Attached files

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EX-10.12 - FORM OF RESTRICTED STOCK AWARD AGREEMENT - SOUTHWEST GEORGIA FINANCIAL CORPex1012restrstockagreement.htm
EX-23.1 - CONSENT OF TJS DEEMER DANA LLP - SOUTHWEST GEORGIA FINANCIAL CORPex231consentoftjsdd.htm
EX-32.2 - SECTION 906 CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER - SOUTHWEST GEORGIA FINANCIAL CORPtenk17ex322.htm
EX-32.1 - SECTION 906 CERTIFICATION BY CHIEF EXECUTIVE OFFICER - SOUTHWEST GEORGIA FINANCIAL CORPtenk17ex321.htm
EX-31.2 - SECTION 302 CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER - SOUTHWEST GEORGIA FINANCIAL CORPtenk17ex312.htm
EX-31.1 - SECTION 302 CERTIFICATION BY CHIEF EXECUTIVE OFFICER - SOUTHWEST GEORGIA FINANCIAL CORPtenk17ex311.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - SOUTHWEST GEORGIA FINANCIAL CORPex21subsidiariesofregistrant.htm

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, 2017

 

[ ] 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 001-12053

 

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
Incorporation Or Organization)   Identification No.)
     
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   NYSE AMERICAN LLC
(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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

 

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 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated file,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X ] Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X ]

 

Aggregate market value of voting and non-voting stock held by nonaffiliates of the registrant as of June 30, 2017: $41,104,181 based on 2,005,082 shares at the price of $20.50 per share.

 

As of March 23, 2018, 2,545,776 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 2018 annual meeting of shareholders, to be filed with the Commission are incorporated by reference into Part III.

 

 

TABLE OF CONTENTS

 

 

PART I       PAGE
  Item 1.   Business 3
  Item 1A.   Risk Factors 25
  Item 1B.   Unresolved Staff Comments 30
  Item 2.   Properties 30
  Item 3.   Legal Proceedings 30
  Item 4.   Mine Safety Disclosures 31
           
PART II        
  Item 5.   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 31
  Item 6.   Selected Financial Data 33
  Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
  Item 7A.   Quantitative and Qualitative Disclosures About Market Risk 42
  Item 8.   Financial Statements and Supplementary Data 42
  Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 98
  Item 9A.   Controls and Procedures 98
  Item 9B.   Other Information 98
           
PART III        
  Item 10.   Directors, Executive Officers and Corporate Governance 98
  Item 11.   Executive Compensation 99
  Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 99
  Item 13.   Certain Relationships and Related Transactions, and Director Independence 99
  Item 14.   Principal Accountant Fees and Services 99
           
PART IV        
  Item 15.   Exhibits and Financial Statement Schedules 99
  Item 16.   Form 10-K Summary 101

 

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 Bank commenced operations as Moultrie National Bank in 1928. The Bank is a state-chartered bank insured by the Federal Deposit Insurance Corporation (the “FDIC”).

 

The Corporation’s primary business is providing banking services through the Bank to individuals and businesses principally in the following counties: Colquitt, Baker, Worth, Lowndes, and Tift as well as the surrounding counties of southwest Georgia. Empire Financial Services, Inc. (“Empire”), a provider of commercial mortgage banking services has been wholly owned by the Bank since 2001. In December 2017, the Bank dissolved Empire. The executive office of the Corporation is located at 25 Second Avenue, S. W., Moultrie, Georgia 31768, and its telephone number is (229) 985-1120.

 

All references herein to the Corporation include Southwest Georgia Financial Corporation and the Bank unless the context indicates a different meaning.

 

General

 

The Corporation is a registered bank holding company. The Bank is community-oriented and offers customary banking services such as consumer and commercial checking accounts, NOW accounts, savings accounts, certificates of deposit, lines of credit, VISA® business 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 Wealth Strategies division 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. Also, the Wealth Strategies area has a securities sales department which offers full-service brokerage services through a third party service provider. The Bank’s Southwest Georgia Insurance Services Division offers property and casualty insurance, life, health, and disability insurance.

 

Markets

 

The Corporation conducts banking activities in four counties in southwest and south central Georgia. Population characteristics in these counties range from rural to more metropolitan. Our largest market is Lowndes County with a total population of 114,628 and the highest growth rate in our markets at 14.1% from 2006 to 2016. Due primarily to the location of a state university and a large air force base in Lowndes County, this market has a median age estimated at 29.9, younger than an average median age of 40.9 in the other three counties that the Bank primarily serves. These counties, Colquitt, Worth, and Baker, have an average total population of 23,202 and an average growth in population of 0.19% from 2006 to 2016. Per capita income is approximately $20,000 in the Bank’s markets. Agriculture plays a major economic role in the Bank’s markets. Colquitt, Worth, Lowndes, and Baker Counties produce a large portion of our state’s crops, including cotton, peanuts, and a variety of vegetables.

 

The Corporation opened a loan production office at the beginning of 2016 and is currently building a full-service banking center in Tifton, the largest community in Tift County, Georgia. Tift County is an agricultural community as well as a major transportation hub where Interstate 75, U.S. Highway 82 and U.S. Highway 319 intersect. The total population of Tift County is 40,828.

 

Deposits

 

The Bank offers a full range of depository accounts and services to both consumers and businesses. At December 31, 2017, the Corporation’s deposit base, totaling $397,005,759, consisted of $127,668,471 in noninterest-bearing demand deposits (32.1% of total deposits), $154,911,744 in interest-bearing demand deposits including money market accounts (39.0% of total deposits), $30,793,864 in savings deposits (7.8% of total deposits), $37,579,089 in time deposits in amounts less than $100,000 (9.5% of total deposits), and $46,052,591 in time deposits of $100,000 or more (11.6% of total deposits).

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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, 2017, consumer installment, real estate (including construction and mortgage loans), and commercial (including financial and agricultural) loans represented approximately 1.1%, 76.7% and 22.2%, 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. The committee approves all individual loan or relationship requests that exceed $800,000. 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.

 

Mortgage Banking Services

 

The Bank recognizes revenue from mortgage banking services. In 2017, mortgage banking revenue was $155,053 compared with $354,627 in 2016.

 

Loan Review and Nonperforming Assets

 

The Bank regularly requires a review of its loan portfolio to determine deficiencies and corrective action to be taken. An independent loan review is conducted by an outside third party firm on a semiannual basis with their findings being reported annually to the Board’s Loan Committee and the Audit Committee. Also, the Bank’s external auditors as well as an outside third party firm conduct independent loan review adequacy tests and their findings are included annually as part of the overall report to the Audit Committee and to the Board of Directors.

 

Certain loans are monitored more often by the Credit Administration Department and the Loan Committee. These loans include nonaccruing 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 Asset/Liability Management Committee (“ALCO”) is established by the Bank’s Board of Directors and 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 ALCO manages the Bank’s overall acquisition and allocation of funds. At its monthly meetings, the ALCO 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. The Board of Directors reviews ALCO data quarterly.

 

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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.

 

Employees

 

The Bank had 114 full-time employees and three part-time employees at December 31, 2017. 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, savings and loan associations, credit unions and certain governmental agencies. Many of these competitors have substantially greater resources than we do and offer services that we do not currently provide. Such competitors may also have greater lending limits than the Bank. In addition, nonbank competitors are generally not subject to the extensive regulations applicable to us. Price (the interest charged on loans and paid on deposits) remains a means of competition within the services industry. The Bank also competes on the basis of service and convenience in providing financial services. The Bank ranks second out of twenty-one banks in a five county region (Baker, Brooks, Colquitt, Lowndes, and Worth) in deposit market share.

 

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 agency 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. There are statutory and regulatory requirements applicable to the payment of dividends by the Bank, as well as by the Corporation to its shareholders.

 

Under the regulations of the Georgia Department of Banking and Finance (“DBF”), a state bank with positive retained earnings may declare dividends without DBF approval if it 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. The FDIC has issued a policy statement providing that insured banks should generally only pay dividends out of current operating earnings. In addition to the formal statutes and regulations, regulatory authorities consider the adequacy of each of the Bank’s total capital in relation to its assets, deposits and other such items. Capital adequacy considerations could further limit the availability of dividends to the Bank. At December 31, 2017, net assets available from the Bank to pay dividends without prior approval from regulatory authorities totaled $1,932,331. For 2017, the Corporation’s cash dividend payout to shareholders was $1,120,872.

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Supervision and Regulation

 

The following is a brief summary of the supervision and regulation of the Corporation and the Bank as financial institutions and is not intended to be a complete discussion of all NYSE American LLC, state or federal rules, statutes and regulations affecting their operations, or that apply generally to business corporations or companies listed on NYSE American LLC. Changes in the rules, statutes and regulations applicable to the Corporation and the Bank can affect the operating environment in substantial and unpredictable ways.

 

General. 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 “Federal Reserve Act”). The Corporation is required to file annual and quarterly financial information with the Federal Reserve and is subject to periodic examination by the Federal Reserve.

 

The Federal Reserve 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. 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 Federal Reserve 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 are:

 

  ·         making, acquiring 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 and permitted 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.

 

Under this legislation, the Federal Reserve 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.

 

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The Corporation has no current plans to register as a financial holding company.

 

The Corporation must also register with the 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 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 of 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 Bank is regularly examined by the FDIC. As a state banking association organized under Georgia law, the Bank is subject to the supervision and the regular examination of the DBF. Both the FDIC and DBF must grant prior approval of any merger, consolidation or other corporation reorganization involving the Bank.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted in 2010, and resulting in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. In 2017, both the House of Representatives and the Senate introduced legislation that would repeal or modify provisions of the Dodd-Frank Act and significantly impact financial services regulation. Although the bills vary in content, certain key aspects include revisions to rules related to mortgage loans, delayed implementation of rules related to the Home Mortgage Disclosure Act, reform and simplification of certain Volcker Rule requirements, and raising the threshold for applying enhanced prudential standards to bank holding companies with total consolidated assets equal to or greater than $50 billion to those with total consolidated assets equal to or greater than $250 billion.

 

Capital Adequacy. Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

 

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. “Total capital” is composed of Tier 1 capital and Tier 2 capital. “Tier 1 capital” includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, less goodwill, most intangible assets and certain other assets. “Tier 2 capital” includes, among other things, perpetual preferred stock and related surplus not meeting the Tier 1 capital definition, qualifying mandatorily convertible debt securities, qualifying subordinated debt and allowances for possible loan and lease losses, subject to limitations. 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 Federal Reserve will require a bank holding company to maintain a leverage ratio well above minimum levels if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve. The FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve will also require banks to maintain capital well above minimum levels.

 

In July 2013, the Federal Reserve published the Basel III Capital Rules establishing a new comprehensive capital framework applicable to all depository institutions, bank holding companies with total consolidated assets above a certain threshold, and all savings and loan holding companies except for those that are substantially engaged in insurance underwriting or commercial activities (collectively, “banking organizations”). The rules implement the December 2010 framework proposed by the Basel Committee on Banking Supervision (the “Basel Committee”), known as “Basel III”, for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act.

 

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The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the prior U.S. risk-based capital rules. The Basel III Capital Rules:

  

  ·         defined the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios;
  ·         addressed risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replaced the prior risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords;
  ·         introduced a new capital measure called “common equity Tier 1” (“CET1”);
  ·         specified that Tier 1 capital consists of CET1 and “additional Tier 1 capital” instruments meeting specified requirements; and
  ·         implemented the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules.

  

The Basel III Capital Rules became effective for the Bank on January 1, 2015, subject to a phase-in period, but are not applicable to bank holding companies, like the Corporation, with less than $1 billion in total consolidated assets that meet certain criteria.

 

The Basel III Capital Rules require the Bank to maintain;

 

  ·         a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in over four years to 2.5%, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation);
  ·         a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6%, plus the capital conservation buffer (which is added to the 6% Tier 1 capital ratio as that buffer is phased in over four years to 2.5%, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation);
  ·         a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8%, plus the capital conservation buffer (which is added to the 8% Total capital ratio as that buffer is phased in over four years to 2.5%, effectively resulting in a minimum Total capital ratio of 10.5% upon full implementation); and
  ·         a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.

 

In addition, Section 38 of 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. The FDIC is required to resolve a bank when its ratio of tangible equity to total assets reaches 2%. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.

 

The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, as revised by the Basel III Capital Rules effective January 1, 2015, 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%, a Tier 1 risk-based ratio of at least 8%, a CET1 risk-based ratio of 6.5% and a leverage ratio of at least 5%; (2) an “adequately capitalized” institution has a Total risk-based capital ratio of at least 8%, a Tier 1 risk-based ratio of at least 6%, a CET1 risk-based ratio of 4.5% and a leverage ratio of at least 4%; (3) an “undercapitalized” institution has a Total risk-based capital ratio of under 8%, a Tier 1 risk-based ratio of under 6%, a CET1 risk-based ratio of under 4.5% or a leverage ratio of under 4%; (4) a “significantly undercapitalized” institution has a Total risk-based capital ratio of under 6%, a Tier 1 risk-based ratio of under 4%, a CET1 risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a “critically undercapitalized” institution has a ratio of tangible equity to total assets of 2% or less. Institutions in any of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions. The FDIC regulations also allow it to “downgrade” an institution to a lower capital category based on supervisory factors other than capital.

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As of December 31, 2017, the most recent notifications from the FDIC categorized the Bank as “well-capitalized” under current regulations.

 

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under prior capital standards, the effects of certain accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, certain banking organizations, including the Bank, may make a one-time permanent election to continue to exclude these items. The Bank made this election in the first quarter of 2015 in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Bank’s available-for-sale securities portfolio.

 

The “capital conservation buffer” is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015, and will be phased-in over a four-year period (beginning at 4.5% on January 1, 2015, and an additional 0.625% per year thereafter). The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

 

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Consistent with the Dodd-Frank Act, the Basel III Capital Rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250% risk weight. In addition, the Basel III Capital Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

 

As of December 31, 2017, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.

 

In November 2017, the federal banking agencies adopted a final rule to extend the regulatory capital treatment applicable during 2017 under the capital rules for certain items, including regulatory capital deductions, risk weights, and certain minority interest limitations. The relief provided under the final rule applies to banking organizations that are not subject to the capital rules’ advanced approaches, such as the Corporation. Specifically, the final rule extends the current regulatory capital treatment of mortgage servicing assets, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, significant investments in the capital of unconsolidated financial institutions in the form of common stock, and common equity tier 1 minority interest, tier 1 minority interest, and total capital minority interest exceeding the capital rules’ minority interest limitations.

-9-
 

In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred to as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of risk-weighted assets (“RWA”), which will be accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; constraining the use of internally modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust capital floor. Leadership of the federal banking agencies who are tasked with implementing Basel IV supported the revisions. Although it is uncertain at this time, we anticipate some, if not all, of the Basel IV accord may be incorporated into the capital requirements framework applicable to the Corporation.

 

Consumer Protection Laws. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (“CFPB”), and giving it the power to promulgate and enforce federal consumer protection laws. Depository institutions are subject to the CFPB’s rule writing authority, and existing federal bank regulatory agencies retain examination and enforcement authority for such institutions. The CFPB and the Corporation’s existing federal regulator, the FDIC, are focused on the following:

 

  ·         risks to consumers and compliance with the federal consumer financial laws;
  ·         the markets in which firms operate and risks to consumers posed by activities in those markets;
  ·         depository institutions that offer a wide variety of consumer financial products and services;
  ·         depository institutions with a more specialized focus; and
  ·         non-depository companies that offer one or more consumer financial products or services.

  

The CFPB experienced a leadership change in late 2017, which is subject to ongoing litigation and may impact the CFPB’s policies and supervision and enforcement efforts.

 

Volcker Rule. The Dodd-Frank Act amended the Federal Reserve Act to require the federal bank regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory provision is commonly called the “Volcker Rule”. The Federal Reserve adopted final rules implementing the Volcker Rule on December 10, 2013. The Volcker Rule and the final rules adopted by the Federal Reserve thereunder, do not have a material effect on the Corporation and the Bank, as we do not engage in businesses prohibited by the Volcker Rule. In the future, the Corporation may incur costs to adopt additional policies and systems to ensure compliance with the Volcker Rule.

 

Commercial Real Estate. The federal bank regulatory agencies, including the FDIC, restrict concentrations in commercial real estate lending and have noted that recent increases in banks’ commercial real estate concentrations have created safety and soundness concerns in the event of a significant economic downturn. The regulatory guidance mandates certain minimal risk management practices and categorizes banks with defined levels of such concentrations as banks requiring elevated examiner scrutiny. Although management believes that the Corporation’s credit processes and procedures meet the risk management standards dictated by this guidance, regulatory outcomes could effectively limit increases in the real estate concentrations in the Bank’s loan portfolio and require additional credit administration and management costs associated with those portfolios.

 

Source of Strength Doctrine. Federal Reserve regulations and policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this policy, the Corporation is expected to commit resources to support the Bank.

 

Loans. Inter-agency guidelines adopted by federal bank regulatory agencies mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital.

 

Transactions with Affiliates. Under federal law, all transactions between and among a state nonmember bank and its affiliates, which include holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. Generally, these requirements limit these transactions to a percentage of the bank’s capital and require all of them to be on terms at least as favorable to the bank as transactions with non-affiliates. In addition, a bank may not lend to any affiliate engaged in non-banking activities not permissible for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The FDIC is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a bank. The regulations also set forth various reporting requirements relating to transactions with affiliates.

-10-
 

Financial Privacy. In accordance with the GLB Act, federal banking regulatory agencies adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated 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.

 

Anti-Money Laundering Initiatives and the USA Patriot Act. 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 United States Department of the Treasury has issued a number of implementing regulations which apply various requirements of the USA Patriot Act of 2001 to 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.

 

Incentive Compensation. The federal banking agencies have issued guidance on incentive compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an institution, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the institution’s board of directors.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions like the Corporation that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the financial institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution’s safety and soundness and the institution is not taking prompt and effective measures to correct the deficiencies.

 

The scope and content of banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect our ability to hire, retain and motivate our key employees.

 

Cybersecurity. Recent cyber-attacks against banks and other financial institutions that resulted in unauthorized access to confidential customer information have prompted the federal bank regulatory agencies to issue extensive guidance on cybersecurity. These agencies are likely to devote more resources to this part of their safety and soundness examination than they may have in the past.

-11-
 

Fair Value. The Corporation’s impaired loans and foreclosed assets may be measured and carried at “fair value”, the determination of which requires management to make assumptions, estimates and judgments.  When a loan is considered impaired, a specific valuation allowance is allocated or a partial charge-off is taken, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  In addition, foreclosed assets are carried at the lower of cost or “fair value”, less cost to sell, following foreclosure.  “Fair value” is defined by U.S. generally accepted accounting principles (“GAAP”) “as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.”  GAAP further defines an “orderly transaction” as “a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets; it is not a forced transaction (for example, a forced liquidation or distress sale).”  Recently in the Bank’s markets, there have been very few transactions in the type of assets which represent the vast majority of the Bank’s impaired loans and foreclosed properties which reflect “orderly transactions” as so defined.  Instead, most transactions in comparable assets have been distressed sales not indicative of “fair value.”  Accordingly, the determination of fair value in the current environment is difficult and more subjective than it would be in a stable real estate environment.  Although management believes its processes for determining the value of these assets use appropriate factors and allow the Corporation to arrive at a fair value, the processes require management judgment and assumptions and the value of such assets at the time they are revalued or divested may be significantly different from management’s determination of fair value.  Because of this increased subjectivity in fair value determinations, there is greater than usual grounds for differences in opinions, which may result in increased disagreements between management and the Bank’s regulators, disagreements which could impair the relationship between the Bank and its regulators.

 

Future Legislation. Various legislation affecting financial institutions and the financial industry is, from time to time, introduced in Congress. Such legislation may change banking statutes and the operating environment of the Corporation and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of the Corporation or any of its subsidiaries. With the current economic environment, the nature and extent of future legislative and regulatory changes affecting financial institutions is not known at this time.

 

The Tax Act. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 and related regulations (the “Tax Act”) was signed into law. The Tax Act includes a number of provisions that affect the Corporation, including the following:

·Tax Rate. The Tax Act replaces the graduated corporate tax rates applicable under prior law, which imposed a maximum rate of 35% with a reduced 21% flat tax rate. Although the reduced tax rate generally should be favorable to us by resulting in increased earnings and capital, it will decrease the value of our existing deferred tax assets. GAAP requires that the impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly, the incremental income tax expense recorded by the Corporation in the fourth quarter of 2017 related to the Tax Act was $419 thousand, resulting primarily from a remeasurement of the Corporation’s deferred tax assets which now total $1.7 million.
·Employee Compensation. A “publicly held corporation” is not permitted to deduct compensation in excess of $1 million per year to certain employees. The Tax Act eliminates certain exceptions to the $1 million limit applicable under prior law related to performance-based compensation, such as equity grants and cash bonuses that are paid only on the attainment of performance goals. As a result, our ability to deduct certain compensation paid to our most highly compensated employees will now be limited.
·Business Asset Expensing. The Tax Act allows taxpayers immediately to expense the entire cost (instead of only 50% as under prior law) of certain depreciable tangible property and real property improvements acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain property). This 100% “bonus” depreciation is phased out proportionately for property placed in service on or after January 1, 2023 and before January 1, 2027 (with an additional year for certain property).
·Interest Expense. The Tax Act limits a taxpayer’s annual deduction of business interest expense to the sum of (i) business interest income and (ii) 30% of “adjusted taxable income,” defined as a business’s taxable income without taking into account business interest income or expense, net operating losses, and, for 2018 through 2021, depreciation, amortization and depletion. Because we generate significant amounts of net interest income, we do not expect to be impacted by this limitation.

 

The foregoing description of the impact of the Tax Act on us should be read in conjunction with Note 10 to the Corporation’s consolidated financial statements. 

-12-
 

Available Information

 

The Corporation’s website where you can find more information is located at www.sgb.bank. We make available free of charge, through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other reports filed or furnished pursuant to Section 13(a) or 15(d) under the Securities Exchange Act of 1934 (the “Exchange Act”). These reports are available as soon as reasonably practicable after those materials are electronically filed with the Securities and Exchange Commission (the “SEC”). Our SEC filings are publicly available at the SEC’s website located at www.sec.gov. You may also read and copy any document we file with the SEC at its Public Reference Facilities at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information about the Public Reference Room operations by calling the SEC at 1-800-SEC-0330.

 

Information provided on our website is not part of this report, and is not incorporated herein by reference unless otherwise specifically referenced as such in this report.

 

Executive Officers of the Corporation and the Bank

 

Executive officers are elected by the Board of Directors annually in May and hold office until the following May at the pleasure of the Board of Directors. The principal executive officers of the Corporation and the Bank and their ages, positions, and terms of office as of March 30, 2018, are as follows:

Name (Age) Principal Position

Executive

Officer Since

       
DeWitt Drew President and Chief Executive Officer of the 1999
  (61) Corporation and Bank  
       
John J. Cole, Jr. Executive Vice President and Chief Operating Officer 1984
  (68) of the Corporation and Bank  
       
Jeffery E. Hanson Executive Vice President and Chief Banking Officer 2011
  (52) of the Corporation and Bank  
       
Danny E. Singley Executive Vice President and Chief Credit Officer of 2002
  (63) the Bank  
       
Donna S. Lott Executive Vice President of the Corporation and 2008
  (42) Executive Vice President and Cashier of the Bank  
       
Karen T. Boyd Senior Vice President and Treasurer of the Corporation 2010
  (49) and Senior Vice President and Controller of the Bank  
     
Jeffrey (Jud) Moritz Senior Vice President of the Bank and Valdosta 2011
  (41) Region President  
       
Ross K. Dekle Senior Vice President of the Bank and Moultrie 2011
  (36) Region President  
       
Gregory P. Costin Senior Vice President of the Bank 2012
  (42)    
       
Pamela J. Yeager Senior Vice President of the Bank 2015
  (49)    
       
Chad J. Carpenter Senior Vice President of the Bank and Tifton 2015
  (43) Region President  

-13-
 

 

None of the above officers are related and there are no arrangements or understandings between them and any other person pursuant to which any of them was elected as an officer, other than arrangements or understandings with directors or officers of the Corporation or Bank acting solely in their capacities as such.

 

The following is a brief description of the business experience of the principal executive officers of the Corporation and the Bank. Except as otherwise indicated, each principal executive officer has been engaged in their present or last employment, in the same or similar position, for more than five years.

 

Mr. Drew is a director of the Corporation and the 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 the Corporation and the Bank.

 

Mr. Cole is a director of the Corporation and the Bank and became Executive Vice President and Chief Operating Officer of the Corporation and the Bank in 2011. He has been Executive and Senior Vice President of the Corporation and the Bank since 1992 and has served in various other positions with the Bank since 1976 and the Corporation since 1981.

 

Mr. Hanson became Executive Vice President of the Corporation in 2012 and Executive Vice President and Chief Banking Officer of the Bank in 2011. Previously, he was employed by Park Avenue Bank in Valdosta, Georgia, as Valdosta Market President and various other positions since 1994.

