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, 2004
[ ] 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 of (I.R.S. Employer Identification No.)
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. [ ]
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, 2004: $48,731,766 based on 2,397,037 shares at the price of
$20.33 per share. The number of shares has been adjusted for the 20 percent
stock dividend that was distributed on October 29, 2004.
As of March 24, 2005, 4,263,020 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 2005 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, 2004
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 Corporation's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities
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
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Corporation
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 and Financial Statement Schedules
-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. The Bank also operates Empire Financial Services,
Inc. ("Empire"), a commercial mortgage banking firm. Effective February 27,
2004, the Corporation acquired and merged with First Bank Holding Company,
Inc. ("First Bank"), and its subsidiary bank, Sylvester Banking Company. The
Bank operates the former Sylvester Banking Company as a full service branch
of the Bank serving an area approximately 30 miles in radius from Sylvester,
Worth County, Georgia. The branch 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, which include
turnips, cabbage, sweet potatoes, and squash, and its 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. Apparel, lumber and wood products, and textile manufacturers are
among the various types of manufacturers located in the Bank's market.
Empire provides mortgage banking services which includes underwriting,
construction, and long-term financing of commercial properties principally
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, 2004, the Corporation's deposit
base, totaling $222,488,102, consisted of $36,399,339 in noninterest-bearing
demand deposits (16.4% of total deposits), $64,764,638 in interest-bearing
demand deposits including money market accounts (29.1% of total deposits),
$28,080,860 in savings deposits (12.6% of total deposits), $65,900,438 in
time deposits in amounts less than $100,000 (29.6% of total deposits), and
$27,342,827 in time deposits of $100,000 or more (12.3 % of total deposits).
Loans
The Bank makes both secured and unsecured loans to individuals, corporations,
and other businesses. 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, 2004, consumer installment, real estate (including
construction and mortgage loans), and commercial (including financial and
agricultural) loans represented approximately 8.8%, 80.0% and 11.2%,
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 businesses 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. In 2004, Bank revenue received from
mortgage banking services was $3,611,755 compared with $3,446,658 in 2003.
All of this income was from Empire except for $29,905 in 2004 and $69,659 in
2003, 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 125 full-time employees at December 31, 2004. 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.
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 revenue of the Corporation results from dividends paid to it by the
Bank. Federal and state laws and regulations impose restrictions on the
ability of the Corporation and the Bank to pay dividends.
-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. For 2004, the Corporation's cash dividend payout to stockholders
was 38.8% 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 (the
"GLB 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.
In accordance with the GLB Act, federal banking regulators adopted rules that
limit the ability of banks and other financial institutions to disclose non-
public information about consumers to nonaffiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal
information to a nonaffiliated third party. The privacy provisions of the
GLB Act affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors.
-9-
Supervision and Regulation (continued)
A major focus of governmental policy on financial institutions in recent
years has been aimed at combating terrorist financing. This has generally
been accomplished by amending existing anti-money laundering laws and
regulations. The USA Patriot Act of 2001 (the "USA Patriot Act") imposed
significant new compliance and due diligence obligations, creating new crimes
and penalties and expanding the extra-territorial jurisdiction of the United
States. The United States Treasury Department has issued a number of
implementing regulations which apply to various requirements of the USA Patriot
Act to the Corporation and the Bank. These regulations impose obligations on
financial institutions to maintain appropriate policies, procedures and
controls to detect, prevent and report money laundering and terrorist financing
and to verify the identity of their customers. Failure of a financial
institution to maintain and implement adequate programs to combat terrorist
financing, or to comply with all of the relevant laws or regulations, could
have serious legal and reputational consequences for the institution.
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 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.
-10-
Capital Adequacy (continued)
The FDIC 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 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, 2004, would be considered to be a
"well capitalized" institution.
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.
-11-
Executive Officers of the Corporation (continued)
The principal executive officers of the Corporation and their ages, positions
with the Corporation, and terms of office as of January 31, 2005, are as
follows:
Officer Of The
Name (Age) Principal Position Corporation Since
- ------------------------ ---------------------------------- -----------------
DeWitt Drew Chief Executive Officer and President 1999
(48) of the Corporation and Bank
John J. Cole, Jr. Executive Vice President of the 1984
(54) Corporation and Executive Vice President
and Cashier of the Bank
J. David Dyer, Jr. Senior Vice President of the Corporation 2002
(57) and Bank and Chief Executive Officer
and President of Empire
George R. Kirkland Senior Vice President and Treasurer 1991
(54) of the Corporation and Senior Vice
President and Comptroller of the Bank
C. Wallace Sansbury Senior Vice President of the Corporation 1996
(62) and Bank
Randall L. Webb, Jr. Senior Vice President of the Corporation 1994
(56) and Bank
Geraldine A. Ferrone Senior Vice President of the Corporation 1995
(58) and Bank
J. Larry Blanton Senior Vice President of the Corporation 2000
(58) and Bank
Susan T. Whittle Senior Vice President of the Corporation 2001
(46) and Bank
Robert M. Carlton, Jr. Senior Vice President of the Corporation 1995
(63) and Bank
Morris I. Bryant Senior Vice President of the Corporation 2004
(63) and 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.
-12-
Executive Officers of the Corporation (continued)
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
beginning in 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.
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.
Mr. Dyer became Senior Vice President of the Bank and Corporation in 2002.
