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, 2006
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________.
Commission file number 1-12053
Southwest Georgia Financial Corporation
(Exact Name of Corporation as specified in its charter)
Georgia 58-1392259
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 First Street, S. E.
Moultrie, Georgia 31768
(Address of principal executive offices) (Zip Code)
(Corporation's telephone number, including area code) (229) 985-1120
Securities registered pursuant to Section 12(b) of this Act:
Common Stock $1 Par Value American Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the Act).
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
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 stock held by nonaffiliates of the registrant
as of June 30, 2006: $48,445,553 based on 2,392,373 shares at the price of
$20.25 per share.
As of March 24, 2007, 4,288,555 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 2007 annual
meeting of shareholders, to be filed with the Commission are incorporated by
reference into Part III.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market Price of and Dividends on the Corporation's Common
Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Stockholder Related Matters
Item 13. Certain Relationships and Related Transactions and Director
Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
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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. Currently, it is a
FDIC insured, state-chartered bank.
The Corporation's primary business is providing banking services to
individuals and businesses principally in Colquitt County, Baker County,
Thomas County, Worth County, and the surrounding counties of southwest
Georgia through the Bank. The Bank also operates Empire Financial Services,
Inc. ("Empire"), a commercial mortgage banking firm. The Corporation's
executive office is located at 201 First Street, S. E., Moultrie, Georgia
31768, and its telephone number is (229) 985-1120.
All references herein to the Corporation include Southwest Georgia Financial
Corporation, the Bank, and Empire, unless the context indicates a different
meaning.
General
The Corporation is a registered bank holding company. All of the
Corporation's activities are currently conducted by the Bank and Empire. The
Bank is community-oriented and offers such customary banking services as
consumer and commercial checking accounts, NOW accounts, savings accounts,
certificates of deposit, lines of credit, MasterCard and VISA accounts, and
money transfers. The Bank finances commercial and consumer transactions,
makes secured and unsecured loans, and provides a variety of other banking
services. The Bank has a trust and investment 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 trust and investment area has a securities sales
department which offers full service brokerage and through a third party
service provider. The Bank operates Southwest Georgia Insurance Services
Division, an insurance agency that offers property and casualty insurance,
life, health, and disability insurance. Empire, a subsidiary of the Bank, is
a commercial mortgage banking firm that offers commercial mortgage banking
services.
Markets
The Corporation conducts banking activities in multiple counties in southwest
Georgia. Agriculture plays an important part in the economy of the Bank's
market area. A large portion of Georgia's produce crops, which include
turnips, cabbage, sweet potatoes, and squash, and its producers of tobacco,
peanuts, and cotton are in the Bank's market. In addition, manufacturing
firms, service industries, and retail stores employ a large number of
residents. Apparel, lumber and wood products, and textile manufacturers are
among the various types of manufacturers located in the Bank's market.
Empire provides mortgage banking services which includes underwriting,
construction, and long-term financing of commercial properties principally
throughout the Southeastern United States.
Deposits
The Bank offers a full range of depository accounts and services to both
consumers and businesses. At December 31, 2006, the Corporation's deposit
base, totaling $226,709,112, consisted of $33,387,979 in noninterest-bearing
demand deposits (14.7% of total deposits), $79,389,689 in interest-bearing
demand deposits including money market accounts (35.1% of total deposits),
$22,228,442 in savings deposits (9.8% of total deposits), $65,977,976 in time
deposits in amounts less than $100,000 (29.1% of total deposits), and
$25,725,026 in time deposits of $100,000 or more (11.3 % of total deposits).
Loans
The Bank makes both secured and unsecured loans to individuals, corporations,
and other businesses. Both consumer and commercial lending operations
include various types of credit for the Bank's customers. Secured loans
include first and second real estate mortgage loans. The Bank also makes
direct installment loans to consumers on both a secured and unsecured basis.
At December 31, 2006, consumer installment, real estate (including
construction and mortgage loans), and commercial (including financial and
agricultural) loans represented approximately 6.6%, 76.7% and 16.7%,
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
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of secured and unsecured loans which can be made to a single borrower or
related group of borrowers.
The Loan Committee of the Bank's Board of Directors is responsible for
approving and monitoring the loan policy and providing guidance and counsel
to all lending personnel. It also approves all extensions of credit over
$200,000. The Loan Committee is composed of the Chief Executive Officer and
President, and other executive officers of the Bank, as well as certain Bank
Directors.
Servicing and Origination Fees on Loans
The Corporation through its subsidiary, Empire, recognizes as income in the
current period all loan origination and brokerage fees collected on loans
closed for investing participants. Loan servicing fees are based on a
percentage of loan interest paid by the borrower and are recognized over the
term of the loan as loan payments are received. Empire does not directly
fund any mortgages and acts as a service-oriented broker for participating
mortgage lenders. Fees charged for continuing servicing fees are comparable
with market rates. In 2006, Bank revenue received from mortgage banking
services was $3,978,271 compared with $4,416,543 in 2005. All of this income
was from Empire except for $34,091 in 2006 and $43,736 in 2005, which was
mortgage banking income from the Bank.
Loan Review and Nonperforming Assets
The Bank regularly reviews its loan portfolio to determine deficiencies and
corrective action to be taken. Loan reviews are prepared by the Bank's loan
review officer and presented periodically to the Board's Loan Committee and
the Audit Committee. Also, the Bank's external auditors conduct independent
loan review adequacy tests and include their findings annually as part of
their overall report to the Audit Committee and to the Board of Directors.
Certain loans are monitored more often by the loan review officer and the
Loan Committee. These loans include non-accruing loans, loans more than 90
days past due, and other loans, regardless of size, that may be considered
high risk based on factors defined within the Bank's loan review policy.
Asset/Liability Management
The Asset/Liability Management Committee ("ALCO") 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 directs
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 Bank's Loan Committee
oversees the ALCO.
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 at December 31, 2006. The Bank is not a
party to any collective bargaining agreement, and the Bank believes that its
employee relations are good.
Competition
The banking business is highly competitive. The Bank competes with other
depository institutions and other financial service organizations, including
brokers, finance companies, credit unions and certain governmental agencies.
Further, changes in the laws applicable to banks, savings and loan
associations, and other financial institutions and the increased competition
from investment bankers, brokers, and other financial service organizations
may have a significant impact on the competitive environment in which the
Bank operates. See "Supervision and Regulation."
The Bank ranks first in market share on the basis of deposits in Colquitt
County and third in Worth County. The Bank is the only bank operating in
Baker County and has a growing presence in Thomas County.
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Monetary Policies
The results of operations of the Bank are affected by credit policies of
monetary authorities, particularly the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). The instruments of monetary policy
employed by the Federal Reserve include open market operations in U. S.
Government securities, changes in the discount rate on bank borrowings, and
changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels, loan demand, or the business and earnings of the Bank.
Payment of Dividends
The Corporation is a legal entity separate and distinct from the Bank. Most
of the revenue of the Corporation results from dividends paid to it by the
Bank. 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"), dividends may not be declared out of the retained earnings of a
state bank without first obtaining the written permission of the DBF, unless
such bank meets all the following requirements:
(a) total classified assets as of the most recent examination of the bank do
not exceed 80% of equity capital (as defined by regulation);
(b) the aggregate amount of dividends declared or anticipated to be declared
in the calendar year does not exceed 50% of the net profits after taxes
but before dividends for the previous calendar year; and
(c) the ratio of equity capital to adjusted assets is not less than 6%.
The payment of dividends by the Corporation and the Bank may also be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which, depending upon
the financial condition of the bank, could include the payment of dividends),
such authority may require, after notice and hearing, that such bank cease
and desist from such practice. 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, 2006, net assets available from
the Bank to pay dividends without prior approval from regulatory authorities
totaled approximately $2.135 million. For 2006, the Corporation's cash
dividend payout to stockholders was $1.5 million, or 50.5% of net income.
Supervision and Regulation
General.
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 American Stock Exchange (the "Amex"), state or
federal rules, statutes and regulations affecting their operations, or that
apply generally to business corporations or Amex listed companies. Changes
in the rules, statutes and regulations applicable to the Corporation and the
Bank can affect the operating environment in substantial and unpredictable
ways.
The Corporation is a registered bank holding company subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve")
under the Bank Holding Corporation Act of 1956, as amended (the "Act"). The
Corporation is required to file certain annual and quarterly financial
information with the Federal Reserve but voluntarily files its consolidated
quarterly financial information and is subject to periodic examination by the
Federal Reserve.
The Act requires every bank holding company to obtain the Federal Reserve's
prior approval before (1) it may acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank that it does not
already control; (2) it or any of its non-bank subsidiaries may acquire all
or substantially all of the assets of a bank; and (3) it may merge or
consolidate with any other bank holding company. In addition, a bank holding
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company is generally prohibited from engaging in, or acquiring, direct or
indirect control of the voting shares of any company engaged in non-banking
activities. This prohibition does not apply to activities listed in the Act
or found by the Federal Reserve, by order or regulation, to be closely
related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve has
determined by regulation or order to be closely related to banking are:
* making or servicing loans and certain types of leases;
* performing certain data processing services;
* acting as fiduciary or investment or financial advisor;
* providing brokerage services;
* underwriting bank eligible securities;
* underwriting debt and equity securities on a limited basis through
separately capitalized subsidiaries; and
* making investments in corporations or projects designed primarily to
promote community welfare.
Although the activities of bank holding companies have traditionally been
limited to the business of banking and activities closely related or
incidental to banking (as discussed above), the Gramm-Leach-Bliley Act (the
"GLB Act") relaxed the previous limitations 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.
A bank holding company may become a financial holding company under this
statute only if each of its subsidiary banks is well capitalized, is well
managed and has at least a satisfactory rating under the Community
Reinvestment Act. A bank holding company that falls out of compliance with
such requirement may be required to cease engaging in certain activities.
Any bank holding company that does not elect to become a financial holding
company remains subject to the bank holding company restrictions of the Act.
Under this legislation, the Federal Reserve Board serves as the primary
"umbrella" regulator of financial holding companies with supervisory
authority over each parent company and limited authority over its
subsidiaries. The primary regulator of each subsidiary of a financial
holding company will depend on the type of activity conducted by the
subsidiary. For example, broker-dealer subsidiaries will be regulated
largely by securities regulators and insurance subsidiaries will be regulated
largely by insurance authorities.
The Corporation has no 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 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 Federal Deposit Insurance Corporation
(the "FDIC"). As a state banking association organized under Georgia law,
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the Bank is subject to the supervision of, and is regularly examined by, the
DBF. Both the FDIC and DBF must grant prior approval of any merger,
consolidation or other corporation reorganization involving the Bank. A bank
can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with the default of a commonly-controlled
institution.
Capital Adequacy.
The Federal Reserve and the FDIC have implemented substantially identical
risk-based rules for assessing bank and bank holding company capital
adequacy. These regulations establish minimum capital standards in relation
to assets and off-balance sheet exposures as adjusted for credit risk. Banks
and bank holding companies are required to have (1) a minimum level of Total
Capital (as defined) to risk-weighted assets of eight percent (8%); and (2) a
minimum Tier I Capital (as defined) to risk-weighted assets of four percent
(4%). In addition, the Federal Reserve and the FDIC have established a
minimum three percent (3%) leverage ratio of Tier I Capital to quarterly
average total assets for the most highly-rated banks and bank holding
companies. "Tier I Capital" generally consists of common equity excluding
unrecognized gains and losses on available for sale securities, plus minority
interests in equity accounts of consolidated subsidiaries and certain
perpetual preferred stock less certain intangibles. The Federal Reserve and
the FDIC will require a bank holding company and a bank, respectively, to
maintain a leverage ratio greater than four percent (4%) if either is
experiencing or anticipating significant growth or is operating with less
than well-diversified risks in the opinion of the Federal Reserve. The
Federal Reserve and the FDIC use the leverage ratio in tandem with the risk-
based ratio to assess the capital adequacy of banks and bank holding
companies. The FDIC, the Office of the Comptroller of the Currency (the
"OCC") and the Federal Reserve consider interest rate risk in the overall
determination of a bank's capital ratio, requiring banks with greater
interest rate risk to maintain adequate capital for the risk.
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. Regulators are also empowered to place in
receivership or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches 2%. Better capitalized
institutions are generally subject to less onerous regulation and supervision
than banks with lesser amounts of capital.
The FDIC has adopted regulations implementing the prompt corrective action
provisions of the 1991 Act, which place financial institutions in the
following five categories based upon capitalization ratios: (1) a "well
capitalized" institution has a Total risk-based capital ratio of at least
10%, a Tier I risk-based ratio of at least 6% 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 I risk-based ratio of at least 4% and a
leverage ratio of at least 4%; (3) an "undercapitalized" institution has a
Total risk-based capital ratio of under 8%, a Tier I risk-based ratio of
under 4% or a leverage ratio of under 4%; (4) a "significantly
undercapitalized" institution has a Total risk-based capital ratio of under
6%, a Tier I risk-based ratio of under 3% or a leverage ratio of under 3%;
and (5) a "critically undercapitalized" institution has a leverage ratio 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 establish procedures for "downgrading" an
institution to a lower capital category based on supervisory factors other
than capital.
To continue to conduct its business as currently conducted, the Corporation
and the Bank will need to maintain capital well above the minimum levels. As
of December 31, 2006 and 2005, the most recent notifications from the FDIC
categorized the Bank as "well capitalized" under current regulations.
Commercial Real Estate.
In December, 2006 the federal banking agencies, including the FDIC, issued a
final guidance on concentrations in commercial real estate lending, noting
that recent increases in banks' commercial real estate concentrations could
create safety and soundness concerns in the event of a significant economic
downturn. The guidance mandates certain minimal risk management practices
and categorizes banks with defined levels of such concentrations as banks
requiring elevated examiner scrutiny. The Bank has a concentration in
commercial real estate loans in excess of those defined levels. Management
believes that the Corporation's credit processes and procedures meet the risk
management standards dictated by this guidance, but it is not yet possible to
determine the impact this guidance may have on examiner attitudes with
respect to the Bank's real estate concentrations, which attitudes could
effectively limit increases in the Bank's loan portfolios and require
additional credit administration and management costs associated with those
portfolios.
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Loans.
Inter-agency guidelines adopted by federal bank regulators 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. The Bank adopted the
federal guidelines in 2001.
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.
Financial Privacy.
In accordance with the GLB Act, federal banking regulators adopted rules that
limit the ability of banks and other financial institutions to disclose non-
public information about consumers to nonaffiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal
information to a nonaffiliated third party. The privacy provisions of the
GLB Act affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors.
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 USA Patriot Act of 2001 (the "USA Patriot Act") has imposed
significant new compliance and due diligence obligations, creating new crimes
and penalties. The United States Treasury Department has issued a number of
implementing regulations which apply to various requirements of the USA
Patriot Act to the Corporation and the Bank. These regulations impose
obligations on financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and
terrorist financing and to verify the identity of their customers. Failure
of a financial institution to maintain and implement adequate programs to
combat terrorist financing, or to comply with all of the relevant laws or
regulations, could have serious legal and reputational consequences for the
institution.
Available Information
The Corporation is subject to the information requirements of the Securities
Exchange Act of 1934, which means that it is required to file certain
reports, proxy statements, and other information, all of which are available
at the Public Reference Section of the Securities and Exchange Commission at
Room 1580, 100 F. Street, N.E., Washington, D.C. 20549. You may also obtain
copies of the reports, proxy statements, and other information from the
Public Reference Section of the SEC, at prescribed rates, by calling 1-800-
SEC-0330. The SEC maintains a World Wide Web site on the Internet at
www.sec.gov where you can access reports, proxy, information and registration
statements, and other information regarding Corporations that file
electronically with the SEC through the EDGAR system.
The Corporation's Internet website address is www.sgfc.com.
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Executive Officers of the Corporation
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 their ages, positions
with the Corporation, and terms of office as of January 31, 2007, are as
follows:
Officer Of The
Name (Age) Principal Position Corporation Since
DeWitt Drew Chief Executive Officer and President 1999
(50) of the Corporation and Bank
John J. Cole, Jr. Executive Vice President of the 1984
(56) Corporation and Executive Vice President
and Cashier of the Bank
C. Wallace Sansbury Executive Vice President of the Corporation 1996
(64) and Bank
J. David Dyer, Jr. Senior Vice President of the Corporation 2002
(59) and Bank and Chief Executive Officer
and President of Empire
George R. Kirkland Senior Vice President and Treasurer 1991
(56) of the Corporation and Senior Vice
President and Comptroller of the Bank
Randall L. Webb, Jr. Senior Vice President of the Corporation 1994
(58) and Bank
Geraldine Ferrone Luff Senior Vice President of the Corporation 1995
(60) and Bank
J. Larry Blanton Senior Vice President of the Corporation 2000
(60) and Bank
D. Paul Bell Senior Vice President of the Corporation 2006
(37) and Bank
Robert M. Carlton, Jr. Senior Vice President of the Corporation 1995
(65) and Bank
Morris I. Bryant Senior Vice President of the Corporation 2004
(65) and Bank
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The following is a brief description of the business experience of the
principal executive officers of the Corporation. Except as otherwise
indicated, each principal executive officer has been engaged in their present
or last employment, in the same or similar position, for more than five
years.
Mr. Drew is a director of Southwest Georgia Financial Corporation and
Southwest Georgia Bank and was named President and Chief Executive Officer in
May 2002. Previously he served as President and Chief Operating Officer
beginning in 2001 and Executive Vice President in 1999 of Southwest Georgia
Financial Corporation and Southwest Georgia Bank.
Mr. Cole became Executive Vice President and Cashier of the Bank and
Executive Vice President of the Corporation in 2002. Previously, he had been
Senior Vice President and Cashier of the Bank and Senior Vice President of
the Corporation.
Mr. Sansbury became Executive Vice President of the Bank and the Corporation
in December 2006. Previously, he had been Senior Vice President of the Bank
and the Corporation since December 1996.
Mr. Dyer became Senior Vice President of the Bank and the Corporation in
2002. He also serves as Chief Executive Officer and President of Empire, a
wholly owned subsidiary of the Bank. Mr. Dyer has served as Chief Executive
Officer and President of Empire since forming the firm in 1985.
Mr. Kirkland became Senior Vice President and Treasurer of the Corporation
and Senior Vice President and Comptroller of the Bank in 1993.