 

Mr. Singley became Executive Vice President and Chief Credit Officer of the Bank in 2014. Previously, he was appointed President Moultrie Region and Senior Vice President of the Bank in 2011 and served as Senior Vice President of the Bank since 2008. Prior to that, he had been Vice President of the Bank since 2002.

 

Ms. Lott became Executive Vice President of the Corporation and the Bank in 2017. She is also Cashier of the Bank. Previously, she served as Senior Vice President of the Bank since 2014. Prior to that, she served as Vice President of the Bank since 2008 and Assistant Vice President of the Bank since 2007.

 

Ms. Boyd became Senior Vice President and Treasurer of the Corporation in 2017. She is also Senior Vice President and Controller of the Bank since 2014. Previously, she served as Vice President of the Bank since 2010 and, prior to that, Assistant Vice President of the Bank since 2007.

 

Mr. Moritz became Senior Vice President of the Bank and Valdosta Region President in 2011. Previously, he was employed by Park Avenue Bank in Valdosta, Georgia, for five years and Regions Bank for five years.

 

Mr. Dekle became Senior Vice President of the Bank and Moultrie Region President in 2014. Previously, he served as Vice President of the Bank since 2011 and, prior to that, Assistant Vice President of the Bank since 2007.

 

Mr. Costin became Senior Vice President of the Bank in 2015. Previously, he served as Vice President of the Bank since 2012 and, prior to that, Assistant Vice President of the Bank since 2011.

 

Ms. Yeager became Senior Vice President of the Bank in 2015. Previously, she was employed for 11 years with Commercial Banking Company in Valdosta, Georgia. Prior to that, she was employed for 18 years with First State Bank and Trust in Valdosta, Georgia.

 

Mr. Carpenter became Senior Vice President of the Bank and Tifton Region President in 2015. Previously, he was employed by BB&T Bank in Tifton, Georgia, for 15 years where he most recently held the position of Area President for the communities of Tifton, Valdosta and Douglas.

 

-14-
 

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, 2017, 2016, and 2015, 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, 2017
  

Average

Balance

  Interest  Rate
   (Dollars in thousands)
ASSETS               
Cash and due from banks  $8,701   $—      —  %
                
Earning assets:               
     Interest-bearing deposits with banks   18,104    195    1.08%
     Loans, net (a) (b) (c)   314,559    16,345    5.20%
     Certificates of deposit in other banks   1,477    35    2.37%

Taxable investment securities

held to maturity

   53,036    1,285    2.42%

Nontaxable investment securities

held to maturity (c)

   45,286    1,713    3.78%

Nontaxable investment securities

available for sale (c)

   7,260    287    3.95%
     Other investment securities   2,150    103    4.79%
                
                    Total earning assets   441,872   $19,963    4.52%
Premises and equipment   11,835           
Other assets   11,035           
                
Total assets  $473,443           
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Noninterest-bearing demand deposits  $130,252   $—      —  %
                
Interest-bearing liabilities:               
     NOW accounts   20,606    40    0.19%
     Money market deposit accounts   129,313    381    0.29%
     Savings deposits   30,448    82    0.27%
     Time deposits   79,832    652    0.82%
     Federal funds purchased   80    1    1.25%
     Other borrowings   38,293    747    1.95%
                
                    Total interest-bearing liabilities   298,572    1,903    0.64%
Other liabilities   4,157           
                
                    Total liabilities   432,981           
                
Common stock   4,294           
Surplus   31,702           
Retained earnings   30,587           
Less treasury stock   (26,121)          
                
                    Total shareholders’ equity   40,462           
                
Total liabilities and shareholders’ equity  $473,443           
                
Net interest income and margin       $18,060    4.09%

 

(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 of $965 thousand.
(c) Reflects taxable equivalent adjustments using a tax rate of 34%.

 

-15-
 

 

   Year Ended December 31, 2016
  

Average

Balance

  Interest  Rate
   (Dollars in thousands)
ASSETS               
Cash and due from banks  $7,479   $—      —  %
                
Earning assets:               
     Interest-bearing deposits with banks   19,759    103    0.52%
     Loans, net (a) (b) (c)   277,908    14,863    5.35%
     Certificates of deposit in other banks   17    0    0.00%

Taxable investment securities

held to maturity

   47,620    1,168    2.45%

Nontaxable investment securities

held to maturity (c)

   51,151    1,888    3.69%

Nontaxable investment securities

available for sale (c)

   3,696    151    4.09%
     Other investment securities   1,941    92    4.74%
                
                    Total earning assets   402,092   $18,265    4.54%
Premises and equipment   11,355           
Other assets   10,155           
                
Total assets  $431,081           
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Noninterest-bearing demand deposits  $113,122   $—      —  %
                
Interest-bearing liabilities:               
     NOW accounts   17,623    30    0.17%
     Money market deposit accounts   112,434    285    0.25%
     Savings deposits   29,621    50    0.17%
     Time deposits   80,204    570    0.71%
     Federal funds purchased   1    0    0.00%
     Other borrowings   35,861    677    1.89%
                
                    Total interest-bearing liabilities   275,744    1,612    0.58%
Other liabilities   3,845           
                
                    Total liabilities   392,711           
                
Common stock   4,294           
Surplus   31,702           
Retained earnings   28,489           
Less treasury stock   (26,115)          
                
                    Total shareholders’ equity   38,370           
                
Total liabilities and shareholders’ equity  $431,081           
                
Net interest income and margin       $16,653    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 of $1,045 million.
(c) Reflects taxable equivalent adjustments using a tax rate of 34%.

 

-16-
 

 

   Year Ended December 31, 2015
  

Average

Balance

  Interest  Rate
   (Dollars in thousands)
ASSETS               
Cash and due from banks  $7,358   $—      —  %
                
Earning assets:               
     Interest-bearing deposits with banks   20,244    62    0.31%
     Loans, net (a) (b) (c)   232,791    12,767    5.48%
     Certificates of deposit in other banks   1,293    12    0.93%

Taxable investment securities

held to maturity

   59,365    1,344    2.26%

Nontaxable investment securities

held to maturity (c)

   52,580    1,913    3.64%

Nontaxable investment securities

available for sale (c)

   1,990    95    4.77%
     Other investment securities   1,608    74    4.60%
                
                    Total earning assets   369,871   $16,267    4.40%
Premises and equipment   11,525           
Other assets   9,856           
                
Total assets  $398,610           
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Noninterest-bearing demand deposits  $97,879   $—      —  %
                
Interest-bearing liabilities:               
     NOW accounts   16,963    30    0.18%
     Money market deposit accounts   110,478    262    0.24%
     Savings deposits   29,048    44    0.15%
     Time deposits   76,772    460    0.60%
     Federal funds purchased   42    0    0.00%
     Other borrowings   28,852    521    1.81%
                
                    Total interest-bearing liabilities   262,155    1,317    0.50%
Other liabilities   2,619           
                
                    Total liabilities   362,653           
                
Common stock   4,294           
Surplus   31,702           
Retained earnings   26,075           
Less treasury stock   (26,114)          
                
                    Total shareholders’ equity   35,957           
                
Total liabilities and shareholders’ equity  $398,610           
                
Net interest income and margin       $14,950    4.04%

 

(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 of $797 thousand.
(c) Reflects taxable equivalent adjustments using a tax rate of 34%.

 

-17-
 

 

Table 2 – Rate/Volume Analysis

 

The following table sets forth, for the indicated years ended December 31, a summary of the changes in interest paid resulting from changes in volume and changes in rate. The change due to volume is calculated by multiplying the change in volume by the prior year’s rate. The change due to rate is calculated by multiplying the change in rate by the prior year’s volume. The change attributable to both volume and rate is calculated by multiplying the change in volume by the change in rate.

 

           

Due To

Changes In (a)

   2017  2016 

Increase

(Decrease)

  Volume  Rate
   (Dollars in thousands)
Interest earned on:                         
     Interest-bearing deposits with banks  $195   $103   $92   $(8)  $100 
     Loans, net (b)   16,345    14,863    1,482    1,889    (407)
     Certificates of deposit in other banks   35    0    35    18    17 
     Taxable investment securities held to maturity   1,285    1,168    117    131    (14)

Nontaxable investment securities

held to maturity (b)

   1,713    1,888    (175)   (224)   49 

Nontaxable investment securities

available for sale (b)

   287    151    136    141    (5)
     Other investment securities   103    92    11    10    1 
               Total interest income   19,963    18,265    1,698    1,957    (259)
                          
Interest paid on:                         
     NOW accounts   40    30    10    6    4 
     Money market deposit accounts   381    285    96    46    50 
     Savings deposits   82    50    32    1    31 
     Time deposits   652    570    82    (3)   85 
     Federal funds purchased   1    0    1    0    1 
     Other borrowings   747    677    70    47    23 
               Total interest expense   1,903    1,612    291    97    194 
                          
Net interest earnings  $18,060   $16,653   $1,407   $1,860   $(453)

 

(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% for 2017 and 2016 in adjusting interest on nontaxable loans and securities to a fully taxable basis.

 

-18-
 

 

           

Due To

Changes In (a)

   2016  2015 

Increase

(Decrease)

  Volume  Rate
   (Dollars in thousands)
Interest earned on:                         
     Interest-bearing deposits with banks  $103   $62   $41   $(1)  $42 
     Loans, net (b)   14,863    12,767    2,096    2,404    (308)
     Certificates of deposit in other banks   0    12    (12)   (6)   (6)
     Taxable investment securities held to maturity   1,168    1,344    (176)   (304)   128 

Nontaxable investment securities

held to maturity (b)

   1,888    1,913    (25)   (54)   29 

Nontaxable investment securities

available for sale (b)

   151    95    56    68    (12)
     Other investment securities   92    74    18    16    2 
               Total interest income   18,265    16,267    1,998    2,123    (125)
                          
Interest paid on:                         
     NOW accounts   30    30    0    0    0 
     Money market deposit accounts   285    262    23    5    18 
     Savings deposits   50    44    6    1    5 
     Time deposits   570    460    110    22    88 
     Other borrowings   677    521    156    131    25 
               Total interest expense   1,612    1,317    295    159    136 
                          
Net interest earnings  $16,653   $14,950   $1,703   $1,964   $(261)

 

(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% for 2016 and 2015 in adjusting interest on nontaxable loans and securities to a fully taxable basis.

 

Table 3 - Investment Portfolio

 

The carrying values of investment securities for the indicated years are presented below:

 

   Year Ended December 31,
   2017  2016  2015
   (Dollars in thousands)
Securities held to maturity:               
State and municipal  $41,447   $50,436   $54,775 
Residential mortgage-backed   3,144    4,167    6,114 
     Total securities held to maturity  $44,591   $54,603   $60,889 
                
Securities available for sale:               
U.S. government treasuries  $968   $962   $0 
U.S. government agencies   43,860    40,985    42,642 
State and municipal   7,573    6,453    2,608 
Residential mortgage-backed   1,862    2,529    3,741 
Corporate notes   0    2,524    2,473 
Equity securities   100    112    12 
     Total securities available for sale  $54,363   $53,565   $51,476 

 

At December 31, 2017, the total investment portfolio decreased to $98,954,482, down $9,213,556, compared with $108,168,038 at December 31, 2016. The decrease was mainly due to calls and maturities of $9,059,769 of municipal securities and U.S. government agency securities, as well as residential mortgage-backed securities principal paydowns of $1,646,502. Additionally, we sold $5,741,211 of available for sale U.S. government agency securities, corporate notes, and Federal Agricultural Mortgage Corporation equity securities resulting in a net gain of $186,610. Partially offsetting these calls, maturities and sales were purchases of $7,304,139 of U.S. government agency securities and municipal securities.

 

-19-
 

The following table shows the contractual maturities of debt securities at December 31, 2017, and the weighted average yields (for nontaxable obligations on a fully taxable basis assuming a 34% tax rate) of such securities. Mortgage-backed securities amortize in accordance with the terms of the underlying mortgages, including prepayments as a result of refinancing and other early payoffs.

 

   MATURITY
  

Within

One Year

 

After One

But Within

Five Years

 

After Five

But Within

Ten Years

 

After

Ten Years

   Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield
   (Dollars in thousands)
Debt Securities:                                        
U.S. government treasuries  $0    0%  $0    0%  $968    2.25%  $0    0%
U.S. government agencies   0    0%   15,278    2.32%   28,582    2.42%   0    0%
State and municipal   9,813    2.78%   19,528    4.25%   14,959    2.97%   4,720    4.44%
Residential mortgage-backed   0    0%   217    2.81%   3,479    3.31%   1,310    2.74%
                                         
     Total  $9,813    2.78%  $35,023    3.40%  $47,988    2.97%  $6,030    4.07%

 

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, 2017 and 2016, securities carried at approximately $71,520,817 and $63,902,259, respectively, were pledged to secure public and trust deposits as required by law. At December 31, 2017, approximately $12,100,000 was over pledged and could be released if necessary for liquidity needs. At December 31, 2017 and 2016, no securities were pledged to secure our Federal Home Loan Bank advances.

 

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,
   2017  2016  2015  2014  2013
   (Dollars in thousands)

Commercial, financial and agricultural

  $73,146   $70,999   $58,173   $47,861   $43,675 
Real estate:                         
  Construction loans   22,287    25,999    19,831    12,257    15,859 
  Commercial mortgage loans   106,458    91,733    85,777    76,916    78,722 
  Residential loans   99,160    83,271    67,969    69,305    64,383 
  Agricultural loans   25,374    16,580    15,620    14,996    12,606 
Consumer & other   3,766    3,961    3,435    3,091    3,469 
       Total loans   330,191    292,543    250,805    224,426    218,714 
Less:                         
Unearned interest and discount   18    19    19    26    26 
Allowance for loan losses   3,044    3,124    3,032    3,114    3,078 
       Net loans  $327,129   $289,400   $247,754   $221,286   $215,610 

 

The following table shows maturities of the commercial, financial, agricultural, and construction loan portfolio at December 31, 2017.

 

  

Commercial,

Financial,

Agricultural and

Construction

   (Dollars in thousands)
Distribution of loans which are due:     
     In one year or less  $24,266 
     After one year but within five years   50,570 
     After five years   20,597 
          Total  $95,433 

 

 

-20-
 

The following table shows, for such loans due after one year, the amounts which have predetermined interest rates and the amounts which have floating or adjustable interest rates at December 31, 2017.

 

    Loans With        
    Predetermined   Loans With    
    Rates   Floating Rates   Total
    (Dollars in thousands)
Commercial, financial, agricultural and construction   $ 67,721   $ 3,446   $ 71,167

 

 

The following table presents information concerning outstanding balances of nonaccrual, past-due, and restructured loans as well as foreclosed assets for the indicated years. Respectively, they are defined as: (a) loans accounted for on a nonaccrual basis (“nonaccruals”); (b) loans which are contractually past due 90 days or more as to interest or principal payments and still accruing (“past-dues”); and (c) loans past due 30 days or more for which the terms have been modified to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (“troubled debt restructured”). The Corporation’s nonaccrual policy is located in Note 3 of the Corporation’s Notes to Consolidated Financial Statements.

 

      Accruing Loans      
   Nonaccrual Loans  90 Days Past-Due  Troubled Debt Restructured  Total  Foreclosed Assets
   (Dollars in thousands)
                
 December 31, 2017   $1,675   $0   $4   $1,679   $759 
 December 31, 2016   $246   $0   $914   $1,160   $127 
 December 31, 2015   $1,546   $1   $2,290   $3,837   $82 
 December 31, 2014   $786   $0   $215   $1,001   $274 
 December 31, 2013   $913   $0   $256   $1,169   $406 
 December 31, 2012   $25   $0   $199   $224   $1,690 

 

In 2017, nonaccrual loans increased due primarily to one $965,116 commercial customer relationship. Items in foreclosed assets includes one agricultural real estate property totaling $758,878.

 

The Bank performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. All loans risk rated Watch, Other Assets Especially Mentioned (OAEM), Substandard or Doubtful are listed on the Bank’s “watchlist.” Management monitors these loans closely and reviews their performance on a regular basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as being Loss are fully charged off. In addition, the Bank maintains a listing of “classified loans”, of which some loans may be potential problem loans, consisting of Substandard and Doubtful loans which totaled $6,336,000 at December 31, 2017. Potential problem loans are loans other than nonaccruals, past-dues and troubled debt restructured loans which management has doubt as to the borrower’s ability to comply with the present loan repayment terms.

 

Management closely monitors the watchlist for signs of deterioration to mitigate the growth in nonaccrual loans. At December 31, 2017, watchlist loans, inclusive of the “classified loans”, totaled $13,485,811, of which $8,590,081 are not considered impaired. See Note 3 of the Corporation’s Notes to Consolidated Financial Statements for further discussion on classification of potential problem loans.

-21-
 

 

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,
   2017  2016  2015  2014  2013
   (Dollars in thousands)
Average loans outstanding  $317,724   $281,006   $235,939   $223,295   $215,040 
                          

Amount of allowance for loan losses at beginning of period

  $3,124   $3,032   $3,114   $3,078   $2,845 
                          

Amount of loans charged off during period:

                         

   Commercial, financial and agricultural

   113    103    264    37    18 
   Real estate:                         
       Construction   0    0    0    121    0 
       Commercial   169    0    0    0    161 
       Residential   60    4    33    158    46 
       Agricultural   94    0    0    0    0 
    Consumer & other   12    9    22    26    9 
                          
        Total loans charged off   448    116    319    342    234 
                          
Amount of recoveries during period:                         

   Commercial, financial and agricultural

   64    28    42    12    23 
   Real estate:                         
       Construction   0    0    0    0    0 
       Commercial   0    0    0    0    5 
       Residential   0    17    22    30    13 
       Agricultural   0    0    0    0    0 
    Consumer & other   4    3    32    6    6 
                          
        Total loans recovered   68    48    96    48    47 
                          
Net loans charged off during period   380    68    223    294    187 

Additions to allowance for loan losses charged to operating expense during period

   300    160    141    330    420 
                          

Amount of allowance for loan losses at end of period

  $3,044   $3,124   $3,032   $3,114   $3,078 
                          

Ratio of net charge-offs during period to average loans outstanding for the period

   .12%   .02%   .09%   .13%   .09%

 

 

 

The allowance is based upon management’s analysis of the portfolio under current economic conditions. This analysis includes a study of loss experience, a review of delinquencies, and an estimate of the possibility of loss in view of the risk characteristics of the portfolio. Based on the above factors, management considers the current allowance to be adequate.

 

-22-
 

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 based on historical experience of net charge-offs. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. 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, 2017  December 31, 2016  December 31, 2015
Category  Allocation 

% of Total

Loans

  Allocation 

% of Total

Loans

  Allocation 

% of Total

Loans

   (Dollars in thousands)

Commercial, financial and agricultural

  $324    22.2%  $191    24.3%  $145    23.2%
Real estate:                              
     Construction   1,043    6.8%   1,043    8.9%   1,043    7.9%
     Commercial   1,057    32.2%   1,192    31.3%   1,192    34.2%
     Residential   416    30.0%   420    28.5%   382    27.1%
     Agricultural   12    7.7%   87    5.7%   86    6.2%
Consumer & other   192    1.1%   191    1.3%   184    1.4%
                               
          Total  $3,044    100.0%  $3,124    100.0%  $3,032    100.0%

 

   December 31, 2014  December 31, 2013
Category  Allocation 

% of Total

Loans

  Allocation 

% of Total

Loans

    

Commercial, financial and agricultural

  $300    21.3%  $298    20.0%
Real estate:                    
     Construction   1,043    5.4%   1,032    7.3%
     Commercial   1,192    34.3%   1,192    36.0%
     Residential   313    30.9%   301    29.3%
     Agricultural   86    6.7%   77    5.8%
Consumer & other   180    1.4%   178    1.6%
                     
          Total  $3,114    100.0%  $3,078    100.0%

 

 

The calculation is based upon total loans including unearned interest and discount. Management believes that the portfolio is diversified and, to a large extent, secured without undue concentrations in any specific risk area. Control of loan quality is regularly monitored by management, the loan committee, 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 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,
   2017  2016  2015
   (Dollars in thousands)
Noninterest-bearing demand deposits  $130,252   $113,122   $97,879 
                
NOW accounts   20,606    17,623    16,963 
Money market deposit accounts   129,313    112,435    110,478 
Savings   30,448    29,621    29,048 
Time deposits   79,832    80,204    76,772 
                
        Total interest-bearing deposits   260,199    239,883    233,261 
                
        Total average deposits  $390,451   $353,005   $331,140 

 

-23-
 

 

The maturity of certificates of deposit of $100,000 or more as of December 31, 2017, are presented below.

 

   (Dollars in thousands)
    
3 months or less  $7,864 
Over 3 months through 6 months   9,994 
Over 6 months through 12 months   21,908 
Over 12 months   6,287 
      
       Total outstanding certificates of deposit of $100,000 or more  $46,053 

 

Table 6 - Return on Equity and Assets

 

Certain financial ratios are presented below.

 

   Year Ended December 31,
   2017  2016  2015
          
Return on average assets   0.80%   0.94%   0.85%
                
Return on average equity   9.41%   10.51%   9.38%
                

Dividend payout (dividends paid divided by net income)

   29.44%   26.53%   30.21%
                
Average equity to average assets   8.55%   8.90%   9.02%

 

Forward-Looking Statements

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of the Corporation and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.

-24-
 

 

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 any 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 banking system, financial markets, and general economic conditions;

·         the Corporation’s ability to raise capital;

·         the Corporation’s ability to maintain liquidity or access other sources of funding;

·         the impact of the Tax Act;

·         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 from financial institutions and other financial service providers;

·         the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations;

·         changes in regulatory capital and other requirements;

·         changes in regulation and monetary policy;

·         losses due to fraudulent and negligent conduct of customers, service providers or 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;

·         a cybersecurity incident involving the misappropriation, loss or unauthorized disclosure or use of confidential information of our customers; and

·         weather, natural disasters and other catastrophic events and other factors discussed in the Corporation’s other filings with the SEC.

 

The foregoing list of factors is not exclusive, and readers are cautioned not to place undue reliance on any forward-looking statements. 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 SEC.

 

ITEM 1A. RISK FACTORS

 

An investment in the Corporation’s common stock and the Corporation’s financial results are subject to a number of risks. Investors should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K and the documents incorporated by reference. Additional risks and uncertainties, including those generally affecting the industry in which the Corporation operates and risks that management currently deems immaterial, may arise or become material in the future and affect the Corporation’s business.

As a bank holding company, adverse conditions in the general business or economic environment could have a material adverse effect on the Corporation’s financial condition and results of operation.

 

Weaknesses or adverse changes in business and economic conditions generally or specifically in the markets in which the Corporation operates could adversely impact our business, including causing one or more of the following negative developments:

 

  ·         a decrease in the demand for loans and other products and services offered by the Corporation;
  ·         a decrease in the value of the Corporation’s loans secured by consumer or commercial real estate;
  ·         an impairment of the Corporation’s assets, such as its intangible assets, goodwill, or deferred tax assets; or
  ·         an increase in the number of customers or other counterparties who default on their loans or other obligations to the Corporation, which could result in a higher level of nonperforming assets, net charge-offs and provision for loan losses.

 

For example, if the Corporation is unable to continue to generate, or demonstrate that it can continue to generate, sufficient taxable income in the near future, then it may not be able to fully realize the benefits of its deferred tax assets. Such a development, or one or more other negative developments resulting from adverse conditions in the general business or economic environment, some of which are described above, could have a material adverse effect on the Corporation’s financial condition and results of operations.

-25-
 

 

The Corporation’s ability to raise capital could be limited, affect its liquidity, and could be dilutive to existing shareholders.

 

Current conditions in the capital markets are such that traditional sources of capital may not be available to the Corporation on reasonable terms if it needed to raise capital.  In such case, there is no guarantee that the Corporation will be able to borrow funds or successfully raise additional capital at all or on terms that are favorable or otherwise not dilutive to existing shareholders.

 

Liquidity is essential to the Corporation’s businesses and it relies on external sources to finance a significant portion of its operations.

 

Liquidity is essential to the Corporation’s businesses. The Corporation’s capital resources and liquidity could be negatively impacted by disruptions in its ability to access these sources of funding. Factors that the Corporation cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, could impair its ability to raise funding. Other financial institutions may be unwilling to extend credit to banks because of concerns about the banking industry and the economy generally and there may not be a viable market for raising short or long-term debt or equity capital. In addition, the Corporation’s ability to raise funding could be impaired if lenders develop a negative perception of its long-term or short-term financial prospects. Such negative perceptions could be developed if the Corporation is downgraded or put on (or remains on) negative watch by the rating agencies, suffers a decline in the level of its business activity or regulatory authorities take significant action against it, among other reasons. If the Corporation is unable to raise funding using the methods described above, it would likely need to finance or liquidate unencumbered assets to meet maturing liabilities. The Corporation may be unable to sell some of its assets, or it may have to sell assets at a discount from market value, either of which could adversely affect its results of operations and financial condition.

 

The Corporation’s construction and land development loans are subject to unique risks that could adversely affect earnings.

