Attached files
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2009
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from __________ to __________
Commission file number 1-12053
SOUTHWEST GEORGIA FINANCIAL CORPORATION
(Exact Name Of Small Business Issuer as specified in its Charter)
Georgia 58-1392259
(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
201 FIRST STREET, S.E., MOULTRIE, GEORGIA 31768
Address Of Principal Executive Offices
(229) 985-1120
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company
(as defined in Rule 12-b of the Act).
Large accelerated filer [ ] Non-accelerated filer [ ]
Accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding At November 6, 2009
Common Stock, $1 Par Value 2,547,837
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
PAGE #
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are provided for
Southwest Georgia Financial Corporation as required
by this Item 1.
a. Consolidated balance sheets - September 30, 2009
(unaudited) and December 31, 2008 (audited). 2
b. Consolidated statements of income (unaudited) - for
the nine months and the three months ended
September 30, 2009 and 2008. 3
c. Consolidated statements of comprehensive income
(unaudited) - for the nine months and the three months
ended September 30, 2009 and 2008. 4
d. Consolidated statements of cash flows (unaudited) for
the nine months ended September 30, 2009 and 2008. 5
e. Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 27
ITEM 4(T). CONTROLS AND PROCEDURES 28
ITEM 6. EXHIBITS 29
SIGNATURE 30
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2009 and December 31, 2008
(Unaudited) (Audited)
September 30, December 31,
2009 2008
ASSETS
Cash and due from banks $ 8,542,207 $ 7,469,754
Interest-bearing deposits in other banks 4,151,385 29,930
Cash and cash equivalents 12,693,592 7,499,684
Investment securities available for sale,
at fair value 78,673,616 83,212,281
Investment securities held to maturity (fair
value approximates $9,925,756 and $12,174,105) 9,652,929 12,108,040
Federal Home Loan Bank stock, at cost 1,649,900 1,618,300
Total investment securities 89,976,445 96,938,621
Loans 157,406,126 149,098,935
Less: Unearned income ( 29,409) ( 29,594)
Allowance for loan losses ( 2,428,285) ( 2,375,713)
Loans, net 154,948,432 146,693,628
Premises and equipment, net 7,362,502 5,783,275
Foreclosed assets, net 3,866,663 210,673
Intangible assets 900,423 1,056,152
Other assets 8,675,657 9,115,295
Total assets $ 278,423,714 $ 267,297,328
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
NOW accounts $ 23,542,043 $ 25,282,470
Money Market 39,365,957 35,700,805
Savings 21,466,577 21,213,082
Certificates of deposit $100,000 and over 30,289,288 28,755,297
Other time accounts 73,486,120 64,216,422
Total interest-bearing deposits 188,149,985 175,168,076
Noninterest-bearing deposits 35,003,610 39,372,928
Total deposits 223,153,595 214,541,004
Federal funds purchased 0 430,000
Short-term borrowed funds 5,000,000 15,000,000
Long-term debt 21,000,000 10,000,000
Other liabilities 4,233,129 4,009,802
Total liabilities 253,386,724 243,980,806
Stockholders' equity:
Common stock - $1 par value, 5,000,000 shares
authorized, 4,293,835 shares issued 4,293,835 4,293,835
Capital surplus 31,701,533 31,701,533
Retained earnings 15,619,025 14,511,867
Accumulated other comprehensive income ( 463,608) ( 1,076,918)
Treasury stock, at cost 1,745,998 shares
for 2008 and 2009 ( 26,113,795) ( 26,113,795)
Total stockholders' equity 25,036,990 23,316,522
Total liabilities and stockholders' equity $ 278,423,714 $ 267,297,328
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
2009 2008 2009 2008
Interest income:
Interest and fees on loans $ 2,385,878 $ 2,385,536 $ 7,022,447 $ 7,089,658
Interest on taxable securities
available for sale 800,535 1,009,870 2,420,091 2,417,121
Interest on taxable securities
held to maturity 38,612 72,965 132,552 655,749
Interest on tax exempt securities
available for sale 104,745 163,455 338,112 663,090
Interest on tax exempt securities
held to maturity 64,893 58,950 183,809 160,973
Dividends 2,235 10,300 2,235 60,569
Interest on federal funds sold 0 0 97 89,659
Interest on deposits in other banks 5,691 12,242 21,844 289,964
Total interest income 3,402,589 3,713,318 10,121,187 11,426,783
Interest expense:
Interest on deposits 709,758 1,048,529 2,228,493 3,520,502
Interest on federal funds purchased 911 16,030 994 16,030
Interest on other short-term borrowings 11,629 190,662 133,732 603,312
Interest on long-term debt 189,583 29,182 442,274 173,819
Total interest expense 911,881 1,284,403 2,805,493 4,313,663
Net interest income 2,490,708 2,428,915 7,315,694 7,113,120
Provision for loan losses 140,000 0 385,709 0
Net interest income after
provision for loan losses 2,350,708 2,428,915 6,929,985 7,113,120
Noninterest income:
Service charges on deposit accounts 471,606 400,247 1,320,776 1,204,773
Income from trust services 47,379 78,878 157,794 213,454
Income from retail brokerage services 52,960 85,589 187,915 272,783
Income from insurance services 230,576 239,912 795,842 862,940
Income from mortgage banking services 411,470 417,250 1,038,451 1,715,191
Net gain on disposition of assets 0 0 0 12,500
Net gain on sale of securities 34,080 0 34,080 0
Net (loss) on the impairment of
equity securities 0 (4,104,901) 0 ( 4,104,901)
Other income 45,985 42,543 183,396 181,474
Total noninterest income (loss) 1,294,056 (2,840,482) 3,718,254 358,214
Noninterest expense:
Salaries and employee benefits 1,693,604 1,956,212 4,865,062 5,492,603
Occupancy expense 218,720 227,112 637,314 654,352
Equipment expense 167,074 164,871 495,238 488,494
Data processing expense 170,127 169,060 519,992 472,123
Amortization of intangible assets 51,909 51,910 155,729 175,034
Losses related to mortgage
banking services 0 1,002,284 0 1,002,284
Other operating expenses 718,764 660,994 2,690,433 1,905,063
Total noninterest expenses 3,020,198 4,232,443 9,363,768 10,189,953
Income (loss) before income taxes 624,566 (4,644,010) 1,284,471 ( 2,718,619)
Provision for income taxes 157,249 (1,978,956) 177,313 ( 1,556,101)
Net income (loss) $ 467,317 $(2,665,054) $ 1,107,158 ( 1,162,518)
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Earnings per share of common stock:
Net income (loss), basic $ 0.18 $ (1.05) $ 0.43 $ (0.46)
Net income (loss), diluted $ 0.18 $ (1.05) $ 0.43 $ (0.46)
Dividends paid per share $ - $ 0.14 $ 0.07 $ 0.42
Weighted average shares outstanding 2,547,837 2,547,837 2,547,837 2,547,956
Diluted average shares outstanding 2,547,837 2,553,653 2,547,837 2,552,591
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
2009 2008 2009 2008
Net income 467,317 (2,665,054) 1,107,158 (1,162,518)
Other comprehensive income, net of tax:
Unrealized gain(loss) on securities
available for sale, net of tax expense
(benefit) of $400,479 and $398,579
for the quarter $315,947 and $(687,404)
for the year 777,400 773,473 613,310 (1,334,373)
Total comprehensive income 1,244,717 (1,891,581) 1,720,468 (2,496,891)
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months
Ended September 30,
(Unaudited) (Unaudited)
2009 2008
Cash flows from operating activities:
Net income $ 1,107,158 $( 1,162,518)
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 385,709 0
Depreciation 543,277 540,685
Net amortization and (accretion) of
investment securities ( 39,736) ( 66,612)
Amortization of intangibles 155,729 175,034
Net loss(gain) on sale of equity securities
and disposal of assets ( 34,080) ( 12,500)
Net loss on the impairmant of equity securities 0 4,104,901
Funds held related to mortgage banking activities 54,861 ( 223,328)
Change in:
Other assets 123,689 ( 475,086)
Other liabilities 346,814 ( 211,024)
Net cash provided by operating activities 2,643,421 2,669,552
Cash flows from investing activities:
Proceeds from calls and maturities of
securities held to maturity 4,000,000 76,000,000
Proceeds from calls, paydowns and maturities
of securities AFS 24,333,914 19,334,414
Proceeds from sale of securities available for sale 70,080 0