Previously, he also serves as Chief Executive Officer and President of
Empire, now a wholly owned subsidiary of the Bank. 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.
Mr. Sansbury became Senior Vice President of the Bank and Corporation in
December 1996.
Mr. Webb became Senior Vice President of the Bank and Corporation in 1997.
Previously, he had been Vice President of the Bank and Corporation since 1994
and Assistant Vice President of the Bank since 1984.
Mrs. Ferrone became Senior Vice President in 2000 and Vice President of the
Bank and Corporation in 1995. Previously, she had been Assistant Vice
President of the Bank since 1988.
Mr. Blanton became Senior Vice President of the Bank and Corporation in 2001.
Previously, he has served as Vice President of the Bank and Corporation since
2000 and in various other positions with the bank since 1999.
Mrs. Whittle became Senior Vice President of the Bank and the Corporation in
2001. Previously, she had been Senior Vice President and Senior Lender at
Citizens Bank in Russellville, Alabama since 1999.
Mr. Carlton became Senior Vice President of the Bank and Corporation in 2004.
Previously, he had been Vice President of the Bank since 1995.
Mr. Bryant became Senior Vice President of the Corporation and of the Bank in
2004. Previously, he was employed by Sylvester Banking Company in Sylvester,
Georgia, as Vice President and Cashier since 1969.
-13-
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, 2004,
2003, and 2002, 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, 2004
Average
Balance Interest Rate
(Dollars in thousands)
ASSETS
Cash and due from banks $ 10,137 $ - - %
Earning assets:
Interest-bearing deposits 5,476 81 1.48%
Loans, net (a) (b) (c) 99,716 7,002 7.02%
Taxable investment securities
held to maturity 131,496 5,787 4.40%
Nontaxable investment securities
held to maturity (c) 6,014 365 6.07%
Nontaxable investment securities
available for sale (c) 14,869 941 6.33%
Other investment securities
available for sale 1,428 50 3.50%
Federal funds sold 3,190 35 1.10%
Total earning assets 262,189 14,261 5.44%
Premises and equipment 6,460
Other assets 9,082
Total assets $ 287,868
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 34,628 $ - - %
Interest-bearing liabilities:
Savings deposits 87,827 693 0.79%
Time deposits 95,911 1,789 1.87%
Federal funds purchased 520 7 1.35%
Other borrowings 27,525 912 3.31%
Total interest-bearing liabilities 211,783 3,401 1.61%
Other liabilities 3,274
Total liabilities 249,685
Common stock 3,607
Surplus 14,343
Retained earnings 28,668
Less treasury stock (8,435)
Total shareholders' equity 38,183
Total liabilities and shareholders' equity $ 287,868
Net interest income and margin $ 10,860 4.14%
(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: 2004 - $453,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 percent.
-14-
Table 1 - Distribution of Assets, Liabilities, and Shareholders' Equity;
Interest Rates and Interest Differentials (continued)
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%
(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.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 percent.
-15-
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%
(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: 2002 - $444,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 percent.
-16-
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
Increase Changes In (a)
2004 2003 (Decrease) Volume Rate
(Dollars in thousands)
Interest earned on:
Interest-bearing deposits $ 81 $ 43 $ 38 $ 18 $ 20
Loans, net (b) 7,002 7,309 (307) 174 (481)
Taxable investment
securities held to maturity 5,787 4,946 841 1,340 (499)
Nontaxable investment
securities held to
maturity (b) 365 247 118 136 (18)
Nontaxable investment
securities available
for sale (b) 941 928 13 10 3
Other securities available
for sale 50 46 4 8 (4)
Federal funds sold 35 2 33 34 (1)
Total interest income 14,261 13,521 740 1,720 (980)
Interest paid on:
Savings deposits 693 660 33 94 (61)
Time deposits 1,789 2,062 (273) 121 (394)
Federal funds purchased 7 3 4 4 0
Other borrowings 912 663 249 279 (30)
Total interest expense 3,401 3,388 13 498 (485)
Net interest earnings $10,860 $10,133 $ 727 $1,222 $(495)
-17-
Table 2 - Rate/Volume Analysis (continued)
Due To
Increase Changes In (a)
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)
(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
2004, 2003, and 2002 in adjusting interest on nontaxable loans and
securities to a fully taxable basis.
-18-
Table 3 - Investment Portfolio
The carrying values of investment securities for the indicated years are
presented below:
Year Ended December 31,
2004 2003 2002
(Dollars in thousands)
Securities held to maturity:
U. S. Government Agencies $108,508 $ 47,542 $ 59,541
State and municipal 7,538 7,153 5,609
Total securities held to maturity $116,046 $ 54,695 $ 65,150
Securities available for sale:
Equity securities $ 3,342 $ 2,225 $ 2,179
U. S. Government Agencies 38,813 53,998 21,024
State and municipal 13,836 13,922 13,311
Mortgage backed 861 1,399 3,541
Total securities available for sale $ 56,852 $ 71,544 $ 40,055
The following table shows the maturities of debt securities at December 31,
2004, 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 $18,629 5.59% $84,798 3.85% $43,894 4.27% $ - - %
State and
Municipal 1,085 7.10% 1,437 6.46% 15,769 6.76% 3,083 5.98%
Mortgage
Backed - - % 362 5.73% 369 6.40% 130 6.54%
Total $19,714 5.67% $86,597 3.90% $60,032 4.94% $3,213 6.00%
-19-
Table 3 - Investment Portfolio (continued)
The calculation of weighted average yields is based on the carrying value and
effective yields of each security weighted for the scheduled maturity of each
security. At December 31, 2004 and 2003, securities carried at approximately
$62,138,000 and $41,988,000, 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,
2004 2003 2002 2001 2000
(Dollars in thousands)
Commercial, financial and
agricultural $ 11,188 $ 9,547 $ 9,273 $ 11,142 $ 16,871
Real estate:
Commercial mortgage loans 40,385 42,969 47,219 54,178 48,161
Residential loans 33,968 30,244 33,900 38,751 39,292
Agricultural loans 5,621 4,851 5,333 7,524 8,506
Installment 8,795 9,550 10,263 10,014 11,183
Total loans 99,957 97,161 105,988 121,609 124,013
Less:
Unearned income 42 46 54 60 123
Allowance for loan losses 2,507 2,338 1,900 1,883 1,795
Net loans $ 97,408 $ 94,777 $ 104,034 $ 119,666 $ 122,095
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, 2004.