 

The Corporation’s construction and land development loan portfolio was $22.3 million at December 31, 2017, comprising 6.8% of total loans. Construction and land development loans are often riskier than home equity loans or residential mortgage loans to individuals. In the event of a general economic slowdown, they would represent higher risk due to slower sales and reduced cash flow that could impact the borrowers’ ability to repay on a timely basis. In addition, although regulations and regulatory policies affecting banks and financial services companies undergo continuous change and we cannot predict when changes will occur or the ultimate effect of any changes, there has been recent regulatory focus on construction, development and other commercial real estate lending. Federal policies applicable to construction, development or other commercial real estate loans make us subject to substantial limitations with respect to making such loans, increase the costs of making such loans, and require us to have a greater amount of capital to support this kind of lending, all of which could have a material adverse effect on our profitability or financial condition.

 

Recent performance may not be indicative of future performance.

 

Various factors, such as economic conditions, regulatory and legislative considerations, competition and the ability to find and retain talented people, may impede the Corporation’s ability to remain profitable.

 

Deterioration in asset quality could have an adverse impact on the Corporation.

 

A significant source of risk for the Corporation arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of diverse real and personal property that may be affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, environmental contamination and other external events. In addition, decreases in real estate property values due to the nature of the Bank’s loan portfolio, over 76% of which is secured by real estate, could affect the ability of customers to repay their loans. The Bank’s loan policies and procedures may not prevent unexpected losses that could have a material adverse effect on the Corporation’s business, financial condition, results of operations, or liquidity.

-26-
 

  

Changes in prevailing interest rates may negatively affect the results of operations of the Corporation and the value of its assets.

 

The Corporation’s earnings depend largely on the relationship between the yield on earning assets, primarily loans and investments, and the cost of funds, primarily deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities and the level of nonperforming assets. Fluctuations in interest rates affect the demand of customers for the Corporation’s products and services. In addition, interest-bearing liabilities may re-price or mature more slowly or more rapidly or on a different basis than interest-earning assets. Significant fluctuations in interest rates could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.

 

Changes in the level of interest rates may also negatively affect the value of the Corporation’s assets and its ability to realize book value from the sale of those assets, all of which ultimately affect earnings.

 

If the Corporation’s allowance for loan losses is not sufficient to cover actual loan losses, earnings would decrease.

 

The Bank’s loan customers may not repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to assure repayment. The Bank may experience significant loan losses which would have a material adverse effect on the Corporation’s operating results. Management makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. The Corporation maintains an allowance for loan losses in an attempt to cover any loan losses inherent in the portfolio. In determining the size of the allowance, management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and nonaccruals, national and local economic conditions and other pertinent information. As a result of these considerations, the Corporation has from time to time increased its allowance for loan losses. For the year ended December 31, 2017, the Corporation recorded an allowance for possible loan losses of $3.04 million, compared with $3.12 million for the year ended December 31, 2016. If these assumptions are incorrect, the allowance may not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio.

 

The Corporation may be subject to losses due to fraudulent and negligent conduct of the Bank’s loan customers, third party service providers and employees.

 

When the Bank make loans to individuals or entities, they rely upon information supplied by borrowers and other third parties, including information contained in the applicant’s loan application, property appraisal reports, title information and the borrower’s net worth, liquidity and cash flow information.  While they attempt to verify information provided through available sources, they cannot be certain all such information is correct or complete.  The Bank’s reliance on incorrect or incomplete information could have a material adverse effect on the Corporation’s profitability or financial condition.

 

Technology difficulties or failures or cyber security breaches of our network security could have a material adverse effect on the Corporation.

 

The Corporation depends upon data processing, software, and communication and information exchange on a variety of computing platforms and networks. The computer platforms and network infrastructure we use could be vulnerable to unforeseen hardware and cyber security issues. The Corporation cannot be certain that all of its systems are entirely free from vulnerability to cyber-attack or other technological difficulties or failures. The Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and the Corporation could subject us to additional regulatory scrutiny, damage our reputation, result in a loss of customers and expose us to claims from customers. Any of these results could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.

-27-
 

The Corporation’s business is subject to the success of the local economies and real estate markets in which it operates.

 

The Corporation’s banking operations are located in southwest Georgia. Because of the geographic concentration of its operations, the Corporation’s success depends largely upon economic conditions in this area, which include volatility in the agricultural market, influx and outflow of major employers in the area, and minimal population growth throughout the region. Deterioration in economic conditions in the communities in which the Corporation operates could adversely affect the quality of the Corporation’s loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity. The Corporation is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of more diverse economies.

 

The Corporation may face risks with respect to its ability to execute its business strategy.

 

The financial performance and profitability of the Corporation will depend on its ability to execute its strategic plan and manage its future growth. Moreover, the Corporation’s future performance is subject to a number of factors beyond its control, including pending and future federal and state banking legislation, regulatory changes, unforeseen litigation outcomes, inflation, lending and deposit rate changes, interest rate fluctuations, increased competition and economic conditions. Accordingly, these issues could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.

 

The Corporation depends on its key personnel, and the loss of any of them could adversely affect the Corporation.

 

The Corporation’s success depends to a significant extent on the management skills of its existing executive officers and directors, many of whom have held officer and director positions with the Corporation for many years. The loss or unavailability of any of its key personnel, including DeWitt Drew, President and CEO; John J. Cole, Jr., Executive Vice President and COO; Jeffery E. Hanson, Executive Vice President and CBO; Danny E. Singley, Executive Vice President and CCO; and Karen T. Boyd, Senior Vice President & Treasurer, could have a material adverse effect on the Corporation’s business, financial condition, and results of operations or liquidity.

 

Competition from financial institutions and other financial service providers may adversely affect the Corporation.

 

The banking business is highly competitive, and the Corporation experiences competition in its markets from many other financial institutions. The Corporation competes with these other financial institutions both in attracting deposits and in making loans. Many of its competitors are well-established, larger financial institutions that are able to operate profitably with a narrower net interest margin and have a more diverse revenue base. The Corporation may face a competitive disadvantage as a result of its smaller size, lack of geographic diversification and inability to spread costs across broader markets. There can be no assurance that the Corporation will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.

 

The short-term and long-term impact of the changing regulatory capital requirements is uncertain.

 

The Basel III Capital Rules include minimum risk-based capital and leverage ratios, which are being phased in and modify the capital and asset definitions for purposes of calculating those ratios. Among other things, the Basel III Capital Rules established a common equity Tier 1 minimum capital requirement of 4.5%, a higher minimum Tier 1 capital to risk-weighted assets requirement of 6% and Total capital to risk-weighted assets of 8%. In addition, to be considered “well-capitalized”, the rules include a common equity Tier 1 capital requirement of 6.5% or greater and a higher Tier 1 capital to risk-weighted assets requirement of 8% or greater. Moreover, the rules limit a banking organization’s capital distributions and certain discretionary bonus payments if such banking organization does not hold a “capital conservation buffer” consisting of a 2.5% of common equity Tier 1 capital in addition to the 4.5% minimum common equity Tier 1 requirement and the other amounts necessary to meet the minimum risk-based capital requirements that will be phased in and fully effective in 2019.

 

-28-
 

The application of the more stringent capital requirements described above could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in additional regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in us modifying our business strategy and could restrict dividends.

 

In 2017, both chambers of Congress proposed comprehensive financial regulatory reform bills that would amend the Dodd-Frank Act and that could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. Although the bills vary in content, certain key aspects include revisions to rules related to mortgage loans, delayed implementation of rules related to the Home Mortgage Disclosure Act, reform and simplification of certain Volcker Rule requirements, and raising the threshold for applying enhanced prudential standards to bank holding companies with total consolidated assets equal to or greater than $50 billion to those with total consolidated assets equal to or greater than $250 billion. At this time, a timeline for presentment and enactment of such regulatory relief is uncertain and adoption of any such legislation may not result in a meaningful reduction of our regulatory burden and attendant costs. The failure to adopt financial reform regulation would result in our continuing to be subject to significant regulatory compliance costs.

 

The financial services industry is experiencing leadership changes at the federal banking agencies, which may impact regulations and government policy applicable to us.

 

In 2017 and early 2018, Congress confirmed a new Chairman of the Federal Reserve and a new Vice Chairman for Supervision at the Federal Reserve. In addition, the President nominated a new Chairwoman of the FDIC, and the Director of the CFPB resigned and was replaced by an interim Director. The President, senior members of Congress, and many among this new leadership group have advocated for significant reduction of financial services regulation, which may cause broader economic changes due to changes in governing ideology and governing style. As a result of the changes and impending changes in agency leadership, new regulatory initiatives may be stalled and certain previously enacted regulations may be revisited. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. At this time, further impact of these leadership changes and the potential impact on the regulatory requirements applicable to us and our supervision by these agencies is uncertain.

 

We could be subject to changes in tax laws, regulations and interpretations or challenges to our income tax provision.

 

We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Any change in enacted tax laws, rules or regulatory or judicial interpretations, any adverse outcome in connection with tax audits in any jurisdiction or any change in the pronouncements relating to accounting for income taxes could adversely affect our effective tax rate, tax payments and results of operations. In addition, changes in enacted tax laws, such as adoption of a lower income tax rate in any of the jurisdictions in which we operate, could impact our ability to obtain the future tax benefits represented by our deferred tax assets.

 

The Tax Act may have negative effects on our financial performance. For example, the Tax Act enacted limitations on certain deductions which will partially offset the anticipated increase in net earnings from a lower tax rate. In addition, as a result of the lower corporate tax rate, we are required under GAAP to record a tax expense due to remeasurement in the fourth quarter of 2017 with respect to our deferred tax asset amounting to $419 thousand. The impact of the Tax Act may differ from the foregoing, possibly materially, due to changes in interpretations or in assumptions that we have made, guidance or regulations that may be promulgated, and other actions that we may take as a result of the Tax Act. Similarly, the Bank’s customers are likely to experience varying effects from both the individual and business tax provisions of the Tax Act and such effects, whether positive or negative, may have a corresponding impact on our business and the economy as a whole.

-29-
 

 

Changes in government regulation or monetary policy could adversely affect the Corporation.

 

The Corporation and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the Corporation conducts its banking business, undertakes new investments and activities and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit holders of the Corporation’s securities. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve, significantly affects credit conditions for the Corporation, and any unfavorable change in these conditions could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity. See Part I, Item 1, “Supervision and Regulation.”

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

There are no unresolved comments from the SEC staff regarding the Corporation’s periodic or current reports under the Exchange Act.

 

ITEM 2. PROPERTIES

 

The executive offices of the Corporation are located in the SGB Wealth Strategies office at 25 Second Avenue S.W. Moultrie, Georgia. The main banking office and operations center of the Bank are located in a 22,000 square foot facility at 201 First Street, S.E., Moultrie, Georgia. The Trust and Brokerage operations are located in the SGB Wealth Strategies office. The Bank’s Administrative Services office is located across the street from the main office at 205 Second Street, S.E., Moultrie, Georgia. This building is also used for training and meeting rooms, record storage, and a drive-thru teller facility.

 

Name

 

 

Address

 

Square Feet

       
Main Office  201 First Street, SE, Moultrie, GA  31768   22,000 
Old Operations Center  11 Second Avenue, SW, Moultrie, GA  31768   5,000 
SGB Wealth Strategies Office  25 Second Avenue, SW, Moultrie, GA  31768   9,400 
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 Branch  168 Georgia Highway 91, Newton, GA  39870   4,400 
Sylvester Branch  300 North Main Street, Sylvester, GA  31791   12,000 
North Valdosta Branch  3500 North Valdosta Road, Valdosta, GA 31602   5,900 
Valdosta Commercial Banking Center  3520 North Valdosta Road, Valdosta, GA 31602   10,700 
Baytree Branch  1404 Baytree Road, Valdosta, GA 31602   3,000 

 

 

All of the buildings and land, which include parking and drive-thru teller facilities, are owned by the Bank. There are two automated teller machines on the Bank’s main office premises and one in each of the Baker County, Sylvester, North Valdosta and Baytree branch offices. These automated teller machines are linked to the Passport network of automated teller machines. The Bank also leases space for a loan production office in Tifton, Georgia. A full-service branch office in Tifton, Georgia, is currently under construction and expected to be open in the second quarter of 2018. The new Tifton banking center will be approximately 9,000 square feet located at 205 East 8th Street, Tifton, Georgia. The Bank owns a property in Pavo, Georgia, that was formerly a branch office. It is considered bank property held for sale.

 

ITEM 3. LEGAL PROCEEDINGS

 

In the ordinary course of operations, the Corporation, the Bank and Empire are defendants in various legal proceedings. Additionally, in the ordinary course of business, the Corporation, the Bank and Empire are subject to regulatory examinations and investigations. In the opinion of management, there is no pending or threatened proceeding in which an adverse decision will result in a material adverse change in the consolidated financial condition or results of operations of the Corporation. No material proceedings terminated in the fourth quarter of 2017.

-30-
 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

The Corporation’s common stock trades on the NYSE American LLC under the symbol “SGB”. The closing price on December 31, 2017, was $24.00. Below is a schedule of the high and low stock prices for each quarter of 2017 and 2016.

 

2017
For the Quarter  Fourth  Third  Second  First
             
 High   $24.00   $21.99   $23.50   $25.00 
                       
 Low   $19.65   $18.50   $18.93   $18.50 

 

2016
For the Quarter  Fourth  Third  Second  First
             
 High   $19.99   $17.00   $15.25   $15.95 
                       
 Low   $15.33   $14.51   $14.00   $13.27 

 

As of December 31, 2017, there were 414 record holders of the Corporation’s common stock. Also, there were approximately 570 additional shareholders who held shares through trusts and brokerage firms.

 

Dividends

 

Cash dividends paid on the Corporation’s common stock were $0.44 per share in 2017 and $0.42 per share in 2016. Our dividend policy objective is to pay out a portion of earnings in dividends to our shareholders in a consistent manner over time. 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 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 Part I, Item 1, “Business – Payment of Dividends.” The Corporation and its predecessors have paid cash dividends for the past eighty-nine consecutive years.

 

Share Repurchases

 

On behalf of the 2013 Omnibus Incentive Plan Restricted Stock Awards, the Corporation purchased 5,932 shares of its outstanding common stock at an average price of $20.62 per share. Of the shares purchased, 4,271 shares were awarded as Restricted Stock Awards.

 

On October 26, 2016, the Corporation announced that its Board of Directors had authorized a program to repurchase up to $1.75 million of its outstanding shares of common stock through October 31, 2017. Under the program, the shares may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program depended on a number of factors, including the market price of the Corporation’s common stock, general market and economic conditions, and applicable legal requirements. In November 2016, 400 shares were purchased at an average price of $16.64 per share. No additional shares were repurchased during January to October 31, 2017, at which time this share repurchase program expired.

-31-
 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table presents information as of December 31, 2017, with respect to shares of common stock of the Corporation that may be issued under the Key Individual Stock Option Plan, the Director’s and Executive Officers Stock Purchase Plan, and the 2013 Omnibus Incentive Plan. No additional option shares can be granted under the Key Individual Stock Option Plan. During 2017, 4,271 shares of restricted stock were issued under the 2013 Omnibus Incentive Plan.

 

 

 

 

Plan Category

  Number of Securities to be Issued upon Exercise of Outstanding Options/Vesting 

 

Weighted Average Exercise Price of Outstanding Options/Vesting

 

 

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans

          
Equity compensation plans approved by shareholders (1)   4,271   $20.64    357,798 
Equity compensation plans not approved by shareholders (2)   0    0.00    0 
Total   4,271   $20.64    357,798 

 

(1) The Key Individual Stock Option Plan, the Directors and Executive Officers Stock Purchase Plan, and the 2013 Omnibus Incentive Plan.

(2) Excludes shares issued under the 401(k) Plan.

 

Sales of Unregistered Securities

 

The Corporation has not sold any unregistered securities in the past three years.

-32-
 

  

Performance Graph

 

The following graph compares the cumulative total shareholder return of the Corporation’s common stock with SNL’s Southeast Bank Index, SNL Bank $250M-$500M Index, the S&P 500 Index and the NASDAQ Composite Index. SNL’s Southeast Bank Index is a compilation of the total return to shareholders over the past five years of a group of 77 banks located in the southeastern states of Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia. The SNL Bank $250M-$500M Index is a compilation of the total return to shareholders over the past five years of a group of nine banks in the United States with assets between $250 million and $500 million. The comparison assumes $100 was invested January 1, 2012, and that all semi-annual and quarterly dividends were reinvested each period. The comparison takes into consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2011.

 

The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of possible future performance of the Corporation’s common stock.

 

      Period Ending   
Index  12/31/12  12/31/13  12/31/14  12/31/15  12/31/16  12/31/17
Southwest Georgia Financial Corporation   100.00    121.06    153.86    175.41    225.82    275.51 
SNL Bank $250M-$500M Index   100.00    135.79    154.94    177.27    222.44    271.83 
SNL Southeast Bank Index   100.00    135.52    152.63    150.24    199.45    246.72 
S&P 500 Index   100.00    132.39    150.51    152.59    170.84    208.14 
NASDAQ Composite Index   100.00    140.12    160.78    171.97    187.22    242.71 

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

-33-
 

  

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 trust, retail brokerage and insurance services. In December 2017, the Bank dissolved its commercial mortgage banking services subsidiary, Empire Financial Services. Our primary market area incorporates Colquitt County, where we are headquartered, as well as Baker, Lowndes, Tift and Worth Counties, each contiguous with Colquitt County, and the surrounding counties of southwest Georgia. We have five full service banking facilities, six automated teller machines, and a loan production office in Tifton, Georgia.

 

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, about seven years ago, we began expanding geographically in Valdosta, Georgia, with two full-service banking centers, and added a commercial banking center in August 2014. Continuing to expand our geographic footprint, in January 2016, a loan production office was opened in the neighboring community of Tifton, Georgia. Construction is nearing completion on a full-service banking center in Tifton, Georgia, and is expected to be open during second quarter 2018.

 

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 and the interest paid on interest-bearing liabilities. The Corporation’s earning assets are primarily loans, securities, and short-term interest-bearing deposits with banks, and the interest-bearing liabilities are principally customer deposits and borrowings. Net interest income is highly sensitive to fluctuations in interest rates. To address interest rate fluctuations, we manage our balance sheet in an effort to diminish the impact should interest rates suddenly change.

 

Broadening our revenue sources helps to reduce the risk and exposure of our financial results to the impact of changes in interest rates, which are outside of our control. Sources of noninterest income include our insurance agency, fees on customer accounts, and trust and retail brokerage services through our Wealth Strategies division. In 2017, noninterest income, at 18.4% of the Corporation’s total revenue, decreased mostly due to lower income from mortgage banking services when compared with 2016.

 

Our profitability is also impacted by operating expenses such as salaries, employee benefits, occupancy, and income taxes. Our lending activities are significantly influenced by regional and local factors such as 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.

 

Although the economy is slowly recovering, regulatory burdens continue to outpace growth opportunities. Despite these challenges, we will continue to focus on our customers and believe that our strategic positioning, strong balance sheet and capital levels position us to sustain our franchise, capture market share and build customer loyalty.

-34-
 

 

At the end of 2017, the Corporation’s nonperforming assets increased to $2.43 million from $373 thousand at December 31, 2016, due to increases of $1.43 million in nonaccrual loans and an increase of $632 thousand in foreclosed assets when compared to the end of 2016.

 

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, 2017, is adequate; however, under adverse 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

 

For the year ended December 31, 2017, net income was $3.81 million, down $226 thousand from net income of $4.03 million for 2016. The decline in net income is due to the revaluation of net deferred tax assets based on the enactment of the Tax Act resulting in a $419 thousand impact to provision for income taxes. Absent the deferred tax impairment, net income would have been $4.23 million, or a 4.8% increase compared with the full year 2016. Net interest income for 2017 increased $1.44 million to $17.24 million due primarily to a $1.50 million increase in interest income and fees on loans compared with last year. Growth in net interest income more than offset the $915 thousand increase in noninterest expense due in large part to higher professional fees, migration to a new core processing provider, and investment in personnel. Noninterest income also decreased $147 thousand mainly due to lower income from mortgage banking services. Net income was $1.49 per diluted share for 2017 compared with a net income of $1.58 per diluted share for 2016. Excluding the deferred tax impairment, net income would have been $1.66 per diluted share for 2017.

 

For the year ended December 31, 2016, net income was $4.03 million, up $660 thousand from net income of $3.37 million for 2015. The improvement in net income was primarily due to a $1.67 million increase in net interest income after provision for loan losses. Interest income and fees on loans increased $2.10 million due to a $45.1 million increase in average loan volume. Also, positively impacting our net income was a $199 thousand increase in noninterest income compared to 2015. Partially offsetting these improvements in net earnings was an increase in salaries and employee benefits of $852 thousand due to investment in personnel for the expanding Valdosta and Tifton markets compared with 2015. Interest expense also increased $295 thousand mainly due to increased average borrowings and higher interest rates on deposits. On a per share basis, we had a net income of $1.58 per diluted share for 2016 compared with a net income of $1.32 per diluted share for 2015.

 

We measure our performance on selected key ratios, which are provided in the following table:

 

   2017  2016  2015
Return on average total assets   0.80%   0.94%   0.85%
Return on average shareholders’ equity   9.41%   10.51%   9.38%
Average shareholders’ equity to average total assets   8.55%   8.90%   9.02%
Net interest margin (tax equivalent)   4.09%   4.14%   4.04%

-35-
 

 

Net Interest Income

 

Net interest income after provision for loan losses increased $1.30 million, or 8.3%, to $16.94 million for 2017 when compared with 2016. Total interest income increased $1.73 million which more than offset an increase in total interest expense of $290 thousand. The Corporation recognized a $300 thousand provision for loan losses in 2017, a $140 thousand increase compared with $160 thousand in 2016. Interest income and fees on loans increased $1.50 million when compared with 2016 resulting from growth in average loans of $36.7 million. Also, interest income on investment securities increased $104 thousand mainly due to an increase in average investment securities volume of $3.3 million compared with 2016. Interest on deposits in other banks also increased $92 thousand compared with the same period last year. Partially offsetting these increases in net interest income, interest paid on deposits increased $218 thousand to $1.15 million and interest paid on total borrowings increased by $72 thousand when compared with the prior year. The average rate paid on average time deposits of $79.8 million increased 11 basis points when compared with 2015.

 

For the year 2016, net interest income after provision for loan losses increased $1.67 million, or 12.0%, to $15.64 million when compared with 2015. Total interest income increased $2.0 million which more than offset an increase in total interest expense of $295 thousand. The Corporation recognized a $160 thousand provision for loan losses in 2016, a $19 thousand increase compared with $141 thousand in 2015. Interest income and fees on loans increased $2.1 million when compared with 2015 resulting from growth in average loans of $45.1 million. Interest on deposits in other banks also increased $41 thousand compared with the same period in 2015. Partially offsetting these increases in net interest income, interest paid on total borrowings increased by $156 thousand when compared with 2015, and interest paid on deposits increased $139 thousand to $935 thousand at the end of 2016. The average rate paid on average time deposits of $80.2 million increased 11 basis points when compared with 2015. Also, decreases of $146 thousand in interest income on investment securities were mainly due to a decline in average investment securities volume of $11.1 million compared with 2015.

 

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 decreased 5 basis points to 4.09% for 2017 when compared with 2016. The decrease in net interest margin was primarily impacted by the increased volume and rate paid on interest bearing liabilities of 6 basis points while the rate earned on earning assets for the year decreased by 2 basis points. Net interest margin was 4.14% for 2016, a 10 basis point increase from 4.04% in 2015.

 

Noninterest Income

 

Noninterest income is an important contributor to net earnings. The following table summarizes the changes in noninterest income during the past three years:

   2017  2016  2015
   (Dollars in thousands)
   Amount  % Change  Amount  % Change  Amount  % Change
Service charges on deposit accounts  $1,005    (7.5)%  $1,086    (3.1)%  $1,121    (12.1)%
Income from trust services   219    4.3    210    (14.3)   245    1.7 
Income from retail brokerage services   362    5.9    342    (18.8)   421    12.0 
Income from insurance services   1,523    3.0    1,478    7.7    1,373    3.7 
Income from mortgage banking services   155    (56.2)   354    11.3    318    (50.7)
Gain (loss) on the sale or disposition of assets   (9)   NM    38    72.7    22    (75.3)
Gain on the sale of securities   187    10.7    169    NM    4    (98.6)
Other income   870    11.3    782    3.4    756    1.7 
                               
          Total noninterest income  $4,312    (3.3)%  $4,459    4.7%  $4,260    (14.6)%

 

*NM = not meaningful

 

For 2017, noninterest income was $4.31 million, down from $4.46 million in the same period of 2016. The decrease was primarily attributed to a decline in income from mortgage banking services of $199 thousand compared with 2016. Commercial mortgage banking fees from Empire ceased as the entity was dissolved in late 2017. Service charges on deposit accounts also decreased $81 thousand compared with 2016. A loss on the disposition of assets of $9 thousand was recognized in 2017 compared with a gain of $38 thousand in 2016. These decreases were partially offset by increases in other income, income from insurance services and income from retail brokerage services of $88 thousand, $45 thousand, and $20 thousand, respectively, when compared with 2016. Gain on the sale of securities increased $18 thousand to $187 thousand compared with 2016. Also, income from trust services increased $9 thousand compared with last year.