Mr. Webb became Senior Vice President of the Bank and the Corporation in
1997. Previously, he had been Vice President of the Bank and the Corporation
since 1994 and Assistant Vice President of the Bank since 1984.
Mrs. Luff became Senior Vice President in 2000 and Vice President of the Bank
and the Corporation in 1995. Previously, she had been Assistant Vice
President of the Bank since 1988.
Mr. Blanton became Senior Vice President of the Bank and the Corporation in
2001. Previously, he has served as Vice President of the Bank and
Corporation since 2000 and in various other positions with the bank since
1999.
Mr. Bell became Senior Vice President of the Bank and the Corporation in
2006. Previously, he was President of Trinity Bank since 2004, and City
President and Senior Vice-President of Community Bank and Trust since 2001,
both located in Dothan, Alabama.
Mr. Carlton became Senior Vice President of the Bank and the Corporation in
2004. Previously, he had been Vice President of the Bank since 1995.
Mr. Bryant became Senior Vice President of the Bank and the Corporation in
2004. Previously, he was employed by Sylvester Banking Company in Sylvester,
Georgia, as Vice President and Cashier since 1969.
-10-
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, 2006,
2005, and 2004, 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, 2006
Average
Balance Interest Rate
(Dollars in Thousands)
ASSETS
Cash and due from banks $ 12,477 $ - - %
Earning assets:
Interest-bearing deposits with banks 3,609 171 4.74%
Loans, net (a) (b) (c) 116,782 9,365 8.02%
Taxable investment securities
held to maturity 129,619 5,350 4.13%
Nontaxable investment securities
held to maturity (c) 5,237 307 5.86%
Nontaxable investment securities
available for sale (c) 14,408 954 6.62%
Federal Home Loan Bank stock 2,201 125 5.68%
Federal funds sold 4,284 202 4.72%
Total earning assets 276,140 16,474 5.97%
Premises and equipment 6,766
Other assets 9,503
Total assets $304,886
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits $ 36,032 $ - - %
Interest-bearing liabilities:
NOW accounts 55,023 315 0.57%
Money market deposit accounts 21,759 827 3.80%
Savings deposits 23,928 449 1.88%
Time deposits 90,353 3,587 3.97%
Federal funds purchased 476 26 5.46%
Other borrowings 34,475 1,176 3.41%
Total interest-bearing liabilities 226,014 6,380 2.82%
Other liabilities 4,868
Total liabilities 266,914
Common stock 4,274
Surplus 31,385
Retained earnings 14,975
Less treasury stock (12,662)
Total shareholders' equity 37,972
Total liabilities and shareholders' equity $304,886
Net interest income and margin $10,094 3.66%
(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 $409,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 %.
-11-
Year Ended December 31, 2005
Average
Balance Interest Rate
(Dollars in Thousands)
ASSETS
Cash and due from banks
$ 11,462 $ - - %
Earning assets:
Interest-bearing deposits with banks 5,715 182 3.18%
Loans, net (a) (b) (c) 102,071 7,719 7.56%
Taxable investment securities
held to maturity 142,654 5,973 4.19%
Nontaxable investment securities
held to maturity (c) 5,313 314 5.91%
Nontaxable investment securities
available for sale (c) 14,690 955 6.50%
Federal Home Loan Bank stock 2,215 92 4.15%
Federal funds sold 253 10 3.95%
Total earning assets 272,911 15,245 5.59%
Premises and equipment 6,771
Other assets 9,250
Total assets $300,394
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits $ 35,422 $ - - %
Interest-bearing liabilities:
NOW accounts 53,453 253 0.47%
Money market deposit accounts 13,458 302 2.24%
Savings deposits 27,565 354 1.28%
Time deposits 91,215 2,485 2.72%
Federal funds purchased 256 9 3.52%
Other borrowings 34,968 1,173 3.35%
Total interest-bearing liabilities 220,915 4,576 2.07%
Other liabilities 4,449
Total Liabilities 260,786
Common stock 4,264
Surplus 31,220
Retained earnings 13,566
Less treasury stock (9,442)
Total shareholders' equity 39,608
Total liabilities and shareholders' equity $300,394
Net interest income and margin $10,669 3.91%
(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 $534,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 %.
-12-
Year Ended December 31, 2004
Average
Balance Interest Rate
(Dollars in Thousands)
ASSETS
Cash and due from banks $ 10,137 $ - - %
Earning assets:
Interest-bearing deposits with banks 5,476 81 1.48%
Loans, net (a) (b) (c) 99,716 7,002 7.02%
Taxable investment securities
held to maturity 131,496 5,787 4.40%
Nontaxable investment securities
held to maturity (c) 6,014 365 6.07%
Nontaxable investment securities
available for sale (c) 14,869 941 6.33%
Federal Home Loan Bank stock 1,428 50 3.50%
Federal funds sold 3,190 35 1.10%
Total earning assets 262,189 14,261 5.44%
Premises and equipment 6,460
Other assets 9,082
Total assets $287,868
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits $ 34,628 $ - - %
Interest-bearing liabilities:
NOW accounts 48,961 165 .34%
Money market deposit accounts 12,020 107 .89%
Savings deposits 26,846 314 1.17%
Time deposits 95,911 1,896 1.98%
Federal funds purchased 520 7 1.35%
Other borrowings 27,525 912 3.31%
Total interest-bearing liabilities 211,783 3,401 1.61%
Other liabilities 3,274
Total liabilities 249,685
Common stock 3,607
Surplus 14,343
Retained earnings 28,668
Less treasury stock (8,435)
Total shareholders' equity 38,183
Total liabilities and shareholders' equity $287,868
Net interest income and margin $10,860 4.14%
(a) Average loans are shown net of unearned income and the allowance for
loan losses. Nonperforming loans are included.
(b) Interest income includes loan fees of $453,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 %.
-13-
Table 2 - Rate/Volume Analysis
The following table sets forth, for the indicated years ended December 31, a
summary of the changes in interest paid resulting from changes in volume and
changes in rate. The change due to volume is calculated by multiplying the
change in volume by the prior year's rate. The change due to rate is
calculated by multiplying the change in rate by the prior year's volume. The
change attributable to both volume and rate is calculated by multiplying the
change in volume by the change in rate.
Due To
Increase Changes In (a)
2006 2005 (Decrease) Volume Rate
(Dollars in Thousands)
Interest earned on:
Interest-bearing
deposits with banks $ 171 $ 182 $( 11) $ 34 $( 45)
Loans, net (b) 9,365 7,719 1,646 1,157 489
Taxable investment
securities held to maturity 5,350 5,973 (623) (538) ( 85)
Nontaxable investment
securities held to
maturity (b) 307 314 ( 7) ( 4) ( 3)
Nontaxable investment
securities available
for sale (b) 954 955 ( 1) 0 ( 1)
Federal Home Loan Bank stock 125 92 33 ( 1) 34
Federal funds sold 202 10 192 190 2
Total interest income 16,474 15,245 1,229 838 391
Interest paid on:
NOW accounts 315 253 62 7 55
Money market deposit accounts 827 302 525 247 278
Savings deposits 449 354 95 ( 38) 133
Time deposits 3,587 2,485 1,102 ( 23) 1,125
Federal funds purchased 26 9 17 10 7
Other borrowings 1,176 1,173 3 ( 13) 16
Total interest expense 6,380 4,576 1,804 190 1,614
Net interest earnings $10,094 $10,669 $( 575) $ 648 $(1,223)
-14-
Due To
Increase Changes In (a)
2005 2004 (Decrease) Volume Rate
(Dollars in Thousands)
Interest earned on:
Interest-bearing
deposits with banks $ 182 $ 81 $ 101 $ 4 $ 97
Loans, net (b) 7,719 7,002 717 168 549
Taxable investment
securities held to maturity 5,973 5,787 186 425 ( 239)
Nontaxable investment
securities held to
maturity (b) 314 365 ( 51) ( 41) ( 10)
Nontaxable investment
securities available
for sale (b) 955 941 14 ( 11) 25
Federal Home Loan Bank stock 92 50 42 32 10
Federal funds sold 10 35 ( 25) 14 ( 39)
Total interest income 15,245 14,261 984 591 393
Interest paid on:
NOW accounts 253 165 88 17 71
Money market deposit accounts 302 107 195 14 181
Savings deposits 354 314 40 8 32
Time deposits 2,485 1,896 589 ( 89) 678
Federal funds purchased 9 7 2 ( 1) 3
Other borrowings 1,173 912 261 250 11
Total interest expense 4,576 3,401 1,175 199 976
Net interest earnings $10,669 $10,860 $( 191) $ 392 $( 583)
(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
2006, 2005, and 2004 in adjusting interest on nontaxable loans and
securities to a fully taxable basis.
-15-
Table 3 - Investment Portfolio
The carrying values of investment securities for the indicated years are
presented below:
Year Ended December 31,
2006 2005 2004
(Dollars in Thousands)
Securities held to maturity:
U. S. Government Agencies $ 96,997 $100,002 $108,508
State and municipal 5,236 6,777 7,538
Total securities held to maturity $102,233 $106,779 $116,046
Securities available for sale:
Equity securities $ 1,059 $ 1,043 $ 1,033
U. S. Government Agencies 18,473 32,925 38,813
State and municipal 13,381 13,500 13,836
Mortgage backed 410 575 861
Total securities available for sale $ 33,323 $ 48,043 $ 54,543
The following table shows the expected maturities of debt securities at
December 31, 2006, and the weighted average yields (for nontaxable
obligations on a fully taxable basis assuming a 34% tax rate) of such
securities. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations without
call or prepayment penalties. Mortgage backed securities amortize in
accordance with the terms of the underlying mortgages, including prepayments
as a result of refinancings and other early payouts.
MATURITY
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in Thousands)
Debt Securities:
U. S.
Government
Agencies $10,008 3.62% $105,462 4.07% $ - - % $ - - %
State and
Municipal 392 5.93% 3,274 6.52% 14,626 6.53% 325 6.15%
Mortgage
Backed - - % 147 5.64% 263 6.44% - - %
Total $10,400 3.71% $108,883 4.14% $14,889 6.53% $ 325 6.15%
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, 2006 and 2005, securities carried at approximately
$37,319,000, as required by law, and $30,336,000 and $35,437,000 were pledged
to secure Federal Home Loan Bank advances.
-16-
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,
2006 2005 2004 2003 2002
(Dollars in Thousands)
Commercial, financial and
agricultural $ 20,938 $ 12,370 $ 7,395 $ 8,312 $ 9,020
Real estate:
Construction loans 13,238 10,669 3,793 1,235 253
Commercial mortgage loans 45,506 33,869 40,385 42,969 47,219
Residential loans 31,942 33,773 33,968 30,244 33,900
Agricultural loans 5,576 5,851 5,621 4,851 5,333
Consumer & Other 8,336 8,143 8,795 9,550 10,263
Total loans 125,536 104,675 99,957 97,161 105,988
Less:
Unearned income 44 40 42 46 54
Allowance for loan losses 2,417 2,454 2,507 2,338 1,900
Net loans $123,075 $102,181 $ 97,408 $ 94,777 $104,034
The following table shows maturities and interest sensitivity of the
commercial, financial, agricultural, and construction loan portfolio at
December 31, 2006.
Commercial,
Financial
Agricultural, and
Construction
(Dollars in Thousands)
Distribution of loans which are due:
In one year or less $ 9,725
After one year but within five years 16,344
After five years 8,107
Total $ 34,176
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, 2006.
Loans With
Predetermined Loans With
Rates Floating Rates Total
(Dollars in Thousands)
Commercial, financial,
agricultural and construction $ 19,450 $ 5,001 $ 24,451
-17-
The following table presents information concerning outstanding balances of
nonperforming loans and foreclosed assets for the indicated years.
Nonperforming loans comprise: (a) loans accounted for on a nonaccrual basis
("nonaccrual loans"); (b) loans which are contractually past due 90 days or
more as to interest or principal payments and still accruing ("past-due
loans"); (c) loans for which the terms have been renegotiated to provide a
reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower ("renegotiated loans"); and (d) loans
now current but where there are serious doubts as to the ability of the
borrower to comply with present loan repayment terms ("potential problem
loans").
Nonperforming loans
Nonaccrual Past-Due Renegotiated Potential Foreclosed
Loans Loans Loans Problem Loans Total Assets
(Dollars in Thousands)
December 31, 2006 $2,347 $ 10 $ 19 $ 70 $2,446 $ 0
December 31, 2005 $ 103 $ 5 $ 52 $ 172 $ 332 $ 0
December 31, 2004 $1,387 $ 4 $ 9 $ 163 $1,563 $ 14
December 31, 2003 $1,012 $ 0 $ 60 $ 414 $1,486 $ 1,203
December 31, 2002 $1,529 $ 3 $ 0 $ 408 $1,940 $ 1,982
The Corporation has a single $2.2 million nonaccrual loan that has caused a
substantial increase in nonperforming loans in 2006. The Corporation does
not anticipate any loss on this loan. We have a sales contract in process
which will either pay off or assume this loan.
The Corporation follows a policy of continuing to accrue interest on consumer
loans that are contractually past due over 90 days up to the time the loans
are considered uncollectible and the loan amount is charged against the
allowance for loan losses.
-18-
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.
There were no charge-offs or recoveries of real estate construction loans
for the periods presented.
Year Ended December 31,
2006 2005 2004 2003 2002
(Dollars in Thousands)
Average loans outstanding $119,213 $104,552 $102,208 $99,589 $114,586
Amount of allowance for
loan losses at beginning
of period $ 2,454 $ 2,507 $ 2,338 $ 1,900 $ 1,883
Amount of loans charged off
during period:
Commercial, financial and
agricultural 0 24 0 37 226
Real estate:
Commercial 0 0 79 0 0
Residential 0 51 25 71 113
Agricultural 0 0 0 0 0
Installment 60 151 176 169 258
Total loans charged off 60 226 280 277 597
Amount of recoveries during
period:
Commercial, financial, and
agricultural 0 1 88 147 25
Real estate:
Commercial 0 61 17 0 0
Residential 0 1 13 14 5
Agricultural 0 0 0 0 0
Installment 23 30 65 37 50
Total loans recovered 23 93 183 198 80
Net loans charged off
during period 37 133 97 79 517
Additions to allowance for
loan losses charged to
operating expense during period 0 80 92 517 534
Purchased reserve 0 0 174 0 0
Amount of allowance for
loan losses at end
of period $ 2,417 $ 2,454 $ 2,507 $ 2,338 $ 1,900
Ratio of net charge-offs
during period to average
loans outstanding for
the period .03% .13% .10% .08% .45%
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.
-19-
Allocation of Allowance for Loan Losses
Management has allocated the allowance for loan losses within the categories
of loans set forth in the table below according to amounts deemed reasonably
necessary to provide for possible losses. The amount of the allowance
applicable to each category and the percentage of loans in each category to
total loans are presented below.
December 31, 2006 December 31, 2005 December 31, 2004
% of % of % of
Total Total Total
Category Allocation Loans Allocation Loans Allocation Loans
(Dollars in Thousands)
Commercial, financial
and agricultural $ 403 16.7% $ 290 11.8% $ 186 7.4%
Real estate:
Construction 254 10.5% 250 10.2% 95 3.8%
Commercial 875 36.2% 793 32.3% 1,016 40.4%
Residential 614 25.4% 793 32.3% 852 34.1%
Agricultural 106 4.4% 137 5.6% 140 5.6%
Installment 165 6.8% 191 7.8% 218 8.7%
Total $ 2,417 100.0% $ 2,454 100.0% $ 2,507 100.0%
December 31, 2003 December 31, 2002
% of % of
Total Total
Category Allocation Loans Allocation Loans
(Dollars in Thousands)
Commercial, financial
and agricultural $ 199 8.5% $ 161 8.5%
Real estate:
Construction 30 1.3% 5 .2%
Commercial 1,034 44.2% 847 44.6%
Residential 727 31.1% 608 32.0%
Agricultural 117 5.0% 95 5.0%
Installment 231 9.9% 184 9.7%
Total $ 2,338 100.0% $ 1,900 100.0%
The calculation is based upon total loans including unearned interest.
Management believes that the portfolio is well diversified and, to a large
extent, secured without undue concentrations in any specific risk area.
Control of loan quality is regularly monitored by management, 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.
-20-
Table 5 - Deposits
The average amounts of deposits for the last three years are presented below.
Year Ended December 31,
2006 2005 2004
(Dollars in Thousands)
Noninterest-bearing
demand deposits $ 36,032 $ 35,422 $ 34,628
NOW accounts 55,023 53,453 48,961
Money market deposit
accounts 21,759 13,458 12,020
Savings 23,928 27,565 26,846
Time deposits 90,353 91,215 95,911
Total interest-bearing 191,063 185,691 183,738
Total average deposits $ 227,095 $ 221,113 $ 218,366
The maturity of certificates of deposit of $100,000 or more as of December
31, 2006, are presented below.
(Dollars in Thousands)
3 months or less $ 5,187
Over 3 months through 6 months 2,486
Over 6 months through 12 months 14,218
Over 12 months 3,834
Total outstanding certificates of deposit
of $100,000 or more $ 25,725
Return on Equity and Assets
Certain financial ratios are presented below.
Year Ended December 31,
2006 2005 2004
Return on average assets 1.00% 1.44% 1.34%
Return on average equity 8.01% 10.93% 10.12%
Dividend payout ratio
(dividends declared
divided by net income) 50.50% 39.22% 38.79%
Average equity to average
assets ratio 12.45% 13.19% 13.26%
-21-
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.
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 $13.2
million at December 31, 2006, comprising 10.5% 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. Recent changes in the federal
policies applicable to construction, development or other commercial real
estate loans make us subject us 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.
The Corporation may not be able to sustain its profitability. Various
factors, such as economic conditions, regulatory and legislative
considerations, competition and the ability to find and retain talented
people, may impede its ability to remain profitable.
A 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.
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
non-performing 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. For additional information regarding interest rate risk, see Part
II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."
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 collectibility
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
-22-
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 non-
accruals, national and local economic conditions and other pertinent
information. If those 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.
Technology difficulties or failures could have a material adverse effect on
the Corporation.
The Corporation depends upon data processing, software, communication and
information exchange on a variety of computing platforms and networks and
over the internet. The Corporation cannot be certain that all of its systems
are entirely free from vulnerability to 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 be exposed 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.