Purchase of securities held to maturity ( 1,544,156) ( 877,133)
Purchase of securities available for sale (18,894,586) (81,459,264)
Net change in loans (10,868,824) (24,681,633)
Expenditures for improvements to other real estate owned ( 1,427,679) 0
Purchase of premises and equipment ( 2,122,504) ( 229,347)
Proceeds from sales of other assets 0 102,500
Net cash provided(used) for investing activities ( 6,453,755) (11,810,463)
Cash flows from financing activities:
Net change in deposits 8,612,591 ( 7,710,498)
Decrease in federal funds purchased ( 430,000) 6,230,000
Payment of short-term debt and short-term
portion of long-term debt ( 5,000,000) (20,000,000)
Proceeds from issuance of short-term debt 0 10,000,000
Proceeds from issuance of long-term debt 6,000,000 10,000,000
Cash dividends paid ( 178,349) ( 1,069,546)
Payment for common stock 0 ( 63,773)
Net cash provided(used) for financing activities 9,004,242 ( 2,613,817)
Increase(decrease) in cash and cash equivalents 5,193,908 (11,754,728)
Cash and cash equivalents - beginning of period 7,499,684 18,733,968
Cash and cash equivalents - end of period $ 12,693,592 $ 6,979,240
NONCASH ITEMS:
Increase in foreclosed properties and decrease in loans $ 2,228,311 $ 210,673
Unrealized gain(loss) on securities available for sale $ 929,256 $( 2,021,777)
Net reclass between short and long-term debt $ 5,000,000 $ 0
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________
Basis of Presentation
Southwest Georgia Financial Corporation (the "Corporation"), a bank-holding
company organized under the laws of Georgia, provides deposit, lending, and
other financial services to businesses and individuals primarily in the
Southwest region of Georgia. The Corporation and its subsidiaries are
subject to regulation by certain federal and state agencies.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and footnotes necessary for a fair presentation
of financial position, results of operations, and changes in financial
position in conformity with generally accepted accounting principles. The
interim financial statements furnished reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the results for
the interim periods presented. The interim consolidated financial statements
should be read in conjunction with the Corporation's 2008 Annual Report on
Form 10-K. The corporation evaluates subsequent events through the date of
filing with the SEC.
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries (the "Corporation") conform to generally
accepted accounting principles and to general practices within the banking
industry. The following is a description of the more significant of those
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest
Georgia Financial Corporation and its wholly-owned direct and indirect
Subsidiaries, Southwest Georgia Bank (the "Bank") and Empire Financial
Services, Inc. ("Empire"). All significant intercompany accounts and
transactions have been eliminated in the consolidation.
Nature of Operations
The Corporation offers comprehensive financial services to consumer,
business, and governmental customers through its banking offices in southwest
Georgia. Its primary deposit products are savings and certificates of
deposit, and its primary lending products are consumer and commercial
mortgage loans. The Corporation provides, in addition to conventional
banking services, investment planning and management, trust management,
mortgage banking, and commercial and individual insurance products.
Insurance products and advice are provided by the Bank's Southwest Georgia
Insurance Services Division. Mortgage banking for primarily commercial
properties is provided by Empire, a mortgage banking services subsidiary.
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Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with these evaluations, management
obtains independent appraisals for significant properties.
A substantial portion of the Corporation's loans are secured by real estate
located primarily in Georgia. Accordingly, the ultimate collection of these
loans is susceptible to changes in the real estate market conditions of this
market area.
Cash and Cash Equivalents and Statement of Cash Flows
For purposes of reporting cash flows, the Corporation considers cash and cash
equivalents to include all cash on hand, deposit amounts due from banks,
interest-bearing deposits in other banks, and federal funds sold. The
Corporation maintains its cash balances in several financial institutions.
Accounts at the financial institutions are secured by the Federal Deposit
Insurance Corporation up to $250,000. Uninsured deposits aggregate to
$2,793,818 at September 30, 2009.
Investment Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized
cost. Securities not classified as held to maturity or trading, including
equity securities with readily determinable fair values, are classified as
"available for sale" and recorded at fair value with unrealized gains and
losses reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that
are deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of
the issuer, and (3) the intent and ability of the Corporation to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the trade date and are determined using the
specific identification method.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation has been calculated primarily using the straight-
line method for buildings and building improvements over the assets estimated
useful lives. Equipment and furniture are depreciated using the modified
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accelerated recovery system method over the assets estimated useful lives for
financial reporting and income tax purposes for assets purchased on or before
December 31, 2003. For assets acquired since 2003, the Corporation used the
straight-line method of depreciation. The following estimated useful lives
are used for financial statement purposes:
Land improvements 5 - 31 years
Building and improvements 10 - 40 years
Machinery and equipment 5 - 10 years
Computer equipment 3 - 5 years
Office furniture and fixtures 5 - 10 years
All of the Corporation's leases are operating leases and are not capitalized
as assets for financial reporting purposes. Maintenance and repairs are
charged to expense and betterments are capitalized.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and
the write-down would be material, an assessment of recoverability is
performed prior to any write-down of the asset. Impairment on intangibles is
evaluated at each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount should be assessed.
Impairment, if any, is recognized through a valuation allowance with a
corresponding charge recorded in the income statement.
Loans and Allowances for Loan Losses
Loans are stated at principal amounts outstanding less unearned income and
the allowance for loan losses. Interest income is credited to income based
on the principal amount outstanding at the respective rate of interest except
for interest on certain installment loans made on a discount basis which is
recognized in a manner that results in a level-yield on the principal
outstanding.
Accrual of interest income is discontinued on loans when, in the opinion of
management, collection of such interest income becomes doubtful. Accrual of
interest on such loans is resumed when, in management's judgment, the
collection of interest and principal becomes probable.
Fees on loans and costs incurred in origination of most loans are recognized
at the time the loan is placed on the books. Because loan fees are not
significant, the results on operations are not materially different from the
results which would be obtained by accounting for loan fees and costs as
amortized over the term of the loan as an adjustment of the yield.
A loan is considered impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis
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for commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collection of the principal is unlikely.