Commercial,
Financial and
Agricultural
(Dollars in thousands)
Distribution of loans which are due:
In one year or less $ 5,353
After one year but within five years 5,496
After five years 339
Total $ 11,188
-20-
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, 2004.
Loans With
Predetermined Loans With
Rates Floating Rates Total
(Dollars in thousands)
Commercial, financial
and agricultural $ 3,740 $ 2,095 $ 5,835
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
--------------------------------------------------
Non- Renego- Potential
accrual Past-Due tiated Problem Foreclosed
Loans Loans Loans Loans Total Assets
------- ------- ------- ------- ------- -------
(Dollars in thousands)
December 31, 2004 $ 1,387 $ 4 $ 9 $ 163 $ 1,563 $ 14
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
The Corporation follows a policy of continuing to accrue interest on consumer
and bank card loans that are contractually past due over 90 days up to the
time of charging the loan amount against the allowance for loan losses.
-21-
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,
2004 2003 2002 2001 2000
(Dollars in thousands)
Average loans outstanding $102,208 $99,589 $114,586 $123,668 $118,809
Amount of allowance for
loan losses at beginning
of period $ 2,338 $ 1,900 $ 1,883 $ 1,795 $ 1,944
Amount of loans charged off
during period:
Commercial, financial and
agricultural 0 37 226 69 360
Real estate:
Commercial 79 0 0 0 1
Residential 25 71 113 18 26
Agricultural 0 0 0 0 0
Installment 176 169 258 261 112
Total loans charged off 280 277 597 348 499
Amount of recoveries during
period:
Commercial, financial, and
agricultural 88 147 25 18 81
Real estate:
Commercial 17 0 0 0 0
Residential 13 14 5 2 5
Agricultural 0 0 0 0 0
Installment 65 37 50 36 44
Total loans recovered 183 198 80 56 130
Net loans charged off
during period 97 79 517 292 369
Additions to allowance for
loan losses charged to
operating expense during period 92 517 534 380 220
Purchased reserve 174 0 0 0 0
Amount of allowance for
loan losses at end
of period $ 2,507 $ 2,338 $ 1,900 $ 1,883 $ 1,795
Ratio of net charge-offs
during period to average
loans outstanding for
the period .10% .08% .45% .24% .31%
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
-22-
Table 4 - Loan Portfolio (continued)
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.
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, 2004 December 31, 2003 December 31, 2002
% of % of % of
Total Total Total
Category Allocation Loans Allocation Loans Allocation Loans
(Dollars in thousands)
Domestic:
Commercial, financial
and agricultural $ 281 11.2% $ 229 9.8% $ 166 8.7%
Real estate:
Commercial 1,016 40.4% 1,034 44.2% 847 44.6%
Residential 852 34.1% 727 31.1% 608 32.0%
Agricultural 140 5.6% 117 5.0% 95 5.0%
Installment 218 8.7% 231 9.9% 184 9.7%
Total $ 2,507 100.0% $ 2,338 100.0% $ 1,900 100.0%
December 31, 2001 December 31, 2000
% of % of
Total Total
Category Allocation Loans Allocation Loans
(Dollars in thousands)
Domestic:
Commercial, financial
and agricultural $ 173 9.2% $ 244 13.6%
Real estate:
Commercial 838 44.5% 696 38.8%
Residential 600 31.9% 569 31.7%
Agricultural 117 6.2% 124 6.9%
Installment 155 8.2% 162 9.0%
Total $ 1,883 100.0% $ 1,795 100.0%
-23-
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.
Table 5 - Deposits
The average amounts of deposits for the last three years are presented below.
Year Ended December 31,
2004 2003 2002
(Dollars in thousands)
Noninterest-bearing
demand deposits $ 34,628 $ 25,844 $ 26,521
NOW accounts 48,961 35,831 34,198
Money market deposit
accounts 12,020 14,386 14,153
Savings 26,846 18,861 16,266
Time deposits 95,911 90,999 97,354
Total interest-bearing 183,738 160,077 161,971
Total average deposits $ 218,366 $ 185,921 $ 188,492
The maturity of certificates of deposit of $100,000 or more as of December
31, 2004, are presented below.
(Dollars in thousands)
3 months or less $ 7,962
Over 3 months through 6 months 5,637
Over 6 months through 12 months 6,864
Over 12 months 6,880
Total outstanding certificates of deposit
of $100,000 or more $ 27,343
-24-
Return On Equity and Assets
Certain financial ratios are presented below.