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 significantly depends largely upon economic conditions in this area,
which include volatility in the agriculture market, influx and outflow of
major employers in the area, 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 G. DeWitt Drew,
President and CEO, John J. Cole, Jr., Executive Vice President, J. David
Dyer, Senior Vice President and President of Empire, C. Wallace Sansbury,
Executive Vice President and George R. Kirkland, 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.
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
-23-
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 System, 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
The Corporation has not received any written comments from the Securities
Exchange Commission staff in connection with a review of any of its reports.
ITEM 2. PROPERTIES
The executive offices of the Corporation and the main banking office of the
Bank are located in a 22,000 square foot facility at 201 First Street, S. E.,
Moultrie, Georgia. The Bank's Operations Center is located at 10 Second
Avenue, Moultrie, Georgia. The Trust and Investment Division of the Bank is
located at 25 Second Avenue, Moultrie, Georgia. A building located across
the street from the main office at 205 Second Street, S. E., Moultrie,
Georgia, has been renovated for the Bank's Administrative Services offices,
training and meeting rooms, record storage, and a drive-thru teller facility.
Square
Name Address Feet
Main Office 201 First Street, SE, Moultrie, GA 31768 22,000
Operations Center 10 Second Avenue, SE, Moultrie, GA 31768 5,000
Trust & Investment Office 25 Second Avenue, SE, Moultrie, GA 31768 11,000
Administrative Services 205 Second Street, SE, Moultrie, GA 31768 15,000
Southwest Georgia Ins.
Services 501 South Main Street, Moultrie, GA 31768 5,600
Baker County Bank Highway 91, Newton, GA 31717 4,400
Bank of Pavo 1102 West Harris Street, Pavo, GA 31778 3,900
Sylvester Banking Company 300 North Main Street, Sylvester, GA 31791 12,000
Empire Financial Services 121 Executive Parkway, Milledgeville, GA 31061 2,700
All the buildings and land, which include parking and drive-thru teller
facilities, are owned by the Bank. There are two automated teller machines
on the Bank's main office premises, one in each of the Baker County, Thomas
County, and Worth County branch offices, and one additional automated teller
machine located in Doerun, Georgia. These automated teller machines are
linked to the STAR network of automated teller machines.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Corporation or
the Bank is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of 2006 for a vote
of the security holders through the solicitation of proxies or otherwise.
-24
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE CORPORATION'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information
The Corporation's common stock trades on the American Stock Exchange under
the symbol "SGB". The closing price on December 31, 2006, was $19.30. Below
is a schedule of the high and low stock prices for each quarter of 2006 and
2005.
2006
For The
Quarter Fourth Third Second First
High $22.75 $22.65 $24.70 $25.70
Low $18.50 $18.00 $20.00 $21.37
2005
For The
Quarter Fourth Third Second First
High $22.30 $21.80 $23.25 $24.00
Low $20.50 $19.65 $20.10 $22.00
As of December 31, 2006, we had 564 record holders of the Corporation's
common stock. Also, there were approximately 270 additional shareholders who
held shares through trusts and brokerage firms.
Dividends
Cash dividends paid on the Corporation's common stock were $.52 in 2006 and
2005. Our dividend policy objective is to pay out a portion of earnings in
dividends to our shareholders in a consistent manner over time, and we intend
to continue paying dividends. However, no assurance can be given that
dividends will be declared in the future. The amount and frequency of
dividends is determined by the Corporation's Board of Directors after
consideration of various factors, which include the Corporation's financial
condition and results of operations, investment opportunities available to
the Corporation, capital requirements, tax considerations and general
economic conditions. The primary source of funds available to the parent
company is the payment of dividends by its subsidiary bank. Federal and
State banking laws restrict the amount of dividends that can be paid without
regulatory approval. See "Business - Payment of Dividends". The Corporation
and its predecessors have paid cash dividends for the past seventy-eight
consecutive years.
In 2006, we repurchased 575,000 shares of our common stock through a tender
offer with a total cost of $13,225,000. Because of our strong capital
condition, we continued through 2006 the stock repurchase program that began
in January 2000. In 2006, 65,000 shares were repurchased through the
repurchase program. Through the end of 2006, a total of 612,095 shares have
been repurchased since the beginning of the program. The share repurchase
program was extended by the Board of Directors at their meeting in January
2007 through the end of January 2008. The Corporation is authorized to
purchase an additional 100,000 shares under the plan.
On June 23, 2006, John H. Clark, director, sold to the Employee Stock
Ownership Plan 10,000 shares of common stock for $21.40 per share and also, on
February 1, 2007, both Mr. Clark and his wife sold to the Corporation 25,000
shares of common stock for $19.435 per share in a private stock repurchase
transaction.
-25-
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents information as of December 31, 2006, with
respect to shares of common stock of the Corporation that may be issued under
the Key Individual Stock Option Plan.
Number of Securities
to be Issued upon Weighted Average Number of Securities Remaining
Exercise of Exercise Price of Available for Future Issuance
Plan Category Outstanding Options Outstanding Options Under Equity Compensation Plans
Equity compensation plans
approved by shareholders(1) 113,105 $17.66 44,340
Equity Compensation Plans
Not Approved by
Shareholders(2) 0 0.00 0
Total 113,105 $17.66 44,340
(1) The Key Individual Stock Option Plan
(2) Excludes shares issued under the 401(k) Plan.
-26-
Performance Graph
The following graph compares the cumulative total shareholder return of the
Corporation's Common Stock with The Carson Medlin Company's Independent Bank
Index and the S&P 500 Index. The Independent Bank Index is the compilation
of the total return to shareholders over the past five years of a group of 28
independent community banks located in the southeastern states of Alabama,
Florida, Georgia, North Carolina, South Carolina, Tennessee, Virginia, and
West Virginia. The comparison assumes $100 was invested January 1, 2001, and
that all semi-annual and quarterly dividends were reinvested each period.
This comparison takes into consideration changes in stock price, cash
dividends, stock dividends, and stock splits since January 1, 2001.
The comparisons in the graph are required by the Securities and Exchange
Commission and are not intended to forecast or be indicative of possible
future performance of the Corporation's Common Stock.
2001 2002 2003 2004 2005 2006
SOUTHWEST GEORGIA FINANCIAL CORPORATION 100 122 152 185 183 166
INDEPENDENT BANK INDEX 100 124 168 193 199 230
S&P 500 INDEX 100 78 100 111 117 135
-27-
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Selected Financial Data (1)
(Dollars in Thousands, except per
share data and ratios) 2006 2005 2004 2003 2002
For The Year: Earnings &
Share Data
Interest income $ 16,030 $ 14,818 $ 13,822 $ 13,126 $ 14,738
Interest expense 6,380 4,576 3,401 3,387 4,429
Non-interest income 7,110 7,865 6,754 4,545 5,596
Non-interest expense 12,986 12,382 12,073 10,267 10,299
Net income 3,040 4,329 3,865 2,480 3,602
Earnings per share - diluted 0.96 1.31 1.18 0.80 1.14
Weighted average shares
outstanding - diluted (2) 3,153 3,294 3,281 3,084 3,148
Dividends declared per share $ 0.52 $ 0.52 $ 0.46 $ 0.43 $ 0.40
At Year End: Balance Sheet Data
Total assets $288,516 $301,274 $305,900 $246,153 $240,468
Loans, less unearned income 125,492 104,634 99,915 97,115 105,933
Deposits 226,709 221,844 222,488 182,876 189,923
Shareholders' equity (2) 27,957 39,853 38,952 32,988 33,322
Book value per share (2) 10.59 12.23 11.88 10.83 10.73
Tangible book value per share (2) $ 9.93 $ 11.31 $ 10.77 $ 10.16 $ 9.97
Common shares outstanding (2) 2,640 3,258 3,279 3,047 3,107
Selected Average Balances
Average total assets $304,886 $300,394 $287,868 $241,861 $236,369
Average loans 119,213 104,552 102,208 99,589 114,586
Average deposits 227,095 221,113 218,366 185,921 188,492
Average shareholders' equity $ 37,973 $ 39,608 $ 38,183 $ 33,237 $ 32,193
Asset Quality
Non-performing assets to
total assets .82% .04% .46% .90% 1.46%
Non-performing assets $ 2,357 $ 108 $ 1,405 $ 2,215 $ 3,515
Net loan charge-offs (recoveries) $ 37 $ 133 $ 98 $ 79 $ 517
Net loan charge-offs (recoveries)
to average loans 0.03% 0.13% 0.10% 0.08% 0.45%
Reserve for loan losses to loans 1.93% 2.35% 2.51% 2.41% 1.79%
Performance Ratios
Return on average total assets 1.00% 1.44% 1.34% 1.03% 1.52%
Return on average
shareholders' equity 8.01% 10.93% 10.12% 7.46% 11.19%
Average shareholders' equity
to average total assets 12.45% 13.19% 13.26% 13.74% 13.62%
Efficiency ratio 75.48% 66.81% 68.54% 69.94% 63.27%
Net interest margin 3.66% 3.91% 4.14% 4.61% 5.00%
Dividend payout ratio 50.50% 39.22% 38.79% 53.57% 35.13%
(1) On October 29, 2004, the Corporation paid a 20% stock dividend to
shareholders of record as of October 7, 2004. All per share information has
been adjusted to take into account the stock dividend.
(2) On October 24, 2006, the Corporation repurchased 575,000 shares of our
common stock through a tender offer with a total cost of $13,225,000. The
tender offer caused a decrease in the number of shares outstanding,
stockholder's equity and book and tangible book value per share.
-28-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For further information about the Corporation, see selected statistical
information on pages 11 - 28 of this report on Form 10-K.
Overview
The Corporation is a full-service community bank holding company
headquartered in Moultrie, Georgia. The community of Moultrie has been
served by the Bank since 1928. We provide comprehensive financial services to
consumer, business and governmental customers, which, in addition to
conventional banking products, include a full range of mortgage banking,
trust, investment and insurance services. Our primary market area
incorporates Colquitt County, where we are headquartered, and Baker, Thomas,
and Worth Counties, each contiguous with Colquitt County, and the surrounding
counties of southwest Georgia. We have four full service banking facilities
and six automated teller machines.
Our strategy is to:
* maintain the diversity of our revenue, including both interest and
noninterest income through a broad base of business,
* 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 through acquisitions into
areas proximate to our current market area.
The Corporation's profitability, like most financial institutions, is
dependent to a large extent upon net interest income, which is the difference
between the interest received on earning assets, such as loans, securities
and federal funds sold, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings. Net interest income is
highly sensitive to fluctuations in interest rates. In the first half of
2006, the Federal Reserve Bank increased short-term interest rates 1% and
since July 2004, short-term rates increased seventeen times, or 4.25% by year
end.
Our profitability is impacted as well by operating expenses such as salaries
and 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.
To address interest rate fluctuations, we manage our balance sheet in an
effort to diminish the impact should interest rates suddenly change. In
addition, broadening our revenue sources helps to reduce the risk and
exposure of our financial results to the impact of changes in interest rates,
which is outside of our control. As a result of our strategy to diversify
revenue, noninterest income has grown over the last few years and was 73.7%
of 2006 net interest income. Sources of noninterest income include our
insurance agency and Empire, the Corporation's commercial mortgage banking
subsidiary, as well as fees on customer accounts, trust and retail brokerage
services.
In 2006, we continued to focus on asset quality following significant
improvements made with respect to overall asset quality in 2005 and 2004.
During the second quarter of 2004, we sold a large foreclosed property with a
loss on sale of approximately $90,000. Although the Corporation has a single
$2.2 million nonaccrual loan that has caused a substantial increase in
nonperforming loans in 2006, we do not anticipate any loss on this loan due
to a sales contract that is currently in process which will either pay off or
assume this loan.
Mergers and Acquisitions
On February 27, 2004, the Corporation acquired First Bank Holding Company and
its bank subsidiary, Sylvester Banking Company, for $4.2 million in cash and
240,000 shares of Southwest Georgia Financial Corporation common stock valued
at $5.5 million. Sylvester Banking Company was merged into Southwest Georgia
Bank. The business combination was accounted for by the purchase method of
accounting and the results of operations of Sylvester Banking Company since
the date of acquisition are included in the Consolidated Financial
Statements. Total assets of $49.6 million and liabilities of $39.9 million
were booked at fair value including a core deposit intangible of $1.7
million. This core deposit intangible is being amortized over a 10-year
period.
-29-
The following table shows the fair value of assets acquired and liabilities
assumed as of the acquisition date.
Dollars in
Thousands
Cash, due from banks, and Federal funds sold $ 9,861
Investment securities 26,934
Loans, net 10,264
Bank premises and equipment 588
Core deposit intangible 1,670
Other assets 335
Deposits (39,834)
Other liabilities (98)
Net assets acquired $ 9,720
Tender Offer
On October 24, 2006, the Corporation repurchased 575,000 shares of our common
stock through a tender offer with a total cost of $13,225,000. The tender
offer caused a decrease in the number of shares outstanding, stockholder's
equity and book and tangible book value per share.
Stock Dividend
On October 29, 2004, the Corporation paid a 20% stock dividend to
shareholders of record as of October 7, 2004. All per share information has
been adjusted to take into account the stock dividend.
Critical Accounting Policies
In the course of the Corporation's normal business activity, management must
select and apply many accounting policies and methodologies that lead to the
financial results presented in the consolidated financial statements of the
Corporation. Management considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy because of the
uncertainty and subjectivity inherent in estimating the levels of allowance
needed to cover probable credit losses within the loan portfolio and the
material effect that these estimates have on the Corporation's results of
operations. We believe that the allowance for loan losses as of December 31,
2006 is adequate, however, under adversely different conditions or
assumptions, future additions to the allowance may be necessary. There have
been no significant changes in the methods or assumptions used in our
accounting policies that would have resulted in material estimates and
assumptions changes. Note 1 to the Consolidated Financial Statements
provides a description of our significant accounting policies and contributes
to the understanding of how our financial performance is reported.
Results of Operations
Performance Summary
Net income for 2006 was $3.0 million, a decrease of approximately $1.3 million,
or 30%, when compared with $4.3 million in 2005. Our net income was down
primarily as a result of a $564,000 loss recognized in our investment
securities portfolio in connection with funding the tender offer as well as
$183,000 in administrative expenses related to the tender offer. Net income was
also negatively impacted by a $439,000 decrease in mortgage banking income due
to numerous payoffs of serviced loans at Empire and accelerated amortization
related to such payoffs of $429,000, a one-time $690,000 pension contribution
incurred in connection with the freezing of the pension plan and, a decline in
our net interest margin. On a per share basis, net income for 2006 was down to
$0.96 per diluted share compared with $1.31 per diluted share for 2005.
Net income for 2005 was $4.3 million, an increase of approximately $0.4
million, or 12%, when compared with $3.9 million in 2004. Higher net income
in 2005 was primarily due to solid operating results for Empire and strong
expense control. Mortgage banking revenues increased $805,000, or 22%, over
2004's results. Expenses relating to equipment, data processing,
amortization of intangible assets, and other operating declined $422,000, or
9%, for 2005 compared with 2004. On a per share basis, net income for 2005
was $1.31 per diluted share compared with $1.18 per diluted share for 2004.
We measure our performance on selected key ratios, which are provided for the
last three years in the following table:
2006 2005 2004
Return on average total assets 1.00% 1.44% 1.34%
Return on average shareholders' equity 8.01% 10.93% 10.12%
Average shareholders' equity to average total assets 12.45% 13.19% 13.04%
Net interest margin (tax equivalent) 3.66% 3.91% 4.14%
-30-
Net Interest Income
Net interest income for 2006 decreased $593,000, or 5.8%, compared with 2005.
The largest contributable to the decline in net interest income was the $1.8
million, or 39.4%, increase in interest expense in 2006 compared with 2005
which resulted primarily from a (1) 156 basis point increase in the average
rate paid on money market deposit accounts, a 60 basis point increase on the
average rate paid on savings deposits and a 125 basis point increase in the
average rate paid on time deposits caused by rising rates generally and
competitive pressure in our markets, and (2) an increase in average money
market deposit accounts of $8.3 million or 62%, resulting from the impact of
the migration from non-interest bearing accounts and time deposits in a
rising rate environment and the addition of a cash management program for our
business customers. In addition, average noninterest bearing deposits
increased $610,000, or 1.7%.
Offsetting in part the increased interest expense was increased interest
income from earning assets of $1,211,000, or 8.2%, in 2006 compared with
2005. The majority of the $1,211,000 increase in interest income for the
year resulted from a combination of volume and yield components. Average
loan volumes increased $14.7 million, or 14.4%, and the yield increased 46
basis points to 8.02% resulting in an increase in interest income of
$1,646,000. Average investment volumes decreased $13.4 million, or 8.1%,
primarily due to the sale of securities to fund the tender offer.
Net interest income for 2005 decreased $178,000, or 1.7%, compared with 2004.
The decrease was influenced by the mix of earning assets, interest-bearing
liabilities, and higher funding costs. Interest income from earning assets
increased $997,000, or 7.2%, in 2005 compared with 2004, while interest
expenses increased $1.2 million, or 34.5%, for the same period. The majority
of the $997,000 increase in interest income for the year resulted from
increased volumes in earning assets related to the acquisition. Average
investment volumes increased $11 million, or 7.2%, in 2005 compared with 2004
while the average yield decreased 19 basis points. Average loan volumes
increased $2.4 million during 2005, combined with a yield increase of 54
basis points to 7.56% resulted in an increase in interest income from loans
of $717,000.
The increase of $1.2 million of interest expense in 2005 compared with 2004
primarily resulted from a 74 basis point increase in the average rate paid on
time deposits and 135 basis points increase in the average rate paid on money
market deposit accounts. The volume of average time deposits decreased $4.7
million, or 4.9%, but was more than offset by an increase in average long-
term debt of $7.4 million. During 2005, average interest-bearing deposits
increased $2 million, or 1.1%. The majority of the increase, or $4.5
million, was in lower rate NOW accounts which was somewhat offset by a $4.7
million, or 4.9%, decrease on the average level of certificates of deposit.
Average non-interest bearing deposits increased $0.8 million or 2%. Interest
expense on deposits continues to closely follow interest rate trends.
Net Interest Margin
Net interest margin, which is the net return on earning assets, is a key
performance ratio for evaluating net interest income. It is computed by
dividing net interest income by average total earning assets.
