1992 (included as Exhibit 10.10 to the Registrant's Form 10-KSB dated
December 31, 1992, previously filed with the Commission and
incorporated herein by reference).
10.5 Supplemental Retirement Plan of the Corporation dated December 21,
1994 (included as Exhibit 10.11 to the Corporation's Form 10-KSB
dated December 31, 1994, previously filed with the Commission and
incorporated herein by reference).*
10.6 Trust under the Corporation's Supplemental Retirement Plan, as
amended (included as Exhibit 10.6b to the Corporation's Form 10-K
dated December 31, 1997, previously filed with the Commission and
incorporated herein by reference).*
10.7 Employee Stock Ownership Plan and Trust of the Corporation as amended
(included as Exhibit 10.7 to the Corporation's Form 10-K dated
December 31, 2000, previously filed with the commission and
incorporated herein by reference).
10.8 Dividend Reinvestment and Share Purchases Plan of the Corporation as
amended and restated by Amendment No. 1 (included as Exhibit 99 to the
Corporation's Form S-3DPOS dated September 30, 1998, previously filed
with the Commission and incorporated herein by reference).
10.9 Key Individual Stock Option Plan of the Corporation dated March 19,
1997 (included as Exhibit 10.9 to the Corporation's Form 10-K dated
December 31, 1997, previously filed with the Commission and
incorporated herein by reference).*
-76-
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K,
continued
10.10 Employment agreement of J. David Dyer, Jr. (included as Exhibit 10.10
to the Corporation's Form 10-K dated December 31, 2002, previously
filed with the Commission and incorporated herein by reference).*
10.11 Employment agreement of DeWitt Drew (included as Exhibit 10.11 to the
Corporation's Form S-4 dated January 6, 2004, previously filed with
the Commission and incorporated herein by reference).*
10.15 Consulting agreement of John H. Clark (included as Exhibit 10.15 to
the Corporation's Form S-4 dated January 6, 2004, previously filed
with the Commission and incorporated herein by reference).*
10.16 Agreement and Plan of Reorganization, dated as of December 10, 2003,
by and between Southwest Georgia Financial Corporation, Southwest
Georgia Bank, First Bank Holding Company and Sylvester Banking Company
(included as Exhibit 2.1 to the Registrant's Form S-4 dated
January 6, 2004, previously filed with the Commission and incorporated
herein by reference).
14 Code of Ethical Conduct dated January 28, 2004.
16 Letter of change of certifying accountant (included as Exhibit 16 to
the Corporation's Form 8-K dated November 20, 2002, previously filed
with Commission and incorporated herein by reference).
21 Subsidiaries of the Corporation (included as Exhibit 21 to the
Corporation's Form 10-K dated December 31, 2002, previously filed
with the Commission, incorporated herein by reference and included as
Exhibit 99.1 hereto)
23.1 Consent of Thigpen, Jones, Seaton & Co., P.C.
23.2 Consent of Draffin & Tucker, LLP.
31.1 Section 302 Certification of Periodic Financial Report by
Chief Executive Officer.
31.2 Section 302 Certification of Periodic Financial Report by
Chief Financial Officer.
32.1 Section 906 Certification of Periodic Financial Report by
Chief Executive Officer.
32.2 Section 906 Certification of Periodic Financial Report by
Chief Financial Officer.
-77-
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K,
continued
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form.
(b) Reports on Form 8-K filed during the fourth quarter of 2003.
On October 22, 2003, the Corporation furnished an 8-K to report the
following event: issuance of a press release to report earnings for
the quarter ended September 30, 2003.
On November 24, 2003, the Corporation furnished an 8-K to report the
following event: issuance of a press release announcing that it and
First Bank Holding Company, parent corporation of Sylvester Banking
Company, have signed a letter of intent to merge 100% of the common
shares of Sylvester Banking Company into Southwest Georgia Bank.
-78-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Southwest Georgia Financial Corporation
(Corporation)
Date:March 26, 2004 By: /s/ DeWitt Drew
--------------------------
DEWITT DREW
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the dates indicated.
/s/ DeWitt Drew Date: March 26, 2004
- ----------------------------------------
DEWITT DREW
President and Chief Executive Officer
[Principal Executive Officer]
/s/ George R. Kirkland Date: March 26, 2004
- ----------------------------------------
GEORGE R. KIRKLAND
Senior Vice-President and Treasurer
[Principal Financial and Accounting Officer]
/s/ John H. Clark Date: March 26, 2004
- ----------------------------------------
JOHN H. CLARK
Chairman of the Board of Directors
-79-
SIGNATURES, Continued
/s/ Cecil H. Barber Date: March 26, 2004
- ----------------------------------------
CECIL H. BARBER
Director
/s/ Michael J. McLean Date: March 26, 2004
- ----------------------------------------
MICHAEL J. MCLEAN
Director
/s/ Richard L. Moss Date: March 26, 2004
- ----------------------------------------
RICHARD L. MOSS
Director
/s/ Roy Reeves Date: March 26, 2004
- ----------------------------------------
ROY REEVES
Director
/s/ Johnny R. Slocumb Date: March 26, 2004
- ----------------------------------------
JOHNNY R. SLOCUMB
Director
/s/ Violet K. Weaver Date: March 26, 2004
- ----------------------------------------
VIOLET K. WEAVER
Director
/s/ C. Broughton Williams Date: March 26, 2004
- ----------------------------------------
C. BROUGHTON WILLIAMS
Director
-80-
Exhibit Index
Exhibit
Number Description Of Exhibit
- ------- -----------------------------------------------
14 Code of Ethical Conduct dated January 28, 2004.
23.1 Consent of Thigpen, Jones, Seaton & Co., P.C.
23.2 Consent of Draffin & Tucker, LLP.
31.1 Section 302 Certification of Periodic Financial
Report by Chief Executive Officer.
31.2 Section 302 Certification of Periodic Financial
Report by Chief Financial Officer.
32.1 Section 906 Certification of Periodic Financial
Report by Chief Executive Officer.
32.2 Section 906 Certification of Periodic Financial
Report by Chief Financial Officer.
-81-