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For 2016, noninterest income was $4.46 million, up from $4.26 million in the same period of 2015. The increase was primarily attributed to a $169 thousand gain on the sale of securities compared with a $4 thousand gain in 2015. Also, income from insurance services and mortgage banking services increased $105 thousand and $36 thousand, respectively, when compared with 2015. These increases were partially offset by decreases in income from retail brokerage services, trust services and service charges on deposit accounts of $79 thousand, $35 thousand, and $35 thousand, respectively, when compared with 2015.

 

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:

   2017 2016 2015
   (Dollars in thousands)
   Amount  % Change  Amount  % Change  Amount  % Change
Salaries and employee benefits  $9,251    5.5%  $8,766    10.8%  $7,914    (5.3)%
Occupancy expense   1,124    (1.4)   1,140    1.7    1,121    5.7 
Equipment expense   850    (1.3)   861    (6.7)   923    3.0 
Data processing expense   1,513    10.6    1,368    11.8    1,224    8.3 
Amortization of intangible assets   16    0.0    16    0.0    16    (64.4)
Other operating expenses   3,075    11.3    2,763    (2.4)   2,832    (1.6)
                               
          Total noninterest expense  $15,829    6.1%  $14,914    6.3%  $14,030    (2.4)%

 

Noninterest expense increased $915 thousand to $15.83 million in 2017 compared with the same period in 2016. Salaries and employee benefits increased $485 thousand when compared with 2016 as a result of staffing expansion in the Tifton and Valdosta markets and greater incentive based income. Other operating expense increased $312 thousand compared with 2016 due primarily to higher professional fees, increased FDIC insurance assessment and a mass reissue of debit cards among other expenses related to migration to a new core processing provider. Data processing expense also increased $146 thousand compared with 2016 largely related to the core processor migration as well. Partially offsetting these increases were decreases in occupancy and equipment expense of $16 thousand and $11 thousand, respectively, compared with 2016.

 

For 2016, noninterest expense increased $884 thousand to $14.91 million compared with the same period in 2015. Salaries and employee benefits increased $852 thousand when compared with 2015 as a result of new personnel in our Valdosta and Tifton markets as well as new staff needed in connection with the upcoming retirement of critical staff. Data processing and occupancy expense also increased $144 thousand and $19 thousand, respectively, compared with 2015. Partially offsetting these increases were decreases in other operating and equipment expense of $69 thousand and $62 thousand, respectively, compared with 2015.

 

The efficiency ratio, (noninterest expense divided by total noninterest income plus tax equivalent net interest income), a measure of productivity, increased slightly to 70.8% for 2017 when compared with 70.6% for 2016 whereas the ratio decreased from 73.0% for year ending 2015. Although the efficiency ratio remained flat for 2017, the growth in interest income more than offset the increase in noninterest expense and noninterest income decreased when compared with 2016. The improvement in the efficiency ratio for 2016 resulted from large growth in interest income when compared with 2015.

 

Federal Income Tax Expense

 

The Corporation had an expense of $1.62 million for federal income taxes in 2017 compared with an expense of $1.15 million in 2016 and $827 thousand for the year ending December 31, 2015. These amounts resulted in an effective tax rate of 29.8%, 22.2%, and 19.7%, for 2017, 2016, and 2015, respectively. See Note 10 of the Corporation’s Notes to Consolidated Financial Statements for further details of tax expense.

-37-
 

 

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.

 

Total average assets increased $42.4 million to $473.4 million in 2017 compared with 2016. The increase in total average assets is primarily attributable to an increase in average loans of $36.7 million and an increase in average investment securities of $3.3 million. The Corporation’s earning assets, which include loans, investment securities, certificates of deposit with other banks and interest-bearing deposits with banks, averaged $441.9 million in 2017, a 10% increase from $402.1 million in 2016. The average volume for total deposits increased $37.4 million mostly due to an increase in noninterest-bearing deposits of $17.1 million compared with the prior year. For 2017, average earning assets were comprised of 71% loans, 25% investment securities, and 4% deposit balances with banks. The ratio of average earning assets to average total assets remained flat at 93.3% for both 2017 and 2016.

 

Loans

 

Loans are one of the Corporation’s largest earning assets and uses 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 2017, average net loans represented 71% of average earning assets and 66% of average total assets.

 

The composition of the Corporation’s loan portfolio at December 31, 2017, 2016, and 2015 was as follows:

 

                2017                  2016                2015                
   (Dollars in thousands)
Category  Amount  % Change  Amount  % Change  Amount  % Change
                   
Commercial, financial, and agricultural  $73,146    3.0%  $70,999    22.1%  $58,173    21.5%
Real estate:                              
    Construction   22,287    (14.3)   25,999    31.1    19,831    61.8 
    Commercial   106,458    16.1    91,733    6.9    85,777    11.5 
    Residential   99,160    19.1    83,271    22.5    67,969    (1.9)
    Agricultural   25,374    53.0    16,580    6.2    15,620    4.2 
Consumer & other   3,766    (4.9)   3,961    15.3    3,435    11.1 
       Total loans  $330,191    12.9   $292,543    16.6   $250,805    11.8 
Unearned interest and discount   (18)   5.3    (19)   0.0    (19)   (26.9)
Allowance for loan losses   (3,044)   2.6    (3,124)   3.0    (3,032)   (2.6)
       Net loans  $327,129    13.0%  $289,400    16.8%  $247,754    11.9%

 

Total year-end balances of loans increased $37.7 million while average total loans increased $36.7 million in 2017 compared with 2016. Commercial, residential, and agricultural real estate loan categories as well as commercial, financial and agricultural loans experienced growth in 2017. The ratio of total loans to total deposits at year end increased to 83.2% in 2017 compared with 78.7% in 2016. The loan portfolio mix at December 31, 2017 consisted of 6.8% loans secured by construction real estate, 32.2% loans secured by commercial real estate, 30.0% of loans secured by residential real estate, and 7.7% of loans secured by agricultural real estate. The loan portfolio also included other commercial, financial, and agricultural purposes of 22.2% and installment loans to individuals for consumer purposes of 1.1%.

 

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, 2017.

 

-38-
 

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 non-accruing, past due, and other potentially impaired loans that have been identified as possible problems.

 

The allowance for loan losses was $3.044 million, or 0.9% of total loans outstanding, as of December 31, 2017. This level represented an $81 thousand decrease from the corresponding 2016 year-end amount, which was 1.1% of total loans outstanding.

 

There was a provision for loan losses of $300 thousand in 2017 compared with a provision for loan losses of $160 thousand in 2016. See Part I, Item 1, “Table 4 – Loan Portfolio” for details of the changes in the allowance for loan losses.

 

Investment Securities

 

The investment portfolio serves several important functions for the Corporation. Investments in securities are used as a source of income for excess liquidity that is not needed for 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 significant cash flow for reinvestment. The Corporation’s investment securities represent 20.7% of our assets and 50% of the portfolio includes largely state, county and municipal securities. Also, the portfolio includes 44% of U.S. government agency securities, 5% of U.S. government sponsored pass-thru residential mortgage-backed securities, and 1% of U.S. government treasury securities.

 

The following table summarizes the contractual maturity of investment securities at their carrying values as of December 31, 2017:

 

Amounts Maturing In: 

Securities

Available for Sale

 

Securities

Held to Maturity

  Total
   (Dollars in thousands)
One year or less  $0   $9,813   $9,813 
After one through five years   15,556    19,467    35,023 
After five through ten years   35,442    12,547    47,989 
After ten years   3,265    2,764    6,029 
       Total debt investment securities   54,263    44,591    98,854 
Equity securities   100    0    100 
       Total investment securities  $54,363   $44,591   $98,954 

 

At December 31, 2017, the total investment portfolio decreased to $99.0 million, down $9.2 million, compared with $108.2 million at December 31, 2016. The decrease was mainly due to calls and maturities of $9.1 million of municipal securities and U.S. government agency securities as well as residential mortgage-backed securities principal paydowns of $1.6 million. Additionally, we sold $5.7 million of available for sale U.S. government agency securities, corporate notes, and Federal Agricultural Mortgage Corporation equity securities resulting in a net gain of $187 thousand. Partially offsetting these calls, maturities and sales were purchases of $7.3 million of U.S. government agency securities and municipal 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, other-than-temporarily impaired preferred stock, and property acquired by foreclosure. The level of nonperforming assets increased $2.1 million at December 31, 2017 compared with December 31, 2016 due to an increase of $1.4 million in nonaccrual loans. Also, foreclosed assets increased $632 thousand compared with 2016. Nonperforming assets were approximately $2.4 million, or 0.51% of total assets as of December 31, 2017, compared with $373 thousand or 0.08% of total assets at December 31, 2016.

 

-39-
 

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.

 

In 2017, average deposits increased from $353.0 million in 2016 to $390.5 million. This average deposit growth occurred primarily in NOW accounts, noninterest-bearing, and money market deposits. As of December 31, 2017, the Corporation’s balance of certificates of deposit of $100,000 or more increased to $46.1 million from $43.2 million at the end of 2016.

 

We have used borrowings from the Federal Home Loan Bank to support our residential mortgage lending activities. During 2017, the Corporation borrowed $16 million in principal reducing credit advances, $19 million in fixed rate credit advances, $5 million in daily rate credit, repaid $19 million of the fixed-rate and daily rate advances, and made annual installment payments of $8.4 million on five principal reducing credit advances from the Federal Home Loan Bank. During 2018, we expect to make annual installment payments totaling $8.0 million on principal reducing credit advances and payoff two fixed-rate advances totaling $10 million that have convertible options by the issuer to convert the rates to a 3-month LIBOR. Total long-term advances with the Federal Home Loan Bank were $29.1 million at December 31, 2017. Details on the Federal Home Loan Bank advances are presented in Notes 7 and 8 to the financial statements.

 

Liquidity

 

Liquidity is managed to assume that the Bank 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, loan repayments and the maturity or sale of other earning assets.

 

The Corporation is a separate entity from the Bank and provides for its own liquidity. The Corporation is responsible for the payment of dividends declared for shareholders, and interest and principal on its outstanding debt. Substantially, all of the Corporation’s liquidity is obtained from dividends from the Bank.

 

The Consolidated Statement of Cash Flows details the Corporation’s cash flows from operating, investing, and financing activities. During 2017, operating and financing activities provided cash flows of $42.7 million, while investing activities used $35.1 million resulting in an increase in cash and cash equivalents balances of $7.6 million.

 

Liability liquidity represents our ability to renew or replace our short-term borrowings and deposits as they mature or are withdrawn. The Bank’s deposit mix includes a significant amount of core deposits. Core deposits are defined as total deposits less 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 were 88.4% of total deposits on December 31, 2017, and 2016.

 

Asset liquidity is provided through ordinary business activity, such as cash received from interest and fee payments as well as from maturing loans and investments. Additional sources include marketable securities and short-term investments that are easily converted into cash without significant loss. The Bank had $9.8 million of investment securities maturing within one year or less on December 31, 2017, which represented 9.9% of the investment debt securities portfolio. Also, the Bank has $4.6 million of U.S. government agency securities callable at the option of the issuer within one year and approximately $1.2 million of expected annual cash flow in principal reductions from payments of mortgage-backed securities. In 2017, none of our callable U.S. government agency securities were called and $9.6 million were called in 2016. We have reinvested these proceeds from called investment securities in new loans and new investment securities. We are not aware of any other known trends, events, or uncertainties that will have or that are reasonably likely to have a material adverse effect on the Corporation’s liquidity or operations.

-40-
 

 

Contractual Obligations

 

The chart below shows the Corporation’s contractual obligations and its scheduled future cash payments under those obligations as of December 31, 2017.

 

The majority of the Corporation’s outstanding contractual obligations are long-term debt. The remaining contractual are comprised of purchase obligations for data processing services and a rental agreement for our loan production office in Tifton, Georgia. We have no capital lease obligations.

 

   Payments Due by Period
   (Dollars in thousands)
Contractual Obligations 

 

 

Total

 

Less than 1 Year

 

 

1-3 Years

 

 

4-5 Years

 

 

After 5 Years

Long-term debt  $29,057   $0   $17,343   $9,143   $2,571 
Operating leases   23    13    10    0    0 
Total contractual obligations  $29,080   $13   $17,353   $9,143   $2,571 

 

Off-Balance Sheet Arrangements

 

We are a party to financial instruments with off-balance-sheet risk which arise in the normal course of business to meet the financing needs of our customers. 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 and are unconditionally cancelable. Since many of the commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements.

 

Financial instruments whose contract amounts represent credit risk: 

 

2017

 

 

2016

   (Dollars in thousands)
Commitments to extend credit  $24,706   $34,031 
Standby letters of credit  $3,135   $2,660 

 

The Corporation does not have any special purpose entities or off-balance sheet financing payment obligations.

 

Capital Resources and Dividends

 

Our average equity to average assets ratio was 8.55% in 2017 and 8.90% in 2016. The Federal Reserve Board and the FDIC have issued rules regarding risk-based capital requirements for U.S. banks and bank holding companies. The Basel III Capital Rules set forth changes in the methods of calculating certain risk-weighted assets, which in turn affect the calculation of risk-based ratios. The new risk weightings are more punitive for assets held by banks that are deemed to be of higher risk. The minimum capital level requirements applicable to the Bank under the Basel III Capital Rules are: (i) a common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6%; (iii) a Total risk-based capital ratio of 8%; and (iv) Tier 1 leverage ratio of 4%. Common equity Tier 1 capital consists of retained earnings and common stock instruments, subject to certain adjustments. At December 31, 2017, we were well in excess of the minimum requirements under the guidelines with a common equity Tier 1 capital ratio of 12.74%, Tier I risk-based capital ratio of 12.74%, Total risk-based capital ratio of 13.65%, and a leverage ratio of 8.79%. To continue to conduct its business as currently conducted, the Corporation and the Bank will need to maintain capital well above the minimum levels.

 

-41-
 

The following table presents the risk-based capital and leverage ratios at December 31, 2017 and 2016 in comparison to both the minimum regulatory guidelines and the minimum for well capitalized:

 

  

Southwest Georgia

Financial Corporation

  Southwest Georgia Bank      
Risk-Based Capital Ratios  2017  2016  2017  2016  Minimum Regulatory Guidelines 

Minimum

For Well Capitalized

                   
Common Equity Tier 1   12.74%   13.03%   12.02%   12.47%   4.50%  ≥  6.50%
Tier I capital   12.74%   13.03%   12.02%   12.47%   6.00%  ≥  8.00%
Total risk-based capital   13.65%   14.04%   12.93%   13.48%   8.00%  ≥ 10.00%
Leverage   8.79%   8.87%   8.29%   8.49%   4.00%  ≥  5.00%

 

Interest Rate Sensitivity

 

The Corporation’s most important element of asset/liability management is the monitoring of its sensitivity and exposure to interest rate movements which is the Corporation’s primary market risk. 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’s Board of Directors. 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 which receives monthly cash flows from mortgage-backed securities principal payments, and staggered 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.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The information required by this item is filed herewith.

-42-
 

 

Management’s Report on Internal Control over Financial Reporting

 

Management of the Corporation is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

    

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Corporation conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the above framework, management of the Corporation has concluded the Corporation maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rule 13a-15(f), as of December 31, 2017. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

     

Management is also responsible for the preparation and fair presentation of the consolidated financial statements and other financial information contained in this report. The accompanying consolidated financial statements were prepared in conformity with GAAP and include, as necessary, best estimates and judgments by management.

 

 

/s/ DeWitt Drew   /s/ Karen T. Boyd  
DeWitt Drew   Karen T. Boyd  
President and Chief Executive Officer              Senior Vice President and Treasurer  
(Principal Executive Officer)   (Principal Financial Officer)  

 

 

March 30, 2018

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SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2017 and 2016

   2017  2016
ASSETS
       
Cash and due from banks  $11,143,494   $7,700,522 
Interest-bearing deposits in other banks   22,994,927    18,819,394 
Cash and cash equivalents   34,138,421    26,519,916 
           
Certificates of deposit in other banks   1,985,000    0 
Investment securities available for sale, at fair value   54,363,641    53,565,503 
Investment securities to be held to maturity (fair value          
approximates $45,147,800 and $55,123,073)   44,590,841    54,602,535 
Federal Home Loan Bank stock, at cost   2,438,200    1,874,200 
Loans, net of allowance for loan losses of $3,043,632 and $3,124,611   327,129,758    289,399,625 
Premises and equipment, net   12,249,518    11,209,285 
Bank property held for sale   211,500    211,500 
Foreclosed assets, net   758,878    126,713 
Intangible assets   19,532    35,156 
Bank owned life insurance   6,553,318    5,356,683 
Other assets   4,633,768    5,600,114 
           
Total assets  $489,072,375   $448,501,230 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
Liabilities:          
Deposits:          
NOW accounts  $25,871,273   $47,420,335 
Money market   129,040,471    95,658,654 
Savings   30,793,864    29,006,734 
Certificates of deposit $100,000 and over   46,052,591    43,234,832 
Other time accounts   37,579,089    39,524,168 
           
Total interest-bearing deposits   269,337,288    254,844,723 
Noninterest-bearing deposits   127,668,471    116,648,264 
           
Total deposits   397,005,759    371,492,987 
           
Short-term borrowed funds   17,971,429    8,447,619 
Long-term debt   29,057,143    26,028,571 
Other liabilities   3,895,058    4,109,719 
           
Total liabilities   447,929,389    410,078,896 
           
Shareholders’ equity:          
Common stock – $1 par value, 5,000,000 shares          
authorized, 4,293,835 shares for 2017 and 2016 issued   4,293,835    4,293,835 
Additional paid-in capital   31,701,533    31,701,533 
Retained earnings   33,020,030    30,333,410 
Accumulated other comprehensive loss   (1,629,619)   (1,785,991)
Treasury stock, at cost 1,752,330 shares for 2017          
and 1,746,398 for 2016   (26,242,793)   (26,120,453)
           
Total shareholders’ equity   41,142,986    38,422,334 
           
Total liabilities and shareholders’ equity  $489,072,375   $448,501,230 

 

See accompanying notes to consolidated financial statements.

-45-
 

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

for the years ended December 31, 2017, 2016, and 2015

         2017        2016        2015
Interest income:               
Interest and fees on loans  $16,299,091   $14,796,649   $12,695,520 
Interest on debt securities:  Taxable   1,286,473    1,170,259    1,345,549 
Interest on debt securities:  Tax-exempt   1,228,479    1,253,064    1,240,706 
Dividends   102,360    89,840    72,619 
Interest on deposits in other banks   195,032    103,244    62,138 
Interest on certificates of deposit in other banks   34,879    52    11,795 
Total interest income   19,146,314    17,413,108    15,428,327 
                
Interest expense:               
Deposits   1,153,609    935,291    795,850 
Federal funds purchased   1,068    10    426 
Other short-term borrowings   224,144    103,567    67,274 
Long-term debt   523,344    573,225    453,258 
Total interest expense   1,902,165    1,612,093    1,316,808 
                
Net interest income   17,244,149    15,801,015    14,111,519 
                
Provision for loan losses   300,000    160,000    141,300 
Net interest income after provision               
for loan losses   16,944,149    15,641,015    13,970,219 
                
Noninterest income:               
Service charges on deposit accounts   1,005,270    1,086,268    1,121,240 
Income from trust services   218,657    209,755    245,279 
Income from brokerage services   362,416    342,051    420,695 
Income from insurance services   1,523,309    1,477,663    1,372,872 
Income from mortgage banking services   155,053    354,627    317,970 
Net gain (loss) on sale or disposition of assets   (9,022)   38,165    22,382 
Net gain on sale of securities   186,610    168,919    3,587 
Other income   870,229    781,811    756,152 
Total noninterest income   4,312,522    4,459,259    4,260,177 
                
Noninterest expense:               
Salaries and employee benefits   9,250,777    8,765,865    7,914,155 
Occupancy expense   1,124,028    1,140,600    1,120,940 
Equipment expense   850,376    860,935    923,267 
Data processing expense   1,513,630    1,367,569    1,224,177 
Amortization of intangible assets   15,625    15,625    15,625 
Other operating expenses   3,074,843    2,763,227    2,831,433 
Total noninterest expenses   15,829,279    14,913,821    14,029,597 
                
Income before income taxes   5,427,392    5,186,453    4,200,799 
Provision for income taxes   1,619,900    1,152,476    827,164 
Net income  $3,807,492   $4,033,977   $3,373,635 
                
Basic earnings per share:               
Net income  $1.49   $1.58   $1.32 
Weighted average shares outstanding   2,547,421    2,547,778    2,547,837 
Diluted earnings per share:               
Net income  $1.49   $1.58   $1.32 
Weighted average shares outstanding   2,547,422    2,547,778    2,547,837 

 

See accompanying notes to consolidated financial statements.

-46-
 

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

for the years ended December 31, 2017, 2016, and 2015

 

   2017  2016  2015
          
Net income  $3,807,492   $4,033,977   $3,373,635 
Other comprehensive income (loss), net of tax:               
    Unrealized gain (loss) on securities available for sale   326,684    (704,188)   116,782 
    Reclassification adjustment for (gain) loss realized               
      in income on securities available for sale   (186,610)   (144,034)   17,992 
    Unrealized gain (loss) on pension plan benefits   503,167    (110,306)   (1,032,035)
    Federal income tax (expense) benefit   486,869    (325,900)   (305,069)
          Other comprehensive income (loss), net of tax   156,372    (632,628)   (592,192)
           Total comprehensive income  $3,963,864   $3,401,349   $2,781,443 

 

 

See accompanying notes to consolidated financial statements.

-47-
 

 

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

for the years ended December 31, 2017, 2016, and 2015

 

  

Common

Stock

 

Additional

Paid-In

Capital

 

Retained

Earnings

  Accumulated Other Comprehensive Loss  Treasury Stock  Total Shareholders’ Equity
Balance at Dec. 31, 2014  $4,293,835   $31,701,533   $25,014,980   $(561,171)  $(26,113,795)  $34,335,382 
Net Income   —      —      3,373,635    —      —      3,373,635 
Comprehensive income (loss):                              

Changes in net gain on securities available for sale

   —      —      —      88,951    —      88,951 

Changes in net loss on pension plan benefits

   —      —      —      (681,143)   —      (681,143)

Cash dividend declared $.40 per share

   —      —      (1,019,135)   —      —      (1,019,135)
Balance at Dec. 31, 2015   4,293,835    31,701,533    27,369,480    (1,153,363)   (26,113,795)   36,097,690 
Net Income   —      —      4,033,977    —      —      4,033,977 
Comprehensive income (loss):                              

Changes in net gain on securities available for sale

   —      —      —      (559,826)   —      (559,826)

Changes in net loss on pension plan benefits

   —      —      —      (72,802)   —      (72,802)

Cash dividend declared $.42 per share

   —      —      (1,070,047)   —      —      (1,070,047)
Purchase of 400 shares of treasury stock   —      —      —      —      (6,658)   (6,658)
Balance at Dec. 31, 2016   4,293,835    31,701,533    30,333,410    (1,785,991)   (26,120,453)   38,422,334 
Net Income   —      —      3,807,492    —      —      3,807,492 
Comprehensive income (loss):                              

Changes in net gain on securities available for sale

   —      —      —      93,675    —      93,675 

Changes in net gain on pension plan benefits

   —      —      —      62,697    —      62,697 

Cash dividend declared $.44 per share

   —      —      (1,120,872)   —      —      (1,120,872)
Purchase of 5,932 shares of treasury stock   —      —      —      —      (122,340)   (122,340)
Balance at Dec. 31, 2017  $4,293,835   $31,701,533   $33,020,030   $(1,629,619)  $(26,242,793)  $41,142,986 

 

See accompanying notes to consolidated financial statements.