Net interest margin was 3.66% for 2006, a 25 basis point decrease from 3.91%
in 2005. The net interest margin in 2005 was down 23 basis points compared
with the net interest margin of 4.14% in 2004. Our net interest margin
declines in each year were primarily due to higher funding costs and the
shifting of deposit accounts from non-interest bearing accounts into
interest-bearing accounts
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:
-31-
2006 2005 2004
(Dollars in Thousands)
Amount % Change Amount % Change Amount % Change
Service charges on
deposit accounts $1,716 10.5 % $1,553 * % $1,554 20.4 %
Income from trust services 295 (3.3) 305 (1.6) 310 18.3
Income from retail
brokerage services 296 11.7 265 8.2 245 (6.1)
Income from insurance services 1,167 4.9 1,113 1.0 1,102 10.0
Income from mortgage
banking services 3,978 (9.9) 4,417 22.3 3,612 4.8
Gain (loss) on the sale or
abandonment of assets 15 87.5 8 102.9 (280) 84.8
Gain (loss) on the sale
of securities (564) * 0 * 3 *
Other income 207 1.5 204 (1.9) 208 61.2
Total noninterest income $7,110 (9.6)% $7,865 16.4 % $6,754 48.6 %
* = less than 1%
Noninterest income in 2006 decreased $755,000 compared with 2005. The
decline was primarily the result of a decrease of $439,000 in mortgage
banking income, the single largest component of the Corporation's noninterest
income, due to numerous payoffs of serviced loans at Empire. The mortgage
banking servicing portfolio at Empire is comprised of non-recourse loans
which we service for participating commercial mortgage lenders, and, at
December 31, 2006, was approximately $422 million, or an 11% decrease from
the balance at December 31, 2005. This decline is primarily due to the
numerous payoffs of serviced loans of which we feel will not continue at this
current level.
Noninterest income was also negatively impacted in 2006 by a $564,000 loss
recognized on the sale of securities to fund the repurchase of 575,000 shares
of the tender offer and 3.3% decrease in fees from trust services.
Offsetting in part, the declines in noninterest income, deposit service
charge income increased $163,000 or 10.5%, for 2006 over 2005 related
primarily to increased fees from our new cash management program for our
business customers and increased fees related to our overdraft protection
program. Other increases resulted from a 4.9% growth in fees related to
insurance services and 11.7% increase in fees related to retail brokerage
services.
Noninterest income in 2005 increased $1.1 million compared with 2004.
Mortgage banking income increased $805,000 as loan origination fees on
commercial mortgages increased over the prior year. Service charges on
deposit accounts, income from trust services, and income from insurance
services leveled off in 2005. Gain on sale or abandonment of assets
increased $288,000, resulting primarily from losses on sales of foreclosed
properties in 2004.
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:
2006 2005 2004
(Dollars in Thousands)
Amount % Change Amount % Change Amount % Change
Salaries and employee
benefits $ 7,276 (0.7)% $ 7,324 9.8 % $ 6,668 16.0 %
Occupancy expense 835 3.1 810 10.2 735 30.6
Equipment expense 631 (3.8) 656 (0.6) 660 13.4
Data processing expense 694 (4.3) 725 (5.4) 766 41.6
Amortization of intangible
assets 917 86.8 491 (2.2) 502 54.9
Other operating expense 2,632 10.8 2,376 (13.3) 2,742 9.3
Total noninterest expense $12,985 4.9 % $12,382 2.6 % $12,073 17.6 %
Total noninterest expense increased $603,000, or 4.9%, in 2006 compared with
2005. The majority of this increase of $429,000 was from increased
amortization of intangible assets resulting from accelerating the
amortization of our mortgage servicing assets due to the payoffs of serviced
loans at Empire described above. Also, increases occurred in other operating
expense of 10.8% due to administrative fees related to the tender offer and
other professional services expenses related to pension consulting services
and an increase in occupancy expense of 3.1% due to normal operations.
-32-
These increases in noninterest expenses were partially offset by a 4.3%
decrease in data processing fees due to the expiration of a contract related
to our overdraft protection program. Equipment expenses were down in 2006
3.8% due to normal operations.
Salary decreased slightly due to a decrease in the number of full time
employees from 118 to 114, which decrease was partially offset by an
additional pension contribution of $690,000. The additional pension funding
was a one-time charge by the Corporation incurred in connection with freezing
the pension plan and was necessary for the required minimum contribution.
Total noninterest expense increased $309,000, or 2.6%, in 2005 compared with
2004. Salaries and employee benefits expense increased 9.8% due to incentive
based compensation at Empire, increased pension contributions and increased
staffing to replace near term retirees. The Corporation's employees totaled
118 at December 31, 2005 compared with 125 the prior year end.
In 2005, occupancy expense increased $75,000, or 10.2%, compared with 2004.
This was primarily due to increased depreciation expense from a building
renovation project completed in late 2004. The other noninterest expense
categories: equipment, data processing, amortization of intangible assets,
and other operating expenses declined from the previous year due to incurring
higher expenses related to the acquisition of Sylvester Banking Company in
2004.
The "efficiency ratio" (noninterest expenses divided by total noninterest
income plus net interest income), a measure of productivity, increased to
75.48% for 2006, from 66.81% for 2005 and 68.54% for 2004. The higher
efficiency ratio was primarily due to lower revenues.
Federal Income Tax Expense
The Corporation expensed $734,000, $1.32 million and $1.14 million for
federal income taxes for the years ending December 31, 2006, 2005 and 2004,
respectively. These amounts resulted in an effective tax rate of 19.5%,
23.3%, and 22.8% for 2006, 2005, and 2004, respectively. See Note 10 of the
Corporation's Notes to Consolidated Financial Statements for further details
of tax expense.
Uses and Sources of Funds
The Corporation, primarily through the Bank, acts as a financial
intermediary. As such, our financial condition should be considered in terms
of how we manage our sources and uses of funds. Our primary sources of funds
are deposits and borrowings. We invest our funds in assets, and our earning
assets are what provide us income.
During 2006, total average assets increased $4.5 million, or 1.5%, to $304.9
million. The Corporation's earning assets, which include loans, investment
securities, deposits at the Federal Home Loan Bank, and federal funds sold
averaged $276.1 million in 2006, a 1.2% increase over $272.9 million in 2005.
This increase was primarily the result of improved loan volume, which also
caused the earning asset mix to shift towards more loans during the year. For
2006, average earning assets were comprised of 42% loans, 55% investment
securities, and 3% federal funds sold and funds at the Federal Home Loan
Bank. The ratio of average earning assets to average total assets slightly
decreased to 90.6% for 2006 compared with 90.9% for 2005.
Loans
Loans are one of the Corporation's largest earning assets and users of funds.
Because of the importance of loans, most of the other assets and liabilities
are managed to accommodate the needs of the loan portfolio. During 2006,
average loans represented 42% of average earning assets and 38% of average
total assets.
The composition of the Corporation's loan portfolio at December 31, 2006,
2005, and 2004 was as follows:
2006 2005 2004
(Dollars in Thousands)
Category Amount % Change Amount % Change Amount % Change
Commercial, financial,
and agricultural $ 20,938 69.3 % $ 12,370 67.3 % $ 7,395 (11.0)%
Real estate:
Construction 13,238 24.1 % 10,669 181.3 % 3,793 207.1 %
Commercial 45,506 34.4 % 33,869 (16.1)% 40,385 (6.0)%
Residential 31,942 (5.4)% 33,773 (0.6)% 33,968 12.3 %
Agricultural 5,576 (4.7)% 5,851 4.1 % 5,621 15.9 %
Installment 8,336 2.4 % 8,143 (7.4)% 8,795 (7.9)%
Total loans $125,536 20.0 % $104,675 4.7 % $99,957 2.9 %
Average total loans increased in 2006 due to an increase in local loan demand
mainly in construction and commercial loans. The ratio of total loans to
-33-
total deposits at year end increased to 55.4% in 2006 compared with 47.2% in
2005. The loan portfolio mix at year end 2006 consisted of 10.5% loans
secured by construction real estate, 36.2% loans secured by commercial real
estate, 25.5% of loans secured by residential real estate, and 4.5% of loans
secured by agricultural real estate. The loan portfolio also included other
commercial, financial, and agricultural purposes of 16.7% and installment
loans to individuals for consumer purposes of 6.6%.
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, 2006.
We have a loan review program in place which provides for the regular
examination and evaluation of the risk elements within the loan portfolio.
The adequacy of the allowance for loan losses is regularly evaluated based on
the review of all significant loans with particular emphasis on nonaccruing,
past due, and other potentially impaired loans that have been identified as
possible problems.
The allowance for loan losses was $2.4 million, or 1.9% of total loans
outstanding, as of December 31, 2006. This level represented a $37,000
decrease from the corresponding 2005 year-end amount which was 2.3% of total
loans outstanding.
There was no provision for loan losses in 2006, a $80,000 decrease from the
prior year's provision. Our assessment of the adequacy of the allowance to
absorb possible losses in the loan portfolio resulted in not having to
provide for losses during the year. See Note 3 of the Corporation's Notes to
Consolidated Financial Statements for details of the changes in the allowance
for loan losses.
Investment Securities
The Corporation's investment securities consist primarily of U.S. Government
agency securities. The investment portfolio serves several important
functions for the Corporation. Investments in securities are used as a
source of income, to complement loan demand and to satisfy pledging
requirements in the most profitable way possible. The investment portfolio
is a source of liquidity when loan demand exceeds funding availability, and
is a vehicle for adjusting balance sheet sensitivity to cushion against
adverse rate movements. Our investment policy attempts to provide adequate
liquidity by maintaining a portfolio with staggered maturities ranging from
one to five years.
The following table summarizes the contractual maturity of investment
securities as of December 31, 2006:
Securities Securities
Amounts Maturing In: Available for Sale Held to Maturity
(Dollars in Thousands)
One year or less $ 1,390 $ 9,010
After one through five years 20,749 87,987
After five through ten years 9,715 4,911
After ten years 0 325
Equity & mortgage-backed securities 1,469 0
Total investment securities $ 33,323 $102,233
The total investment portfolio decreased to $135.6 million from $154.8
million at year-end 2006 compared with year-end 2005, a decrease of $19.2
million, or 12.4%. The majority of this decrease was due to the sale of
securities to fund our tender offer. Also, other decreases resulted from the
maturing and called U.S. Government agency securities and to an increase in
loan demand. The average total investment portfolio decreased to $149.3
million in 2006 compared with $162.7 million for 2005.
We will continue to actively manage the size, components, and maturity
structure of the investment securities portfolio. Future investment
strategies will continue to be based on profit objectives, economic
conditions, interest rate risk objectives, and balance sheet liquidity
demands.
Nonperforming Assets
Nonperforming assets are defined as nonaccrual loans, loans that are 90 days
past due and still accruing, and property acquired by foreclosure. The level
of nonperforming assets increased $2.2 million at year-end 2006 compared with
year-end 2005. This increase primarily resulted from a single loan and no
loss is anticipated due to a sales contract that is currently is process
which will either pay off or assume this loan. Nonperforming assets were
approximately $2,357,000, or 0.82% of total assets as of December 31, 2006,
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compared with $108,000, or 0.04% of total assets at year-end 2005.
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 2006, average deposits increased 2.7% compared with 2006 from $221.1
million to $227.1 million. The majority of the increase in average deposits
occurred in average money market deposit accounts and NOW account deposits.
Competitive interest rates during 2006 resulted in change in the deposit mix.
Some customers shifted money from savings to money markets due to higher
rates paid on money market account deposits. Also, we implemented a cash
management program for commercial customers which provided money market rates
of return for large cash balances. As of December 31, 2006, the Corporation
had a total of $25.7 million in certificates of deposit of $100,000 or more
each. This was an 8.6% increase over the $23.7 million total in 2005.
We have used borrowings from the Federal Home Loan Bank to support our
residential mortgage lending activities. During 2006, the Corporation repaid
short-term advances with the Federal Home Loan Bank of $5.0 million leaving
$5.0 million to be paid in June and $10.0 million to be paid in August of
2007. In 2006, the Corporation borrowed no additional advances from the
Federal Home Loan Bank. Total long-term advances with the Federal Home Loan
Bank were $15.2 million at December 31, 2006. Details on the Federal Home
Bank advances are presented in Note 8 to the financial statements.
Liquidity
Liquidity is managed to assume that the Corporation can meet the cash flow
requirements of customers who may be either depositors wanting to withdraw
their funds or borrowers needing funds to meet their credit needs. Many
factors affect the ability to accomplish liquidity objectives successfully.
Those factors include the economic environment, our asset/liability mix and
our overall reputation and credit standing in the marketplace. In the
ordinary course of business, our cash flows are generated from deposits,
interest and fee income, from loan repayments and the maturity or sale of
other earning assets.
The Consolidated Statement of Cash Flows details the Corporation's cash flows
from operating, investing, and financing activities. During 2006, operating
and investing activities generated cash flows of $16.2 million, while
financing activities used $15.9 million of this and increased the cash and
due from banks balances by $300 thousand. Cash produced from operations
continues to provide cash for the payment of dividends and common stock
repurchases.
Liability liquidity represents our ability to renew or replace our short-term
borrowings and deposits as they mature or are withdrawn. The Corporation's
deposit mix includes a significant amount of core deposits. Core deposits
are defined as total deposits less public funds and time deposits of $100,000
or more. These funds are relatively stable because they are generally
accounts of individual customers who are concerned not only with rates paid,
but with the value of the services they receive, such as efficient operations
performed by helpful personnel. Total core deposits were 79.9% of total
deposits on December 31, 2006, compared with 83.2% in 2005.
Asset liquidity is provided through ordinary business activity, such as cash
which is received from interest and fee payments as well as from maturing
loans and investments. Additional sources include marketable securities and
short-term investments which can be easily be converted to cash without
significant loss. The Corporation's investment securities maturing within
one year or less were $10.4 million on December 31, 2006, which represented
8% of the investment debt securities portfolio. Also, the Corporation had
$2.0 million of investment securities callable at the option of the issuer
and that are unlikely to be called during 2007. These maturing and callable
investment securities are sources for repayment of our short-term and long-
term debt obligations.
We are not aware of any known trends, events, or uncertainties that will have
or that are reasonably likely to have a material effect on the Corporation's
liquidity or operations.
Contractual Obligations
The chart below shows the Corporation's contractual obligations and
commercial commitments, and its scheduled future cash payments under those
commitments as of December 31, 2006.
The majority of the Corporation's outstanding contractual obligations were
long-term debt. The remaining contractual obligations were comprised of
telephone operating leases and purchase obligations for data processing
services. We have no capital lease obligations.
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Contractual Obligations Payments Due by Period
Less
than 1 1-3 4-5 After 5
(Dollars in Thousands) Total year Years years Years
Long-term debt $15,229 $114 $115 $0 $15,000
Operating leases 62 18 38 6 0
Total contractual obligations $15,291 $132 $153 $6 $15,000
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of our customers.
These financial instruments include commitments to extend credit in the form
of loans or through letters of credit. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the financial statements. Since many of the commitments to
extend credit and standby letters of credit are expected to expire without
being drawn upon, the contractual amounts do not necessarily represent future
cash requirements.
Financial instruments whose contract amounts
represent credit risk (Dollars in Thousands):
2006 2005
Commitments to extend credit $ 20,471 $ 31,897
Standby letters of credit $ 10 $ 207
The Corporation does not have any special purpose entities or off-balance
sheet financing arrangements.
Capital Resources and Dividends
Our average equity to average assets ratio was 12.45% in 2006 and 13.19% in
2005. The Federal Reserve Board and the FDIC have issued rules regarding
risk-based capital requirements for U.S. banks and bank holding companies.
Overall, these guidelines define the components of capital, require higher
levels of capital for higher risk assets and lower levels of capital for
lower risk assets, and include certain off-balance sheet items in the
calculation of capital requirements. The risk-based capital regulations
require banks to maintain an 8% total risk-based ratio, of which 4% must
consist primarily of tangible common shareholders' equity (Tier I capital) or
its equivalent. Also, the regulations require a financial institution to
maintain a 3% leverage ratio. At year-end 2006, we were well in excess of
the minimum requirements under the guidelines with a total risk-based capital
ratio of 19.23%, a Tier I risk-based capital ratio of 17.98%, and a leverage
ratio of 8.88%.
The 2006 decrease in risk-based capital ratios was due to the repurchase of
575,000 shares through a tender offer.
The following table presents the risk-based capital and leverage ratios for
year-end 2006 and 2005 in comparison to the minimum regulatory guidelines:
Minimum Regulatory
Risk Based Capital Ratios Dec. 31, 2006 Dec. 31, 2005 Guidelines
Tier I capital 17.98% 27.28% 4.00%
Total risk-based capital 19.23% 28.53% 8.00%
Leverage 8.88% 12.75% 3.00%
Forward-Looking Statements
In addition to historical information, this 2006 Annual Report contains
forward-looking statements within the meaning of the federal securities laws.
The Corporation cautions that there are various factors that could cause
actual results to differ materially from the anticipated results or other
expectations expressed in the Corporation's forward-looking statements;
accordingly, there can be no assurance that such indicated results will be
realized.
These factors include asset quality; the adequacy of the allowance for loan
losses; technology difficulties or failures; the Corporation's ability to
execute its business strategy; the loss of key personnel; competition;
changes in regulation and monetary policy; legislative and regulatory
initiatives regarding deregulation and restructuring of the banking industry;
acquisitions or dispositions of assets or internal restructuring, that may be
pursued by the Corporation; changes in or application of environmental and
other laws and regulations to which the Corporation is subject; political,
legal and local economic conditions and developments; financial market
conditions and the results of financing efforts; changes in commodity prices
and interest rates; weather, natural disasters and other catastrophic events;
and other factors discussed in the Corporation's other filings with the
Securities and Exchange Commission.
-36-
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of the Corporation. Any such statement
speaks only as of the date the statement was made. The Corporation
undertakes no obligation to update or revise any forward-looking statements.
Additional information with respect to factors that may cause results to
differ materially from those contemplated by such forward-looking statements
is included in the Corporation's current and subsequent filings with the
Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risk is exposure to interest rate movements.
We have no foreign currency exchange rate risk, commodity price risk, or any
other material market risk. The Corporation has no trading investment
portfolio, nor do we have any interest rate swaps or other derivative
instruments.