The allowance is an amount which management believes will be adequate to
absorb estimated losses on existing loans that may become uncollectible based
on evaluation of the collectability of loans and prior loss experience. This
evaluation takes into consideration such factors as changes in the nature and
volume of the loan portfolios, current economic conditions that may affect
the borrowers' ability to pay, overall portfolio quality, and review of
specific problem loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based upon changes in economic
conditions. Also, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses. Such agencies may require the Corporation to recognize additions to
the allowance based on their judgments of information available to them at
the time of their examination.
Foreclosed Assets
Properties acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at the lower of cost or fair value at the
date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
Credit Related Financial Instruments
In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit, and standby letters of credit.
Such financial instruments are recorded when they are funded.
Retirement Plans
The Corporation and its subsidiaries have retirement plans covering
substantially all employees. The Corporation makes annual contributions to
the plans in amounts not exceeding the regulatory requirements.
Income Taxes
The Corporation, the Bank and its subsidiary file a consolidated income tax
return. The Bank's subsidiary provides for income taxes based on its
contribution to income taxes (benefits) of the consolidated group.
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Deferred income tax assets and liabilities result from temporary differences
between the tax basis of assets and liabilities and their reportable amounts
in the financial statements that will result in taxable or deductible amounts
in future years. Recognition of deferred tax assets is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences and tax credits will be realized.
Recent Accounting Pronouncements
On June 30, 2009, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162, which was subsequently incorporated into ASC Subtopic 105-
10, Generally Accepted Accounting Principles - Overall. This guidance
replaces The Hierarchy of Generally Accepted Accounting Principles and
establishes the FASB Accounting Standards Codification ("Codification") as
the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with U.S. GAAP. Rules and interpretive releases of
the SEC under federal securities laws are also sources of authoritative U.S.
GAAP for SEC registrants. All guidance contained in the Codification carries
an equal level of authority. This guidance was effective for financial
statements issued for interim and annual periods ending after September 15,
2009, and does not have a material impact on our financial position or
results of operations.
On May 28, 2009, the FASB issued SFAS No. 165, "Subsequent Events" (SFAS
165). SFAS 165 provides general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In addition, SFAS 165
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. The adoption of SFAS 165,
effective September 30, 2009, did not impact the Corporation's financial
condition and results of operations.
In April 2009, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. 157-4 ("Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly"). This Staff position provides
guidance in determining fair values when there is no active market or where
the price inputs being used represent distressed sales. It reaffirms what
Statement 157 states is the objective of fair value measurement to reflect
how much an asset would be sold for in an orderly transaction (as opposed to
a distressed or forced transaction) at the date of the financial statements
under current market conditions. Specifically, it reaffirms the need to use
judgment to ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive. If it is
determined that a transaction is not orderly, a reporting entity should place
little, if any, weight on that transaction price when estimating fair value.
The guidance in the Staff position is effective for interim and annual
periods ending after September 15, 2009 with early adoption permitted. The
adoption of Staff Position No. 157-4 did not have an impact on our financial
position or results of operation.
In April 2009, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 111, which amends Topic 5.M. in the Staff
Accounting Bulletin Series entitled Other Than Temporary Impairment of
Certain Investments in Debt and Equity Securities ("Topic 5.M."). SAB No. 111
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maintains the SEC staff's previous views related to equity securities. It
also amends Topic 5.M. to exclude debt securities from its scope. SAB No. 111
interpretive responded that the phrase "other than temporary" for equity
securities classified as available-for-sale in FSP FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments, should not
be interpreted to mean "permanent."
In April 2009, the FASB issued FASB Staff Position No. 115-2 and FAS No. 124-
2 ("Recognition and Presentation of Other-Than-Temporary Impairments"). This
Staff position changes the other-than-temporary impairment guidance for debt
securities. Prior to issuance of this Staff position, if a debt security was
impaired and an entity had the ability and intent to hold the security for a
period of time sufficient to allow for any anticipated recovery in fair
value, then the impairment loss was not recognized in earnings. The guidance
of this Staff position indicates that if an entity does not intend to sell an
impaired debt security that the entity should assess whether it is more
likely than not that it will be required to sell the security before
recovery. If the entity more likely than not, will be required to sell the
security before recovery, an other-than-temporary impairment has occurred
that would be recognized in earnings. If an entity more likely than not will
not be required to sell the debt security, but does not expect to recover its
cost, the entity should determine whether a credit loss exists, and if so,
the credit loss should be recognized in earnings and the remaining impairment
should be recognized in other comprehensive income. The guidance in the Staff
position is effective for interim and annual periods ending after September
15, 2009 with early adoption permitted. The adoption of Staff Position No.
115-2 did not have an impact on our financial position or results of
operation.
In April 2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1
("Interim Disclosures about Fair Value of Financial Instruments"). Prior to
issuing this Staff position, fair values for financial assets and liabilities
were only disclosed once a year. The Staff position now requires disclosures
of these fair values on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value. The guidance in
the Staff position is effective for interim and annual periods ending after
September 15, 2009 with early adoption permitted. This Staff position expands
fair value annual disclosure to quarterly periods. The adoption of Staff
Position No. 107-1 did not have an impact on our financial position or
results of operation.
In December 2008, the FASB issued FSP FAS 132(R)-1, "Employer's Disclosures
about Postretirement Benefit Plan Assets." This FSP amends SFAS No. 132(R),
"Employers' Disclosures about Pensions and Other Postretirement Benefits - An
Amendment of FASB Statements No. 87, 88, and 106" to require more detailed
disclosures about plan assets of a defined benefit pension or other
postretirement plan, including investment strategies; major categories of
plan assets; concentrations of risk within plan assets; inputs and valuation
techniques used to measure the fair value of plan assets; and the effect of
fair-value measurements using significant unobservable inputs on changes in
plan assets for the period. FSP 132(R)-1 is effective for fiscal years ending
after December 15, 2009, with earlier application permitted. We do not expect
the adoption of this standard to have an effect on our financial position or
results of operations.
-11-
On November 21, 2008 the FDIC adopted the final rule relating to the
Temporary Liquidity Guarantee Program ("TLG Program") which is also a part of
EESA. Under the TLG program the FDIC will (1) guarantee certain newly issued
senior unsecured debt and (2) provide full FDIC deposit insurance coverage
for non-interest bearing transaction accounts, NOW accounts paying less than
0.5 percent interest per annum and Interest on Lawyers Trust Accounts held at
participating FDIC insured institutions through December 31, 2009. The
Corporation has elected to only participate in the full FDIC deposit
insurance coverage program.
In response to the current financial crisis affecting the banking system and
financial markets, the Emergency Economic Stabilization Act of 2008 ("EESA")
was signed into law on October 3, 2008. This law established the Troubled
Asset Relief Program ("TARP"). As part of TARP, the Treasury established the
Capital Purchase Program ("CPP") to provide up to $700 billion of funding to
eligible financial institutions through the purchase of capital Stock and
other financial instruments for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. After carefully reviewing and
analyzing the terms and conditions of the CPP, the Board of Directors and
management of the Corporation believed that, given its present financial
condition, participation in the CPP was unnecessary and not in the best
interests of the Corporation, its customers or shareholders.