-48-
 

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the years ended December 31, 2017, 2016, and 2015

 

   2017  2016  2015
Cash flows from operating activities:               
    Net income  $3,807,492   $4,033,977   $3,373,635 
    Adjustments to reconcile net income to               
        net cash provided by operating activities:               
        Provision for loan losses   300,000    160,000    141,300 
        Depreciation   881,000    923,578    961,964 
        Net amortization of investment securities   396,899    309,185    307,861 
        Income on cash surrender value of bank owned life insurance   (133,398)   (125,290)   (147,601)
        Disposal of fixed assets to charitable expense   13,045    0    0 
        Amortization of intangibles   15,625    15,625    15,625 
        Loss (gain) on sale/writedown of foreclosed assets   8,892    0    (13,077)
        Net gain on sale of securities   (186,610)   (168,919)   (3,587)
        Net loss (gain) on disposal of other assets   1,594    (36,701)   (9,305)
    Change in:               
        Other assets   489,903    (253,894)   52,322 
        Other liabilities   288,505    324,142    (208,670)
                Net cash provided by operating activities   5,882,947    5,181,703    4,470,467 
                
Cash flows from investing activities:               
    Proceeds from calls, paydowns and maturities of securities HTM   10,070,453    5,952,271    5,115,703 
    Proceeds from calls, paydowns and maturities of securities AFS   635,818    10,354,337    4,143,139 
    Proceeds from Federal Home Loan Bank Stock repurchase   705,100    413,700    141,600 
    Proceeds from sale of securities available for sale   5,741,211    11,933,634    4,044,500 
    Proceeds from sale of securities held to maturity   0    576,834    516,746 
    Proceeds from maturity of  certificates of deposit in other banks   0    245,000    1,225,000 
    Purchase of securities held to maturity   (265,000)   (478,559)   (5,207,650)
    Purchase of securities available for sale   (7,039,139)   (25,129,827)   (5,709,379)
    Purchase of Federal Home Loan Bank Stock   (1,269,100)   (418,700)   (450,800)
    Purchase certificates of deposit in other banks   (1,985,000)   0    0 
    Net change in loans   (38,895,975)   (41,850,494)   (26,517,707)
    Purchase bank owned life insurance   (1,063,237)   0    0 
    Proceeds from bank owned life insurance   0    0    30,011 
    Purchase of premises and equipment   (1,955,067)   (1,455,043)   (370,837)
    Proceeds from sales of fixed assets and foreclosed assets   233,553    304,825    201,000 
                Net cash used by investing activities   (35,086,383)   (39,552,022)   (22,838,674)
                
Cash flows from financing activities:               
    Net change in deposits   25,512,772    32,477,143    29,042,251 
    Payment of short-term portion of long-term debt   (13,447,619)   (7,590,476)   (5,133,333)
    Proceeds from issuance of short-term debt   7,857,143    857,143    2,457,143 
    Proceeds from issuance of long-term debt   18,142,857    5,142,857    11,542,857 
    Cash dividends paid   (1,120,872)   (1,070,047)   (1,019,135)
    Payment for treasury stock   (122,340)   (6,658)   0 
                Net cash provided by financing activities   36,821,941    29,809,962    36,889,783 
                
Increase (decrease) in cash and cash equivalents   7,618,505    (4,560,357)   18,521,576 
Cash and cash equivalents - beginning of period   26,519,916    31,080,273    12,558,697 
Cash and cash equivalents - end of period  $34,138,421   $26,519,916   $31,080,273 
                
Cash paid during the year for:               
    Income taxes  $895,000   $964,000   $725,000 
    Interest paid  $1,881,924   $1,600,593   $1,314,156 

 

 

See accompanying notes to consolidated financial statements.

 

-49-
 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

 

   2017  2016  2015
NONCASH ITEMS:               
Increase in foreclosed properties and decrease in loans  $903,842   $44,963   $241,980 
Unrealized gain (loss) on securities AFS  $140,074   $(848,222)  $134,774 
Unrealized gain (loss) on pension plan benefits  $503,167   $(110,306)  $(1,032,035)
Net reclass between short and long-term debt  $15,114,286   $7,590,476   $5,133,333 
Sale of foreclosed properties through loans  $38,000   $0   $334,000
Property moved from fixed assets to property held for sale  $0   $211,500   $0 

 

 

See accompanying notes to consolidated financial statements.

 

-50-
 

SOUTHWEST GEORGIA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accounting and reporting policies of Southwest Georgia Financial Corporation (the “Corporation”) and its direct and indirect subsidiaries, including its wholly-owned banking subsidiary, Southwest Georgia Bank (the “Bank”), conform to U.S. generally accepted accounting principles (“GAAP”) 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 the Corporation and its direct and indirect subsidiaries. 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 entity customers through its banking offices in southwest Georgia. Its primary deposit products are money market, NOW, savings and certificates of deposit, and its primary lending products are consumer and commercial mortgage loans. In addition to conventional banking services, the Corporation provides investment planning and management, trust management, and commercial and individual insurance products. Insurance products and advice are provided by the Bank’s Southwest Georgia Insurance Services Division.

 

The Corporation’s primary business is providing banking services through the Bank to individuals and businesses principally in the counties of Colquitt, Baker, Worth, Lowndes and the surrounding counties of southwest Georgia. The Bank operates five branch offices in its trade area. It also has three non-deposit taking locations. Trust and retail brokerage services are offered at an office building located at 25 2nd Avenue SW in Moultrie, lending services are offered in Valdosta at 3520 North Valdosta Road, and lending services are offered at 301 N. Virginia Avenue in Tifton.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with these evaluations, management obtains independent appraisals for significant properties.

 

A substantial portion of the Corporation’s loans are secured by real estate located primarily in Georgia. Accordingly, the ultimate collection of these loans is susceptible to changes in the real estate market conditions of this market area.

 

-51-
 

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 (the “FDIC”) up to $250,000. There were uninsured deposits of $12,304 at December 31, 2017.

 

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-temporarily impaired 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 accelerated recovery system method over the assets estimated useful lives for financial reporting and income tax purposes for assets purchased on or before December 31, 2003. For assets acquired after 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.

-52-
 

 

Bank Property Held for Sale

 

In 2016, the Bank’s former branch in Pavo, Georgia, was transferred from premises to bank property held for sale and depreciation was discontinued. The property was booked at the lower of cost or market value based on a current appraisal of $211,500. The Corporation has this property available for sale.

 

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 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.

-53-
 

 

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

 

In accordance with policy guidelines and regulations, properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair market value less costs to sell 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. A valuation allowance is established to record market value changes in foreclosed assets. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. At December 31, 2017, the foreclosed assets recorded were not considered to be residential real estate. There was no valuation allowance for foreclosed asset losses at December 31, 2017. Foreclosed assets totaled $758,878 at December 31, 2017, up from $126,713 at December 31, 2016.

 

Intangible Assets

 

Intangible assets are amortized over a determined useful life using the straight-line basis. These assets are evaluated annually as to the recoverability of the carrying value. The remaining intangibles have a remaining life of less than two years.

 

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 direct and indirect subsidiaries have post-retirement plans covering substantially all employees. The Corporation makes annual contributions to the plans in amounts not exceeding the regulatory requirements.

 

Bank Owned Life Insurance

 

The Bank owns life insurance policies on a group of employees. Banking laws and regulations allow the Bank to purchase life insurance policies on certain employees in order to help offset the Bank’s overall employee compensation costs. The beneficial aspects of these life insurance policies are tax-free earnings and a tax-free death benefit, which are realized by the Bank as the owner of the policies. The cash surrender value of these policies is included as an asset on the balance sheet, and any increases in cash surrender value are recorded as noninterest income on the statement of income. At December 31, 2017 and 2016, the policies had a value of $6,553,318 and $5,356,683, respectively, and were 15.9% and 13.9%, respectively, of shareholders’ equity. These values are within regulatory guidelines.

 

-54-
 

Income Taxes

 

The Corporation and its direct and indirect subsidiaries file a consolidated income tax return. Each subsidiary computes its income tax expense as if it filed an individual return except that it does not receive any portion of the surtax allocation. Any benefits or disadvantages of the consolidation are absorbed by the parent company.  Each subsidiary pays its allocation of federal income taxes to the parent company or receives payment from the parent company to the extent that tax benefits are realized.

 

The Corporation reports income under the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. 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.

 

The Corporation will recognize a tax position as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with an examination being presumed to occur. The amount recognized is the largest amount of a tax benefit that is greater than fifty percent likely of being realized on examination. No benefit is recorded for tax positions that do not meet the more than likely than not test.

 

The Corporation recognizes penalties related to income tax matters in income tax expense.  The Corporation is subject to U.S. federal and Georgia state income tax audit for returns for the tax period ending December 31, 2015 and subsequent years. 

 

Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) includes all changes in shareholders’ equity during a period, except those resulting from transactions with shareholders. Besides net income, other components of the Corporation’s accumulated other comprehensive income (loss) includes the after tax effect of changes in the net unrealized gain/loss on securities available for sale and the unrealized gain/loss on pension plan benefits.

 

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.

 

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 that were expensed during 2017, 2016, and 2015 were $192,016, $173,595, and $153,423, respectively.

 

Regulatory Developments

 

The Corporation and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the federal banking agencies about components, risk weightings and other factors.

 

-55-
 

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum Tier 1 leverage, Tier 1 risk-based capital and Total risk-based capital ratios. In July 2013, the Board of Governors of the Federal Reserve System published the Basel III Capital Rules. These rules establish a comprehensive capital framework applicable to all depository institutions, certain bank holding companies with total consolidated assets below a certain threshold and all and savings and loan holding companies except for those that are substantially engaged in insurance underwriting or commercial activities. These rules implement higher minimum capital requirements for banks and certain bank holding companies, include a new common equity Tier 1 capital requirement and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital.

 

The Basel III Capital Rules became effective for the Bank on January 1, 2015, subject to a phase-in period, but are not applicable to bank holding companies, like the Corporation, with less than $1 billion in total consolidated assets that meet certain criteria.

 

The minimum capital level requirements applicable to the Bank under the Basel III Capital Rules are: (i) a common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a Total risk-based capital ratio of 8% (unchanged from the rules effective for the year ended December 31, 2014); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital will consist of retained earnings and common stock instruments, subject to certain adjustments.

 

The Basel III Capital Rules set forth changes in the methods of calculating certain risk-weighted assets, which in turn affect the calculation of risk-based ratios. The new risk weightings are more punitive for assets held by banks that are deemed to be of higher risk. These changes were also effective beginning January 1, 2015.

 

The Basel III Capital Rules also introduce a “capital conservation buffer”, which is in addition to each capital ratio and is phased-in over a three-year period beginning in January 2016.

 

As of December 31, 2017, the Bank is considered to be well-capitalized under the Basel III Capital Rules. There have been no conditions or events since December 31, 2017, that management believes has changed the Bank’s status as “well-capitalized.” The capital ratios of the Corporation and Bank are presented in Note 15 of the Corporation’s Notes to Consolidated Financial Statements.

 

Recent Accounting Pronouncements

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 provides guidance on accounting for the effects of the Tax Cuts and Jobs Act, which was enacted in December, 2017. The guidance allows reclassification of the tax effects that were stranded in accumulated other comprehensive income as a result of the tax rate change from accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018. The adoption of ASU 2018-02 is not expected to have a material impact on the Corporation’s consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation, Scope of Modification Accounting. This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. The adoption of ASU 2017-09 is not expected to have a material impact on the Corporation’s consolidated financial statements.

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In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium. The premium on individual callable debt securities shall be amortized to the earliest call date. This guidance does not apply to securities for which prepayments are estimated on a large number of similar loans where prepayments are probable and reasonable estimable. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. This update should be adopted on a modified retrospective basis with a cumulative effect adjustment to retained earnings on the date of adoption. The adoption of ASU 2017-08 is not expected to have a material impact on the Corporation’s consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The updated accounting guidance requires changes to the presentation of the components of net periodic benefit cost on the income statement by requiring service cost to be presented with other employee compensation costs and other components of net periodic pension cost to be presented outside of any subtotal of operating income. This ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2017-07 is not expected to have a material impact on the Corporation’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Rather, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on the Corporation’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323), which incorporates into the FASB ASC recent SEC guidance about disclosing, under SEC Staff Accounting Bulletin, Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The effective date varies as each topic addressed in this ASU has its own effective date. The adoption of ASU 2017-03 is not expected to have a material impact on the Corporation’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which provides a new framework for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption will be permitted and should apply it to transactions that have not been reported in financial statements that have been issued or made available for issuance. The adoption of ASU 2017-01 is not expected to have a material impact on the Corporation’s consolidated financial statements.

 

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In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, This ASU requires entities to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption will be permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, adjustments should be reflected at the beginning of the fiscal year that includes that interim period. The adoption of ASU 2016-18 is not expected to have a material impact on the Corporation’s consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets other than Inventory. This ASU eliminates the exception for all intra-entity sales of assets other than inventory. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. For public business entities, this ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods therein. The adoption of ASU No. 2016-16 is not expected to have a material impact on the Corporation’s consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. The amendments are effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Corporation’s consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is essentially the final rule on use of the so-called CECL model, or current expected credit losses. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies and other organizations. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2016-13 is being reviewed for any material impact on the Corporation’s consolidated financial statements.

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2. INVESTMENT SECURITIES

 

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent. The amortized costs of securities as shown in the consolidated balance sheets and their estimated fair values at December 31 were as follows:

 

Securities Available For Sale:

 

December 31, 2017 

Amortized Cost

 

Unrealized Gains

 

Unrealized Losses

 

Estimated Fair Value

             
U.S. government treasury securities  $979,983   $0   $12,213   $967,770 
U.S. government agency securities   43,978,023    580,366    698,299    43,860,090 
State and municipal securities   7,482,912    129,231    38,454    7,573,689 
Residential mortgage-backed securities   1,812,905    51,651    2,844    1,861,712 
                     
       Total debt securities AFS   54,253,823    761,248    751,810    54,263,261 
Equity securities   100,380    0    0    100,380 
       Total securities AFS  $54,354,203   $761,248   $751,810   $54,363,641 

 

December 31, 2016 

Amortized Cost

 

Unrealized Gains

 

Unrealized Losses

 

Estimated Fair Value

             
U.S. government treasury securities  $977,967   $0   $15,817   $962,150 
U.S. government agency securities   41,117,402    697,811    830,316    40,984,897 
State and municipal securities   6,537,093    25,170    109,666    6,452,597 
Residential mortgage-backed securities   2,454,282    76,284    1,252    2,529,314 
Corporate notes   2,497,016    27,944    795    2,524,165 
                     
       Total debt securities AFS   53,583,760    827,209    957,846    53,453,123 
Equity securities   112,380    0    0    112,380 
       Total securities AFS  $53,696,140   $827,209   $957,846   $53,565,503 

 

Securities Held to Maturity:

 

December 31, 2017 

Amortized Cost

 

Unrealized Gains

 

Unrealized Losses

 

Estimated Fair Value

             
State and municipal securities  $41,447,092   $527,632   $48,083   $41,926,641 
Residential mortgage-backed securities   3,143,749    77,542    132    3,221,159 
                     
       Total securities HTM  $44,590,841   $605,174   $48,215   $45,147,800 

 

December 31, 2016 

Amortized Cost

 

Unrealized Gains

 

Unrealized Losses

 

Estimated Fair Value

             
State and municipal securities  $50,435,624   $508,109   $117,077   $50,826,656 
Residential mortgage-backed securities   4,166,911    129,506    0    4,296,417 
                     
       Total securities HTM  $54,602,535   $637,615   $117,077   $55,123,073 

 

At December 31, 2017, securities with a carrying value of $71,520,817 and a market value of $71,648,073 were pledged as collateral for public deposits and other purposes as required by law. Of these amounts, approximately $12,100,000 was over pledged and could be released if necessary for liquidity needs. At December 31, 2016, securities with a carrying value of $63,902,259 and a market value of $64,141,934 were pledged as collateral for public deposits and other purposes as required by law. At December 31, 2017 and 2016, we had both 1 – 4 family and multifamily mortgage loans pledged to secure Federal Home Loan Bank (“FHLB”) advances. The FHLB requires the Bank to hold a minimum investment of stock, based on membership and the level of activity. As of December 31, 2017, this stock investment was $2,438,200.

 

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There were no investments in obligations of any state or municipal subdivisions which exceeded 10% of the Corporation’s shareholders’ equity at December 31, 2017.

 

The amortized cost and estimated fair value of securities at December 31, 2017 and 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 

December 31, 2017      
Available for Sale: 

Amortized Cost

 

Estimated Fair Value

Amounts maturing in:      
  One year or less  $0   $0 
  After one through five years   15,437,594    15,556,274 
  After five through ten years   35,610,754    35,441,617 
  After ten years   3,205,475    3,265,370 
           
     Total debt securities AFS   54,253,823    54,263,261 
Equity securities   100,380    100,380 
     Total securities AFS  $54,354,203   $54,363,641 
           
Held to Maturity:   

Amortized Cost

    

Estimated Fair Value

 
Amounts maturing in:          
  One year or less  $9,812,609   $9,821,948 
  After one through five years   19,467,142    19,680,375 
  After five through ten years   12,546,856    12,806,108 
  After ten years   2,764,234    2,839,369 
           
     Total securities HTM  $44,590,841   $45,147,800 

 

December 31, 2016      
Available for Sale: 

Amortized Cost

 

Estimated Fair Value

Amounts maturing in:      
  One year or less  $0   $0 
  After one through five years   10,130,179    10,303,973 
  After five through ten years   39,818,677    39,507,820 
  After ten years   3,634,904    3,641,330 
           
     Total debt securities AFS   53,583,760    53,453,123 
Equity securities   112,380    112,380 
     Total securities AFS  $53,696,140   $53,565,503 
           
Held to Maturity:   

Amortized Cost

    

Estimated Fair Value

 
Amounts maturing in:          
  One year or less  $7,939,740   $7,941,397 
  After one through five years   26,537,314    26,786,525 
  After five through ten years   15,178,560    15,493,803 
  After ten years   4,946,921    4,901,348 
           
     Total securities HTM  $54,602,535   $55,123,073 

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The following tables summarize the activity of security sales by intention and year for years ending 2017, 2016, and 2015.

 

Securities Available For Sale:

 

December 31,  2017  2016  2015
          
Proceeds of sales  $5,741,211   $11,933,634   $4,044,500 
                
Gross gains  $186,610   $152,102   $0 
Gross losses   0    (8,068)   (17,992)
       Net gains (losses) on sales of  available for sale securities  $186,610   $144,034   $(17,992)

 

 

Securities Held to Maturity:

 

December 31,  2017  2016  2015
          
Amortized cost of securities sold  $0   $551,949   $495,167 
Proceeds from sales   0    576,834    516,746 
       Net gains on sales of  held to maturity securities  $0   $24,885   $21,579 

 

Sales of held to maturity securities during years ended December 31, 2016 and 2015 included small lots of mortgage-backed securities which were paid down by over 85% of face value.

 

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in continuous loss position, follows:

 

December 31, 2017  Less Than Twelve Months  Twelve Months or More
   Gross Unrealized Losses 

 

Fair

Value

  Gross Unrealized Losses 

 

Fair

Value

Securities Available for Sale                    
Temporarily impaired debt securities:                    
U.S. government treasury securities  $12,213   $967,770   $0   $0 
U.S. government agency securities   34,083    4,988,630    664,216    18,347,439 
State and municipal securities   16,836    975,900    21,618    877,798 
Residential mortgage-backed securities   0    0    2,844    188,081 
Total debt securities available for sale  $63,132   $6,932,300   $688,678   $19,413,318 

 

 

                    
Securities Held to Maturity                    
Temporarily impaired debt securities:                    
State and municipal securities  $15,954   $5,521,443   $32,129   $1,281,797 
Residential mortgage-backed securities   132    146,203    0    0 
Total securities held to maturity  $16,086   $5,667,646   $32,129   $1,281,797 

 

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December 31, 2016  Less Than Twelve Months  Twelve Months or More
   Gross Unrealized Losses 

 

Fair

Value

  Gross Unrealized Losses 

 

Fair

Value

Securities Available for Sale                    
Temporarily impaired debt securities:                    
U.S. government treasury securities  $15,817   $962,150   $0   $0 
U.S. government agency securities   830,316    19,330,575    0    0 
State and municipal securities   109,666    4,676,685    0    0 
Residential mortgage-backed securities   1,252    311,851    0    0 
Corporate notes   0    0    795    499,205 
Total debt securities available for sale  $957,051   $25,281,261   $795   $499,205 

 

                    
Securities Held to Maturity                    
Temporarily impaired debt securities:                    
State and municipal securities  $117,077   $16,162,203   $0   $0 
Residential mortgage-backed securities   0    0    0    0 
Total securities held to maturity  $117,077   $16,162,203   $0   $0 

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (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.

 

At December 31, 2017, forty-eight debt securities had unrealized losses with aggregate depreciation of 2.35% from the Corporation’s amortized cost basis. At December 31, 2016, sixty-nine debt securities had unrealized losses with aggregate depreciation of 2.50%. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. Management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale. Also, no declines in debt securities are deemed to be other-than-temporary.

 

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The composition of the Corporation’s loan portfolio at December 31, 2017 and 2016 was as follows:

 

   2017  2016
       
Commercial, financial and agricultural loans  $73,146,397   $70,999,423 
Real estate          
Construction loans   22,287,012    25,999,295 
Commercial mortgage loans   106,458,342    91,732,812 
Residential loans   99,159,607    83,270,983 
Agricultural loans   25,373,621    16,580,126 
Consumer & other loans   3,766,332    3,960,492 
           
         Loans outstanding   330,191,311    292,543,131 
           
Unearned interest and discount   (17,921)   (18,895)
Allowance for loan losses   (3,043,632)   (3,124,611)
       Net loans  $327,129,758   $289,399,625 

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The Corporation’s only significant concentration of credit at December 31, 2017, occurred in real estate loans which totaled approximately $253 million. However, this amount was not concentrated in any specific segment within the market or geographic area.

 

At December 31, 2017, $58,684,267 1-4 family and multifamily mortgage loans were pledged to FHLB to secure outstanding advances.

 

Appraisal Policy

 

When a loan is first identified as a problem loan, the appraisal is reviewed to determine if the appraised value is still appropriate for the collateral. For the duration that a loan is considered a problem loan, the appraised value of the collateral is monitored on a quarterly basis. If significant changes occur in market conditions or in the condition of the collateral, a new appraisal will be obtained.

 

Nonaccrual Policy

 

The Corporation does not accrue interest on any loan (1) that is maintained on a cash basis due to the deteriorated financial condition of the borrower, (2) for which payment in full of principal or interest is not expected, or (3) upon which principal or interest has been past due for ninety days or more unless the loan is well secured and in the process of collection.

 

A loan subsequently placed on nonaccrual status may be returned to accrual status if (1) all past due interest and principal is paid with expectations of any remaining contractual principal and interest being repaid or (2) the loan becomes well secured and in the process of collection.

 

Loans placed on nonaccrual status amounted to $1,674,656 and $246,320 at December 31, 2017 and 2016, respectively. There were no past due loans over 90 days and still accruing at December 31, 2017 or 2016. The accrual of interest is discontinued when the loan is placed on nonaccrual. Interest income that would have been recorded on these nonaccrual loans in accordance with their original terms totaled $41,496 and $476 as of December 31, 2017 and 2016, respectively.

 

The following tables present an age analysis of past due loans and nonaccrual loans segregated by class of loans.

 

  

Age Analysis of Past Due Loans

As of December 31, 2017

   30-89 Days Past Due  Greater than 90 Days  Total Past Due Loans  Nonaccrual Loans  Current Loans  Total Loans
                   

Commercial, financial and agricultural loans

  $364,527   $0   $364,527   $394,455   $72,387,415   $73,146,397 
Real estate:                              
Construction loans   198,861    0    198,861    0    22,088,151    22,287,012 
Commercial mortgage loans   645,214    0    645,214    757,085    105,056,043    106,458,342 
Residential loans   2,023,517    0    2,023,517    518,301    96,617,789    99,159,607 
Agricultural loans   0    0    0    0    25,373,621    25,373,621 
Consumer & other loans   30,033    0    30,033    4,815    3,731,484    3,766,332 
                               
         Total loans  $3,262,152   $0   $3,262,152   $1,674,656   $325,254,503   $330,191,311 

 

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Age Analysis of Past Due Loans

As of December 31, 2016

   30-89 Days Past Due  Greater than 90 Days  Total Past Due Loans  Nonaccrual Loans  Current Loans  Total Loans
                   

Commercial, financial and agricultural loans

  $1,264,998   $0   $1,264,998   $38,798   $69,695,627   $70,999,423 
Real estate:                              
Construction loans   66,931    0    66,931    207,522    25,724,842    25,999,295 
Commercial mortgage loans   1,268,405    0    1,268,405    0    90,464,407    91,732,812 
Residential loans   1,376,671    0    1,376,671    0    81,894,312    83,270,983 
Agricultural loans   0    0    0    0    16,580,126    16,580,126 
Consumer & other loans   65,127    0    65,127    0    3,895,365    3,960,492 
                               
         Total loans  $4,042,132   $0   $4,042,132   $246,320   $288,254,679   $292,543,131 

 

Impaired Loans

 

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

At December 31, 2017 and 2016, impaired loans amounted to $4,895,730 and $3,560,901, respectively. A reserve amount of $331,779 and $549,429, respectively, was recorded in the allowance for loan losses for these impaired loans as of December 31, 2017 and 2016.

 

The following tables present impaired loans, segregated by class of loans as of December 31, 2017 and 2016:

 

   Unpaid  Recorded Investment    

Year-to-date

Average

 

Interest

Income Received

December 31, 2017  Principal Balance  With No Allowance  With Allowance  Total  Related Allowance  Recorded Investment  During Impairment
                      

Commercial, financial and agricultural loans

  $459,003   $208,032   $250,971   $459,003   $44,468   $190,994   $10,920 
Real estate:                                   
Construction loans   549,599    428,799    0    428,799    0    299,609    24,487 
Commercial mortgage loans   1,615,811    1,107,654    339,440    1,447,094    57,403    4,130,250    54,582 
Residential loans   2,476,728    316,230    2,079,823    2,396,053    224,916    5,277,602    108,472 
Agricultural loans   142,966    142,966    0    142,966    0    703,079    8,198 
Consumer & other loans   21,815    846    20,969    21,815    4,992    10,684    521 
                                    
         Total loans  $5,265,922   $2,204,527   $2,691,203   $4,895,730   $331,779   $10,612,218   $207,180 

 

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   Unpaid  Recorded Investment    

Year-to-date

Average

 

Interest

Income Received

December 31, 2016  Principal Balance  With No Allowance  With Allowance  Total  Related Allowance  Recorded Investment  During Impairment
                      

Commercial, financial and agricultural loans

  $102,086   $4,798   $97,288   $102,086   $12,021   $21,154   $2,464 
Real estate:                                   
Construction loans   247,015    126,215    0    126,215    0    168,432    12,691 
Commercial mortgage loans   880,670    0    880,670    880,670    245,472    4,005,175    46,195 
Residential loans   2,223,421    230,610    1,971,899    2,202,509    291,936    3,272,528    122,370 
Agricultural loans   246,175    246,175    0    246,175    0    851,740    8,150 
Consumer & other loans   3,246    3,246    0    3,246    0    6,501    201 
                                    
         Total loans  $3,702,613   $611,044   $2,949,857   $3,560,901   $549,429   $8,325,530   $192,071 

 

For the period ending December 31, 2015, the average recorded investment for impaired loans was $6,484,420 and the interest income received during impairment was $237,889.