Our primary source of earnings, net interest income, can fluctuate with
significant interest rate movements. To lessen the impact of these
movements, we seek to maximize net interest income while remaining within
prudent ranges of risk by practicing sound interest rate sensitivity
management. We attempt to accomplish this objective by structuring the
balance sheet so that the differences in repricing opportunities between
assets and liabilities are minimized. Interest rate sensitivity refers to
the responsiveness of earning assets and interest-bearing liabilities to
changes in market interest rates. The Corporation's interest rate risk
management is carried out by the Asset/Liability Management Committee which
operates under policies and guidelines established by the Bank. The
principal objective of asset/liability management is to manage the levels of
interest-sensitive assets and liabilities to minimize net interest income
fluctuations in times of fluctuating market interest rates. To effectively
measure and manage interest rate risk, the Corporation uses computer
simulations that determine the impact on net interest income of numerous
interest rate scenarios, balance sheet trends and strategies. These
simulations cover the following financial instruments: short-term financial
instruments, investment securities, loans, deposits, and borrowings. These
simulations incorporate assumptions about balance sheet dynamics, such as
loan and deposit growth and pricing, changes in funding mix, and asset and
liability repricing and maturity characteristics. Simulations are run under
various interest rate scenarios to determine the impact on net income and
capital. From these computer simulations, interest rate risk is quantified
and appropriate strategies are developed and implemented. The Corporation
also maintains an investment portfolio that staggers maturities and provides
flexibility over time in managing exposure to changes in interest rates. Any
imbalances in the repricing opportunities at any point in time constitute a
financial institution's interest rate sensitivity.
The table below provides information about the Corporation's financial assets
and liabilities that are sensitive to changes in interest rates. For each
rate-sensitive asset and liability listed, the table presents principal
balances and weighted average interest rates by expected maturity or the
earliest possible repricing opportunity dates.
One of the indicators for our interest rate sensitivity position is the
measurement of the difference between its rate-sensitive assets and rate-
sensitive liabilities, which is referred to as the "gap." A gap analysis
displays the earliest possible repricing opportunity for each asset and
liability category based upon contractual maturities and repricing.
At year-end 2006, our sensitivity ratio, or one-year cumulative rate-
sensitive assets relative to cumulative rate-sensitive liabilities, was 72%
compared with 88% for 2005. This change in the sensitivity ratio was a
result of the Corporation's management of its exposure to interest rate risk.
We were more liability-sensitive at the one year gap position compared with
the previous year. These changes in assets and liabilities occurred in: (1)
growth in money market account deposits, (2) increase in short-term portion
of long-term debt, and (3) decrease in short-term investments. This
liability sensitive position will increase the Corporation's exposure to
rising interest rates.
All interest rates and yields do not adjust at the same pace; therefore, the
sensitivity ratio is only a general indicator of the potential effects of
interest rate changes on net interest income. We monitor our asset and
liability mix in an effort to ensure that the effects of interest rate
movements in either direction are not significant over time.
-37-
Interest Rate Sensitivity December 31, 2006
Expected Maturity/Repricing Dates
(Dollars in Thousands)
2012 Fair
2007 2008 2009 2010 2011 & Beyond Total Value
Rate-sensitive Assets: *
Short-term Investments $ 415 $ $ $ $ $ $ 415 $ 415
Average interest rate 5.34% 5.34%
Securities available for sale 1,389 15,444 6,250 2,960 1,993 5,287 33,323 33,323
Average interest rate 5.13% 4.47% 5.18% 4.86% 6.66% 6.87% 5.18%
Securities held to maturity** 11,010 9,999 34,335 30,260 13,393 3,236 102,233 100,283
Average interest rate 3.76% 3.17% 4.03% 4.33% 4.60% 5.79% 4.14%
Federal Home Loan Bank stock 1,967 1,967 1,967
Average interest rate 5.90% 5.90%
Fixed-rate loans 24,719 13,892 9,816 7,083 4,001 12,535 72,046 70,962
Average interest rate 7.83% 7.35% 7.37% 7.36% 7.35% 6.73% 7.41%
Variable-rate loans 48,378 1,639 2,740 336 67 330 53,490 52,155
Average interest rate 8.56% 5.15% 5.50% 6.57% 7.11% 6.36% 8.27%
Total Rate-sensitive Assets $ 87,878 $40,974 $53,141 $40,639 $19,454 $21,388 $263,474 $259,105
Average interest rate 7.62% 5.16% 4.86% 4.92% 5.39% 6.62% 6.02%
Rate-sensitive Liabilities:
Time deposits $ 83,092 $ 7,337 $ 596 $ 281 $ 377 $ 20 $ 91,703 $ 91,881
Average interest rate 4.47% 4.38% 3.93% 4.41% 5.01% 4.75% 4.46%
Other interest-bearing deposits *** 24,377 23,172 23,172 7,724 7,724 15,449 101,618 101,618
Average interest rate 4.00% 0.90% 0.90% 0.90% 0.90% 0.90% 1.64%
Short-term borrowings 15,000 15,000
Average interest rate 3.43% 3.43%
Long-term borrowings 114 5,115 10,000 15,229
Average interest rate 5.19% 2.91% 3.85% 3.54%
Total Rate-sensitive Liabilities $122,583 $35,624 $33,768 $ 8,005 $ 8,101 $15,469 $223,550 $193,499
Average interest rate 4.25% 1.91% 1.83% 1.02% 1.09% 0.90% 3.05%
GAP $(34,705) $ 5,350 $19,373 $32,634 $11,353 $ 5,919 $ 39,924
Sensitivity Ratio 72% 81% 95% 111% 116% 118%
* All rates are tax-equivalent rates
** Repricing date is first call date
*** Interest-bearing deposits with no maturity are distributed over the
average estimated life of the accounts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is filed herewith.
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TJS
Thigpen, Jones, Seaton & Co., P.C.
CERTIFIED PUBLIC ACCOUNTANTS Frank W. Seaton, Jr., CPA
BUSINESS CONSULTANTS Tracy G. Smith, CPA
1004 Hillcrest Parkway P.O. Box 400 Grayson Dent, CPA
Dublin, Georgia 31040-0400 Robyn T. Tanner, CPA
Tel 478-272-2030 Fax 478-272-3318 Rhonda M. Norris, CPA
E-mail tjs@tjscpa.com Spencer L. Tydings, CPA
Becky G. Hines, CPA
Donna H. Lumley, CPA
Lori Y. Norton, CPA
Cristi H. Jones, CPA
Matthew C. Jones, CPA
Robert E. Thigpen, Jr., CPA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Directors and Stockholders of Southwest
Georgia Financial Corporation
We have audited the consolidated balance sheets of Southwest Georgia
Financial Corporation and Subsidiaries as of December 31, 2006 and 2005, and
the related consolidated statements of income, comprehensive income, changes
in stockholders' equity and cash flows for each of the years in the three
year period ended December 31, 2006. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility
is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Southwest Georgia Financial Corporation and Subsidiaries as of December
31, 2006 and 2005, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of
America.
/s/Thigpen, Jones, Seaton & Co., PC
Dublin, Georgia
February 28, 2007
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
2006 2005
ASSETS
Cash and due from banks $ 11,969,567 $ 11,699,277
Interest-bearing deposits with banks 83,210 10,156,067
Federal funds sold 332,000 3,550,000
Investment securities available for sale,
at fair value 33,322,855 48,042,924
Securities to be held to maturity (fair value
approximates $100,283,068 and $104,601,359) 102,232,804 106,778,632
Federal Home Loan Bank stock, at cost 1,966,900 2,205,200
Loans, net of allowance for loan losses of
$2,417,140 and $2,453,689 123,074,652 102,180,715
Premises and equipment, net 6,578,997 6,840,298
Foreclosed assets, net 0 0
Intangible assets 1,750,511 3,004,693
Other assets 7,204,926 6,815,899
Total assets $288,516,422 $301,273,705
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
NOW accounts $ 55,013,082 $ 51,604,863
Money market 24,376,607 17,079,484
Savings 22,228,442 25,481,261
Certificates of deposit $100,000 and over 25,725,026 23,691,032
Other time accounts 65,977,976 67,077,882
Total interest-bearing deposits 193,321,133 184,934,522
Noninterest-bearing deposits 33,387,979 36,909,869
Total deposits 226,709,112 221,844,391
Other short-term borrowed funds 15,000,000 5,000,000
Long-term debt 15,228,571 30,342,857
Other liabilities 3,621,820 4,233,637
Total liabilities 260,559,503 261,420,885
Stockholders' equity:
Common stock - $1 par value, 5,000,000 shares
authorized, 4,288,555 shares issued 4,288,555 4,266,680
Additional paid-in capital 31,644,063 31,265,216
Retained earnings 16,763,299 15,258,388
Accumulated other comprehensive income (482,588) (1,223,252)
Treasury stock, at cost 1,648,912 shares
for 2006 and 1,008,912 for 2005 (24,256,410) (9,714,212)
Total stockholders' equity 27,956,919 39,852,820
Total liabilities and stockholders' equity $288,516,422 $301,273,705
See accompanying notes to consolidated financial statements.
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 2006, 2005, and 2004
2006 2005 2004
Interest income:
Interest and fees on loans $ 9,343,246 $ 7,718,967 $ 7,002,096
Interest on debt securities:
Taxable 5,352,040 5,974,676 5,787,799
Tax-exempt 837,648 842,897 866,139
Dividends 123,520 90,120 49,915
Interest on deposits in banks 201,951 181,515 80,646
Interest on other short-term investments 171,065 10,274 35,044
Total interest income 16,029,470 14,818,449 13,821,639
Interest expense:
Deposits 5,177,729 3,393,485 2,482,447
Federal funds purchased 25,982 9,372 6,778
Other short-term borrowings 303,925 71,000 136,168
Long-term debt 872,229 1,101,787 775,751
Total interest expense 6,379,865 4,575,644 3,401,144
Net interest income 9,649,605 10,242,805 10,420,495
Provision for loan losses 0 80,000 92,344
Net interest income after provision
for loan losses 9,649,605 10,162,805 10,328,151
Noninterest income:
Service charges on deposit accounts 1,716,296 1,553,199 1,553,486
Income from trust services 295,133 305,483 309,741
Income from security sales 295,859 264,761 245,420
Income from insurance services 1,166,966 1,113,299 1,102,148
Income from mortgage banking services 3,978,271 4,416,543 3,611,755
Net gain (loss) on disposition of assets 15,047 7,595 (279,749)
Net gain (loss) on sale of securities (564,455) 0 2,914
Other income 207,179 203,770 208,268
Total noninterest income 7,110,296 7,864,650 6,753,983
Noninterest expense:
Salaries and employee benefits 7,276,174 7,324,312 6,667,567
Occupancy expense 834,863 810,407 735,174
Equipment expense 631,586 656,071 660,310
Data processing expense 693,683 724,846 765,448
Amortization of intangible assets 917,054 490,884 502,060
Other operating expenses 2,632,006 2,375,725 2,742,030
Total noninterest expenses 12,985,366 12,382,245 12,072,589
Income before income taxes 3,774,535 5,645,210 5,009,545
Provision for income taxes 734,375 1,316,680 1,144,327
Net income $ 3,040,160 $ 4,328,530 $ 3,865,218
Basic earnings per share:
Net income $ 0.97 $ 1.32 $ 1.19
Weighted average shares outstanding 3,134,741 3,267,169 3,258,124
Diluted earnings per share:
Net income $ 0.96 $ 1.31 $ 1.18
Weighted average shares outstanding 3,153,449 3,293,534 3,281,117
See accompanying notes to consolidated financial statements.
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 2006, 2005, and 2004
2006 2005 2004
Net income $ 3,040,160 $ 4,328,530 $ 3,865,218
Other comprehensive income, net of tax:
Unrealized gain(loss) on securities
available for sale 430,121 (1,231,427) (297,064)
Unrealized gain(loss) on pension
plan benefits 0 (673,062) (744,667)
Federal income tax expense(benefit) (146,241) (647,526) (354,576)
Other comprehensive income (loss),
net of tax 283,880 (1,256,963) (687,155)
Total comprehensive income $ 3,324,040 $ 3,071,567 $ 3,178,063
See accompanying notes to consolidated financial statements.
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 2006, 2005, and 2004
Accumulated
Other Total
Common Additional Retained Comprehensive Treasury Stockholders'
Stock paid-in capital Earnings Income Stock Equity
Balance at Dec. 31, 2003 $3,302,750 $ 7,172,051 $29,554,946 $ 720,866 $ (7,762,507) $32,988,106
Comprehensive income:
Net Income - - 3,865,218 - - 3,865,218
Changes in net gain(loss) on
securities available for sale - - - (195,675) - (195,675)
Changes in net gain(loss) on
pension plan benefits - - - (491,480) - (491,480)
Total comprehensive income - - - - - 3,178,063
Common stock issued
for acquisitions 240,000 5,280,000 - - - 5,520,000
Common stock acquired
through purchase program - - - - (1,396,635) (1,396,635)
Cash dividend declared
$.46 per share - - (1,499,194) - - (1,499,194)
Stock dividend declared 709,320 18,584,184 (19,293,504) - - -
Exercise of stock options 10,450 151,487 - - - 161,937
Balance at Dec. 31, 2004 4,262,520 31,187,722 12,627,466 33,711 (9,159,142) 38,952,277
Comprehensive income:
Net Income - - 4,328,530 - - 4,328,530
Changes in net gain(loss) on
securities available for sale - - - (812,742) - (812,742)
Changes in net gain(loss) on
pension plan benefits - - - (444,221) - (444,221)
Total comprehensive income - - - - - 3,071,567
Common stock acquired
through purchase program - - - - (555,070) (555,070)
Cash dividend declared
$.52 per share - - (1,697,608) - - (1,697,608)
Exercise and issuance of
stock options 4,160 77,494 - - - 81,654
Balance at Dec. 31, 2005 4,266,680 31,265,216 15,258,388 (1,223,252) (9,714,212) 39,852,820
Net Income - - 3,040,160 - - 3,040,160
Changes in net gain(loss) on
securities available for sale - - - 283,880 - 283,880
Total comprehensive income - - - - - 3,324,040
Adjustment to initially apply
FASB statement No. 158,
net of tax - - - 456,784 - 456,784
Common stock acquired
through purchase program - - - - (14,542,198) (14,542,198)
Cash dividend declared
$.52 per share - - (1,535,249) - - (1,535,249)
Exercise and issuance of
stock options 21,875 378,847 - - - 400,722
Balance at Dec. 31, 2006 $4,288,555 $31,644,063 $16,763,299 $ (482,588) $(24,256,410) $27,956,919
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2006, 2005, and 2004
2006 2005 2004
Cash flows from operating activities:
Net income $ 3,040,160 $ 4,328,530 $ 3,865,218
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Provision for loan losses 0 80,000 92,344
Depreciation 758,970 749,278 699,991
Net amortization and (accretion) of
investment securities (3,476) 14,371 25,392
Amortization of intangibles 917,054 490,884 502,060
Net loss (gain) on sale and disposal
of assets 559,078 (7,595) 276,835
Funds held related to mortgage
banking activities 100,226 (2,125,225) 173,970
Changes in:
Other assets (598,530) (669,669) 6,795
Other liabilities 123,341 146,136 6,285
Net cash provided by operating activities 4,896,823 3,006,710 5,648,890
Cash flows from investing activities:
Proceeds from maturities of securities
held to maturity 6,540,000 11,585,000 33,610,105
Proceeds from maturities of securities
available for sale 1,396,284 5,620,945 16,064,048
Proceeds from sale of securities
available for sale 13,435,545 0 5,157
Purchase of securities held to maturity (2,000,000) (2,325,000) (61,582,931)
Purchase of securities available for sale 0 (255,400) (1,631,201)
Net change in other short-term investments 3,218,000 (3,550,000) 0
Net change in loans (20,893,937) (5,092,257) 7,303,474
Purchase of premises and equipment (498,343) (762,141) (1,531,592)
Proceeds from sales of other assets 29,351 283,186 1,421,681
Net change in interest-bearing deposits
with banks 10,072,857 (4,189,376) (5,922,749)
Purchase of bank-owned life insurance 0 0 0
Payment for business acquisition 0 0 (847,636)
Net cash provided (used) for investing
activities 11,299,757 1,314,957 (13,111,644)
Cash flows from financing activities:
Net change in deposits 4,864,721 (643,711) (222,165)
Net change in federal funds purchased 0 0 (2,000,000)
Payment of short-term debt and short-term
portion of long-term debt (5,000,000) (8,000,000) (10,000,000)
Proceeds from issuance of short-term debt 0 0 5,000,000
Payment of long-term debt (114,286) (174,286) (174,286)
Proceeds from issuance of long-term debt 0 5,000,000 20,000,000
Cash dividends declared (1,535,249) (1,697,608) (1,499,194)
Proceeds from the exercise of stock options 400,722 81,654 161,937
Payment for common treasury stock (14,542,198) (555,070) (1,396,635)
Net cash provided (used) for
financing activities (15,926,290) (5,989,021) 9,869,657
Increase (decrease) in cash and due from bank 270,290 (1,667,354) 2,406,903
Cash and due from banks - beginning of year 11,699,277 13,366,631 10,959,728
Cash and due from banks - end of year $11,969,567 $11,699,277 $13,366,631
Cash paid during the year for:
Income taxes $ 1,265,000 $ 1,637,554 $ 1,380,000
Interest paid $ 6,238,088 $ 4,501,839 $ 3,206,264
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
2006 2005 2004
NONCASH ITEMS:
Increase in foreclosed properties
and decrease in loans $ 0 $ 239,434 $ 237,345
Unrealized gain(loss) on securities AFS $ 283,880 $ (812,742) $ (195,675)
Unrealized gain(loss) on pension
plan benefits $ 456,784 $ (444,221) $ (491,480)
NONCASH INVESTING & FINANCING ACTIVITY:
Fair value of assets acquired and
liabilities assumed in acquisition of
First Bank Holding Company and Sylvester
Banking Company:
Federal Funds $ $ $ 6,509,000
Securities 26,934,422
Loans, net 10,263,650
Bank premises & equipment 588,372
Core deposit intangibles 1,670,415
Other assets 334,677
Deposits (39,834,516)
Other liabilities (98,384)
Net fair value of non-cash assets
& liabilities 6,367,636
Common stock issued for acquisition (5,520,000)
Cash acquired from acquisition 3,352,364
Cash paid for acquisition $ $ $ 4,200,000
See accompanying notes to consolidated financial statements.