Year Ended December 31,
2004 2003 2002
Return on average assets 1.34% 1.03% 1.52%
Return on average equity 10.12% 7.46% 11.19%
Dividend payout ratio
(dividends declared
divided by net income) 38.79% 53.57% 35.13%
Average equity to average
assets ratio 13.26% 13.74% 13.62%
Item 2. Properties
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 at 10 Second
Avenue, Moultrie, Georgia. The Trust and Investment Division of the Bank is
located at 25 Second Avenue, Moultrie, Georgia. A 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.
Southwest Georgia Bank Property Table
Square
Name Address Feet
- ------------------------- ---------------------------------------------- ------
Main Office 201 First Street, SE, Moultrie, GA 31768 19,000
Operations Center 10 Second Avenue, SE, Moultrie, GA 31768 5,000
Trust & Investment Office 25 Second Avenue, SE, Moultrie, GA 31768 11,000
Administrative Services 205 Second Street, SE, Moultrie, GA 31768 15,000
Southwest Georgia Ins.
Services 501 South Main Street, Moultrie, GA 31768 5,600
Baker County Bank Highway 91, Newton, GA 31717 4,400
Bank of Pavo 1102 West Harris Street, Pavo, GA 31778 3,900
Sylvester Banking Company 300 North Main Street, Sylvester, GA 31791 12,000
Empire Financial Services 121 Executive Parkway, Milledgeville, GA 31061 2,700
All the buildings and land, which include parking and drive-in teller
stations, are owned by the Bank. There are two automated teller machines on
the Bank's main office premises, one in each of the Baker County, Thomas
County, and Worth County branch offices, and one additional automated teller
machine located in Doerun, Georgia. These automated teller machines are
linked to the STAR network of automated teller machines.
-25-
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 2004 for a vote
of the security holders through the solicitation of proxies or otherwise.
-26-
PART II
Item 5. Market for Corporation's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities
Common Stock Market Prices
The Corporation's common stock trades on the American Stock Exchange under the
symbol "SGB". The closing price on December 31, 2004, was $22.70. Below is a
schedule of the high and low stock prices for each quarter of 2004 and 2003.
2004
- ---------------------------------------------------------
For The
Quarter Fourth Third* Second* First*
- -------- ------ ------ ------- ------
High $23.99 $24.33 $21.25 $20.00
Low $21.58 $20.08 $19.33 $18.12
2003*
- ---------------------------------------------------------
For The
Quarter Fourth Third Second First
- -------- ------ ------ ------- ------
High $19.87 $19.79 $17.08 $16.04
Low $18.33 $15.83 $15.00 $14.83
*Adjusted for the 20% stock dividend.
As of December 31, 2004, we had 582 registered record holders of the
Corporation's common stock. Also, there were approximately 300 additional
shareholders who held shares through trust and brokerage firms. Cash
dividends paid on the Corporation's common stock were $.46 in 2004 and $.43
in 2003. In total, we declared $1.499 million in cash dividends in 2004 and
$1.329 million in 2003.
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 after
consideration of various factors, which may include the Corporation's
financial condition and results of operations, investment opportunities
available to the Corporation, capital requirements, tax considerations and
general economic conditions. 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. See "Business - Payment of Dividends". The
Corporation and its predecessors have paid cash dividends for the past
seventy-seven consecutive years.
-27-
Item 6. Selected Financial Data
Five-Year Selected Financial Data
(Dollars in thousands, except per share data and ratios)
2004 2003 2002 2001 2000
For The Year: Earnings & Share Data
Interest income $ 13,822 $ 13,126 $ 14,738 $ 17,562 $ 18,403
Interest expense 3,401 3,387 4,429 7,926 7,894
Net interest income 10,421 9,739 10,309 9,636 10,509
Non-interest income 6,754 4,545 5,596 5,156 2,518
Non-interest expense 12,073 10,267 10,299 9,884 8,371
Net income 3,865 2,480 3,602 3,219 3,359
Earnings per share - basic $ 1.19 $ 0.81 $ 1.15 $ 1.00 $ 0.98
Earnings per share - diluted 1.18 0.80 1.14 1.00 0.98
Weighted average shares
outstanding - basic 3,258 3,072 3,143 3,228 3,422
Weighted average shares
outstanding - diluted 3,281 3,084 3,148 3,229 3,422
Dividends declared per share $ 0.46 $ 0.43 $ 0.40 $ 0.39 $ 0.39
At Year End: Balance Sheet Data
Total assets $305,225 $246,153 $240,468 $234,844 $240,380
Loans, net 97,408 94,777 104,034 119,666 122,094
Deposits 222,488 182,876 189,923 192,901 199,485
Shareholders' equity 39,444 32,988 33,322 30,957 30,641
Book value per share 12.03 10.83 10.73 9.74 9.23
Tangible book value per share $ 11.05 $ 10.16 $ 9.97 $ 8.90 $ 9.03
Common shares outstanding
(including treasury shares) 4,263 3,964 3,960 3,960 3,960
Selected Average Balances
Average total assets $287,868 $241,861 $236,369 $239,928 $232,530
Average loans 102,208 99,589 114,586 123,668 118,809
Average deposits 218,366 185,921 188,492 198,527 188,874
Average shareholders' equity $ 38,183 $ 33,237 $ 32,193 $ 30,693 $ 30,331
Asset Quality
Non-performing assets to
total assets .46% .90% 1.46% 1.77% 1.76%
Non-performing assets $ 1,405 $ 2,215 $ 3,515 $ 4,146 $ 4,238
Net loan charge-offs (recoveries) $ 98 $ 79 $ 517 $ 351 $ 499
Net loan charge-offs (recoveries)
to average loans 0.10% 0.08% 0.45% 0.24% 0.31%
Reserve for loan losses to loans 2.51% 2.41% 1.79% 1.55% 1.45%
Performance Ratios
Return on average total assets 1.34% 1.03% 1.52% 1.34% 1.44%
Return on average shareholders'
Equity 10.12% 7.46% 11.19% 10.49% 11.08%
Average shareholders' equity to
average total assets 13.26% 13.74% 13.62% 12.79% 13.04%
Efficiency ratio 68.54% 69.94% 63.27% 65.13% 61.48%
Net interest margin 4.14% 4.61% 5.00% 4.51% 5.17%
Dividend payout ratio 38.79% 53.57% 35.13% 39.30% 39.91%
-28-
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 14 - 28 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 Bank since 1928. We provide comprehensive financial services to
consumer, business and governmental customers, which, in addition to
conventional banking products, include a full range of mortgage banking,
trust, investment and insurance services. Our primary market area
incorporates Colquitt County, where we are headquartered, and Baker, Thomas,
and Worth Counties, each contiguous with Colquitt County. Including this
acquisition, we have four full service banking facilities and six automated
teller machines.