 

At December 31, 2017 and 2016, included in impaired loans were $4,243 and $914,378, respectively, of troubled debt restructurings.

 

Troubled Debt Restructurings

 

Loans are considered to have been modified in a troubled debt restructuring, or TDR, when due to a borrower’s financial difficulty the Corporation makes certain concessions to the borrower that it would not otherwise consider for new debt with similar risk characteristics. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of the collateral. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time. Not all loan modifications are TDRs. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period.

 

Loan modifications are reviewed and recommended by the Corporation’s senior credit officer, who determines whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether the loan is classified as a TDR include:

 

·         Interest rate reductions – Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

·         Amortization or maturity date changes – Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

·         Principal reductions – Arise when the Corporation charges off a portion of the principal that is not fully collateralized and collectability is uncertain; however, this portion of principal may be recovered in the future under certain circumstances.

-65-
 

 

The following tables present the amount of troubled debt restructuring by loan class, classified separately as accrual and nonaccrual at December 31, 2017 and 2016, as well as those currently paying under restructured terms and those that have defaulted under restructured terms as of December 31, 2017 and 2016. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 or more days past due.

 

   December 31, 2017
         Under restructured terms
  

 

Accruing

  Nonaccruing 

 

#

 

 

Current

 

 

#

 

 

Default

Commercial, financial, and agricultural loans

  $0   $0    0   $0    0   $0 
Real estate:                              
   Construction loans   0    0    0    0    0    0 
   Commercial mortgage loans   0    0    0    0    0    0 
   Residential loans   3,397    0    1    3,397    0    0 
   Agricultural loans   0    0    0    0    0    0 
Consumer & other loans   846    0    1    846    0    0 
Total TDR’s  $4,243   $0    2   $4,243    0   $0 

 

   December 31, 2016
         Under restructured terms
  

 

Accruing

  Nonaccruing 

 

#

 

 

Current

 

 

#

 

 

Default

Commercial, financial, and agricultural loans

  $0   $0    0   $0    0   $0 
Real estate:                              
   Construction loans   0    0    0    0    0    0 
   Commercial mortgage loans   0    0    0    0    0    0 
   Residential loans   4,853    0    1    4,853    0    0 
   Agricultural loans   906,279    0    3    906,279    0    0 
Consumer & other loans   3,246    0    1    3,246    0    0 
Total TDR’s  $914,378   $0    5   $914,378    0   $0 

 

The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and nonaccrual at December 31, 2017 and 2016.

 

   December 31, 2017  December 31, 2016
   Accruing  Nonaccruing  Accruing  Nonaccruing
   #  Balance  #  Balance  #  Balance  #  Balance
Type of concession:                        
Payment modification   0   $0    0   $0    0   $0    0   $0 
Rate reduction   0    0    0    0    0    0    0    0 
Rate reduction, payment modification   2    4,243    0    0    5    914,378    0    0 
Forbearance of interest   0    0    0    0    0    0    0    0 
Total   2   $4,243    0   $0    5   $914,378    0   $0 

 

As of December 31, 2017 and 2016, the Corporation had a balance of $4,243 and $914,378, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans as of December 31, 2017, and no charge-offs as of December 31, 2016. The Corporation’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $0 at both December 31, 2017 and 2016. The Corporation had no unfunded commitment to lend to a customer that has a troubled debt restructured loan as of December 31, 2017.

-66-
 

 

Credit Risk Monitoring and Loan Grading

 

The Corporation employs several means to monitor the risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loss experience and economic conditions.

 

Loans are subject to an internal risk-grading system which indicates the risk and acceptability of that loan. The loan grades used by the Corporation are for internal risk identification purposes and do not directly correlate to regulatory classification categories or any financial reporting definitions.

 

The general characteristics of the risk grades are as follows:

 

Grade 1 – Exceptional – Loans graded 1 are characterized as having a very high credit quality, exhibit minimum risk to the Corporation and have low administrative cost. These loans are usually secured by highly liquid and marketable collateral and a strong primary and secondary source of repayment is available.

 

Grade 2 – Above Average – Loans graded 2 are basically sound credits secured by sound assets and/or backed by the financial strength of borrowers of integrity with a history of satisfactory payments of credit obligations.

 

Grade 3 – Acceptable – Loans graded 3 are secured by sound assets of sufficient value and/or supported by the sufficient financial strength of the borrower. The borrower will have experience in their business area or employed a reasonable amount of time at their current employment. The borrower will have a sound primary source of repayment, and preferably a secondary source, which will allow repayment in a prompt and reasonable period of time.

 

Grade 4 – Fair – Loans graded 4 are those which exhibit some weakness or downward trend in financial condition and although the repayment history is satisfactory, it requires supervision by bank personnel. The borrower may have little experience in their business area or employed only a short amount of time at their current employment. The loan may be secured by good collateral; however, it may require close supervision as to value and/or quality and may not have sufficient liquidation value to completely cover the loan.

 

Grade 5a – Watch – Loans graded 5a contain a discernible weakness; however, the weakness is not sufficiently pronounced so as to cause concern for the possible loss of interest or principal. Loans in this category may exhibit outward signs of stress, such as slowness in financial disclosures or recent payments. However, such signs are not of long duration or of sufficient severity that default appears imminent. Loans in this category are not so deficient as to cause alarm, but do require close monitoring for further deterioration and possible downgrade.

 

Grade 5b – Other Assets Especially Mentioned (OAEM) – Loans graded 5b may otherwise be classified more severely except that the loan is well secured by properly margined collateral, it is generally performing in accordance with the original contract or modification thereof and such performance has seasoned for a period of 90 days, or the ultimate collection of all principal and interest is reasonably expected. Loans in this grade are unsupported by sufficient evidence of the borrower’s sound net worth or repayment capacity or may be subject to third party action that would cause concern for future prompt repayment.

 

Grade 6 – Substandard – Loans graded 6 contain clearly pronounced credit weaknesses that are below acceptable credit standards for the Corporation. Such weaknesses may be due to either collateral deficiencies or inherent financial weakness of the borrower, but in either case represents less than acceptable credit risk. Loans in this grade are unsupported by sufficient evidence of the borrower’s sound net worth, repayment capacity or acceptable collateral.

-67-
 

 

Grade 7 – Doubtful – Loans graded 7 have such a pronounced credit weaknesses that the Corporation is clearly exposed to a significant degree of potential loss of principal or interest. Theses loan generally have a defined weakness which jeopardizes the ultimate repayment of the debt.

 

Grade 8 – Loss – Loans graded 8 are of such deteriorated credit quality that repayment of principal and interest can no longer be considered. These loans are of such little value that their continuance as an active bank asset is not warranted. As of December 31, 2017, all Grade 8 loans have been charged-off.

 

The following tables present internal loan grading by class of loans at December 31, 2017 and 2016:

 

December 31, 2017  Commercial, Financial, and Agricultural  Construction Real Estate  Commercial Real Estate  Residential Real Estate  Agricultural Real Estate  Consumer and Other  Total
Rating:                     
Grade 1- Exceptional  $1,371,135   $0   $0   $23,919   $0   $325,236   $1,720,290 
Grade 2- Above Avg.   0    0    0    0    0    51,421    51,421 
Grade 3- Acceptable   27,024,359    2,085,620    30,090,030    26,304,640    11,071,244    866,455    97,442,348 
Grade 4- Fair   42,821,117    19,772,593    70,518,545    68,103,351    13,781,326    2,494,509    217,491,441 
Grade 5a- Watch   120,626    0    1,027,581    757,628    39,344    7,572    1,952,751 
Grade 5b- OAEM   557,070    0    3,073,051    1,226,841    338,741    1,357    5,197,060 
Grade 6- Substandard   945,238    428,799    1,749,135    2,743,228    142,966    19,782    6,029,148 
Grade 7- Doubtful   306,852    0    0    0    0    0    306,852 
       Total loans  $73,146,397   $22,287,012   $106,458,342   $99,159,607   $25,373,621   $3,766,332   $330,191,311 

 

December 31, 2016  Commercial, Financial, and Agricultural  Construction Real Estate  Commercial Real Estate  Residential Real Estate  Agricultural Real Estate  Consumer and Other  Total
Rating:                     
Grade 1- Exceptional  $615,535   $0   $0   $24,963   $0   $395,765   $1,036,263 
Grade 2- Above Avg.   0    0    0    7,172    289,561    10,195    306,928 
Grade 3- Acceptable   28,049,484    7,456,101    24,383,326    29,654,781    8,899,344    1,343,547    99,786,583 
Grade 4- Fair   40,358,471    18,402,769    62,023,892    48,747,687    6,306,754    2,182,145    178,021,718 
Grade 5a- Watch   111,488    0    1,071,667    832,624    22,642    16,002    2,054,423 
Grade 5b- OAEM   1,561,359    14,210    2,883,133    1,260,719    0    3,247    5,722,668 
Grade 6- Substandard   214,862    126,215    1,370,794    2,743,037    1,061,825    9,591    5,526,324 
Grade 7- Doubtful   88,224    0    0    0    0    0    88,224 
       Total loans  $70,999,423   $25,999,295   $91,732,812   $83,270,983   $16,580,126   $3,960,492   $292,543,131 

 

Allowance for Loan Losses Methodology

 

The allowance for loan losses (ALL) is determined by a calculation based on segmenting the loans into the following categories: (1) impaired loans and nonaccrual loans, (2) loans with a credit risk rating of 5b, 6, 7 or 8, (3) other outstanding loans, and (4) other commitments to lend. In addition, unallocated general reserves are estimated based on migration and economic analysis of the loan portfolio.

-68-
 

 

The ALL is calculated by the addition of the estimated loss derived from each of the above categories. The impaired loans and nonaccrual loans are analyzed on an individual basis to determine if the future collateral value is sufficient to support the outstanding debt of the loan. If an estimated loss is calculated, it is included in the estimated ALL until it is charged to the loan loss reserve. The calculation for loan risk graded 5b, 6, 7 or 8, other outstanding loans and other commitments to lend is based on assigning an estimated loss factor based on a twelve quarter rolling historical weighted average net loss rate. The estimated requirement for unallocated general reserves from migration and economic analysis is determined by considering (1) trends in asset quality, (2) level and trends in charge-off experience, (3) macroeconomic trends and conditions, (4) microeconomic trends and conditions and (5) risk profile of lending activities. Within each of these categories, a risk factor percentage from a rating of excessive, high, moderate or low will be determined by management and applied to the loan portfolio. By adding the estimated value from the migration and economic analysis to the estimated reserve from the loan portfolio, a total estimated loss reserves is obtained. This amount is then compared to the actual amount in the loan loss reserve.

 

The calculation of ALL is performed on a monthly basis and is presented to the Loan Committee and the Board of Directors.

 

Changes in the allowance for loan losses are as follows:

   2017  2016  2015
          
Balance, January 1  $3,124,611   $3,032,242   $3,114,151 
Provision charged to operations   300,000    160,000    141,300 
Loans charged off   (447,747)   (116,006)   (319,200)
Recoveries   66,768    48,375    95,991 
                
Balance, December 31  $3,043,632   $3,124,611   $3,032,242 

 

The following tables detail activity in the ALL by class of loans for the years ended December 31, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

December 31, 2017  Commercial, Financial, and Agricultural  Construction Real Estate  Commercial Real Estate  Residential Real Estate  Agricultural Real Estate  Consumer and Other  Total
Allowance for loan losses:                     
Beginning balance, December 31, 2016  $191,267   $1,043,083   $1,192,098   $420,189   $86,656   $191,318   $3,124,611 
                                    
Charge-offs   113,334    0    168,717    59,764    93,503    12,429    447,747 
Recoveries   63,486    0    0    0    0    3,282    66,768 
Net charge-offs   49,848    0    168,717    59,764    93,503    9,147    380,979 
Provisions charged to operations   182,841    0    33,214    56,049    18,407    9,489    300,000 
Balance at end of period, December 31, 2017  $324,260   $1,043,083   $1,056,595   $416,474   $11,560   $191,660   $3,043,632 
                                    
Ending balance -                                   

Individually evaluated

for impairment

  $44,468   $0   $57,403   $224,916   $0   $4,992   $331,779 
Collectively evaluated for impairment   279,792    1,043,083    999,192    191,558    11,560    186,668    2,711,853 
Balance at end of period  $324,260   $1,043,083   $1,056,595   $416,474   $11,560   $191,660   $3,043,632 
                                    
Loans :                                   
Ending balance -                                   

Individually evaluated

for impairment

  $459,003   $428,799   $4,561,198   $2,448,531   $142,966   $21,815   $8,062,312 
Collectively evaluated for impairment   72,687,394    21,858,213    101,897,144    96,711,076    25,230,655    3,744,517    322,128,999 
Balance at end of period  $73,146,397   $22,287,012   $106,458,342   $99,159,607   $25,373,621   $3,766,332   $330,191,311 

-69-
 

 

At December 31, 2017, of the $8,062,312 loans that were individually evaluated for impairment, only $4,895,730 were deemed impaired.

 

December 31, 2016  Commercial, Financial, and Agricultural  Construction Real Estate  Commercial Real Estate  Residential Real Estate  Agricultural Real Estate  Consumer and Other  Total
Allowance for loan losses:                     
Beginning balance, December 31, 2015  $144,781   $1,043,083   $1,192,098   $381,891   $86,656   $183,733   $3,032,242 
                                    
Charge-offs   103,387    0    0    3,394    0    9,225    116,006 
Recoveries   28,303    0    0    16,994    0    3,078    48,375 
Net charge-offs   75,084    0    0    (13,600)   0    6,147    67,631 
Provisions charged to operations   121,570    0    0    24,698    0    13,732    160,000 
Balance at end of period, December 31, 2016  $191,267   $1,043,083   $1,192,098   $420,189   $86,656   $191,318   $3,124,611 
                                    
Ending balance -                                   

Individually evaluated

for impairment

  $12,021   $0   $245,472   $291,936   $0   $0   $549,429 
Collectively evaluated for impairment   179,246    1,043,083    946,626    128,253    86,656    191,318    2,575,182 
Balance at end of period  $191,267   $1,043,083   $1,192,098   $420,189   $86,656   $191,318   $3,124,611 
                                    
Loans :                                   
Ending balance -                                   

Individually evaluated

for impairment

  $102,086   $126,215   $4,496,700   $2,281,439   $1,061,826   $3,246   $8,071,512 
Collectively evaluated for impairment   70,897,337    25,873,080    87,236,112    80,989,544    15,518,300    3,957,246    284,471,619 
Balance at end of period  $70,999,423   $25,999,295   $91,732,812   $83,270,983   $16,580,126   $3,960,492   $292,543,131 

 

 

At December 31, 2016, of the $8,071,512 loans that were individually evaluated for impairment, only $3,560,901 were deemed impaired.

 

-70-
 

The following table is a summary of amounts included in the ALL for the impaired loans with specific reserves and the recorded balance of the related loans.

 

   Year Ended December 31,
   2017  2016  2015
          
Allowance for loss on impaired loans  $331,779   $549,429   $304,114 
Recorded balance of impaired loans  $4,895,730   $3,560,901   $5,558,615 

 

4. PREMISES AND EQUIPMENT

 

The amounts reported as bank premises and equipment at December 31, 2017 and 2016, are as follows:

 

   2017  2016
Land  $3,846,146   $3,866,891 
Building   12,821,154    12,512,392 
Furniture and equipment   9,442,378    8,846,887 
Construction in process   1,074,744    162,231 
    27,184,422    25,388,401 
Less accumulated depreciation   (14,934,904)   (14,179,116)
           
       Total  $12,249,518   $11,209,285 

 

Depreciation of premises and equipment was $881,000, $923,578, and $961,964 in 2017, 2016, and 2015, respectively. The Corporation depreciates its long-lived assets on various methods over their estimated productive lives, as more fully described in Note 1, Summary of Significant Accounting Policies.

 

A building is being leased for a loan production office opened in Tifton, Georgia, in January 2016. Construction is nearing completion on a full-service banking center in Tifton, Georgia, and is expected to be completed during second quarter 2018.

 

5. INTANGIBLE ASSETS

 

The following table lists the Corporation’s account relationship intangible assets at December 31, 2017 and 2016. These assets have less than two years of remaining amortization.

 

   2017  2016
Amortizing intangible assets          
Account relationships  $19,532   $35,156 
           
Total intangible assets  $19,532   $35,156 

 

The intangible assets’ carrying amount, accumulated amortization and amortization expense for December 31, 2017, and the two succeeding fiscal years are as follows:

 

   2017  2018  2019
Amortizing intangible assets               
                
         Account relationships               
      Gross carrying amount  $125,000   $125,000   $125,000 
      Accumulated amortization   105,468    121,093    125,000 
      Net carrying amount  $19,532   $3,907   $0 
                
      Amortization expense  $15,625   $15,625   $3,907 

 

-71-
 

6. DEPOSITS

 

At December 31, 2017, the scheduled maturities of certificates of deposit are as follows:

  

 

Amount

    
 2018   $70,242,934 
 2019    11,295,919 
 2020    1,526,958 
 2021    515,835 
 2022 and thereafter    50,034 
        
        Total   $83,631,680 

 

The amount of overdraft deposits reclassified as loans were $63,887 and $55,586 for the years ended December 31, 2017 and 2016, respectively. At December 31, 2017, there were 34 certificates of deposit totaling $12,762,235 that were above the FDIC insurance limit of $250,000.

 

7. SHORT-TERM BORROWED FUNDS

 

Federal funds purchased generally mature within one to four days. On December 31, 2017, the Corporation did not have any federal funds purchased. The Corporation had approximately $103,000,000 in unused federal funds and FHLB accommodations at December 31, 2017. The Corporation maintains a line of credit with the Federal Reserve Bank’s Discount Window. The maximum amount that can be borrowed is dependent upon the amount of unpledged securities held by the Corporation as the amount of borrowings must be fully secured.

 

Other short-term borrowed funds consist of FHLB advances of $17,971,429 with interest at 1.73% as of December 31, 2017, and $8,447,619 with interest at 1.28% as of December 31, 2016. At December 31, 2017, two short-term advances totaling $10,000,000 have convertible options by the issuer to convert the rates to a 3-month LIBOR. The Bank intends to pay off these advances at the conversion dates. The Bank has the ability to hold this debt until conversion and the means of repayment. $8.0 million of short-term borrowings are short-term portions of long-term principal reducing Federal Home Loan Bank advances.

 

Information concerning federal funds purchased and FHLB short-term advances are summarized as follows:

 

   2017  2016
       
Average balance during the year  $12,238,066   $8,119,161 
Average interest rate during the year   1.83%   1.28%
           
Maximum month-end balance during the year  $22,114,286   $10,590,476 

 

-72-
 

8. LONG-TERM DEBT

 

Long-term debt at December 31, 2017 and 2016, consisted of the following:

  

   2017    2016   
       
Advance from FHLB with a 3.39% fixed rate of interest maturing August 20, 2018  (convertible to a variable rate at quarterly options of FHLB – no conversion option has been made).  $0   $5,000,000 
           
Advance from FHLB with a 2.78% fixed rate of interest maturing September 10, 2018  (convertible to a variable rate at quarterly options of FHLB – no conversion option has been made).   0    5,000,000 
           
Advance from FHLB with 1.43% fixed rate of interest with annual installment payments maturing September 4, 2018.   0    1,800,000 
           
Advance from FHLB with 1.25% fixed rate of interest with annual installment payments maturing September 30, 2020.   3,200,000    4,800,000 
           
Advance from FHLB with 1.94% fixed rate of interest with annual installment payments maturing December 16, 2022.   3,428,571    4,285,714 
           
Advance from FHLB with 1.42% fixed rate of interest with annual installment payments maturing August 30, 2023.   4,285,715    5,142,857 
           
Advance from FHLB with a 1.53% fixed rate of interest maturing January 10, 2019.   1,500,000    0 
           
Advance from FHLB with a 1.60% fixed rate of interest maturing July 10, 2019.   1,500,000    0 
           
Advance from FHLB with a 1.80% fixed rate of interest maturing July 10, 2020.   2,000,000    0 
           
Advance from FHLB with a 1.93% fixed rate of interest with annual installment payments maturing September 28, 2022.   8,000,000    0 
           
Advance from FHLB with a 2.34% fixed rate of interest with annual installment payments maturing December 5, 2024.   5,142,857    0 
           
Total long-term debt  $29,057,143   $26,028,571 

 

The advances from FHLB are collateralized by the pledging of a combination of 1-4 family residential mortgages and multifamily loans. At December 31, 2017, 1-4 family residential mortgage loans and multifamily loans with a lendable collateral value of $58,684,267 were pledged to secure these advances. In 2016, the advances were secured by 1-4 family residential mortgage loans and multifamily loans with a lendable collateral value of $57,611,388. The amount of FHLB Stock held is based on membership and level of FHLB advances. At year end 2017 and 2016, the amount of stock held that is based on membership was $403,000 and $372,500, respectively, and the amount of stock held that is based on the level of FHLB advances was $2,035,200 and $1,501,700, respectively. At December 31, 2017, the Corporation had approximately $79,200,000 of unused lines of credit with the FHLB.

 

The following are maturities of long-term debt for the next five years. At December 31, 2017, there was no floating rate long-term debt.

 

Due in:  Fixed Rate Amount
 2018   $0 
 2019    9,171,428 
 2020    8,171,429 
 2021    4,571,429 
 2022    4,571,429 
 Later years    2,571,428 
        
 Total long-term debt   $29,057,143 

 

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9. EMPLOYEE BENEFITS AND RETIREMENT PLANS

 

Pension Plan

 

The Corporation has a noncontributory defined benefit pension plan which covers most employees who have attained the age of 21 years and completed one year of continuous service. The Corporation is providing for the cost of this plan as benefits are accrued based upon actuarial determinations employing the aggregate funding method.

 

The table of actuarially computed benefit obligations and net assets and the related changes of the Plan at December 31, 2017, 2016, and 2015, is presented below.

 

   2017  2016  2015
Change in Benefit Obligation         
Benefit obligation at beginning of year  $13,149,559   $13,885,378   $13,322,751 
Service cost   0    0    0 
Interest cost   712,228    764,323    714,604 
Amendments   0    0    0 
Settlement   (129,172)   (841,941)   0 
Benefits paid   (1,116,643)   (1,131,148)   (1,079,912)
Other – net   129,086    472,947    927,935 
Benefit obligation at end of year  $12,745,058   $13,149,559   $13,885,378 

 

               
Change in Plan Assets               
Fair value of plan assets at beginning of year  $10,574,145   $11,420,270   $11,889,678 
Actual return on plan assets   864,481    576,964    110,504 
Employer contribution   480,000    550,000    500,000 
Benefits paid   (1,245,815)   (1,973,089)   (1,079,912)
Fair value of plan assets at end of year  $10,672,811   $10,574,145   $11,420,270 

 

   2017  2016  2015
          
Funded status  $(2,072,247)  $(2,575,414)  $(2,465,108)
Unrecognized net actuarial (gain)/loss   0    0    0 
Unrecognized prior service cost   0    0    0 
Pension liability included in other liabilities  $(2,072,247)  $(2,575,414)  $(2,465,108)
                
Accumulated benefit obligation  $12,745,058   $13,149,559   $13,885,378 

 

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Amount recognized in consolidated

balance sheet consist of the following:

  2017  2016  2015
Accrued Pension  $2,072,247   $2,575,414   $2,465,108 
                
Deferred tax assets  $435,172   $875,641   $838,137 
Accumulated other comprehensive income   1,637,075    1,699,773    1,626,971 
Total  $2,072,247   $2,575,414   $2,465,108 
                
Components of  Pension Cost   2017    2016    2015 
Service cost  $0   $0   $0 
Interest cost on benefit obligation   712,228    764,323    714,604 
Expected return on plan assets   (716,622)   (775,423)   (928,160)
Other - net   587,821    657,260    448,707 
     Net periodic pension cost   583,427    646,160    235,151 
Partial recognition of loss due to settlement   0    426,599    0 
     Total  $583,427   $1,072,759   $235,151 

 

Other changes in plan assets and benefit obligations recognized in comprehensive income:

   2017  2016  2015
Net loss (gain)  $(503,167)  $110,306   $1,032,035 
Prior service costs   0    0    0 
Total recognized in other comprehensive income (loss)   (503,167)   110,306    1,032,035 
Net periodic pension cost   583,427    646,160    235,151 
Partial recognition of loss due to settlement   0    426,599    0 
     Total recognized in net periodic pension cost and other comprehensive income  $(80,260)  $1,183,065   $1,267,186 

 

After adopting ASC Topic 960, Employer’s Accounting for Deferred Benefit Pension Plan and Other Postretirement Plans, and freezing its pension retirement plan, the Corporation decreased the accrued liability by $503,167 in 2017 but increased $110,306 in 2016. Also, changes were made to other comprehensive income (loss) of $62,698 for 2017 and $(72,802) for 2016 on a pre-tax basis. During 2017, the fair value of the plan assets increased $98,666.