-45-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries (the "Corporation") conform to generally
accepted accounting principles and to general practices within the banking
industry. The following is a description of the more significant of those
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest
Georgia Financial Corporation and its wholly-owned direct and indirect
Subsidiaries, Southwest Georgia Bank (the "Bank") and Empire Financial
Services, Inc. ("Empire"). All significant intercompany accounts and
transactions have been eliminated in the consolidation.
Nature of Operations
The Corporation offers comprehensive financial services to consumer,
business, and governmental customers through its banking offices in southwest
Georgia. Its primary deposit products are savings and certificates of
deposit, and its primary lending products are consumer and commercial
mortgage loans. The Corporation provides, in addition to conventional
banking services, investment planning and management, trust management,
mortgage banking, and commercial and individual insurance products.
Insurance products and advice are provided by the Bank's Southwest Georgia
Insurance Services Division. Mortgage banking for primarily commercial
properties is provided by Empire, a mortgage banking services subsidiary.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with these evaluations, management
obtains independent appraisals for significant properties.
A substantial portion of the Corporation's loans are secured by real estate
located primarily in Georgia. Accordingly, the ultimate collection of these
loans is susceptible to changes in the real estate market conditions of this
market area.
Cash and Due from Banks Balances and Cash Flows
For purposes of reporting cash flows, the Corporation considers cash and cash
equivalents to include cash on hand, cash items in process of collection and
deposit amounts due from banks. Cash flows from loans, federal funds sold,
and interest bearing deposits with banks are reported separately and net. The
Corporation maintains its cash balances in several financial institutions.
Accounts at the financial institutions are secured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured deposits aggregate to
$5,537,000 at December 31, 2006.
Interest Bearing Deposits in Banks
Interest bearing deposits in banks mature within one year and are carried at
cost.
Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized
cost. Securities not classified as held to maturity or trading, including
equity securities with readily determinable fair values, are classified as
"available for sale" and recorded at fair value with unrealized gains and
losses reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that
are deemed to be other than temporary are reflected in earnings as realized
losses. 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.
Long-Lived Assets
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation has been calculated primarily using the straight-
line method for buildings and building improvements over the assets estimated
useful lives. Equipment and furniture are depreciated using the modified
accelerated recovery system method over the assets estimated useful lives for
financial reporting and income tax purposes for assets purchased on or before
December 31, 2003. For assets acquired since 2003, the Corporation used the
straight-line method of depreciation. The following estimated useful lives
are used for financial statement purposes:
Land improvements 5 - 31 years
Building and improvements 10 - 40 years
Machinery and equipment 5 - 10 years
Computer equipment 3 - 5 years
Office furniture and fixtures 5 - 10 years
All of the Corporation's leases are operating leases and are not capitalized
as assets for financial reporting purposes. Maintenance and repairs are
charged to expense and betterments are capitalized.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and
the write-down would be material, an assessment of recoverability is
performed prior to any write-down of the asset. Impairment on intangibles is
evaluated at each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount should be assessed.
Impairment, if any, is recognized through a valuation allowance with a
corresponding charge recorded in the income statement.
Loans and Allowances for Loan Losses
Loans are stated at principal amounts outstanding less unearned income and
the allowance for loan losses. Interest income is credited to income based
on the principal amount outstanding at the respective rate of interest except
for interest on certain installment loans made on a discount basis which is
recognized in a manner that results in a level-yield on the principal
outstanding.
Accrual of interest income is discontinued on loans when, in the opinion of
management, collection of such interest income becomes doubtful. Accrual of
interest on such loans is resumed when, in management's judgment, the
collection of interest and principal becomes probable.
Fees on loans and costs incurred in origination of most loans are recognized
at the time the loan is placed on the books. Because loan fees are not
significant, the results on operations are not materially different from the
results which would be obtained by accounting for loan fees and costs as
amortized over the term of the loan as an adjustment of the yield.
A loan is considered impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis
for commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collection of the principal is unlikely.
The allowance is an amount which management believes will be adequate to
absorb estimated losses on existing loans that may become uncollectible based
on evaluation of the collectibility of loans and prior loss experience. This
evaluation takes into consideration such factors as changes in the nature and
volume of the loan portfolios, current economic conditions that may affect
the borrowers' ability to pay, overall portfolio quality, and review of
specific problem loans.
-47-
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based upon changes in economic
conditions. Also, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses. Such agencies may require the Corporation to recognize additions to
the allowance based on their judgments of information available to them at
the time of their examination.
Foreclosed Assets
Properties acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at the lower of cost or fair value at the
date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
Credit Related Financial Instruments
In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit, and standby letters of credit.
Such financial instruments are recorded when they are funded.
Retirement Plans
The Corporation and its subsidiaries have pension plans covering
substantially all employees. The Corporation makes annual contributions to
the plans in amounts not exceeding the regulatory requirements.
Income Taxes
The Corporation and the Bank file a consolidated income tax return. The
Bank's subsidiary provides for income taxes based on its contribution to
income taxes (benefits) of the consolidated group.
Deferred income tax assets and liabilities result from temporary differences
between the tax basis of assets and liabilities and their reportable amounts
in the financial statements that will result in taxable or deductible amounts
in future years. Recognition of deferred tax assets is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences and tax credits will be realized.
Recent Accounting Pronouncements
On December 31, 2006, the Corporation adopted Statement of Financial
Accounting Standards No. 158, Employer's Accounting for Deferred Benefit
Pension and Other Postretirement Plans. The adoption date requirement for
this standard was for fiscal year ending after December 15, 2006. This
standard requires an employer to recognize in its statement of financial
position an asset for a pension retirement plan's overfunded status or a
liability for an underfunded status. The Corporation's funded status of
pension retirement plan is the difference between the fair value of the plan
assets and the projected benefit obligation on December 31, 2006.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment".
SFAS No. 123(R) replaces SFAS No. 123, "Accounting for Stock-Based
Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees". This Statement requires compensation costs related to
share-based payment transactions to be recognized in the financial statements
over the period that an employee provides service in exchange for the award.
Public companies are required to adopt the new standard using either a
modified prospective method or may elect to restate prior periods using the
modified retrospective method. Under the modified prospective method,
companies are required to record compensation cost for new and modified
awards over the related vesting period of such awards prospectively and
record compensation cost prospectively for the unvested portion, at the date
of adoption, of previously issued and outstanding awards over the remaining
vesting period of such awards. No change to prior periods presented is
permitted under the modified prospective method. SFAS No. 123(R) is
effective for periods beginning after June 15, 2005. Effective July 1, 2005,
the Corporation has adopted this new standard using the modified prospective
method. All required details of stock option awards are disclosed in Note 9
of the consolidated financial statements.
Trust Department
Trust income is included in the accompanying consolidated financial
statements on the cash basis in accordance with established industry
practices. Reporting of such fees on the accrual basis would have no
material effect on reported income.
Servicing and Origination Fees on Loans
The Corporation from the Bank's subsidiary, Empire, recognizes as income in
the current period all loan origination and brokerage fees collected on loans
originated and closed for investing participants. Loan servicing fees are
based on a percentage of loan interest paid by the borrower and recognized
over the term of the loan as loan payments are received. Empire does not
directly fund any mortgages and acts as a service-oriented broker for
-48-
participating mortgage lenders. Fees charged for continuing servicing fees
are comparable with market rates charged in the industry. Based on these
facts and after a thorough analysis and evaluation of deferred mortgage
servicing costs as defined under FASB 122 and amended by FASB 140, they are
insignificant and immaterial to be recognized. Late charges assessed on past
due payments are recognized as income by the Corporation when collected.
Advertising Costs
It is the policy of the Corporation to expense advertising costs as they are
incurred. The Corporation does not engage in any direct-response advertising
and accordingly has no advertising costs reported as assets on its balance
sheet. Costs that were expensed during 2006, 2005, and 2004 were $191,625,
$176,341, and $214,547, respectively.
2. INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities as
shown in the consolidated balance sheets and their estimated fair values at
December 31 were as follows:
Securities Available For Sale:
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
December 31, 2006
Equity securities $ 1,024,265 $ 34,612 $ 0 $ 1,058,877
State and municipal securities 12,915,079 466,207 0 13,381,286
U.S. Government Agency
Securities 18,986,568 0 513,443 18,473,125
Mortgage backed securities 402,506 7,171 110 409,567
Total $ 33,328,418 $507,990 $ 513,553 $ 33,322,855
December 31, 2005
Equity securities $ 1,026,265 $ 17,115 $ 0 $ 1,043,380
State and municipal securities 12,912,004 588,100 443 13,499,661
U.S. Government Agency
Securities 33,979,773 3,513 1,058,599 32,924,687
Mortgage backed securities 561,055 14,358 217 575,196
Total $ 48,479,097 $623,086 $1,059,259 $ 48,042,924
-49-
Securities Held to Maturity:
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
December 31, 2006
U.S. Government Agency
Securities $ 96,996,715 $ 14,659 $1,985,807 $ 95,025,567
State and Municipal Securities 5,236,089 45,072 23,660 5,257,501
Total $102,232,804 $ 59,731 $2,009,467 $100,283,068
December 31, 2005
U.S. Government Agency
Securities $100,001,718 $ 70,588 $2,273,111 $ 97,799,195
State and Municipal Securities 6,776,914 93,663 68,413 6,802,164
Total $106,778,632 $164,251 $2,341,524 $104,601,359
At December 31, 2006 and 2005, securities with a carrying value of
$37,312,000 and $25,699,000, respectively were pledged as collateral for
public deposits and other purposes as required by law. Also, securities with
a carrying value of $30,343,000 and $35,437,000 were pledged to secure
Federal Home Loan Bank advances at December 31, 2006 and 2005, respectively.
The Federal Home Loan Bank requires the Bank to hold a minimum investment of
stock, based on the level of activity. As of December 31, 2006 this stock
investment was $1,966,900.
There were no investments in obligations of any state or municipal
subdivisions which exceeded 10 % of the Corporation's stockholders' equity at
December 31, 2006.
The amortized cost and estimated fair value of securities at December 31,
2006, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
Amortized Estimated
Available for Sale: Cost Fair Value
Amounts maturing in:
One year or less $ 1,389,378 $ 1,389,607
After one through five years 21,176,620 20,749,471
After five through ten years 9,335,649 9,715,333
After ten years 0 0
Total debt securities $ 31,901,647 $ 31,854,411
Mortgage-backed securities 402,506 409,567
Equity securities 1,024,265 1,058,877
Total AFS securities $ 33,328,418 $ 33,322,855
Amortized Estimated
Held to Maturity: Cost Fair Value
Amounts maturing in:
One year or less $ 9,010,352 $ 8,939,262
After one through five years 87,986,363 86,086,305
After five through ten years 4,911,089 4,937,197
After ten years 325,000 320,304
Total HTM securities $102,232,804 $100,283,068
For the years ended December 31, 2006, 2005, and 2004, proceeds from sales of
securities available for sale amounted to $13,435,545, $0, and $5,157,
respectively. Gross realized gains (losses) amounted to $(564,455), $0, and
$2,914 respectively. The loss during 2006 was due to liquidating securities
to fund a tender stock offer.
-50-
Information pertaining to securities with gross unrealized losses at December
31, 2006 and 2005, aggregated by investment category and length of time that
individual securities have been in continuous loss position, follows:
December 31, 2006 Less Than Twelve Months Over Twelve Months
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
Securities Available for Sale
Debt securities:
U.S. Government and federal agency $ 1,253 $ 998,125 $ 512,190 $17,475,000
State and municipal securities 0 0 0 0
Mortgage-backed securities 0 0 110 103,287
Total debt securities 1,253 998,125 512,300 17,578,287
Equity securities 0 0 0 0
Total securities available
for sale $ 1,253 $ 998,125 $ 512,300 $17,578,287
Securities Held to Maturity
U.S. Government and federal agency $ 440 $ 1,999,560 $1,985,367 $91,000,996
State and municipal securities 0 0 23,660 2,352,343
Total securities held to maturity $ 440 $ 1,999,560 $2,009,027 $93,353,339
December 31, 2005 Less Than Twelve Months Over Twelve Months
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
Securities Available for Sale
Debt securities:
U.S. Government and federal agency $ 20,938 $ 2,965,312 $1,037,661 $27,959,687
State and municipal securities 443 159,557 0 0
Mortgage-backed securities 217 138,726 0 0
Total debt securities 21,598 3,263,595 1,037,661 27,959,687
Equity securities 0 0 0 0
Total securities available
for sale $ 21,598 $ 3,263,595 $1,037,661 $27,959,687
Securities Held to Maturity
U.S. Government and federal agency $830,496 $46,156,456 $1,442,615 $45,555,135
State and municipal securities 68,413 2,707,239 0 0
Total securities held to maturity $898,909 $48,863,695 $1,442,615 $45,555,135
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, 2006, the debt securities with unrealized losses have
depreciated 2.2% from the Corporation's amortized cost basis. These
unrealized losses relate principally to current interest rates for similar
types of securities. In analyzing an issuers 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. As management has the ability to hold debt securities until
maturity, or for the foreseeable future if classified as available-for-sale,
no declines are deemed to be other-than-temporary.
-51-
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the Corporation's loan portfolio at December 31, 2006,
2005, and 2004 was as follows:
2006 2005 2004
Commercial, financial and
agricultural loans $ 20,937,732 $ 12,369,529 $ 7,394,753
Real estate:
Construction loans 13,238,346 10,669,442 3,793,313
Commercial mortgage loans 45,506,441 33,869,136 40,385,724
Residential loans 31,942,371 33,773,198 33,967,916
Agricultural loans 5,576,468 5,850,641 5,620,766
Deposit account overdrafts 99,516 99,295 115,963
Consumer loans 8,234,881 8,044,000 8,678,825
Loans Outstanding 125,535,755 104,675,241 99,957,260
Unearned discount (43,963) (40,837) (42,531)
Allowance for loan losses (2,417,140) (2,453,689) (2,506,837)
Net loans $123,074,652 $102,180,715 $97,407,892
The Corporation's only significant concentration of credit at December 31,
2006, occurs in real estate loans which totaled approximately $96 million.
However, this amount is not concentrated in any specific segment within the
market or geographic area.
At December 31, 2006 and 2005, impaired loans amounted to $77,045 and
$173,995 respectively. Included in the allowance for loan losses is $17,767
related to impaired loans at December 31, 2006, and $26,099 related to
impaired loans at December 31, 2005. The amounts in the allowance for loan
losses for impaired loans were primarily determined using the fair value of
the loans' collateral.
For the years ended December 31, 2006, 2005, and 2004, the average recorded
investment in impaired loans was $125,520, $191,722, and $328,212
respectively. Interest income was recognized for cash payments received on
loans while they were impaired of $8,891 for 2006, $14,361 for 2005, and
$9,268 for 2004.
Loans placed on nonaccrual status amounted to $2,347,347 and $103,092 at
December 31, 2006 and 2005 respectively. Past due loans over ninety days and
still accruing at December 31, 2006 and 2005 were $9,670 and $4,910
respectively. One large $2,250,000 loan is attributed to the increase of
nonaccrual loans for 2006 and no loss is anticipated because of a sales
contract that is currently in process which will either pay off or assume
this loan.
Changes in the allowance for loan losses are as follows:
2006 2005 2004
Balance, January 1 $ 2,453,689 $ 2,506,837 $ 2,337,811
Provision charged to operations 0 80,000 92,344
Loans charged off (59,505) (226,641) (280,509)
Recoveries 22,956 93,493 182,950
Purchased reserve 0 0 174,241
Balance, December 31 $ 2,417,140 $ 2,453,689 $ 2,506,837
4. BANK PREMISES AND EQUIPMENT
The amounts reported as bank premises and equipment at December 31, 2006 and
2005 are as follows:
2006 2005
Land $ 1,177,059 $ 1,177,059
Building 7,872,203 7,768,440
Furniture and equipment 6,000,498 5,918,425
15,049,760 14,863,924
Less accumulated depreciation (8,470,763) (8,023,626)
Total $ 6,578,997 $ 6,840,298
-52-
Depreciation of premises and equipment was $758,970; $749,278 and $699,991 in
2006, 2005, and 2004, 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. During 2004, the Corporation changed to
straight line of depreciation for all furniture, fixtures, and equipment
acquired during and subsequent to 2004. The Corporation believes the
straight line method allows more consistent recovery over the estimated
useful life of the asset. The Corporation plans to continue to depreciate
furniture, fixtures, and equipment acquired prior to 2004 on the modified
accelerated cost recovery system (MACRS). The effect of this change was to
decrease pre-tax income and net income for 2006 by $500 (no change per share)
and to increase pre-tax income and net income for 2005 by $66,000 ($.02 per
share) and $44,000 ($.01 per share) and for 2004 by $39,000 ($.01 per share)
and $26,000 (less than $.01 per share), respectively.
5. INTANGIBLE ASSETS
The following table lists the Corporation's intangible assets at December 31,
2006 and 2005. Core deposit premiums have 7-8 years of remaining
amortization, and customers' account base have 8-9 years remaining
amortization while mortgage banking has approximately one year to amortize.
The Corporation accelerated the amortization of the mortgage banking
intangible asset by $429,000 due to numerous payoffs for serviced loans
during 2006.
2006 2005
Amortizing intangible assets
Core deposit premiums $ 1,300,012 $ 1,481,754
Customers' account base 171,416 247,429
Mortgage banking 279,083 985,815
Non-amortizing intangible assets
Pension plan 0 289,695
Total intangible assets $ 1,750,511 $ 3,004,693
6. DEPOSITS
At December 31, 2006, the scheduled maturities of certificates of deposit are
as follows:
$ Amount
2006 $ 83,018,432
2007 7,410,760
2008 595,585
2009 280,835
2010 and thereafter 397,390
Total $ 91,703,002
7. SHORT-TERM BORROWINGS
Federal funds purchased generally mature within one to four days. On
December 31, 2006, the Corporation had no federal funds purchased. Other
short-term borrowed funds consist of Federal Home Loan Bank advances of
$15,000,000 with interest at 3.43 % as of December 31, 2006 and $5,000,000
million with interest at 2.43 % as of December 31, 2005.
Information concerning federal funds purchased and Federal Home Loan Bank
short-term advances are summarized as follows:
2006 2005 2004
Average balance during the year $10,475,611 $3,124,427 $ 5,992,467
Average interest rate during the year 3.15% 2.57% 2.39%
Maximum month-end bal. during the year $20,000,000 $5,000,000 $10,000,000
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8. LONG-TERM DEBT
Long-term debt at December 31, 2006 and 2005 consist of the following:
2006 2005
Advance from Federal Home Loan Bank with a 2.85%
fixed rate of interest maturing March 11, 2013.