Our strategy is
* to maintain the diversity of our revenue, including both interest and
noninterest income through a broad base of business,
* to strengthen our sales and marketing efforts while developing our
employees to provide the best possible service to our customers,
* to expand our market share where opportunity exists, 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 fluctuations in interest rates. During 2004, the U.S.
economy was marked by historically low interest rates. Since July 2004,
short-term rates increased 1.25 percent by year end.
Our profitability 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 factors such as 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 and was 64.8 percent of 2004 net interest
income. Sources of noninterest income include our insurance agency and
Empire, the Corporation's commercial mortgage banking subsidiary, as well as
fees on customer accounts.
-29-
We made significant improvements with respect to overall asset quality in
2004 and 2003. During the second quarter of 2004, we sold a large foreclosed
property with a loss on sale of approximately $90,000. 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,
non-performing assets to total assets were 0.5 percent and 0.9 percent at the
end of 2004 and 2003, respectively compared with 1.5 percent at December 31,
2002.
On February 27, 2004, the Corporation acquired ownership of First Bank
Holding Company and its bank subsidiary, Sylvester Banking Company. The
Corporation acquired all of the common shares of First Bank Holding Company
and Sylvester Banking Company for $4.2 million in cash and 240,000 shares of
Southwest Georgia Financial Corporation common stock valued at $5.5 million.
The approximate total value of the transaction was $9.7 million. Sylvester
Banking Company was merged into Southwest Georgia Bank. Sylvester Banking
Company, which has been in business since 1898, at the time of the
acquisition had $49.6 million in assets. The business combination was
accounted for by the purchase method of accounting and the results of
operations of Sylvester Banking Company since the date of acquisition are
included in the Consolidated Financial Statements. Total assets of $49.6
million and liabilities of $39.9 million were booked at fair value including
a core deposit intangible of $1.7 million. This core deposit intangible is
being amortized over a 10-year period.
The following table shows the fair value of assets acquired and liabilities
assumed as of the acquisition date.
Dollars in
thousands
----------
Cash, due from banks, and Federal funds sold $ 9,861
Investment securities 26,934
Loans, net 10,264
Bank premises and equipment 588
Core deposit intangible 1,670
Other assets 335
Deposits (39,834)
Other liabilities ( 98)
Net assets acquired $ 9,720
The following table shows selected pro forma information 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, and pro forma results are not necessarily
indicative of the results which would have been realized had the acquisition
occurred at such date.
-30-
The following are our pro forma results for the three years ended December
31, 2004 showing our results included with those of First Bank and Sylvester:
2004 2003 2002
(Dollars in Thousands)
Net interest income $ 10,652 $ 11,236 $ 11,956
Net Income $ 3,928 $ 2,606 $ 3,830
Basic earnings per share $ 1.18 $ .77 $ 1.11
Diluted earnings per share $ 1.17 $ .77 $ 1.11
Stock Dividends
On September 25, 2004, the Board of Directors elected to pay a 20% stock
dividend to shareholders of record as of October 7, 2004. All per share
financial information has been adjusted to take into account the stock
dividend.
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 have on the Corporation's results of
operations. We believe that the allowance for loan losses as of December 31,
2004 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 would have resulted in material estimates and
assumptions changes. 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 2004 was $3.9 million, an increase of approximately $1.4
million, or 56 percent, when compared with $2.5 million in 2003. Higher net
income in 2004 was primarily due to the $1.2 million after-tax charge in the
second quarter of 2003 for the transfer of a non-performing asset, the
Colquitt Retirement Inn. Excluding the charge associated with the non-
performing asset in 2003, 2004 earnings improved 6.5 percent. Other major
factors contributing to the 2004 improvement in earnings included increases
of $100,000 in insurance services income, $165,000 in mortgage banking
services income, $263,000 in service charge on deposit accounts, and a
$425,000 decrease in the provision for loan losses. The majority of the 2004
increase in net interest income and non-interest expenses was related to the
operations of the acquired bank.