 

At December 31, 2017, the plan assets included cash and cash equivalents, certificates of deposits with banks, U.S. government agency securities, corporate notes, and equity securities.

 

Assumptions used to determine the benefit obligation as of December 31, 2017 and 2016 respectively were:

 

   2017  2016
Weighted-Average Assumptions as of December 31      
Discount rate   5.70%   5.70%
Rate of compensation increase   N/A    N/A 

 

For the years ended December 31, 2017, 2016, and 2015, the assumptions used to determine net periodic pension costs are as follows:

   2017  2016  2015
Discount rate   5.70%   5.75%   5.60%
Expected return on plan assets   7.00%   7.00%   8.00%
Rate of compensation increase   N/A    N/A    N/A 

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The expected rate of return represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In determining the expected rate of return, the Corporation considers long-term compound annualized returns of historical market data as well as actual returns on the Corporation’s plan assets, and applies adjustments that reflect more recent capital market experience.

 

The Corporation’s pension plan investment objective is both security and long-term stability, with moderate growth. The investment strategies and policies employed provide for investments, other than “fixed-dollar” investments, to prevent erosion by inflation. Sufficient funds are held in a liquid nature (money market, short-term securities) to allow for the payment of plan benefits and expenses, without subjecting the funds to loss upon liquidation. In an effort to provide a higher return with lower risk, the fund assets are allocated between stocks, fixed income securities, and cash equivalents. All plan investments and transactions are in compliance with ERISA and any other law applicable to employee benefit plans. The targeted investment portfolio is allocated up to 45% in equities, 50% to 90% in fixed-income investments, and up to 20% in cash equivalent investments. All the Corporation’s equity investments are in mutual funds with a Morningstar rating of 3 or higher, have at least $300 million in investments, and have been in existence 5 years or more. Fixed income securities include issues of the U.S. government and its agencies and corporate notes. Any corporate note purchased has a rating (by Standard & Poor’s or Moody’s) of “A” or better. The average maturity of the fixed income portion of the portfolio does not exceed 10 years.

 

Pension Asset Allocation and Fair Value Measurement as of December 31

 

   2017  2016
   Fair Value  Level 1  %  Fair Value  Level 1  %
Investment at fair value as determined by quoted market price:                  
Equity  $4,302,437   $4,302,437    40%  $3,955,631   $3,955,631    38%
Fixed income   1,351,048    1,351,048    13%   2,670,663    2,670,663    25%
        Total  $5,653,485   $5,653,485    53%  $6,626,294   $6,626,294    63%
                               
Investment as estimated fair value:                              
Certificates of deposit  $4,283,144   $4,283,144    40%  $3,514,182   $3,514,182    33%
Cash and cash equivalent   736,182    736,182    7%   433,669    433,669    4%
              Total  $5,019,326   $5,019,326    47%  $3,947,851   $3,947,851    37%
                               
              Total  $10,672,811   $10,672,811    100%  $10,574,145   $10,574,145    100%

 

All of the pension plan’s investments were reported as Level 1 assets and received Level 1 fair value measurement.

 

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels: Level 1 inputs consist of unadjusted quoted prices in active markets for identical assets and have the highest priority, and Level 3 inputs have the lowest priority. These levels are:

 

Level 1 - The fair values of mutual funds, preferred stock, corporate notes, and U.S. government agency securities were based on quoted market prices. Money market funds and certificates of deposit were reported at fair value.

 

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that were not active, and model-based valuation techniques for which all significant assumptions were 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.

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Estimated Contributions

 

The Corporation expects to contribute $360,000 to its pension plan in 2018.

 

Estimated Future Benefit Payments

 

The following benefit payments, which reflect expected future service and decrements as appropriate, are expected to be paid for fiscal years beginning:

 

 2018   $1,168,000 
 2019    1,142,000 
 2020    1,113,000 
 2021    1,087,000 
 2022    1,107,000 
 Years 2023 – 2027    5,033,000 

 

The estimated amortization amount for 2018 is a net loss of $544,601, no prior service cost or credit, and no net transition asset or obligation.

 

Southwest Georgia Bank 401(K) Plan

 

In place of the Corporation’s frozen defined benefit pension retirement plan, the Corporation offers its employees a 401(K) Plan. This 401(K) plan is a qualified defined contribution plan as provided for under Section 401(K) of the Internal Revenue Code. This plan is a “safe–harbor” plan meaning that the Corporation will match contributions dollar for dollar for the first four percent of salary participants defer into the plan. The plan does allow for discretionary match in excess of the four percent and that the participants are allowed to defer the maximum amount of salary. The Corporation matched the employee participants for the first four percent of salary contributing to the plan $204,565, $186,253, and $188,338 for the years ended December 31, 2017, 2016, and 2015, respectively.

 

Employee Stock Ownership Plan

 

The Corporation has a nondiscriminatory Employee Stock Ownership Plan and Trust (the “ESOP”) administered by a trustee. The plan was established to purchase and hold Southwest Georgia Financial Corporation stock for all eligible employees. Contributions to the plan are made solely by the Corporation and are at the discretion of the Board of Directors. The annual amount of the contribution is determined by taking into consideration the financial conditions, profitability, and fiscal requirements of the Corporation. There were contributions of $425,000, $400,000, and $294,642 for the years ended December 31, 2017, 2016, and 2015, respectively. Contributions to eligible participants are based on percentage of annual compensation. As of December 31, 2017, the ESOP holds 256,225 shares of the Corporation’s outstanding common stock. There were 249,618 released shares allocated to the participants. The 6,607 unreleased shares are pledged as collateral for a $105,000 long-term debt incurred from repurchasing participants’ shares. Dividends paid by the Corporation on ESOP shares are allocated to the participants based on shares held. ESOP shares are included in the Corporation’s outstanding shares and earnings per share computation.

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Directors Deferred Compensation Plan

 

The Corporation has a voluntary deferred compensation plan for the Board of Directors administered by an insurance company. The plan stipulates that if a director participates in the Plan for four years, the Corporation will pay the director future monthly income for ten years beginning at normal retirement age, and the Corporation will make specified monthly payments to the director’s beneficiaries in the event of his or her death prior to the completion of such payments. The plan is funded by life insurance policies with the Corporation as the named beneficiary. This plan is closed to new director enrollment and participation.

 

Directors and Executive Officers Stock Purchase Plan

 

The Corporation has adopted a stock purchase plan for the executive officers and directors of Southwest Georgia Financial Corporation. Under the plan, participants may elect to contribute up to $900 monthly of salary or directors’ fees and receive corporate common stock with an aggregate value of two times their contribution. The expense incurred during 2017, 2016, and 2015 on the part of the Corporation totaled $265,900, $290,573, and $282,600, respectively.

 

Stock Option Plan

 

Effective March 19, 1997, the Corporation established a Key Individual Stock Option Plan (the “Option Plan”) which provides for the issuance of options to key employees and directors of the Corporation. In April 1997, the Option Plan was approved by the Corporation’s shareholders, and was effective for the duration of ten years. Under the Option Plan, the exercise price of each option equals the market price of the Corporation’s stock on the grant date for a term of ten years. The fair value of each stock option grant is estimated on the grant date using an option-pricing model using weighted-average assumptions. The fair value of each option was expensed over its vesting period. A maximum of 196,680 shares of common stock were authorized for issuance with respect to options granted under the Option Plan. The Option Plan provided for the grant of incentive stock options and nonqualified stock options to key employees of the Corporation. The Option Plan was administered by the Personnel Committee of the Board of Directors.

 

The following table sets forth the number of stock options granted, the average fair value of options granted, and the weighted-average assumptions used to determine the fair value of the stock options granted.

 

   2017  2016  2015
Number of stock options granted   0    0    0 
Average fair value of stock options granted   0    0    0 
Number of option shares exercisable   0    0    1,000 
Average price of stock options exercisable  $0.00   $0.00   $19.95 

 

A summary of the status of the Option Plan as of December 31, 2017, 2016 and 2015, and the changes in stock options during the years are presented below:

 

  No. of Shares Average Price
Outstanding at December 31, 2014 2,500 $  21.21
Granted 0 0
Expired (1,500) 22.05
Exercised 0 0
Outstanding at December 31, 2015 1,000 $  19.95
Granted 0 0
Expired (1,000) 19.95
Exercised 0 0
Outstanding at December 31, 2016 0 $    0.00
Granted 0 0
Expired 0 0
Exercised 0 0
Outstanding at December 31, 2017 0 $    0.00

 

As of December 31, 2017, the Option Plan and all stock options issued under the Option Plan had expired.

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Dividend Reinvestment and Share Purchase Plan

 

The Corporation maintains a dividend reinvestment and share purchase plan. The purpose of the plan is to provide shareholders of record of the Corporation’s common stock, who elect to participate in the plan, with a simple and convenient method of investing cash dividends and voluntary cash contributions in shares of the common stock without payment of any brokerage commissions or other charges. Eligible participants may purchase common stock through automatic reinvestment of common stock dividends on all or partial shares and make additional voluntary cash payments of not less than $5 nor more than $5,000 per month. The participant’s price of common stock purchased with dividends or voluntary cash payments will be the average price of all shares purchased in the open market, or if issued from unissued shares or treasury stock the price will be the average of the high and low sales prices of the stock on the NYSE American LLC on the dividend payable date or other purchase date. During the years ended December 31, 2017, 2016, and 2015, shares issued through the plan were 5,286, 6,955, and 6,702, respectively, at an average price of $21.18, $15.92, and $14.73, per share, respectively. These numbers of shares and average price per share are not adjusted by stock dividends.

 

Equity Incentive Award

 

The Corporation has a 2013 Omnibus Incentive Plan (the “Incentive Plan”) that was approved by our shareholders at the Corporation’s 2014 Annual Meeting. The Incentive Plan was established to attract, retain and motivate the Corporation’s employees, consultants, advisors and directors, to promote the success of our business by linking their personal interests to those of our shareholders and to encourage stock ownership on the part of management. Under the Incentive Plan, the Corporation may issue a maximum aggregate amount of 125,000 shares of common stock pursuant to (i) stock options, which includes incentive stock options and non-qualified stock options, (ii) stock appreciation rights, (iii) restricted stock awards, (iv) restricted stock units, (v) incentive awards, (vi) other stock-based awards and (vii) dividend equivalents. The Corporation may also grant cash-based awards under the Incentive Plan. The Corporation granted 4,271 shares of restricted stock awards during 2017 of which none are vested. No awards were made during 2016.

 

10. INCOME TAXES

 

Components of income tax expense for 2017, 2016, and 2015 are as follows:

 

   2017  2016  2015
Current expense  $1,101,902   $1,163,230   $900,543 
Deferred taxes (benefit)   517,998    (10,754)   (73,379)
                
Total income taxes  $1,619,900   $1,152,476   $827,164 

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The reasons for the difference between the federal income taxes in the consolidated statements of income and the amount and percentage computed by the applying the combine statutory federal and state income tax rate to income taxes are as follows:

 

   2017  2016  2015
   Amount  %  Amount  %  Amount  %
Taxes at statutory income tax rate  $1,845,313    34.0   $1,763,394    34.0   $1,428,272    34.0 

Reductions in taxes resulting from exempt income

   (524,347)   (9.7)   (547,556)   (10.6)   (540,861)   (12.9)
Other timing differences   298,934    5.5    (63,362)   (1.2)   (60,247)   (1.4)
                               
  Total income taxes  $1,619,900    29.8   $1,152,476    22.2   $827,164    19.7 

  

The sources of timing differences for tax reporting purposes and the related deferred taxes recognized in 2017, 2016, and 2015 are summarized as follows:

 

   2017  2016  2015
          
Nonqualified retirement plan  $0   $0   $(7,229)
Intangible asset amortization   172,816    0    0 
Deferred gain on covered transaction   9,352    498    (24,154)
Nonaccrual loan interest   (6,896)   32,157    (34,104)
Foreclosed assets expenses   (42,075)   (3,413)   (4,577)
Bad debt expense in excess of tax   423,203    (31,405)   27,850 
Realized impairment gain on equity securities   0    0    13,233 
Accretion of discounted bonds   14,772    33,187    26,370 
Gain on disposition of discounted bonds   (28,215)   (23,059)   (3,503)
Book and tax depreciation difference   (24,959)   (18,719)   (67,265)
                
     Total deferred taxes  $517,998   $(10,754)  $(73,379)

 

ASC 740, Income Taxes, requires organizations to recognize the effect of a change in tax rates at the date of enactment by adjusting its deferred tax liabilities and assets to the new tax rate. With the Jobs and Tax Cut Act of 2017 being signed into law in December 2017, our deferred taxes were revalued resulting in additional income tax expense of $419,359 at December 31, 2017, leaving $98,639 as the actual current period timing difference.

 

   December 31
   2017  2016
Deferred tax assets:          
  Nonaccrual loan interest  $8,843   $1,947 
  Deferred gain on covered transaction   14,304    23,657 
  Alternative minimum tax   332,776    434,920 
  Foreclosed assets expenses   51,693    9,618 
  Intangible asset amortization   125,883    298,699 
  Bad debt expense in excess of tax   639,161    1,062,364 
  Realized loss on other-than-temporarily impaired equity securities   214,353    214,353 
  Deferred directors compensation   104,561    0 
  Capital loss carryforward   32,878    0 
  Pension plan   435,172    875,641 
Total deferred tax assets   1,959,624    2,921,199 
Deferred tax liabilities:          
  Accretion on bonds and gain on discounted bonds   55,690    69,133 
  Book and tax depreciation difference   218,634    243,593 
  Unrealized gain (loss) on securities available for sale   1,982    (44,416)
Total deferred tax liabilities   276,306    268,310 
           
Net deferred tax assets  $1,683,318   $2,652,889 

 

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11. RELATED PARTY TRANSACTIONS

 

The ESOP held 256,225 shares of the Corporation’s stock as of December 31, 2017, of which 6,607 shares have been pledged. In the normal course of business, the Bank has made loans at prevailing interest rates and terms to directors and executive officers of the Corporation and its subsidiaries, and to their affiliates. The aggregate indebtedness to the Bank of these related parties approximated $1,079,000 and $1,431,000 at December 31, 2017 and 2016, respectively. During 2017, approximately $2,345,000 of such loans were made, and repayments totaled approximately $2,534,000. None of these above mentioned loans were restructured, nor were any related party loans charged off during 2017 or 2016. Also, during 2017 and 2016, directors and executive officers had approximately $2,072,000 and $2,941,000, respectively, in deposits with the Bank.

 

12. COMMITMENTS, CONTINGENT LIABILITIES, AND FINANCIAL INSTRUMENTS WITH

OFF-BALANCE SHEET RISK

 

In the normal course of business, various claims and lawsuits may arise against the Corporation. Management, after reviewing with counsel all actions and proceedings, considers that the aggregate liability or loss, if any, will not be material.

 

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own risk exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit in the form of loans or through letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of the instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

 

Commitments to extend credit are contractual obligations to lend to a customer as long as all established contractual conditions are satisfied. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by a customer.

 

Standby letters of credit and financial guarantees are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Standby letters of credit and financial guarantees are generally terminated through the performance of a specified condition or through the lapse of time.

 

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual or notional amounts of these instruments. As these off-balance sheet financial instruments have essentially the same credit risk involved in extending loans, the Corporation generally uses the same credit and collateral policies in making these commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, the contractual or notional amounts do not represent future cash requirements.

 

The contractual or notional amounts of financial instruments having credit risk in excess of that reported in the Consolidated Balance Sheets are as follows:

 

   Dec. 31, 2017  Dec. 31, 2016
       
Financial instruments whose contract amounts represent credit risk:          
  Commitments to extend credit  $24,706,357   $34,031,164 
  Standby letters of credit and financial guarantees  $3,134,849   $2,660,000 

 

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The Corporation’s operating leases are comprised of purchase obligations for data processing services and a rental agreement for our loan production office in Tifton, Georgia. We have no capital lease obligations. The following table shows scheduled future cash payments under those obligations as of December 31, 2017.

 

   Payments Due by Period
  

 

 

Total

 

Less

than 1

Year

 

 

1-3

Years

 

 

4-5

Years

 

 

After 5

Years

Operating leases  $23,244   $12,948   $10,296   $0   $0 

 

Rental expenses were $15,600, $15,600, and $1,300 for the years ended December 31, 2017, 2016, and 2015, respectively.

 

13. FAIR VALUE MEASUREMENTS AND DISCLOSURES

 

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 ASC Topic 820, 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 and due from banks, interest bearing deposits in other banks and federal funds sold, the carrying amount is a reasonable estimate of fair value.

 

Certificates of Deposit in Other Banks:

For disclosure purposes for certificates of deposit in other banks, the carrying amount is a reasonable estimate of fair value.

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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 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.  Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

Investment Securities Held to Maturity:

Investment securities held to maturity 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 ASC Topic 310, Accounting by Creditors for Impairment of a Loan.  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 ASC Topic 820, 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.

 

Bank Owned Life Insurance:

For disclosure purposes, for cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value.

 

-83-
 

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.

 

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 December 31, 2017 and 2016.

 

December 31, 2017  Level 1  Level 2  Level 3  Total
Investment securities available for sale:            
  U.S. government treasury securities   $967,770   $0   $0   $967,770 
  U.S. government agency securities    0    43,860,090    0    43,860,090 
  State and municipal securities    0    7,573,689    0    7,573,689 
  Residential mortgage-backed securities   0    1,861,712    0    1,861,712 
  Equity securities   0    100,380    0    100,380 
     Total  $967,770   $53,395,871   $0   $54,363,641 

 

 

December 31, 2016  Level 1  Level 2  Level 3  Total
Investment securities available for sale:            
  U.S. government treasury securities   $962,150   $0   $0   $962,150 
  U.S. government agency securities    0    40,984,897    0    40,984,897 
  State and municipal securities    0    6,452,597    0    6,452,597 
  Residential mortgage-backed securities   0    2,529,314    0    2,529,314 
  Corporate notes   0    2,524,165    0    2,524,165 
  Equity securities   0    112,380    0    112,380 
     Total  $962,150   $52,603,353   $0   $53,565,503 

 

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 GAAP.  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 December 31, 2017 and 2016.

December 31, 2017  Level 1  Level 2  Level 3  Total
Foreclosed assets  $0   $0   $758,878   $758,878 
Impaired loans   0    0    4,563,951    4,563,951 
     Total assets at fair value  $0   $0   $5,322,829   $5,322,829 

 

-84-
 

December 31, 2016  Level 1  Level 2  Level 3  Total
Foreclosed assets  $0   $0   $126,713   $126,713 
Impaired loans   0    0    3,011,472    3,011,472 
     Total assets at fair value  $0   $0   $3,138,185   $3,138,185 

 

Foreclosed properties that are included above as measured at fair value on a nonrecurring basis are those properties that resulted from a loan that had been foreclosed and charged down or have been written down subsequent to foreclosure. Foreclosed properties are generally recorded at the appraised value less estimated selling costs in the range of 15 – 20%. Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have been either partially charged off or have specific reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to a range of 80 – 85% of appraised value which considers the estimated costs to sell. Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows.

 

The carrying amount and estimated fair values of the Corporation’s assets and liabilities which are required to be either disclosed or recorded at fair value at December 31, 2017 and 2016, are as follows:

 

      Estimated Fair Value
December 31, 2017 

Carrying

Amount

  Level 1  Level 2  Level 3  Total
   (Dollars in thousands)
Assets:                         
  Cash and cash equivalents  $34,138   $34,138   $0   $0   $34,138 
  Certificates of deposit in other banks   1,985    1,985    0    0    1,985 
  Investment securities available for sale   54,364    968    53,396    0    54,364 
  Investment securities held to maturity   44,591    0    45,148    0    45,148 
  Federal Home Loan Bank stock   2,438    0    2,438    0    2,438 
  Loans, net   327,130    0    320,684    4,564    325,248 
  Bank owned life insurance   6,553    0    6,553    0    6,553 
Liabilities:                         
  Deposits   397,006    0    397,331    0    397,331 
  Federal Home Loan Bank advances   47,029    0    46,658    0    46,658 

 

      Estimated Fair Value
December 31, 2016 

Carrying

Amount

  Level 1  Level 2  Level 3  Total
   (Dollars in thousands)
Assets:                         
  Cash and cash equivalents  $26,520   $26,520   $0   $0   $26,520 
  Certificates of deposit in other banks   0    0    0    0    0 
  Investment securities available for sale   53,566    962    52,604    0    53,566 
  Investment securities held to maturity   54,603    0    55,123    0    55,123 
  Federal Home Loan Bank stock   1,874    0    1,874    0    1,874 
  Loans, net   289,400    0    286,869    3,011    289,880 
  Bank owned life insurance   5,357    0    5,357    0    5,357 
Liabilities:                         
  Deposits   371,493    0    371,793    0    371,793 
  Federal Home Loan Bank advances   34,476    0    34,337    0    34,337 

 

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.

-85-
 

 

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.

 

14. SUPPLEMENTAL FINANCIAL DATA

 

Components of other income and other operating expense in excess of one percent of gross revenue for the respective periods are as follows:

 

   Years Ended December 31
   2017  2016  2015
Income:               
    Bank card interchange fees  $600,619   $506,506   $487,933 
Expense:               
    Other professional fees  $317,147   $202,267   $230,920 
    Director & board committee fees  $278,821   $328,919   $336,458 
    FDIC insurance assessment  $247,963   $201,605   $240,223 
    Administrative expense – employee benefit plans  $207,602   $231,311   $224,021 

 

15. SHAREHOLDERS’ EQUITY / REGULATORY MATTERS

 

Dividends paid by the Bank subsidiary are the primary source of funds available to the parent company for payment of dividends to its shareholders and other needs. Banking regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. At December 31, 2017, approximately $1,932,331 of the Bank’s net assets were available for payment of dividends without prior approval from the regulatory authorities.

 

The Federal Reserve Board requires that banks maintain reserves based on their average deposits in the form of vault cash and average deposit balances at the Federal Reserve Banks. For the year ended December 31, 2017, the Bank had a total reserve requirement of $5,378,000.

 

The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by such agencies that, if undertaken, could have a direct material effect on the Corporation’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

-86-
 

 

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total, Common Equity Tier I, and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). As of December 31, 2017 and 2016, the Corporation met all capital adequacy requirements.

 

As of December 31, 2017, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum Total risk-based, Common Equity Tier I risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following tables. Under the Basel III rules, the Bank must hold a capital conservation buffer above the minimum regulatory risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2017 is 1.25%. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Corporation’s and the Bank’s actual capital amounts and ratios as of December 31, 2017 and 2016, are also presented in the table.

 

As a result of regulatory limitations at December 31, 2017, approximately $36,700,864 of the parent company’s investments in net assets of the subsidiary bank of $38,633,195, as shown in the accompanying condensed balance sheets in Note 16, was restricted from transfer by the subsidiary bank to the parent company in the form of cash dividends.

 

The Corporation’s and the Bank’s ratios under the above rules at December 31, 2017 and 2016, are set forth in the following tables.