In October 2008, the FASB issued FSP No. FAS 157-3, "Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active" (FSP
FAS 157-3). This FSP provides additional guidance regarding application of
SFAS No. 157, "Fair Value Measurements," in an inactive market and
illustrates how an entity would determine fair value when the market for a
financial asset is not active. FSP FAS 157-3 is effective immediately upon
issuance and applies to prior periods for which financial statements have not
been issued. We adopted the provisions of FSP FAS 157-3 as of September 30,
2008. The adoption of this standard did not have an impact on our financial
position or results of operations.
In February 2007, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 159 (The Fair Value Option for
Financial Assets and Financial Liabilities). The statement permits entities
to choose to measure many financial instruments and certain other items at
fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. The effective date for
entities that elect to apply its provisions is as of the beginning of an
entity's first fiscal year that begins after November 15, 2007. The
Corporation elected not to apply its provisions.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value under GAAP, expands disclosures about fair value
measurements and specifies a hierarchy of valuation techniques based on
whether the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data corroborated by
independent sources while unobservable inputs reflect market assumptions that
are not observable in an active market or are developed internally. These two
types of inputs create three valuation hierarchy levels. Level 1 valuations
reflect quoted market prices for identical assets or liabilities in active
markets. Level 2 valuations reflect quoted market prices for similar assets
or liabilities in an active market, quoted market prices for identical or
-12-
similar assets or liabilities in non-active markets or model-derived
valuations in which all significant valuation inputs are observable in active
markets. Level 3 valuations reflect valuations in which one or more of the
significant valuation inputs are not observable in an active market. This
standard applies to other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, SFAS 157 does not require any new fair value
measurements. Where applicable, this standard codifies related guidance
within GAAP. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. We adopted the provisions of SFAS 157 as of January 1,
2008. The adoption of this standard did not have an impact on our financial
position or results of operations.
In September 2006, the Emerging Issue Task Force (EITF) issued EITF Issue No.
06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements," (EITF 06-
4). EITF 06-4 requires the accrual of post-retirement benefit over the
service period. EITF 06-4 is effective for fiscal years beginning after
December 31, 2007. The effect of applying this accounting principle did not
have an impact on the Corporation's financial position or results of
operation.
Trust Department
Trust income is included in the accompanying consolidated financial
statements on the cash basis in accordance with established industry
practices. Reporting of such fees on the accrual basis would have no
material effect on reported income.
Servicing and Origination Fees on Loans
The Corporation from the Bank's subsidiary, Empire, recognizes as income in
the current period all loan origination and brokerage fees collected on loans
originated and closed for investing participants. Loan servicing fees are
based on a percentage of loan interest paid by the borrower and recognized
over the term of the loan as loan payments are received. Empire does not
directly fund any mortgages and acts as a service-oriented broker for
participating mortgage lenders. Fees charged for continuing servicing fees
are comparable with market rates charged in the industry. Based on these
facts and after a thorough analysis and evaluation of deferred mortgage
servicing costs as defined under FASB 122 and amended by FASB 140, they are
insignificant and immaterial to be recognized. Late charges assessed on past
due payments are recognized as income by the Corporation when collected.
Advertising Costs
It is the policy of the Corporation to expense advertising costs as they are
incurred. The Corporation does not engage in any direct-response advertising
and accordingly has no advertising costs reported as assets on its balance
sheet. Costs expensed during the third quarter of 2009 were $34,343 and
$104,241 for the nine-month period.
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NOTE 2
Fair Value Measurements
Effective January 1, 2008, the Corporation adopted Financial Accounting
Standards Board ("FASB") Statement No.157, Fair Value Measurements ("SFAS No.
157"), which provides a framework for measuring fair value under generally
accepted accounting principles. SFAS No. 157 applies to all financial
statement elements that are being measured and reported on a fair value
basis.
The Corporation utilizes fair value measurements to record fair value
adjustments to certain assets and liabilities and to determine fair value
disclosures. Securities available-for-sale are recorded at fair value on a
recurring basis. From time to time, the Corporation may be required to
record at fair value other assets on a nonrecurring basis, such as impaired
loans and foreclosed real estate. Additionally, the Corporation is required
to disclose, but not record, the fair value of other financial instruments.
Fair Value Hierarchy:
Under SFAS No. 157, the Corporation groups assets and liabilities at fair
value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to
determine fair value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments
traded in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments
in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are
observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at
least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used for assets and
liabilities which are either recorded or disclosed at fair value.
Cash and Cash Equivalents:
For disclosure purposes for cash, due from banks and federal funds sold, the
carrying amount is a reasonable estimate of fair value.
Investment Securities Available for Sale:
Investment securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are measured
using independent pricing models or other model-based valuation techniques
such as the present value of future cash flows, adjusted for the security's
credit rating, prepayment assumptions and other factors such as credit loss
assumptions. Level 1 securities include those traded on an active exchange,
such as the New York Stock Exchange and U.S. Treasury securities that are
-14-
traded by dealers or brokers in active over-the-counter market funds. Level
2 securities include mortgage-backed securities issued by government
sponsored enterprises and state, county and municipal bonds. Securities
classified as Level 3 include asset-backed securities in less liquid markets.
Investment Securities Held for Sale:
Investment securities held for sale are not recorded at fair value on a
recurring basis. For disclosure purposes, fair value measurement is based
upon quoted prices, if available.
Federal Home Loan Bank Stock:
For disclosure purposes the carrying value of other investments approximate
fair value.
Loans:
The Corporation does not record loans at fair value on a recurring
basis. However, from time to time, a loan is considered impaired and a
specific allocation is established within the allowance for loan
losses. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
No. 114, Accounting by Creditors for Impairment of a Loans, ("SFAS No.
114"). The fair value of impaired loans is estimated using one of three
methods, including collateral value, market value of similar debt, and
discounted cash flows. Those impaired loans not requiring an allowance
represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans. In accordance with
SFAS No. 157, impaired loans where an allowance is established based on the
fair value of collateral require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Corporation records the
impaired loan as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is
further impaired below the appraised value and there is no observable market
price, the Corporation records the impaired loan as nonrecurring Level 3.
For disclosure purposes, the fair value of fixed rate loans which are not
considered impaired, is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with
similar credit ratings. For unimpaired variable rate loans, the carrying
amount is a reasonable estimate of fair value for disclosure purposes.
Foreclosed Assets:
Other real estate properties are adjusted to fair value upon transfer of the
loans to other real estate. Subsequently, other real estate assets are
carried at the lower of carrying value or fair value. Fair value is based
upon independent market prices, appraised values of the collateral or
management's estimation of the value of the collateral. When the fair value
of the collateral is based on an observable market price or a current
appraised value, the Corporation records the other real estate as
nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Corporation
records the other real estate asset as nonrecurring Level 3.
-15-
Deposits:
For disclosure purposes, the fair value of demand deposits, savings accounts,
NOW accounts and money market deposits is the amount payable on demand at the
reporting date, while the fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using current rates
at which comparable certificates would be issued.
Federal Funds Purchased:
For disclosure purposes the carrying amount for Federal funds purchased is a
reasonable estimate of fair value due to the short-term nature of these
financial instruments.
FHLB Advances:
For disclosure purposes the fair value of the FHLB fixed rate borrowing is
estimated using discounted cash flows, based on the current incremental
borrowing rates for similar types of borrowing arrangements.