-31-
On a per share basis, net income for 2004 was $1.18 per diluted share
compared with $0.80 per diluted share for 2003. Excluding the charge
associated with the non-performing asset in 2003, diluted earnings per share
was the same at $1.18. The diluted weighted average common shares
outstanding for the year ended December 31, 2004, were 3.3 million, up 6.4
percent or 197,093 average shares from the previous year. The increase in the
average shares outstanding was primarily attributed to the stock issued to
acquire the outstanding shares of First Bank Holding Company, and partially
offset by the Corporation's stock repurchase program.
Because of our strong capital condition, we continued through 2004 the stock
repurchase program that began in January 2000. In 2004, 67,622 shares were
repurchased. Through the end of 2004, a total of 522,095 shares have been
repurchased since the beginning of the program. The share repurchase program
was extended by the Board of Directors at their meeting in January 2005
through the end of January 2006. The Corporation is authorized to purchase
an additional 100,000 shares under the plan.
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 $1.2 million after-
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 $426,000 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.
We measure our performance on selected key ratios, which are provided for the
last three years in the following table:
2004 2003 2002
------ ------ ------
Return on average total assets 1.34% 1.03% 1.52%
Return on average shareholders' equity 10.12% 7.46% 11.19%
Average shareholders' equity to average total assets 13.04% 13.74% 13.62%
Net interest margin (tax equivalent) 4.14% 4.61% 5.00%
Net Interest Income
Net interest income for 2004 increased $682,000, or 7 percent, compared with
2003. The increase was influenced by the mix of earning assets and interest-
bearing liabilities and the operations of the acquired branch office.
Interest income from earning assets increased $696,000, or 5.3 percent, in
2004 compared with 2003, while interest expenses increased $14,000 or 0.4
percent for the same period.
The majority of the $696,000 increase in interest income for the year
resulted from increased volumes in earning assets related to the
acquisition. Average investment volumes increased $35.8 million, or 30.3
percent, in 2004 compared with 2003 while the average yield decreased 59
basis points. Average loan volumes increased $2.3 million during 2004, but a
yield decrease of 48 basis points to 7.02 percent resulted in a decrease in
interest income from loans of $307,000.
The decrease of $14,000 of interest expense in 2004 compared with 2003
primarily resulted from a 40 basis point decline in the average rate paid on
time deposits. This decrease was partially offset by interest expenses on
acquired deposits and increases of $8.4 million in long-term debt volume.
During 2004, average interest bearing deposits increased $23.7 million, or
14.8 percent, with the majority of the increase, or $18.7 million, in lower
rate savings accounts. Non-interest bearing deposits increased $8.8 million
or 34%. The deposit mix changed due to the lower rate environment causing a
shift from time to savings and NOW account deposits. Interest expense on
deposits continues to closely follow interest rate trends.
-32-
Net interest income for 2003 decreased $571,000, or 5.5 percent, compared
with 2002. 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.
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 4.14 percent for 2004, a 47 basis point decrease from
4.61 percent in 2003. The net interest margin in 2003 was down 39 basis
points compared with the net interest margin of 5.00 percent in 2002. Our
net interest margin decline is primarily due to lower yields on earning
assets acquired with the Sylvester Banking Company acquisition. We have
maintained a relatively strong net interest margin compared with peers
considering the very low interest rate environment during the last few years.
The recent 1.25 percent rise in the federal reserve discount rate since June
of 2004 had little impact on the 2004 net interest income because it did not
significantly change market rates.
Noninterest Income
Noninterest income is an important contributor to net earnings. The largest
single 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:
2004 2003 2002
(Dollars in Thousands)
% % %
Amount Change Amount Change Amount Change
------ ----- ------ ------ ------ -----
Service charges on
deposit accounts $1,554 20.4% $1,290 18.1 % $1,092 13.9%
Income from trust services 310 18.3 262 21.3 216 (15.3)
Income from retail brokerage
services 245 (6.1) 261 (2.2) 267 (31.5)
Income from insurance services 1,102 10.0 1,002 8.7 922 (0.5)
Income from mortgage banking
services 3,612 4.8 3,447 14.1 3,021 23.7
Gain (loss) on the sale or
abandonment of assets (280) 84.8 (1,846) * (214) *
Gain (loss) on the sale
of securities 3 * 0 * 121 *
Other income 208 61.2 129 (24.1) 170 (5.6)
Total noninterest income $6,754 48.6% $4,545 (18.8)% $5,595 8.5%
* = less than 1%
-33-
Excluding the $1.7 million charge associated with the Colquitt Retirement Inn
in 2003, noninterest income in 2004 increased $470,000 compared with 2004.
Service charges on deposit accounts increased due to the addition of the
acquired branch office and our recently offered overdraft protection program.
Increases in fees from trust activities, insurance services, and mortgage
banking services more than offset the decrease in income from security sales.
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. At December 31, 2004, Empire was
servicing approximately $567 million in loans.
Service charges on deposit accounts were positively impacted by a new
overdraft protection program implemented in the last half 2003. 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.