 

As of December 31, 2017 

Actual

 

 

For Capital

Adequacy Purposes

 

To Be Well

Capitalized Under

Prompt Corrective

Action Provisions

                   
   Amount  Ratio  Amount  Ratio  Amount  Ratio
Southwest Georgia Financial Corporation                              
  Common equity Tier I (to risk-weighted assets)  $42,756,979    12.74%  $15,098,672    >4.50%    N/A*    N/A* 
  Total capital (to risk-weighted assets)  $45,800,611    13.65%  $26,842,084    >8.00%    N/A*    N/A* 
  Tier I capital (to risk-weighted assets)  $42,756,979    12.74%  $20,131,563    >6.00%    N/A*    N/A* 
  Leverage (tier I capital to average assets)  $42,756,979    8.79%  $19,467,338    >4.00%    N/A*    N/A* 
                               
Southwest Georgia Bank                              
  Common equity Tier I (to risk- weighted assets)  $40,247,187    12.02%  $15,069,727    >4.50%   $21,767,383    >  6.50% 
  Total capital (to risk-weighted assets)  $43,290,819    12.93%  $26,790,625    >8.00%   $33,488,282    >10.00% 
  Tier I capital (to risk-weighted assets)  $40,247,187    12.02%  $20,092,969    >6.00%   $26,790,625    >  8.00% 
  Leverage (tier I capital to average assets)  $40,247,187    8.29%  $19,418,765    >4.00%   $24,273,457    >  5.00% 

 

-87-
 

 

As of December 31, 2016 

Actual

 

 

For Capital

Adequacy Purposes

 

To Be Well

Capitalized Under

Prompt Corrective

Action Provisions

                   
   Amount  Ratio  Amount  Ratio  Amount  Ratio
Southwest Georgia Financial Corporation                              
  Common equity Tier 1 (to risk- weighted assets)  $40,187,232    13.03%  $13,878,302    >4.50%    N/A*    N/A* 
  Total capital (to risk-weighted assets)  $43,311,843    14.04%  $24,672,536    >8.00%    N/A*    N/A* 
  Tier I capital (to risk-weighted assets)  $40,187,232    13.03%  $18,504,402    >6.00%    N/A*    N/A* 
  Leverage (tier I capital to average assets)  $40,187,232    8.87%  $18,113,752    >4.00%    N/A*    N/A* 
                               
Southwest Georgia Bank                              
   Common equity Tier 1 (to risk- weighted assets)  $38,377,058    12.47%  $13,848,917    >4.50%   $20,003,991    >  6.50% 
  Total capital (to risk-weighted assets)  $41,501,669    13.48%  $24,620,297    >8.00%   $30,775,371    >10.00% 
  Tier I capital (to risk-weighted assets)  $38,377,058    12.47%  $18,465,223    >6.00%   $24,620,297    >  8.00% 
  Leverage (tier I capital to average assets)  $38,377,058    8.49%  $18,077,111    >4.00%   $22,596,389    >  5.00% 

 

 

*N/A - As of December 31, 2017, the Corporation met the definition under the Basel III Capital Rules of a small bank holding company and, therefore, was exempt from consolidated risk-based and leverage capital adequacy guidelines for bank holding companies.

-88-
 

 

16. PARENT COMPANY FINANCIAL DATA

 

Southwest Georgia Financial Corporation’s condensed balance sheets as of December 31, 2017 and 2016, and its related condensed statements of operations and cash flows for the years ended are as follows:

 

Condensed Balance Sheets

as of December 31, 2017 and 2016

(Dollars in thousands)

 

 

   2017  2016
ASSETS
Cash  $1,694   $940 
Investment in consolidated wholly-owned bank          
  subsidiary, at equity   38,633    36,612 
Loans   105    185 
Other assets   711    685 
           
       Total assets  $41,143   $38,422 
           
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
       Total liabilities  $0   $0 
           
Shareholders’ equity:          
  Common stock, $1 par value, 5,000,000 shares          
      authorized, 4,293,835 shares for 2017 and 2016  issued   4,294    4,294 
  Additional paid-in capital   31,701    31,701 
  Retained earnings   33,020    30,334 
  Accumulated other comprehensive loss   (1,629)   (1,786)
  Treasury stock, at cost, 1,752,330 for 2017          
     and 1,746,398 for 2016   (26,243)   (26,121)
           
       Total shareholders’ equity   41,143    38,422 
           
       Total liabilities and shareholders’ equity  $41,143   $38,422 

 

-89-
 

16. PARENT COMPANY FINANCIAL DATA (continued)

 

Condensed Statements of Income and Expense

for the years ended December 31, 2017, 2016, and 2015

(Dollars in thousands)

  

   2017  2016  2015
          
Income:               
  Dividend received from bank subsidiary  $2,000   $0   $2,685 
  Interest income   26    23    12 
                
       Total income   2,026    23    2,697 
                
Expenses:               
  Other   172    178    141 
                
Income before income taxes and equity in               
  Undistributed income of bank subsidiary   1,854    (155)   2,556 
                
Income tax benefit – allocated from               
  consolidated return   88   91   87
                
       Income before equity in undistributed               
          income of subsidiary   1,942    (64)   2,643 
                
Equity in undistributed income of subsidiary   1,865    4,098    731 
                
       Net income   3,807    4,034    3,374 
                
Retained earnings – beginning of year   30,334    27,370    25,015 
                
Cash dividend declared   (1,121)   (1,070)   (1,019)
                
Retained earnings – end of year  $33,020   $30,334   $27,370 
                

 

-90-
 

16. PARENT COMPANY FINANCIAL DATA (continued)

 

Condensed Statements of Cash Flows

for the years ended December 31, 2017, 2016, and 2015

(Dollars in thousands)

  

   2017  2016  2015
          
Cash flow from operating activities:               
  Net income  $3,807   $4,034   $3,374 
  Adjustments to reconcile net income to net               
  cash used by operating activities:               
     Equity in undistributed earnings of               
        Subsidiary   (1,865)   (4,098)   (731)
     Changes in:               
        Other assets   (25)   (16)   (34)
                
       Net cash provided (used) for operating activities   1,917    (80)   2,609 
                
Cash flow from investing activities:               
  Net change in loans   80    178    (347)
                
       Net cash provided (used) for investing               
          activities   80    178    (347)
                
Cash flow from financing activities:               
  Cash dividend paid to shareholders   (1,121)   (1,070)   (1,019)
  Payment to repurchase common stock   (122)   (7)   0 
                
       Net cash used for financing activities   (1,243)   (1,077)   (1,019)
                
        Increase (decrease) in cash   754    (979)   1,243 
                
Cash – beginning of year   940    1,919    676 
                
Cash – end of year  $1,694   $940   $1,919 
                
                

 

-91-
 

17. EARNINGS PER SHARE

 

Earnings per share are based on the weighted average number of common shares outstanding during the year.

 

   December 31,
   2017  2016  2015
Net income  $3,807,492   $4,033,977   $3,373,635 
Net income available to common shareholders  $3,807,492   $4,033,977   $3,373,635 
                
Average number of common shares outstanding   2,547,421    2,547,778    2,547,837 
Effect of dilutive restricted stock   1   0    0 
                
Average number of common shares outstanding used to calculate diluted earnings per common share   2,547,422    2,547,778    2,547,837 
                
Earnings per share - basic  $1.49   $1.58   $1.32 
Earnings per share - diluted  $1.49   $1.58   $1.32 
                

  

 

-92-
 

 18. QUARTERLY DATA

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY DATA
(UNAUDITED)
(Dollars in thousands)

 

   For the Year 2017
   Fourth  Third  Second  First
Interest and dividend income  $5,018   $4,859   $4,767   $4,502 
Interest expense   559    472    435    436 
Net interest income   4,459    4,387    4,332    4,066 
Provision for loan losses   75    75    75    75 
Net interest income after provision for loan losses   4,384    4,312    4,257    3,991 
Noninterest income   960    969    1,100    1,283 
Noninterest expenses   3,892    4,068    3,968    3,901 
Income before income taxes   1,452    1,213    1,389    1,373 
Provision for income taxes   735    261    316    308 
Net income  $717   $952   $1,073   $1,065 
Earnings per share of common stock:                    
  Basic  $.28   $.37   $.42   $.42 
  Diluted  $.28   $.37   $.42   $.42 
                     

 

   For the Year 2016
   Fourth  Third  Second  First
Interest and dividend income  $4,449   $4,408   $4,287   $4,269 
Interest expense   431    412    394    375 
Net interest income   4,018    3,996    3,893    3,894 
Provision for loan losses   45    45    40    30 
Net interest income after provision for loan losses   3,973    3,951    3,853    3,864 
Noninterest income   1,076    1,060    1,097    1,226 
Noninterest expenses   3,767    3,739    3,680    3,728 
Income before income taxes   1,282    1,272    1,270    1,362 
Provision for income taxes   280    299    259    314 
Net income  $1,002   $973   $1,011   $1,048 
Earnings per share of common stock:                    
  Basic  $.39   $.38   $.40   $.41 
  Diluted  $.39   $.38   $.40   $.41 
                     

 

19. SEGMENT REPORTING

 

The Corporation operations are divided into four reportable business segments: The Retail and Commercial Banking Services, Insurance Services, Wealth Strategies Services, and Financial Management Services. These operating segments have been identified primarily based on the Corporation’s organizational structure.

 

The Retail and Commercial Banking Services segment serves consumer and commercial customers by offering a variety of loan and deposit products, and other traditional banking services.

-93-
 

 

The Insurance Services segment offers clients a full spectrum of commercial and personal lines insurance products including life, health, property, and casualty insurance.

 

The Wealth Strategies Services segment provides personal trust administration, estate settlement, investment management, employee retirement benefit services, and the Individual Retirement Account (IRA) administration. Also, this segment offers full-service retail brokerage which includes the sale of retail investment products including stocks, bonds, mutual funds, and annuities.

 

The Financial Management Services segment is responsible for the management of the investment securities portfolio. It also is responsible for managing financial risks, including liquidity and interest rate risk.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Corporation evaluates performance based on profit or loss from operations after income taxes not including nonrecurring gains or losses.

 

The Corporation’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technology and marketing strategies.

 

The Corporation allocates capital and funds used or funds provided for each reportable business segment. Also, each segment is credited or charged for the cost of funds provided or used. These credits and charges are reflected as net intersegment interest income (expense) in the table below. The Corporation does allocate income taxes to the segments. Other revenue represents noninterest income, exclusive of the net gain (loss) on disposition of assets and expenses associated with administrative activities which are not allocated to the segments. Those expenses include audit, compliance, investor relations, marketing, personnel, and other executive or parent company expenditures.

 

The Corporation does not have operating segments other than those reported. Parent Company and the Administrative Offices financial information is included in the “Other” category, and is deemed to represent an overhead function rather than an operating segment. The Administrative Offices include audit, marketing, information technology, personnel, and the executive office.

 

The Corporation does not have a single external customer from which it derives 10% or more of its revenue and operates in one geographical area.

 

Information about reportable business segments, and reconciliation of such information to the consolidated financial statements for the years ended December 31, 2017, 2016, and 2015, are as follows:

 

-94-
 

Segment Reporting

For the year ended December 31, 2017

 

   Retail and Commercial Banking  Insurance Services  Wealth Strategies  Financial Management  Inter-segment Elimination  Other  Totals
   (Dollars in thousands)
Net Interest Income (expense)                                   
  external customers  $15,119    0    0    2,099    0    26   $17,244 
Net intersegment interest                                   
  income (expense)   1,817    16    (6)   (1,827)   0    0    0 
Net Interest Income   16,936    16    (6)   272    0    26    17,244 
                                    
Provision for Loan Losses   300    0    0    0    0    0    300 
                                    
Noninterest Income (expense)                                   
  external customers   2,099    1,525    612    75    0    1    4,312 
Intersegment noninterest                                   
  income (expense)   (16)   16    32    0    (32)   0    0 
Total Noninterest Income   2,083    1,541    644    75    (32)   1    4,312 
                                    
Noninterest Expenses:                                   
Depreciation   685    33    24    56    0    83    881 
Amortization of intangibles   0    16    0    0    0    0    16 
Other Noninterest expenses   10,328    1,119    592    780    0    2,113    14,932 
Total Noninterest expenses   11,013    1,168    616    836    0    2,196    15,829 
                                    
Pre-tax Income   7,706    389    22   (489)   (32)   (2,169)   5,427 
                                    
Provision for Income Taxes   1,784    86    (2)   306   0    (554)   1,620 
                                    
Net Income  $5,922    303    24    (795)   (32)   (1,615)  $3,807 
                                    
Assets  $567,723    1,687    177    138,598    (219,840)   727   $489,072 
                                    
Expenditures for Fixed Assets  $1,888    48    2    17    0    0   $1,955 

 

      
Amounts included in the "Other" column are as follows:  
    Other   
Net interest Income:       
   Parent Company  $26   
Noninterest Income:       
   Executive office miscellaneous income   1   
Noninterest Expenses:       
   Parent Company corporate expenses   172   
   Executive office expenses not       
     allocated to segments   2,024   
Provison for Income taxes:       
   Parent Company income taxes (benefit)   (88)  
   Executive office income taxes not       
     allocated to segments   (466)  
Net Income:  $(1,615)  
        
Segment assets:       
    Parent Company assets, after       
      intercompany elimination  $727   

-95-
 

 

Segment Reporting

For the year ended December 31, 2016

 

   Retail and Commercial Banking  Insurance Services  Wealth Strategies  Financial Management  Inter-segment Elimination  Other  Totals
   (Dollars in thousands)
Net Interest Income (expense)                                   
  external customers  $13,837    0    0    1,940    0    24   $15,801 
Net intersegment interest                                   
  income (expense)   1,671    11    (6)   (1,676)   0    0    0 
Net Interest Income   15,508    11    (6)   264    0    24    15,801 
                                    
Provision for Loan Losses   160    0    0    0    0    0    160 
                                    
Noninterest Income (expense)                                   
  external customers   2,316    1,477    584    80    0    2    4,459 
Intersegment noninterest                                   
  income (expense)   (11)   11    32    0    (32)   0    0 
Total Noninterest Income   2,305    1,488    616    80    (32)   2    4,459 
                                    
Noninterest Expenses:                                   
Depreciation   738    30    23    57    0    76    924 
Amortization of intangibles   0    16    0    0    0    0    16 
Other Noninterest expenses   9,260    1,184    585    737    0    2,208    13,974 
Total Noninterest expenses   9,998    1,230    608    794    0    2,284    14,914 
                                    
Pre-tax Income   7,655    269    2   (450)   (32)   (2,258)   5,186 
                                    
Provision for Income Taxes   1,794    61    (7)   (107)   0    (589)   1,152 
                                    
Net Income  $5,861    208    9    (343)   (32)   (1,669)  $4,034 
                                    
Assets  $507,538    1,414    199    148,099    (209,619)   870   $448,501 
                                    
Expenditures for Fixed Assets  $1,409    15    11    20    0    0   $1,455 

 

      
Amounts included in the "Other" column are as follows:  
    Other   
Net interest Income:       
   Parent Company  $24   
Noninterest Income:       
   Executive office miscellaneous income   2   
Noninterest Expenses:       
   Parent Company corporate expenses   178   
   Executive office expenses not       
     allocated to segments   2,106   
Provison for Income taxes:       
   Parent Company income taxes (benefit)   (91)  
   Executive office income taxes not       
     allocated to segments   (498)  
Net Income:  $(1,669)  
        
Segment assets:       
    Parent Company assets, after       
      intercompany elimination  $870   

-96-
 

 

Segment Reporting

For the year ended December 31, 2015

 

   Retail and Commercial Banking  Insurance Services  Wealth Strategies  Financial Management  Inter-segment Elimination  Other  Totals
   (Dollars in thousands)
Net Interest Income (expense)                                   
  external customers  $11,888    0    0    2,212    0    12   $14,112 
Net intersegment interest                                   
  income (expense)   1,901    6    (5)   (1,902)   0    0    0 
Net Interest Income   13,789    6    (5)   310    0    12    14,112 
                                    
Provision for Loan Losses   141    0    0    0    0    0    141 
                                    
Noninterest Income (expense)                                   
  external customers   2,110    1,371    700    78    0    1    4,260 
Intersegment noninterest                                   
  income (expense)   (6)   6    35    0    (35)   0    0 
Total Noninterest Income   2,104    1,377    735    78    (35)   1    4,260 
                                    
Noninterest Expenses:                                   
Depreciation   767    31    23    66    0    75    962 
Amortization of intangibles   0    16    0    0    0    0    16 
Other Noninterest expenses   8,492    1,203    717    687    0    1,953    13,052 
Total Noninterest expenses   9,259    1,250    740    753    0    2,028    14,030 
                                    
Pre-tax Income   6,493    133    (10)   (365)   (35)   (2,015)   4,201 
                                    
Provision for Income Taxes   1,390    28    (10)   (81)   0    (500)   827 
                                    
Net Income  $5,103    105    0    (284)   (35)   (1,515)  $3,374 
                                    
Assets  $453,406    1,287    175    149,830    (190,875)   1,032   $414,855 
                                    
Expenditures for Fixed Assets  $353    14    0    4    0    0   $371 

 

      
Amounts included in the "Other" column are as follows:  
    Other   
Net interest Income:       
   Parent Company  $12   
Noninterest Income:       
   Executive office miscellaneous income   1   
Noninterest Expenses:       
   Parent Company corporate expenses   141   
   Executive office expenses not       
     allocated to segments   1,887   
Provison for Income taxes:       
   Parent Company income taxes (benefit)   (87)  
   Executive office income taxes not       
     allocated to segments   (413)  
Net Income:  $(1,515)  
        
Segment assets:       
    Parent Company assets, after       
      intercompany elimination  $1,032   

-97-
 

20. SUBSEQUENT EVENTS

 

The Corporation performed an evaluation of subsequent events through March 29, 2018, the date upon which the Corporation’s financial statements were available for issue. The Corporation has not evaluated subsequent events after this date. At its meeting on February 28, 2018, the Board of Directors adopted a resolution to retire its treasury stock. The number of treasury shares retired was 1,748,059.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

The Corporation did not change accountants nor have any disagreements with its accountants on any matters of accounting practices or principles or financial statement disclosure.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Corporation’s management, including the Chief Executive Officer and Principal Financial Officer, supervised and participated in an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures (as defined in federal securities rules) as of December 31, 2017. Based on, and as of the date of, that evaluation, the Corporation’s Chief Executive Officer and Principal 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 Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the SEC’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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’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, 2017, is included in Item 8 of this Annual Report on Form 10-K under the heading “Management’s Report on Internal Controls Over Financial Reporting.”

 

Changes in Internal Control Over Financial Reporting

 

No changes were made to the Corporation’s internal control over financial reporting during the last fiscal quarter that materially affected or could reasonably likely to materially affect the Corporation’s internal controls over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information contained under the heading “Information About Nominees For Director” and “Compliance

with Section 16(a) of the Exchange Act” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 22, 2018, to be filed with the SEC, is incorporated herein by reference.

-98-
 

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information contained under the heading “Executive Compensation” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 22, 2018, to be filed with the SEC, is incorporated herein by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

 

The information contained under the heading “Voting Securities and Principal Holders” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 22, 2018, to be filed with the SEC, and the information contained in Item 5 hereof under the heading “Securities Authorized for Issuance Under Equity Compensation Plans,” is incorporated herein by reference.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information contained under the heading “Certain Relationships and Related Party Transactions” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 22, 2018, to be filed with the SEC, is incorporated herein by reference.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information contained under the heading “Information Concerning the Corporation’s Accountants” in the definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 22, 2018, to be filed with the SEC, is incorporated herein by reference.

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)   Financial Statements
     
  The following consolidated financial statements and supplementary information for the fiscal years ended
  December 31, 2017, 2016, and 2015 are included in Part II, Item 8 herein:
     
  (i) Report of Independent Auditors
     
  (ii)

Consolidated Balance Sheets – December 31, 2017 and 2016

     
  (iii) Consolidated Statements of Income – Years ended December 31, 2017, 2016, and 2015
     
  (iv) Consolidated Statements of Comprehensive Income – Years ended December 31, 2017, 2016, and
    2015
     
  (v) Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2017,
   

2016, and 2015

     
  (vi)

Consolidated Statements of Cash Flows – Years ended December 31, 2017, 2016, and 2015

     
  (vii) Notes to Consolidated Financial Statements – December 31, 2017
     
(b)  

Financial Statement Schedules

     
  All applicable financial statement schedules required have been included in the Notes to the Consolidated
  Financial Statements.
     
(c)   Exhibits:

-99-
 

 

The exhibits filed as part of this registration statement are as follows:

 

Exhibit Number Description Of Exhibit
   
3.1 Articles of Incorporation of Southwest Georgia Financial Corporation, as amended and restated (included as Exhibit 3.1 to the Corporation’s Form 10-KSB dated December 31, 1996, previously filed with the SEC and incorporated herein by reference).
   
3.2 Bylaws of the Corporation, as amended (included as Exhibit 3.2 to the Corporation’s Form 10-KSB dated December 31, 1995, previously filed with the SEC and incorporated herein by reference).
   
10.1 Form of Directors’ Deferred Compensation Plan of the Corporation (included as Exhibit 10.3 to the Corporation’s Form S-18 dated January 23, 1990, previously filed with the SEC and incorporated herein by reference).*
   
10.2 Directors and Executive Officers Stock Purchase Plan of the Corporation dated August 22, 2012 (included as Exhibit 4 to the Corporation’s Form S-8 dated October 11, 2012, previously filed with the SEC and incorporated herein by reference).*
   
10.3 Amendment No. 1 to Directors and Executive Officers Stock Purchase Plan of the Corporation dated March 23, 2016 (included as Exhibit 10.3 to the Corporation’s Form 10-K dated December 31, 2016, previously filed with the SEC and incorporated herein by reference).*
   
10.4 Supplemental Retirement Plan of the Corporation dated December 21, 1994 (included as Exhibit 10.11 to the Corporation’s Form 10-KSB dated December 31, 1994, previously filed with the SEC and incorporated herein by reference).*
   
10.5 Trust under the Corporation’s Supplemental Retirement Plan, as amended (included as Exhibit 10.6b to the Corporation’s Form 10-K dated December 31, 1997, previously filed with the SEC and incorporated herein by reference).*
   
10.6 Dividend Reinvestment and Share Purchase Plan of the Corporation, as amended and restated by Amendment No. 1 (included as Exhibit 99 to the Corporation’s Form S-3DPOS dated September 30, 1998, previously filed with the SEC and incorporated herein by reference).
   
10.7 Employment Agreement of DeWitt Drew (included as Exhibit 10.11 to the Corporation’s Form S-4 dated January 6, 2004, previously filed with the SEC and incorporated herein by reference).*
   
10.8 2013 Omnibus Incentive Plan of the Corporation dated December 18, 2013 (included as Appendix I to the Corporation’s Proxy Statement dated April 17, 2014, previously filed with the SEC and incorporated herein by reference).*

 

-100-
 

   
10.9 Employee Stock Ownership Plan and Trust of the Corporation, as restated effective as of January 1, 2014 (included as Exhibit 10.10 to the Corporation’s Form 10-K dated December 31, 2016, previously filed with the SEC and incorporated herein by reference).*
   
10.10 Southwest Georgia Bank 401(k) Plan, as restated effective as of January 1, 2015 (included as Exhibit 10.11 to the Corporation’s Form 10-K dated December 31, 2016, previously filed with the SEC and incorporated herein by reference).*
   
10.11 Pension Retirement Plan of the Corporation, as amended and restated effective as of January 1, 2015; amended effective as of December 1, 2016 (included as Exhibit 10.12 to the Corporation’s Form 10-K dated December 31, 2016, previously filed with the SEC and incorporated herein by reference).*
   
10.12 Form of Restricted Stock Award Agreement.*
   
14 Code of Ethical Conduct dated February 27, 2008 (included as Exhibit 14 to the Corporation’s Form 8-K dated February 27, 2008, previously filed with the SEC and incorporated herein by reference).
   
21 Subsidiaries of the Corporation
   
23.1 Consent of TJS Deemer Dana, LLP
   
31.1 Section 302 Certification of Periodic Financial Report by Chief Executive Officer.
   
31.2 Section 302 Certification of Periodic Financial Report by Principal Financial Officer.
   
32.1 Section 906 Certification of Periodic Financial Report by Chief Executive Officer.
   
32.2 Section 906 Certification of Periodic Financial Report by Principal Financial Officer.
   
101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.

 

ITEM 16. FORM 10-K SUMMARY

 

None.

-101-
 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Southwest Georgia Financial Corporation
    (Corporation)
       
Date: March 30, 2018   By: /s/ DeWitt Drew                                
      DEWITT DREW
      President and Chief Executive Officer
       
Date: March 30, 2018     /s/ Karen T. Boyd                              
      KAREN T. BOYD
      Senior Vice President and Treasurer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Corporation and in the capacities and on the dates indicated.

 

 

/s/ Roy Reeves      Date:  March 30, 2018

ROY REEVES

Chairman

   
     
/s/ Cecil H. Barber                                      Date:  March 30, 2018

CECIL H. BARBER

Vice Chairman

   
     
/s/ Richard L. Moss                                        Date:  March 30, 2018

RICHARD L. MOSS

Director

   
     
/s/ John J. Cole, Jr.                                     Date:  March 30, 2018

JOHN J. COLE, JR.

Director

   
     
/s/ Johnny R. Slocumb                                    Date:  March 30, 2018

JOHNNY R. SLOCUMB

Director

   
     
/s/ M. Lane Wear                                    Date:  March 30, 2018

M. LANE WEAR

Director

   
     
/s/ Marcus R. Wells                                    Date:  March 30, 2018

MARCUS R. WELLS

Director

   

 

-102-
 

Exhibit Index

 

 

Exhibit Number Description of Exhibit  
     
10.12 Form of Restricted Stock Award Agreement  
     
21 Subsidiaries of the Corporation  
     
23.1 Consent of TJS Deemer Dana, LLP  
     
31.1 Section 302 Certification of Periodic Financial Report by Chief Executive Officer.  
     
31.2 Section 302 Certification of Periodic Financial Report by Principal Financial Officer.  
     
32.1 Section 906 Certification of Periodic Financial Report by Chief Executive Officer.  
     
32.2 Section 906 Certification of Periodic Financial Report by Principal Financial Officer.  
     
101.INS XBRL Instance Document  
     
101.SCH XBRL Taxonomy Extension Schema Document  
     
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document  
     
101.DEF XBRL Taxonomy Extension Definition Linkbase Document  
     
101.LAB XBRL Taxonomy Extension Label Linkbase Document  
     
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document  

 

-103-