Commitments to Extend Credit and Standby Letters of Credit:
Because commitments to extend credit and standby letters of credit are made
using variable rates and have short maturities, the carrying value and the
fair value are immaterial for disclosure.
Assets Recorded at Fair Value on a Recurring Basis:
The table below presents the recorded amount of assets measured at fair value
on a recurring basis as of September 30, 2009.
Level 1 Level 2 Level 3 Total
Investment securities available
for sale $ 200,098 $78,473,518 $ 0 $78,673,616
Assets Recorded at Fair Value on a Nonrecurring Basis:
The Corporation may be required, from time to time, to measure certain assets
at fair value on a nonrecurring basis in accordance with U.S. generally
accepted accounting principles. These include assets that are measured at
the lower of cost or market that were recognized at fair value below cost at
the end of the period. Assets measured at fair value on a nonrecurring basis
are included in the table below as of September 30, 2009.
Level 1 Level 2 Level 3 Total
Foreclosed assets $ 0 $3,866,663 $ 0 $3,866,663
Nonperforming loans 0 1,526,687 0 1,526,687
Total assets at fair value $ 0 $5,393,350 $ 0 $5,393,350
-16-
The carrying amount and estimated fair value of the Corporation's assets and
liabilities which are required to be either disclosed or recorded at fair
value at September 30, 2009 and December 31, 2008.
September 30, 2009 December 31, 2008
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Dollars in thousands) (Dollars in thousands)
Assets:
Cash and cash equivalents $ 12,694 $ 12,694 $ 7,500 $ 7,500
Investment securities available
for sale 78,674 78,674 83,212 83,212
Investment securities held to
maturity 9,653 9,926 12,108 12,174
Federal Home Loan Bank stock 1,650 1,650 1,618 1,618
Loans 154,948 151,256 146,694 147,282
Liabilities:
Deposits 223,154 223,829 214,541 215,349
Federal funds purchased 0 0 430 430
FHLB advances 26,000 28,638 25,000 25,817
Limitations:
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial statement element.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates included herein are based on existing on- and off-
balance-sheet financial instruments without attempting to estimate the value
of anticipated future business and the fair value of assets and liabilities
that are not required to be recorded or disclosed at fair value like premises
and equipment. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Form 10-Q report contains
forward-looking statements within the meaning of the federal securities laws.
The Corporation cautions that there are various factors that could cause
actual results to differ materially from the anticipated results or other
expectations expressed in the Corporation's forward-looking statements;
accordingly, there can be no assurance that such indicated results will be
realized.
These factors include risks related to:
* the conditions in the financial markets and economic conditions generally;
* the Corporation's ability to raise capital;
* the Corporation's liquidity;
* the Corporation's construction and land development loans;
* asset quality;
* the adequacy of the allowance for loan losses;
* technology difficulties or failures;
* the Corporation's ability to execute its business strategy;
* the loss of key personnel;
* competition;
* changes in regulation and monetary policy;
* losses due to fraudulent and negligent conduct of customers,
service providers and employees;
* acquisitions or dispositions of assets or internal restructuring that may
be pursued by the Corporation;
* changes in or application of environmental and other laws and regulations
to which the Corporation is subject;
* political, legal and local 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.
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, Lowndes,
Thomas, and Worth Counties, each contiguous with Colquitt County, and the
surrounding counties of southwest Georgia. We have four full service banking
facilities, a loan production office, and six automated teller machines.
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Our strategy is to:
* maintain the diversity of our revenue, including both interest and
noninterest income through a broad base of business,
* strengthen our sales and marketing efforts while developing our employees
to provide the best possible service to our customers,
* expand our market share where opportunity exists, and
* grow outside of our current geographic market either through de-novo
branching or acquisitions into areas proximate to our current
market area.
We believe that investing in sales and marketing in this challenging market
will provide us with a competitive advantage. To that end, we have continued
with our plans to expand geographically and established a loan production
office in Valdosta, Georgia, in the first quarter of 2008. We have
established leadership in place in Valdosta and have purchased a permanent
site for a branch bank. We have broken ground and have begun the
construction phase of our branch bank building which we expect to be in
operation in the latter half of 2010.
The Corporation's profitability, like most financial institutions, is
dependent to a large extent upon net interest income, which is the difference
between the interest received on earning assets, such as loans, securities
and federal funds sold, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings. Net interest income is
highly sensitive to the fluctuations in interest rates. For example, after
reaching a high of 5.25%, the Federal Reserve Bank decreased the overnight
borrowing rate for banks by 5% to a range of 0% to .25% from September 2007
to December 2008. The Federal funds rate remained at this low level during
the first nine months of 2009.
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. Some specific factors include changes in population,
competition among lenders, interest rate conditions and prevailing market
rates on competing uses of funds and investments, customer preferences and
levels of personal income and savings in the Corporation's primary market
area.
To address interest rate fluctuations out of our control, we manage our
balance sheet in an effort to diminish the impact of sudden interest rates
changes by broadening our revenue sources to reduce the risk and exposure of
our financial results to the impact of changes in interest rates, which is
outside of our control. Sources of noninterest income include our insurance
agency and Empire, the Corporation's commercial mortgage banking subsidiary,
as well as fees on customer accounts, trust and retail brokerage services.
Noninterest income was 52% of third quarter 2009 net interest income and 28%
of third quarter 2009 total revenue.
At September 30, 2009, the majority of non-performing assets included one
large loan placed on interest nonaccrual in late 2007. This loan was
partially charged-off during the fourth quarter of 2008 and was moved to
other real estate owned in the second quarter of 2009. This foreclosed
commercial property is now under construction and the costs of improvements
were fully funded in the third quarter of 2009.
-19-
Since mid-2007, and particularly during the past year, the financial markets
and economic conditions generally were materially and adversely affected by
significant declines in the values of nearly all asset classes and by a
serious lack of liquidity. This was initially triggered by declines in home
prices and the values of subprime mortgages, but spread to all commercial and
residential mortgages as property prices declined rapidly and to nearly all
asset classes. The effect of the market and economic downturn also spread to
other areas of the credit markets and severely affected the availability of
liquidity. The magnitude of these declines led to a crisis of confidence in
the financial sector as a result of concerns about the capital base and
viability of certain financial institutions. During this period, interbank
lending and commercial paper borrowing fell sharply, precipitating a credit
freeze for both institutional and individual borrowers. Unemployment has
also increased significantly.
Critical Accounting Policies
In the course of the Corporation's normal business activity, management must
select and apply many accounting policies and methodologies that lead to the
financial results presented in the consolidated financial statements of the
Corporation. Management considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy because of the
uncertainty and subjectivity inherent in estimating the levels of allowance
needed to cover probable credit losses within the loan portfolio and the
material effect that these estimates can have on the Corporation's results of
operations. We believe that the allowance for loan losses as of September
30, 2009 is adequate, however, under adversely different conditions or
assumptions, future additions to the allowance may be necessary. There have
been no significant changes in the methods or assumptions used in our
accounting policies that require material estimates and assumptions. Note 1
to the Consolidated Financial Statements provides a description of our
significant accounting policies and contributes to the understanding of how
our financial performance is reported.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves the ability to meet the cash flow requirements
of customers who may be either depositors wanting to withdraw their funds or
borrowers needing assurance that sufficient funds will be available to meet
their credit needs. In the ordinary course of business, the Corporation's
cash flows are generated from interest and fee income as well as from loan
repayments and the maturity or sale of other earning assets. In addition,
liquidity is continuously provided through the acquisition of new deposits
and borrowings or the rollover of maturing deposits and borrowings. The
Corporation strives to maintain an adequate liquidity position by managing
the balances and maturities of interest-earning assets and interest-earning
liabilities so its short-term investments balance, at any given time, will
adequately cover any reasonably anticipated immediate need for funds.