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:
2004 2003 2002
-------------- --------------- --------------
(Dollars in Thousands)
% % %
Amount Change Amount Change Amount Change
------- ----- ------- ------ ------- -----
Salaries and
employee benefits $ 6,668 16.0% $ 5,749 (4.9)% $ 6,045 7.1%
Occupancy expense 735 30.6 563 1.8 553 2.0
Equipment expense 660 13.4 582 12.2 518 2.4
Data processing expense 766 41.6 541 1.7 532 (3.1)
Amortization of
intangible assets 502 54.9 324 0.0 324 88.4
Other operating expense 2,742 9.3 2,508 7.8 2,327 (5.9)
Total noninterest expense $12,073 17.6% $10,267 (0.3)% $10,299 4.2%
Total noninterest expense increased $1.8 million, or 17.6 percent, in 2004
compared with 2003 primarily as a result of the Corporation's acquisition of
Sylvester Banking Company. Salaries and employee benefits expense increased
16 percent due to an increase in 19 full-time equivalent employees to a total
of 125 at December 31, 2004 compared with the prior year end. Excluding the
acquired branch office's operations and acquisition costs, 2004 noninterest
expenses increased 3.4 percent compared with 2003 primarily due to increases
in personnel.
Amortization of intangible assets increased $178,000 in 2004 compared with
the previous year. This increase resulted from the amortization of core
deposit premiums related to the purchase of Sylvester Banking Company.
-34-
Total noninterest expense decreased $32,000, 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 in 2003 was somewhat offset
by an increase of $181,000 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.
The "efficiency ratio" (noninterest expenses divided by total noninterest
income plus net interest income), a measure of productivity, was 68.54
percent for 2004 and 69.94 percent and 63.27 percent for 2003 and 2002,
respectively.
Federal Income Tax Expense
The Corporation expensed $1.14 million, $1.02 million and $1.47 million for
federal income taxes for the years ending December 31, 2004, 2003 and 2002,
respectively. These amounts resulted in an effective tax rate of 22.8% for
2004, 29.1% for 2003 and 29.0% for 2002. See Note 9 of the Corporation's
Notes to Consolidated Financial Statements for further details of tax
expense.
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 2004, total average assets increased $46 million, or 19 percent, to
$287.9 million. The Corporation's earning assets, which include loans,
investment securities, deposits at the Federal Home Loan Bank, and federal
funds sold averaged $262.1 million in 2004, a 19.3 percent increase over
$219.6 million in 2003. This increase was the result of the acquisition of
Sylvester Banking Company. The earning asset mix remained relatively stable
during the year. For 2004, average earning assets were comprised of 38
percent loans, 59 percent investment securities, and 3 percent federal funds
sold and funds at the Federal Home Loan Bank. The ratio of average earning
assets to average total assets increased to 91.1 percent for 2004 compared
with 90.8 percent for 2003. This increase was primarily related to the
decreased level of foreclosed assets.
Loans
Loans are 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 2004,
average loans represented 38 percent of average earning assets and 35.5
percent of average total assets.
-35-
The composition of the Corporation's loan portfolio at December 31, 2004,
2003, and 2002 was as follows:
2004 2003 2002
-------------- --------------- --------------
(Dollars in Thousands)
% % %
Amount Change Amount Change Amount Change
------- ----- ------- ------ ------- -----
Real estate -
commercial mortgage $40,386 (6.0)% $42,968 (9.0)% $ 47,218 (12.8)%
Real estate-residential 33,968 12.3 % 30,245 (10.8)% 33,901 (12.5)%
Real estate-agricultural 5,621 15.9 % 4,851 (9.0)% 5,333 (29.1)%
Commercial, financial,
and agricultural loans 11,188 17.2 % 9,547 (3.0)% 9,272 (16.8)%
Consumer loans 8,752 (7.9)% 9,504 (6.9)% 10,209 2.5 %
Total loans $99,915 2.9 % $97,115 (8.3)% $105,933 (12.8)%
Average total loans increased in 2004 due to our acquisition early in 2004.
Despite the decrease in local loan demand, we continued to apply stringent
credit criteria on all loan applications. As a result of low loan demand, the
ratio of total loans to total deposits at year end declined to 44.9 percent
in 2004 compared with 53.1 percent in 2003. The loan portfolio mix at year
end 2004 consisted of 40.4 percent loans secured by commercial real estate,
34 percent of loans secured by residential real estate, and 5.6 percent of
loans secured by agricultural real estate. The loan portfolio also included
other commercial, financial, and agricultural purposes (11.2 percent) and
loans to individuals for consumer purposes (8.8 percent).
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 any subsequent recoveries are credited to the
allowance. There can be no assurance 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, 2004.
We have a 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 potentially impaired loans that have been identified as
possible problems.
The allowance for loan losses was $2.5 million, or 2.5 percent of total loans
outstanding, as of December 31, 2004. This level represented a $169,000
increase from the corresponding 2003 year-end amount which was 2.4 percent of
total loans outstanding.
The provision for loan losses was $92,000 in 2004, a $425,000 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 allowance for loan losses.