(convertible to a variable rate at option of
Federal Home Loan Bank on March 11, 2008). $ 5,000,000 $ 5,000,000
Advance from Federal Home Loan Bank with a 4.00%
fixed rate of interest maturing August 6, 2012,
(convertible to a variable rate at option of
Federal Home Loan Bank on August 6, 2007),
(transferred to short-term borrowings) 0 5,000,000
Advance from Federal Home Loan Bank with a 3.85%
fixed rate of interest maturing April 30, 2014,
(convertible to a variable rate at option of
Federal Home Loan Bank on April 30, 2009). 10,000,000 10,000,000
Advance from Federal Home Loan Bank with a 3.08%
fixed rate of interest maturing August 13, 2014,
(convertible to a variable rate at option of
Federal Home Loan Bank on August 13, 2007),
(transferred to short-term borrowings) 0 5,000,000
Advance from Federal Home Loan Bank with a 3.21%
fixed rate of interest maturing June 29, 2015,
(convertible to a variable rate at option of
Federal Home Loan Bank on June 29, 2007),
(transferred to short-term borrowings) 0 5,000,000
Advance from Federal Home Loan Bank with a 5.21%
fixed rate of interest due in annual installments
maturing December 17, 2008. 228,571 342,857
Total long-term debt $15,228,571 $30,342,857
The advances from Federal Home Loan Bank are collateralized by the pledging
of investment securities. At December 31, 2006 and 2005, securities with a
carrying value of $30,343,000 and $35,437,000 respectively were pledged to
secure these advances. There were no 1-4 family residential mortgages
pledged to secure Federal Home Loan Bank advances. At December 31, 2006, the
Corporation had approximately $16,000,000 of unused lines of credit with the
Federal Home Loan Bank.
The following are maturities of long-term debt for the next five years. At
December 31, 2006, there was no floating rate long-term debt; however, some
of the advances have convertible call features.
Fixed Rate
Due in: $ Amount
2007 $ 114,286
2008 114,285
2009 0
2010 0
2011 0
Later Years 15,000,000
Total long-term debt $15,228,571
9. EMPLOYEE BENEFITS PLAN
Pension Plan
The Corporation has a noncontributory defined benefit pension plan which
covers most all employees who have attained the age of 21 years and completed
one year of continuous service. The Corporation is providing for the cost of
this plan as benefits are accrued based upon actuarial determinations
employing the aggregate funding method.
The table of actuarially computed benefit obligations and net assets and the
related changes of the Plan at December 31, 2006, 2005, and 2004 is presented
below.
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2006 2005 2004
Change in Benefit Obligation
Benefit obligation at beginning of year $11,894,280 $11,053,754 $ 7,796,750
Service cost 499,562 405,783 336,006
Interest cost 734,225 688,756 505,043
Acquisition 0 0 2,637,735
Amendments (1,452,854) 0 0
Actuarial (gain)loss 186,983 309,158 199,608
Benefits paid (678,512) (563,171) (421,388)
Benefit obligation at end of year $11,183,684 $11,894,280 $11,053,754
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 9,450,986 $ 9,233,482 $ 6,706,808
Actual return on plan assets 675,672 286,943 366,107
Acquisition 0 0 2,215,189
Employer contribution 1,009,906 493,732 366,766
Benefits paid (678,512) (563,171) (421,388)
Fair value of plan assets at end of year $10,458,052 $ 9,450,986 $ 9,233,482
2006 2005 2004
Funded Status
Prepaid (accrued) benefit cost $ (725,632) $(2,443,294) $(1,820,272)
Unrecognized net actuarial (gain)/loss 1,380,424 2,686,806 1,889,582
Unrecognized prior service cost 0 289,695 422,546
Prepaid pension cost recognized 654,792 $ 533,207 $ 491,856
Accumulated benefit obligation $11,183,684 $10,625,203 $ 9,908,839
Amount recognized in consolidated
balance sheet consist of:
Prepaid benefit cost $ 654,792 $ 533,207
Accrued benefit liability (725,632) (1,707,424)
Intangible asset 0 289,695
Accumulated other comprehensive income 725,632 1,417,729
Net amount recognized $ 654,792 $ 533,207
On December 31, 2006, the Corporation adopted Statement of Financial
Accounting Standards No. 158, Employer's Accounting for Deferred Benefit
Pension and Other Postretirement Plans. The adoption date requirement for
this standard was for fiscal year ending after December 15, 2006. This
standard requires an employer to recognize in its statement of financial
position an asset for a pension retirement plan's overfunded status or a
liability for an underfunded status. The Corporation's funded status of
pension retirement plan is the difference between the fair value of the plan
assets and the projected benefit obligation on December 31, 2006. During the
fourth quarter of 2006, the Corporation froze its pension retirement plan due
to deterioration of its funding status and the increasing costs to keep it
funded. In December, the Corporation accrued $174,308 additional
contributions to the Plan in order to make the required minimum contribution
for 2006 of $1,184,214. According to SFAS No. 88, Employer's Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, there is no gain to be recognized in 2006 due to
freezing the plan. The table below show the effects of before and after the
curtailment of the pension plan.
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SFAS No. 88 as of December 31, 2006
Before Effect of After
Curtailment Curtailment Curtailment
Projected Benefit Obligation $12,636,538 $(1,452,854) $11,183,684
Market Value of Assets 10,458,052 0 10,458,052
Funded Status $(2,178,486) $ 1,452,854 $ (725,632)
Unrecognized Net Prior Service Cost 259,360 (259,360) 0
Unrecognized Net (Gain) or Loss 2,833,278 (1,452,854) 1,380,424
Prepaid/(Accrued) Pension Cost $ 914,152 $ (259,360) $ 654,792
In 2006, the Corporation recorded the combined non-cash adjustments for
changes before and after the curtailment to the equity through accumulated
other comprehensive income of ($692,097) or ($456,784) on a pre-tax basis,
accrued pension liability of ($981,792), and intangible assets of ($289,695).
The initial year of adoption required the adjustments to only be made to
accumulated comprehensive income in equity.
In years prior to 2006, SFAS No. 87, Employees Accounting for Pension,
requires the recognition of a minimum pension liability for the defined
benefit pension plans whose accumulated benefit obligations exceed the fair
value of the plan assets at the end of the year. In 2005, the Corporation
recorded a non-cash adjustment to the equity through accumulated other
comprehensive income of $444,221 ($673,062 on a pretax basis), accrued
pension liability of $540,211 and intangible assets of ($132,851). In 2004,
the Corporation's financial statements were restated to reflect the minimum
pension benefit liability of defined benefit pension plan. We recorded a
non-cash adjustment to equity through other comprehensive income of $491,480
($744,667 on a pretax basis), accrued pension benefit liability of
$1,167,218, and intangible assets of $422,546.
At December 31, 2006, the plan assets included cash and cash equivalents,
U.S. Treasury bonds and notes, other government agency securities, and equity
securities. The pension plan for Sylvester Banking Company was merged with
the Corporation's plan as of December 31, 2004. The Corporation made
contributions of $117,673 in 2004 to the Sylvester's plan and $79,745 in
benefits were paid to participants prior to the merger of the plans.
Assumptions used to determine the benefit obligation as of December 31, 2006,
2005, and 2004, respectively were:
2006 2005
Weighted-Average Assumptions As of December 31
Discount rate 6.25% 6.50%
Rate of compensation increase 5.00% 5.00%
Components of Net Periodic Benefit Cost 2006 2005 2004
Service cost $499,562 $405,783 $336,006
Interest cost 734,225 688,756 505,043
Expected return on plan assets (792,327) (739,352) (538,713)
Amortization 187,501 97,194 96,147
Net periodic benefit cost $628,961 $452,381 $398,483
For the years ended December 31, 2006, 2005, and 2004, the assumptions used
to determine net periodic pension costs are as follows:
2006 2005 2004
Discount rate 6.50% 6.50% 6.75%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00%
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.
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2006 2005
Planned Asset Allocation as of December 31
Equity 25% 25%
Fixed income 70% 71%
Cash & cash equivalents 5% 4%
Total 100% 100%
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. Since the funds are intended
for retirement, the investment time horizon is long-term by nature. Because
of the long-term focus, short-term volatility is acceptable in an effort to
provide for higher long-term returns. 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 30% in equities, 50% to 90% in fixed-income investments,
and up to 20% in cash equivalents 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. To reduce risk through efficient
diversification and to provide for better liquidity, the stock portion of the
portfolio is maintained with the use of mutual funds. No more than 10% of
the market value of the plan is invested in any one mutual fund. Mutual
funds investing in international stocks is allowed, but is limited to no more
than 5% of the market value of the plan.
Fixed income securities include issues of the U.S. Government and its
agencies, corporate bonds, certificates of deposit, and preferred stocks.
Any corporate bond or preferred stock purchased have a rating (by Standard &
Poor's or Moody's) of "A" or better. Investments in securities of a single
issuer (with the exception of the U.S. Government, U.S. Government Agencies,
and federal insured bank deposits) do not exceed 5% of the market value of
the plan. The average maturity of the fixed income portion of the portfolio
does not exceed 10 years.
Estimated Contributions
The employer expects to contribute $615,000 to this pension plan in 2007.
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:
2007 $ 700,000
2008 750,000
2009 800,000
2010 850,000
2011 850,000
Years 2012 - 2016 $ 5,300,000
Southwest Georgia Bank 401(K) Plan
In place of the Corporation's frozen defined pension retirement plan, the
Corporation is offering the employees a 401(K) Plan effective January 1,
2007. 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 deferred 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.
Employee Stock Ownership Plan
The Corporation has a nondiscriminatory Employee Stock Ownership Plan and
Trust (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 contributions were $0
in 2006, $538,675 in 2005, and $474,278 in 2004. Contributions to eligible
participants are based on percentage of annual compensation. As of December
31, 2006, the ESOP holds 327,478 shares of the Corporation's outstanding
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shares of common stock. All 316,895 released shares are allocated to the
participants. The 10,583 unreleased shares are pledged as collateral for a
$200,000 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.
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.
Deferred Compensation Agreement
The Corporation has entered into an employment agreement with an executive
officer of Empire as of January 1, 2002. Under this employee agreement the
executive officer shall be credited with Deferred Compensation for his
service and covenants in the amount of $200,000 on December 31, 2002 and
$200,000 on each anniversary date thereafter to 2006. The executive officer
has irrevocably elected to waive participation in the Pension and Employee
Stock Ownership Plans.
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 $500 monthly of salary or
directors' fees and receive corporate common stock with an aggregate value of
1.5 times their contribution. The expense incurred during 2006, 2005, and
2004 on the part of the Corporation totaled $62,100, $64,550, and 58,550,
respectively.
Stock Option Plan
Effective March 19, 1997, the Corporation established a Key Individual Stock
Option Plan ("Plan") which provides for the issuance of options to key
employees and directors of the Corporation. In April 1997, the Plan was
approved by the Corporation's shareholders, and it will be effective for ten
years. A maximum of 196,680 shares of common stock have been authorized for
issuance with respect to options granted under the Plan. The Plan provides
for the grant of incentive stock options and nonqualified stock options to
key employees of the Corporation. The Plan is administered by the Personnel
Committee of the Board of Directors.
In 2006, 4,500 incentive stock options (ISO) were granted to the
Corporation's key employees and/or directors. In 2005, the Corporation
granted 1,500 stock options and no stock options were granted in 2003. Under
the Plan, the exercise price of each option equals the market price of the
Corporation's stock on the grant date for a term of ten years. All of these
stock options are fully vested. The fair value of each stock option grant is
estimated on the grant date using an option-pricing model using
weighted-average assumptions.
The following table sets forth the number of 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.
2006 2005 2004
Number of stock options granted 4,500 1,500 13,900
Average fair value of stock options granted $ 3.90 $ 4.11 $ 3.14
Number of option shares exercisable 108,605 131,480 138,640
Average price of stock options exercisable $ 17.66 $ 17.67 $ 17.76
Weighted-average assumptions:
Dividend yield 2.6% 2.4% 2.2%
Risk-free interest rate 4.8% 3.9% 1.3%
Volatility rate 20.0% 20.0% 21.2%
Expected life 5 years 5 years 5 years
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A summary of the status of the Corporation's Plan as of December 31, 2006,
2005 and 2004, and the changes in stock options during the years are
presented below:
No. of Shares Average Price
Outstanding at December 31, 2003 135,960 $ 17.20
Granted 13,900 20.56
Expired 0 0
Exercised (11,220) 14.43
Outstanding at December 31, 2004 138,640 17.76
Granted 1,500 22.05
Expired (3,000) 21.08
Exercised (4,160) 18.19
Outstanding at December 31, 2005 132,980 17.72
Granted 4,500 19.84
Expired (2,500) 22.17
Exercised (21,875) 17.52
Outstanding at December 31, 2006 113,105 $ 17.74
The following table summarizes information about fixed stock options
outstanding and exercisable at December 31, 2006.
Outstanding Stock Options Exercisable Stock Options
Weighted-
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price Range At 12/31/06 Life Price At 12/31/06 Price
$11 to $12 4,620 4.5 Years $ 11.63 4,620 $ 11.63
$12 to $13 6,600 3.8 Years 12.21 6,600 12.21
$13 to $14 17,160 3.4 Years 13.09 17,160 13.09
$19 to $20 81,425 2.8 Years 19.62 76,925 19.61
$21 to $23 3,300 8.5 Years 21.52 3,300 21.52
$11 to $23 113,105 $ 17.74 108,605 $ 17.85
As of July 1, 2005, the Corporation adopted SFAS No. 123R which requires
recording stock option awards as compensation cost based on the fair value of
the stock options over the vesting period. In 2005, the year of adopting the
new standard, the Corporation had no effect from the change on income before
taxes, net income, cash flow from operations, and basic and diluted earnings
per share. The Corporation granted 4,500 ISO's at a fully vested fair value
of $17,570 during 2006 and granted 1,500 ISO's fully vested at a fair value
of $6,165 to employees in December 2005. The fair value of these ISO's which
are classified as equity are required to be recorded in the financial
statements as compensation cost.
Had compensation cost for the Corporation's stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the method prescribed by SFAS No. 123, the Corporation's net
income and earnings per share would have been adjusted to the pro forma
amounts indicated below:
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Years Ended December 31,
2006 2005 2004
(In thousands, except per share data)
Net income, as reported $ 3,040 $ 4,329 $ 3,865
Add: Stock-based employee compensation
cost included in reported income, net
of related tax effects 17 6 0
Deduct: Stock based employee compensation
(cost) income determined under fair
value based method, net of tax effects (17) (6) (3)
Pro forma net income $ 3,040 $ 4,329 $ 3,862
Basic earnings per share - As reported $ .97 $ 1.32 $ 1.19
- Pro forma .97 1.32 1.18
Diluted earnings per share - As reported .96 1.31 1.18
- Pro forma .96 1.31 1.18
The pro forma disclosures include the effects of all awards granted from
January 1, 1995 through December 31, 2006.
Dividend Reinvestment and Share Purchase Plan
In 1997, the Corporation's Board of Directors approved a dividend
reinvestment and share purchase plan. Also, the Board amended this plan on
September 16, 1998. The purpose of the plan is to provide shareholders of
record of the Corporation's common stock, who elect to participate in the
Plan, with a simple and convenient method of investing cash dividends and
voluntary cash contributions in shares of the common stock without payment of
any brokerage commissions or other charges. Eligible participants may
purchase common stock through automatic reinvestment of common stock
dividends on all or partial shares and make additional voluntary cash
payments of not less than $5 nor more than $5,000 per month. The
participant's price of common stock purchased with dividends or voluntary
cash payments will be the average price of all shares purchased in the open
market, or if issued from unissued shares or treasury stock the price will be
the average of the high and low sales prices of the stock on the American
Stock Exchange on the dividend payable date or other purchase date. During
the years ended December 31, 2006, 2005, and 2004, 11,782, 12,747, and
10,079; shares were issued through the plan at an average of $21.89, $22.84,
and $24.05, per share, respectively. These numbers of shares and average
price per share are not adjusted by stock dividends.
10. INCOME TAXES
Components of income tax expense for 2005, 2004, and 2003 are as follows:
2006 2005 2004
Current payable $ 1,051,925 $ 1,716,781 $ 1,054,812
Deferred taxes (benefit) (317,550) (400,101) 89,515
Total income taxes $ 734,375 $ 1,316,680 $ 1,144,327
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:
2006 2005 2004
Amount % Amount % Amount %
Taxes at statutory
income tax rate $1,283,342 34.0 $1,919,371 34.0 $1,703,245 34.0
Reductions in taxes
resulting from
exempt income (254,729) (6.7) (250,890) (4.5) (266,191) (5.3)
Other timing differences (294,238) (7.8) (351,801) (6.2) (292,727) (5.9)
Total income taxes $ 734,375 19.5 $1,316,680 23.3 $1,144,327 22.8
The sources of timing differences for tax reporting purposes and the related
deferred taxes recognized in 2006, 2005, and 2004 are summarized as follows:
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2006 2005 2004
Accretion of discount (net of maturities) $ 8,200 $ 13,700 $ 25,200
Nonqualified retirement plan
contribution / payments (7,500) 9,300 (8,800)
Gain on disposition of discounted bonds (16,900) (34,600) (61,900)
Bad debt expense in excess of tax (198,840) (275,200) 0
Deferred compensation (68,000) (67,900) 0
Book and tax depreciation difference (34,510) (45,401) 135,015
Total deferred taxes $ (317,550) $ (400,101) $ 89,515
December 31
2006 2005
Deferred tax liabilities:
Accretion on securities $ 29,200 $ 37,900
Depreciation on fixed assets 125,472 162,078
Unrealized gain on securities
available for sale 0 0
Total deferred tax liabilities 154,672 199,978
Deferred tax assets:
Bad debt expense in excess of tax 474,040 275,200
Pension plan 246,715 482,028
Unrealized loss on securities
available for sale 1,891 150,718
Deferred compensation 369,500 294,000
Total deferred tax assets 1,092,146 1,201,946
Net deferred tax (assets) liabilities $ (937,474) $(1,001,968)
11. RELATED PARTY TRANSACTIONS
The Employee Stock Ownership Plan and Trust of Southwest Georgia Financial
Corporation presently holds 327,478 shares of the Corporation's stock of
which 10,583 shares have been pledged. In the normal course of business, the
Corporation's banking subsidiary has made loans at prevailing interest rates
and terms to directors and executive officers of the Corporation and its
subsidiaries, and to their affiliates. The aggregate indebtedness to the
Bank of these related parties approximated $2,647,000 and $3,487,000 at
December 31, 2006 and 2005, respectively. During 2006, approximately
$3,044,000 of such loans were made, and repayments totaled approximately
$3,884,000. None of these above mentioned loans were restructured, nor were
any related party loans charged off during 2006 or 2005. Also, during 2006
and 2005, directors and executive officers had approximately $2,017,000 and
$4,600,000, 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, resulting there from will not be material.