Additionally, the Bank maintains relationships with correspondent banks that
could provide funds on short notice, if needed.
The liquidity and capital resources of the Corporation are monitored on a
periodic basis by state and Federal regulatory authorities. As determined
under guidelines established by these regulatory authorities, the Bank's
liquidity ratios at September 30, 2009, were considered satisfactory. At
that date, the Bank's short-term investments were adequate to cover any
reasonably anticipated immediate need for funds. We are not aware of any
known trends, events, or uncertainties that will have or that are reasonably
-20-
likely to have a material adverse effect on the Corporation's liquidity or
operations. At September 30, 2009, the Corporation's and the Bank's risk-
based capital ratios were considered adequate based on guidelines established
by regulatory authorities. During the nine months ended September 30, 2009,
total capital increased $1.7 million to $25 million and increased $2.1
million from the same period last year. The stock repurchase program, adopted
by the Board in January 2000, expired during the first quarter of last year.
As part of its capital management planning, the Corporation and its Board of
Directors elected not to extend the authorization of the stock repurchase
program. Also, the Corporation continues to maintain a healthy level of
capital adequacy as measured by its equity-to-asset ratio of 8.99% as of
September 30, 2009. The Corporation is not aware of any events or trends
likely to result in a material change in capital resources other than the
effects of normal operations on the retention of net earnings. Also, the
Corporation's management is not aware of any current recommendations by the
regulatory authorities which, if they were implemented, would have a material
effect on the Corporation's capital resources.
RESULTS OF OPERATIONS
The Corporation's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and
investment losses, to generate noninterest income and to control noninterest
expense. Since interest rates are determined by market forces and economic
conditions beyond the control of the Corporation, the ability to generate net
interest income is dependent upon the Bank's ability to obtain an adequate
spread between the rate earned on interest-earning assets and the rate paid
on interest-bearing liabilities. Thus, the key performance measure for net
interest income is the interest margin or net yield, which is taxable-
equivalent net interest income divided by average earning assets.
Performance Summary
The Corporation's net income after taxes for the three-month period ending
September 30, 2009, was $467 thousand compared with a net loss of $2.67
million for the same period in 2008. Last year's third quarter results were
negatively impacted by a $4.11 million non-cash loss related to the
impairment of equity securities and a $1.00 million loss sustained by the
commercial mortgage banking subsidiary. The recent quarter's results
benefited from higher noninterest income combined with reductions in salary
and employee benefits of $264 thousand, or 13%, in the recent quarter helped
to offset the effect of a $140 thousand provision for loan loss.
On a per share basis, net income for the third quarter was $.18 per diluted
share compared with a loss of $1.05 per diluted share for the same quarter in
2008. The weighted average common diluted shares outstanding for the third
quarters of 2008 and 2009 were 2.548 million.
For the first nine months of 2009, net income was $1.107 million compared
with net loss of $1.163 million for the same period in 2008. Earnings per
diluted share for the first nine months of 2009 were $0.43 compared with a
loss per diluted share of $0.46 for the same period in 2008. Negatively
impacting the 2009 year-to-date results were a $677 thousand decline in
income from mortgage banking services and a $386 thousand increase in loan
loss provision. The first nine months of 2008 were impacted by the unusual
losses at our mortgage banking subsidiary and by the impairment of equity
securities.
-21-
We measure our performance on selected key ratios, which are provided for the
previous five quarterly periods ended September 30, 2009.
3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
2009 2009 2009 2008 2008
Return on average total assets 0.67% 0.38% 0.56% (0.17)% ( 3.99)%
Return on average total equity 7.71% 4.37% 6.48% (2.02)% (42.53)%
Average shareholders' equity
to Average total assets 8.70% 8.66% 8.62% 8.61% 9.37%
Net interest margin
(tax equivalent) 4.13% 4.12% 4.07% 4.26% 4.19%
Comparison of Statements of Income for the Quarter
Noninterest income, which was 27.5% of the Company's total revenue for the
quarter, increased to $1.29 million when compared with a negative $2.84
million for the third quarter of 2008. Mortgage banking services revenue,
which is a large contributor to noninterest income, decreased $6 thousand,
remaining relatively flat when compared to the same period in 2008. The
mortgage banking business services a $381 million portfolio of non-recourse
loans. Trust services and retail brokerage services revenue decreased $32
thousand, or 40%, and $33 thousand, or 38.1%, respectively, in the third
quarter of 2009. These decreases were offset by an increase in service
charges on deposit accounts of $72 thousand, or 18.0%, when compared with
last year's third quarter. A recent change in our service charge rate
structure on deposit accounts influenced the increase.
Total interest income decreased $311 thousand, or 8.4%, for the three months
ended September 30, 2009 compared with the same period in 2008. Interest on
deposits in other banks and Federal funds sold decreased $6 thousand, and
interest on investment securities decreased $305 thousand. Lower interest on
investment securities was mainly due to a $14 million decline in average
securities compared with the same period last year. This decrease in
investment securities was due to the maturing or calling of $20.3 million of
U.S. Government Agency and municipal securities, most of which were called by
the issuers during the first half of 2009.
Total interest expense decreased $373 thousand, or 29%, in the third quarter
of 2009 compared with the same period in 2008. Interest on deposits
decreased $339 thousand, or 32.3%, during the third quarter of 2009
reflecting lower interest rates compared with the third quarter of 2008. The
average rate paid on average time deposits has decreased 138 basis points
since September 30, 2008. Interest on total borrowings decreased $34
thousand, or 14.3%, compared with the same quarter in 2008.
The primary source of revenue for the Corporation is net interest income,
which is the difference between total interest income on earning assets and
interest expense on interest-bearing sources of funds. Net interest income
improved to $2.491 million for the third quarter of 2009 compared with $2.429
million in the 2008 third quarter as lower costs of borrowings as well as
lower costs of deposits more than offset the decline in interest income. Net
interest income after provision for loan losses for the third quarter of 2009
was $2.351 million compared with $2.429 million for the same period in 2008.
The provision for loan losses increased to $140 thousand compared with no
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provision for loan losses during last year's third quarter. The
Corporation's net interest margin was 4.13% for the third quarter of 2009,
compared with 4.19% for the same period in 2008.
Total noninterest expense decreased 28.6% to $3.020 million from $4.232
million for the third quarter of last year. The bulk of this decrease
resulted from the $1.002 million loss related to mortgage banking services in
third quarter 2008, as our commercial mortgage banking subsidiary sustained a
loss from the cost of covering the shortfall realized by participant banks on
the sale of a foreclosed commercial property. Excluding this $1.002 million
loss, total noninterest expense improved $211 thousand over last year's third
quarter. The majority of the improvement was in salary and employee benefits
which reduced by $264 thousand, or 13%, compared with the third quarter 2008.