-36-
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 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, and
is a vehicle for adjusting balance sheet sensitivity to cushion against
adverse rate movements. Our investment policy attempts to provide 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 as of December 31, 2004:
Securities Securities Held to
Amounts Maturing In: Available for Sale Maturity
(dollars in thousands)
One year or less $ 5,134 $ 8,580
After one through five years 26,801 60,434
After five through ten years 20,542 44,122
After ten years 173 2,910
Equity & mortgage-backed securities 4,202 0
Total investment securities $56,852 $116,046
The total investment portfolio increased to $172.9 million from $126.2
million at year-end 2004 compared with year-end 2003, an increase of $46.7
million, or 37 percent. This increase was due to our acquisition in early
2004 and to a decrease in loan demand. The average total investment
portfolio increased to $153.8 million in 2004 compared with $118.0 million
for 2003. The 2004 growth in securities held to maturity of $61 million was
primarily attributed to purchases of mainly 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 nonaccrual loans, loans that are 90 days
past due and still accruing, and property acquired by foreclosure. The level
of nonperforming assets decreased $810,000 at year-end 2004 compared with
year-end 2003. This decrease primarily resulted from a reduction in
foreclosed real estate. Nonperforming assets were approximately $1.4
million, or 0.46 percent of total assets as of December 31, 2004, compared
with $2.2 million, or 0.90 percent of total assets at year-end 2003.
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds is 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.
-37-
In 2004, average deposits increased 17.4 percent compared with 2003 from
$185.9 million to $218.4 million. This increase in deposits was primarily
due to our acquisition of Sylvester Banking Company in February 2004. The
majority of the increase in average deposits occurred in average savings and
NOW account deposits. Lower interest rates during 2004 resulted in a slight
change in the deposit mix. Some customers shifted money from certificates of
deposit to savings and NOW accounts due to lower rates paid on time
certificates of deposit. As of December 31, 2004, the Corporation had a
total of $27.3 million in certificates of deposit of $100,000 or more each.
This was a 8.3 percent increase over the $25.2 million total in 2003.
We have used borrowings from the Federal Home Loan Bank to support our
residential mortgage lending activities. During 2004, the Corporation repaid
short-term advances with the Federal Home Loan Bank of $10 million leaving
$5.0 million to be paid in January 2005 and $3.0 million to be paid in August
2005. Also, in 2004 the Corporation borrowed an additional $20.0 million in
long-term advances from the Federal Home Loan Bank. All three advances have
fixed rates for 5, 3, or 2 years with a maturity in 2014 with the lender
having an option to convert the advance to a variable rate after the fixed
rate period. Details on the Federal Home Bank advances are presented in Note
7 to the financial statements.
Liquidity
Liquidity is managed to assume that the Corporation can meet the cash flow
requirements of customers who may be either depositors wanting to withdraw
their funds or borrowers needing funds to meet their credit needs. Many
factors affect the ability to accomplish 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 deposits, interest and fee
income, from loan repayments and the maturity or sale of other earning assets.
The Consolidated Statement of Cash Flows details the Corporation's cash flows
from operating, investing, and financing activities. During 2004, operating
and financing activities generated cash flows of $15.5 million, while investing
activities used $13.1 million of this and increased the cash and due from banks
balances increased by $2.4 million. Cash produced from operations continues to
provide cash 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 $100,000
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 80.4 percent of total deposits on December 31, 2004, compared
with 80.9 percent in 2003.
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 $13.7 million on December 31, 2004, which represented 8
percent of the investment debt securities portfolio.
-38-
Also, the Corporation had $11 million of investment securities callable at
the option of the issuer and that are reasonably likely to be called during
2005. 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, 2004.
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 $30,517 $174 $229 $114 $30,000
Operating leases 22 14 8 0 0
Total contractual obligations $30,539 $188 $237 $114 $30,000
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 necessarily represent future
cash requirements.
Financial instruments whose contract amounts
represent credit risk (dollars in thousands): 2004 2003
- --------------------------------------------- -------- --------
Commitments to extend credit $ 25,317 $ 17,499
Standby letters of credit $ 142 $ 52
The Corporation does not have any special purpose entities or off-balance
sheet 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 13.04 percent in 2004 and 13.74
percent in 2003.
The Federal Reserve Board and the FDIC have issued rules 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
-39-
include certain off-balance sheet items in the calculation of capital
requirements. The risk-based capital regulations require banks to maintain
an 8 percent total risk-based 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 2004, we were well in excess of the minimum requirements under the
guidelines with a total risk-based capital ratio of 28.66 percent, a Tier I
risk-based capital ratio of 27.40 percent, and a leverage ratio of 12.88
percent.
The following table presents the risk-based capital and leverage ratios for
year-end 2004 and 2003 in comparison to the minimum regulatory guidelines:
Minimum
Regulatory
Risk Based Capital Ratios Dec. 31, 2004 Dec. 31, 2003 Guidelines
- ------------------------- ------------- ------------- ----------
Tier I capital 27.40% 25.55% 4.00%
Total risk-based capital 28.66% 26.80% 8.00%
Leverage 12.88% 13.11% 4.00%
FORWARD-LOOKING STATEMENTS
In addition to historical information, this 2004 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 other 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.
-40-
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
The Corporation's primary market risk is exposure to interest rate movements.
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 the Bank. 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
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.
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 2004, our sensitivity ratio, or one-year cumulative rate-
sensitive assets relative to cumulative rate-sensitive liabilities, was 126
percent compared with 91 percent for 2003. This change in the sensitivity
ratio was a result of the Corporation's management of its exposure to
interest rate risk. We are asset-sensitive at the one year gap position
because we have primarily purchased in 2004 five-year investment securities
with a year or less of call protection. These securities will be
repositioned in the gap analysis after their first call date if they are not
called. The effect of this reposition would show that the Corporation is
liability-sensitive at the one-year gap position.
-41-
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 rat