This decrease was mainly due to staff reductions. Also, occupancy expense
was less than the previous year amount due to a reduction in office facility.
Other operating expense includes increases in the FDIC insurance assessment of
$87 thousand and legal expenses of $41 thousand when compared to third quarter
2008. Data processing expense remained relatively flat at $170 thousand for
the third quarter of 2009.
Comparison of Statements of Income for the Nine-month Period
For the first nine months of 2009, noninterest income was $3.72 million, up
from $358 thousand in the same period of 2008. Excluding last year's loss on
the impairment of equity securities of $4.11 million, 2009 year-to-date
noninterest income was down $745 thousand when compared with the same period
last year. The majority of the decline was a result of a drop in mortgage
banking services revenue of $677 thousand, or 39.5%, when compared with same
period last year. Other contributing factors include income from insurance
services which decreased $67 thousand and revenue from trust services and
retail brokerage services which decreased $55 thousand and $85 thousand,
respectively. These decreases were partially offset by an increase in service
charges on deposit accounts of $116 thousand in the first nine months of
2009, when compared with the same period last year.
Total interest income for the first nine months of 2009 decreased $1.306
million when compared with the same period in 2008. This decrease in the
nine-month period of 2009 was primarily due to an $881 thousand decrease in
interest on investment securities related to an $18.6 million average lower
volume of securities. Interest on Federal funds sold and deposits in other
banks decreased $357 thousand compared with the first nine months of 2008.
This decrease was mainly related to the lower interest rate environment.
During the first nine months of 2009, the Federal Reserve Bank maintained
short-term interest rates at a range of 0% to 0.25% after decreasing 4% from
the beginning of 2008 through December 2008.
Total interest expense for the nine-month period ended September 30, 2009
decreased $1.508 million or 35%, compared with the same period in 2008. The
decrease in interest expense was primarily related to lower interest paid on
interest-bearing deposits of $1.292 million, or 36.7%, compared with the
nine-month period of 2008 reflecting lower interest rates. Interest on
borrowings decreased $216 thousand, or 27.3%, for the first nine months of
2009 compared with the same period last year.
Net interest income for the first nine months of 2009 was 2.8% higher at
$7.316 million compared with $7.113 million for the same period in 2008,
mainly as a result of lower interest paid on deposits and borrowings. Net
interest income after provision for loan losses was $6.930 million for the
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first nine months of 2009 compared with $7.113 for the same period in 2008.
A provision for loan losses of $386 thousand was recognized in the first nine
months of 2009 mostly due to loan charge-offs recognized during the year.
Showing an improvement of 15 basis points, net interest margin was 4.11% for
the first nine months of 2009 compared with the same period a year ago.
Noninterest expense decreased $826 thousand for the first nine months of 2009
compared with the same period last year. The bulk of this decrease occurred
as a result of the $1.002 million loss related to mortgage banking services
in third quarter 2008, as our commercial mortgage banking subsidiary
sustained a loss from the cost of covering the shortfall realized by
participant banks on the sale of a foreclosed commercial property. Excluding
the loss, noninterest expense increased $176 thousand when compared with the
same period in 2008. Driving this increase were other operating expenses
which were higher due to increased legal and FDIC insurance fees of $774
thousand and $341 thousand, respectively. Other increases are noted in data
processing and equipment expenses due to an increase in operation. These
increases were partially offset by reductions in salary and employee
benefits, occupancy expense and amortization of intangible assets. Salary
and employee benefits were reduced by $628 thousand, or 11.4% during the
first nine months of 2009. This decrease was mainly due to a reduction in
staff and benefit plan expenses. Occupancy expense decreased due to a
reduction in office facility. Also, the amortization of intangible
assets decreased $19 thousand due to the intangible assets related to the
purchase of the commercial mortgage banking subsidiary were fully amortized
in 2008.
Comparison of Financial Condition Statements
At September 30, 2009, total assets were $278.4 million, up $11.1 million
from December 31, 2008. This increase was primarily due to loan and core
deposit growth. Total net loans increased $13.9 million, or 9.8%, to $154.9
million compared with $141.1 million at September 30, 2008. Year-over-year
quarter-end total deposits were up $14.1 million, or 6.7%, to $223.2 million.
Premises and equipment increased due to the $1.6 million purchase of land in
Valdosta, Georgia that will be the site of a new bank branch in 2010. These
increases were partially offset by a decline of $7 million in investment
securities. This decrease in investment securities was due to the maturing
or calling of $20.3 million of U.S. Government Agency and municipal
securities, most of which were called by the issuers during the first half of
2009 as well as $8 million in principal payments from mortgage-backed
securities. The proceeds from these called investment securities were
reinvested in $20 million in new securities.
The Corporation's loan portfolio of $157.4 million increased from the
December 31, 2008, level of $149.1 million. The loan growth was due to
stronger demand in our local market and the addition of our loan production
office in Valdosta, Georgia. The Corporation continues to be conservative in
its lending practices in order to maintain a quality loan portfolio. Loans,
a major use of funds, represent 56.5% of total assets.
Investment securities and short-term investments which include Federal funds
sold and interest-bearing deposits in other banks represent 33.8% of total
assets. Investment securities decreased $7 million and short-term investments
increased $4.2 million since December 31, 2008. This resulted in an overall
decrease in investments of $2.8 million.
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Deposits increased to $223.2 million at the end of the third quarter of 2009,
up $8.6 million from the end of 2008. The bulk of the deposit growth was in
time and money market accounts. At September 30, 2009, total deposits
represented 80.1% of total assets.
The following table shows the major contractual obligations for the
Corporation.
Long-term debt consists of the following:
September 30, December 31, September 30,
2009 2008 2008
Advance from Federal Home Loan Bank with
a 3.39% fixed rate ofinterest maturing
August 20, 2018. (convertible to a
variable rate at option of Federal
Home Loan Bank on August 22, 2011). 5,000,000 5,000,000 5,000,000
Advance from Federal Home Loan Bank with
a 3.85% fixed rate of interest maturing
April 30, 2014. 10,000,000 0 0
Advance from Federal Home Loan Bank with
a 2.78% fixed rate of interest maturing
September 10, 2018. (convertible to a
variable rate at option of Federal Home
Loan Bank on September 10, 2010). 0 5,000,000 5,000,000
Advance from Federal Home Loan Bank with
a 1.57% fixed rate of interest maturing
July 25, 2011. 2,000,000 0 0
Advance from Federal Home Loan Bank with
a 2.23% fixed rate of interest maturing
July 30, 2012. 2,000,000 0 0
Advance from Federal Home Loan Bank with
a 2.79% fixed rate of interest maturing
July 29, 2013. 2,000,000 0 0
Total long-term debt $21,000,000 $10,000,000 $10,000,000
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan losses is
evaluated monthly based on a review of all significant loans, with a
particular emphasis on nonaccruing, past due, and other loans that management
believes require attention.
Other factors used in determining the adequacy of the reserve are
management's judgment about factors affecting loan quality and their
assumptions about the local and national economy. The allowance for loan
losses was 1.54% of total loans outstanding at September 30, 2009, compared
with 1.59% of loans outstanding at December 31, 2008 and 1.66% at September
30, 2008. Nonperforming assets totaled $3.9 million at September 30, 2009,
or 1.94% of total assets, compared with $3.7 million in nonperforming assets,
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or 1.4% of total assets at September 30, 2008. The level of nonperforming
assets was due primarily to one large foreclosed commercial property valued
at $3.7 million. That property has been under construction and the costs of
improvements are now fully funded. Management considers the allowance for
loan losses as of September 30, 2009, adequate to cover potential losses in
the loan portfolio.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to financial instruments
with off-balance-sheet risk to meet the financing needs of our customers and
reduce risk exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit in the form of loans or
through letters of credit. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the financial statements. Since many of the commitments to extend credit
and standby letters of credit are expected to expire without being drawn
upon, the contractual or notional amounts do not represent future cash
requirements.
Financial instruments whose contract amounts September 30, September 30,
represent credit risk (dollars in thousands): 2009 2008
Commitments to extend credit $ 11,724 $ 20,841
Standby letters of credit and financial guarantees $ 10 $ 10
The Corporation does not have any special purpose entities or off-balance
sheet financing arrangements.
Capital Resources and Dividends
At September 30, 2009, the Corporation's and the Bank's risk-based capital
ratios were considered adequate based on guidelines established by regulatory
authorities. Our total risk based capital ratio now stands at 15.74%, which
is more than 57 percent in excess of the regulatory standard for a "well-
capitalized" bank. Southwest Georgia Financial Corporation's and Southwest
Georgia Bank's risk based capital ratios are shown in the following table.
Risk Based Capital Ratios
Southwest Georgia
Financial Corporation Regulatory Guidelines
For Well Minimum
Risk Based Capital Ratios September 30, 2009 Capitalized Guidelines
Tier 1 capital 14.49% 6.00% 4.00%
Total risk based capital 15.74% 10.00% 8.00%
Tier 1 leverage ratio 8.85% 5.00% 3.00%
Southwest Georgia Bank Regulatory Guidelines
For Well Minimum
Risk Based Capital Ratios September 30, 2009 Capitalized Guidelines
Tier 1 capital 13.84% 6.00% 4.00%
Total risk based capital 15.09% 10.00% 8.00%
Tier 1 leverage ratio 8.45% 5.00% 3.00%
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In March of 2009, the Corporation suspended its quarterly cash dividend. This
decision enables the Corporation to have financial flexibility by retaining
equity necessary to support efforts to capture greater market share and
expand outside of its historic footprint. Conditions will be evaluated
quarterly, and when the economic environment stabilizes, the Corporation will
consider a cash dividend payout.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risk lies within its exposure to interest
rate movement. The Corporation has no foreign currency exchange rate risk,
commodity price risk, or any other material market risk. The Corporation
has no trading investment portfolio. As a result, it does not hold any
market risk-sensitive instruments, which would be subject to a trading
environment characterized by volatile short-term movements in interest rates.
Also, the Corporation has no interest rate swaps, or other derivative
instruments, that are both designated and effective as hedges or modify the
interest rate characteristics of specified assets or liabilities. The
Corporation's primary source of earnings, net interest income, can fluctuate
with significant interest rate movements. To lessen the impact of these
movements, the Corporation seeks to maximize net interest income while
remaining within prudent ranges of risk by practicing sound interest rate
sensitivity management. The Corporation attempts to accomplish this
objective by structuring the balance sheet so differences in repricing
opportunities between assets and liabilities are minimized. Interest rate
sensitivity refers to the responsiveness of earning assets and interest-
bearing liabilities to changes in market interest rates. The Corporation's
interest rate risk management is carried out by the Asset/Liability
Management Committee operating under policies and guidelines established by
Management. The 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
maintains an investment portfolio that staggers maturities and provides
flexibility over time in managing exposure to changes in interest rates. At
any point in time, any imbalances in the repricing opportunities constitute a
financial institution's interest rate sensitivity.
The Corporation uses a number of tools to measure interest rate risk. One of
the indicators for the Corporation's interest rate sensitivity position is
the measurement of the difference between its rate-sensitive assets and rate-
sensitive liabilities, referred to as the "gap." A gap analysis displays the
earliest possible repricing opportunity for each asset and liability category
based upon contractual maturities and repricing. As of September 30, 2009,
the Corporation's one-year cumulative rate-sensitive assets represented 112%
of the cumulative rate-sensitive liabilities compared with 95% at the same
period a year ago. This level of cumulative gap is a result of the
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Corporation's management of its exposure to interest rate risk. We are
asset-sensitive at the one year gap position compared with our liability
sensitivity in the third quarter of the previous year. These changes in
assets and liabilities occurred mainly in: (1) increase in short-term
investments, and a (2) increase in long-term debt. This asset sensitive
position will create potential higher earnings for the Corporation in a
rising interest rate environment. All interest rates and yields do not
adjust at the same velocity; therefore, the interest rate sensitivity gap is
only a general indicator of the potential effects of interest rate changes on
net interest income. The Corporation's asset and liability mix is monitored
ensuring the effects of interest rate movements in either direction are not
significant over time.
ITEM 4(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Corporation's management, including the Chief Executive Officer and Chief
Financial Officer, supervised and participated in an evaluation of the
effectiveness of its disclosure controls and procedures (as defined in
federal securities rules) as of the end of the period covered by this report.
Based on, and as of the date of, that evaluation, the Corporation's Chief
Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures were effective in
accumulating and communicating information to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures of that information under the
Securities and Exchange Commission's rules and forms and that the
Corporation's disclosure controls and procedures are designed to ensure that
the information required to be disclosed in reports that are filed or
submitted by the Corporation under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
Management's Annual Report on Internal Control over Financial Reporting
The Corporation's management is responsible for establishing and maintaining
adequate internal control over financial reporting. Management's assessment
of the effectiveness of the Corporation's internal control over financial
reporting as of December 31, 2008 was included in Item 8 of the 10K form,
dated December 31, 2008, under the heading "Management's Report on Internal
Controls Over Financial Reporting".
The annual report form 10K, dated December 31, 2008, does not include an
attestation report of the Corporation's registered public accounting firm
regarding internal control over financial reporting. Management's report was
not subject to attestation by the Corporation's registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission
that permits the Corporation to provide only management's report in the
annual report.
Changes in Internal Control over Financial Reporting
No changes were made to the Corporation's internal control over financial
reporting during this quarter that materially affected or could reasonably
likely to materially affect the Corporation's internal controls over
financial reporting.
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ITEM 6. EXHIBITS
Exhibit 31.1 Section 302 Certification of Periodic Financial Report by
Chief Executive Officer.
Exhibit 31.2 Section 302 Certification of Periodic Financial Report by
Chief Financial Officer.
Exhibit 32.1 Section 906 Certification of Periodic Financial Report by
Chief Executive Officer.
Exhibit 32.2 Section 906 Certification of Periodic Financial Report by
Chief Financial Officer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
/s/GEORGE R. KIRKLAND
BY: _____________________________________
GEORGE R. KIRKLAND
SENIOR VICE-PRESIDENT AND TREASURER
(FINANCIAL AND ACCOUNTING OFFICER)
Date: November 16, 2009
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