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own risk exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit in
the form of loans or through letters of credit. The instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the Consolidated Balance Sheets. The contract or
notional amounts of the instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments.
Commitments to extend credit are contractual obligations to lend to a
customer as long as all established contractual conditions are satisfied.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee by a customer.
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.
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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, 2006 Dec. 31, 2005
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $20,471,344 $31,896,561
Standby letters of credit and
financial guarantees $ 10,000 $ 207,000
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following information and tables present the carrying amounts and fair
values of the Corporation's financial instruments at December 31, 2006 and
2005. Where quoted prices are not available, fair values are based on
estimates using discounted cash flows and other valuation techniques. Those
techniques can be significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Corporation.
Cash and Short-Term Investments
For those short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities
For U. S. Government and U. S. Government Agency securities, fair values are
based on market prices or dealer quotes. For other investment securities,
fair value equals quoted market price if available. If a quoted market price
is not available, fair value is estimated using quoted market prices for
similar securities as the basis for a pricing matrix.
Loans
For all homogenous categories of loans, the fair value is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposits
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at December 31, 2006. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of
similar remaining maturities.
Short-Term Borrowings and Securities Sold Under Repurchase Agreements
For those short-term borrowings, the carrying amount is a reasonable estimate
of fair value. The fair value of securities sold under repurchase agreements
is estimated by discounting the future cash flow using the rates currently
offered for securities sold under repurchase agreements of similar remaining
maturities.
Long-Term Debt
Rates currently available to the Corporation for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements, and the present credit worthiness of the counter parties.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of guarantees and letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counter parties.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. Those
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a
particular instrument. Because no market exists for a significant portion of
the financial instruments, fair value estimates are based on many judgments.
These estimates are subjective in nature and involve matters of judgment and
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therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The carrying amount and estimated fair values of the Corporation's financial
instruments are as follows:
December 31, 2006 December 31, 2005
Carrying Carrying
Amount Fair Value Amount Fair Value
(Dollars in Thousands) (Dollars in Thousands)
Financial assets:
Cash $ 11,970 $ 11,970 $ 11,699 $ 11,699
Short-term investments 415 415 13,706 13,706
Securities available for sale 33,323 33,323 48,043 48,043
Securities held to maturity 102,233 100,283 106,779 104,601
Federal Home Loan Bank stock 1,967 1,967 2,205 2,205
Loans 125,492 123,114 104,634 102,338
Less: allowance for loan losses 2,417 2,417 2,454 2,454
Financial liabilities:
Deposits 226,709 226,887 221,844 221,610
Short-term borrowings 15,000 14,818 5,000 4,901
Long-term debt 15,229 14,934 30,343 29,682
Unrecognized financial
instruments:
Commitments to extend credit 20,471 20,471 31,897 31,897
Standby letters of credit 10 10 207 207
14. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expense in excess of one % of gross revenue for
the respective periods are as follows:
Years Ended December 31
2006 2005 2004
Other professional fees $475,580 $306,271 $468,372
15. STOCKHOLDER'S EQUITY / REGULATORY MATTERS
Dividends paid by the Bank subsidiary are the primary source of funds
available to the parent company for payment of dividends to its shareholders
and other needs. Banking regulations limit the amount of dividends that may
be paid without prior approval of the Bank's regulatory agency. At December
31, 2006, approximately $1,520,000 of the Bank's net assets were available
for payment of dividends without prior approval from the regulatory
authorities.
The Federal Reserve Board requires that banks maintain reserves based on
their average deposits in the form of vault cash and average deposit balances
at the Federal Reserve Banks. For the year ended December 31, 2006, the
Bank's reserve requirements averaged approximately $4,875,000.
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 regulators 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.
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 and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined) and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2006 and 2005, that the Corporation and the Bank meets all
capital adequacy requirements to which they are subject.
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As of December 31, 2006, 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, Tier
1 risk-based and Tier 1 leverage ratios as set forth in the following tables.
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, 2006 and 2005 are also
presented in the table.
As a result of regulatory limitations at December 31, 2006, approximately
$23,788,000 of the parent company's investment in net assets of the
subsidiary bank of $25,308,000, 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.
On September 22, 2004, the Corporation declared a 20 % stock dividend payable
to shareholders of record on October 7, 2004. Share and per share data for
all periods presented have been retroactively restated to reflect the
additional shares outstanding resulting from the stock dividend.
The Corporation's ratios under the above rules at December 31, 2006 and 2005
are set forth in the following table. The Corporation's leverage ratio at
December 31, 2006 was 8.88 %. The capital ratios are reduced because we
funded a tender stock offering through equity.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2006:
Total capital (to risk-
weighted assets) $28,820,209 19.23% $11,989,280 > 8.00% $14,986,600 > 10.00%
Tier I capital (to risk-
weighted assets) $26,940,172 17.98% $ 5,994,640 > 4.00% $ 8,991,960 > 6.00%
Tier I capital (to
average assets) $26,940,172 8.88% $ 9,101,594 > 3.00% $15,169,323 > 5.00%
As of December 31, 2005:
Total capital (to risk-
weighted assets) $39,774,236 28.53% $11,152,240 > 8.00% $13,940,300 > 10.00%
Tier I capital (to risk-
weighted assets) $38,022,911 27.28% $ 5,576,120 > 4.00% $ 8,364,180 > 6.00%
Tier I capital (to
average assets) $38,022,911 12.75% $ 8,948,318 > 3.00% $14,913,862 > 5.00%
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16. PARENT COMPANY FINANCIAL DATA
Southwest Georgia Financial Corporation's condensed balance sheets as of
December 31, 2006 and 2005, and its related condensed statements of
operations and cash flows for the years ended are as follows:
Condensed Balance Sheets
as of December 31, 2006 and 2005
(Dollars in Thousands)
2006 2005
ASSETS
Cash $ 1,631 $ 1,740
Investment in consolidated wholly-owned bank
subsidiary, at equity 25,308 36,408
Investment securities available for sale 32 27
Loans 200 5
Other assets 1,167 2,097
Total assets $ 28,338 $ 40,277
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 343 $ 424
Other Liabilities 38 0
Total liabilities 381 424
Stockholders' equity:
Common stock, $1 par value, 5,000,000 shares
authorized, 4,288,555 shares issued 4,289 4,267
Additional paid-in capital 31,644 31,265
Retained earnings 16,763 15,258
Accumulated other comprehensive income (483) (1,223)
Treasury stock, at cost, 1,648,912 for 2006
and 1,008,912 shares for 2005 (24,256) (9,714)
Total stockholders' equity 27,957 39,853
Total liabilities and stockholders' equity $ 28,338 $ 40,277
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Condensed Statements Of Income and Expense
for the years ended December 31, 2006, 2005, and 2004
(Dollars in Thousands)
2006 2005 2004
Income:
Dividend received from bank subsidiary $ 15,000 $ 3,000 $ 3,000
Interest on loan 42 3 22
Other 69 61 26
Total income 15,111 3,064 3,048
Expenses:
Other 357 97 168
Income before income taxes and equity in
Undistributed income of bank subsidiary 14,754 2,967 2,880
Income tax expense - allocated from
consolidated return (147) (91) (146)
Income before equity in undistributed
income of subsidiary 14,901 3,058 3,026
Equity in undistributed income of subsidiary (11,861) 1,271 839
Net income 3,040 4,329 3,865
Retained earnings - beginning of year 15,258 12,627 29,555
Stock dividend declared 0 0 (19,294)
Cash dividend declared (1,535) (1,698) (1,499)
Retained earnings - end of year $ 16,763 $ 15,258 $ 12,627
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Condensed Statements Of Cash Flows
for the years ended December 31, 2006, 2005, and 2004
(Dollars in Thousands)
2006 2005 2004
Cash flow from operating activities:
Net income $ 3,040 $ 4,329 $ 3,865
Adjustments to reconcile net income to net
cash provided(used) by operating activities:
Equity in undistributed earnings of
Subsidiary 11,861 (1,271) (839)
Changes in:
Other assets 953 (1,079) (159)
Other liabilities (92) 56 16
Net cash provided for operating activities 15,762 2,035 2,883
Cash flow from investing activities:
Net change in loans (195) 20 360
Net cash provided (used) for investing
Activities (195) 20 360
Cash flow from financing activities:
Dividend declared to stockholders (1,535) (1,698) (1,499)
Purchase of treasury stock (14,542) (555) (1,397)
Proceeds from issuance of common stock 401 75 162
Net cash provided (used) for financing
Activities (15,676) (2,178) (2,734)
Increase (decrease) in cash (109) (123) 509
Cash - beginning of year 1,740 1,863 1,354
Cash - end of year $ 1,631 $ 1,740 $ 1,863
17. BUSINESS CONSOLIDATION
Effective February 27, 2004, the Corporation completed the acquisition of
First Bank Holding Company and its sole subsidiary, Sylvester Banking Company
("SBC"). The approximate value of the transaction was $9.7 million. The
Corporation exchanged $4.2 million in cash and 240,000 shares of its common
stock valued at $5.5 million in connection with the acquisition This
acquisition transaction was accounted for as a purchase and accordingly, the
operating results of SBC have been included in the Corporation's consolidated
financial statements since the date of acquisition.
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The following table summarizes the fair values of the assets acquired and
liabilities assumed of SBC.
February 27, 2004
Cash $ 3,352,364
Federal funds sold 6,509,000
Securities 26,934,422
Loans, net 10,263,650
Bank premises & equipment 588,372
Core deposit intangible 1,670,415
Other assets 334,677
Total assets acquired 49,652,900
Deposits 39,834,516
Other liabilities 98,384
Total liabilities 39,932,900
Net assets acquired $ 9,720,000
The acquisition of SBC resulted in the recognition of $1,670,415 of
intangible assets and all were allocated to core deposits. This allocation
was based on the Corporation's valuation of the core deposits of SBC. Among
the factors considered included: (1) the rate and maturity structure of the
interest-bearing liabilities, (2) estimated retention rates of each deposit
liability category, (3) the current interest rate environment, and (4)
estimated noninterest income potential of the acquired relationship. The
core deposit intangible created is being amortized on a straight line basis
over ten years. There was no intangible allocated to goodwill.
The following table shows selected pro forma information as if the
acquisition had occurred during the last three years. The pro forma
information does not include any operating efficiencies that could be
realized in a branch acquisition; therefore, this pro forma information does
not necessarily reflect the results of operations as they would have been if
the acquisition had occurred at the dates presented.
Pro forma information for years ended:
2006 2005 2004
(Dollars in Thousands)
Net interest income $ 9,650 $ 10,243 $ 10,652
Net Income $ 3,040 $ 4,329 $ 3,928
Basic earnings per share $ .97 $ 1.32 $ 1.18
Diluted earnings per share $ .96 $ 1.31 $ 1.17
18. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
outstanding during the year.
Year Ended December 31, 2006
Weighted Per
Average Share
Income Shares Amount
Basic earnings per share:
Net income $ 3,040,160 3,134,741 $ 0.97
Diluted earnings per share:
Net income $ 3,040,160 3,153,449 $ 0.96
-68-
Year Ended December 31, 2005
Weighted Per
Average Share
Income Shares Amount
Basic earnings per share:
Net income $ 4,328,530 3,267,169 $ 1.32
Diluted earnings per share:
Net income $ 4,328,530 3,293,534 $ 1.31
Year Ended December 31, 2004
Weighted Per
Average Share
Income Shares Amount
Basic earnings per share:
Net income $ 3,865,218 3,258,124 $ 1.19
Diluted earnings per share:
Net income $ 3,865,218 3,281,117 $ 1.18
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19. QUARTERLY DATA
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY DATA
(UNAUDITED)
(Dollars in Thousands)
For the Year 2006
Fourth Third Second First
Interest and dividend income $4,095 $4,145 $3,965 $3,824
Interest expense 1,745 1,726 1,541 1,368
Net interest income 2,350 2,419 2,424 2,456
Provision for loan losses 0 0 0 0
Net interest income after provision
for loan losses 2,350 2,419 2,424 2,456
Noninterest income 1,415 1,246 2,402 2,046
Noninterest expenses 3,150 3,654 3,142 3,038
Income before income taxes 615 11 1,684 1,464
Provision(benefit) for income taxes 76 (187) 466 379
Net income $ 539 $ 198 $1,218 $1,085
Earnings per share of common stock:
Basic $ .20 $ .06 $ .38 $ .33
Diluted $ .20 $ .06 $ .37 $ .33
For the Year 2005
Fourth Third Second First
Interest and dividend income $3,781 $3,813 $3,652 $3,573
Interest expense 1,301 1,207 1,071 997
Net interest income 2,480 2,606 2,581 2,576
Provision for loan losses 20 20 20 20
Net interest income after provision
for loan losses 2,460 2,586 2,561 2,556
Noninterest income 1,828 2,048 2,237 1,751
Noninterest expenses 3,114 3,059 3,159 3,050
Income before income taxes 1,174 1,575 1,639 1,257
Provision(benefit) for income taxes 283 385 399 249
Net income $ 891 $1,190 $1,240 $1,008
Earnings per share of common stock:
Basic $ .27 $ .36 $ .38 $ .31
Diluted $ .27 $ .36 $ .38 $ .30
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20. SEGMENT REPORTING
The Corporation operations are divided into five reportable business
segments: The Retail and Commercial Banking Services, Commercial Mortgage
Banking Services, Insurance Services, Trust and Retail Brokerage 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.
The Commercial Mortgage Banking Services segment originates and services
commercial mortgage loans on properties that are located throughout the
southeastern United States. This segment does not directly fund any
mortgages and acts primarily as a servicer and broker for participating
mortgage lenders.
The Insurance Services segment offers clients a full spectrum of commercial
and personal lines insurance products including life, health, and property
and casualty insurance.
The Trust and Retail Brokerage 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 non-interest 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, personnel, and the executive office.
The Corporation does not have a single external customer from which it
derives 10 % or more of its revenues and operates in one geographical area.
This is managements' third year to have reportable business segments.
Information about reportable business segments, and reconciliation of such
information to the consolidated financial statements for the years ended
December 31, 2006, 2005, and 2004, are as follows:
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Segment Reporting
For the year ended December 31, 2006
Trust and
Retail and Commercial Retail
Commercial Mortgage Insurance Brokerage Financial Inter-segment
Banking Banking Services Services Management Elimination Other Totals
(Dollars in Thousands)
Net Interest Income (expense)
external customers $ 4,743 18 (723) 5,501 111 $ 9,650
Net intersegment interest
income (expense) 3,873 (24) (29) 660 (4,480)
Net Interest Income 8,616 (24) (11) (63) 1,021 111 9,650
Provision for Loan Losses
Noninterest Income (expense)
external customers 1,872 3,968 1,174 591 (495) 0 0 7,110
Intersegment noninterest
income (expense) 36 (24) (12) 40 (40)
Total Noninterest Income 1,908 3,944 1,162 631 (495) (40) 0 7,110
Noninterest Expenses:
Depreciation 508 47 35 28 44 96 758
Amortization of intangibles 182 707 35 18 (25) 917
Noninterest Income (expense)
Other Noninterest Expenses 5,502 1,948 848 603 607 0 1,803 11,311
Total Noninterest Expenses 6,192 2,702 918 649 651 (25) 1,899 12,986
Pre-tax Income 4,332 1,218 233 (81) (125) (15) (1,788) 3,774
Provision for Income Taxes 930 472 45 (13) (125) (575) 734
Net Income $ 3,402 746 188 (68) 0 (15) (1,213) $ 3,040
Assets $331,178 3,513 1,614 1,750 145,732 (196,021) 750 $288,516
Expenditures for Fixed Assets $ 458 24 2 12 13 $ 509
Amounts included in the "Other" column are as follows:
Other
Net interest Income:
Parent Company $ 111
Noninterest Income:
Executive office miscellaneous income 0
Noninterest Expenses:
Parent Company corporate expenses 357
Executive office expenses not
allocated to segments 1,542
Provison for Income taxes:
Parent Company income taxes (benefit) (148)
Executive office income taxes not
allocated to segments (428)
Net Income: $( 1,212)
Segment assets:
Parent Company assets, after
intercomany elimination $ 750
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Segment Reporting
For the year ended December 31, 2005
Trust and
Retail and Commercial Retail
Commercial Mortgage Insurance Brokerage Financial Inter-segment
Banking Banking Services Services Management Elimination Other Totals
(Dollars in Thousands)
Net Interest Income (expense)
external customers $ 4,741 9 (510) 5,941 62 $ 10,243
Net intersegment interest
income (expense) 4,254 (35) (33) 727 (4,913)
Net Interest Income 8,995 (35) (24) 217 1,028 62 10,243
Provision for Loan Losses 80 80
Noninterest Income (expense)
external customers 1,697 4,417 1,114 570 64 3 7,865
Intersegment noninterest
income (expense) 58 (44) (14) 41 (41)
Total Noninterest Income 1,755 4,373 1,100 611 64 (41) 3 7,865
Noninterest Expenses:
Depreciation 491 45 32 28 56 96 748
Amortization of intangibles 182 278 38 18 (25) 491
Noninterest Income (expense)
Other Noninterest Expenses 5,527 2,032 862 588 561 0 1,574 11,144
Total Noninterest Expenses 6,200 2,355 932 634 617 (25) 1,670 12,383
Pre-tax Income 4,470 1,983 144 194 475 (16) (1,605) 5,645
Provision for Income Taxes 1,021 754 30 46 114 (649) 1,316
Net Income $ 3,449 1,229 114 148 361 (16) (956) $ 4,329
Assets $292,164 3,648 1,193 23,036 179,472 (198,769) 530 $301,274
Expenditures for Fixed Assets $ 536 77 6 7 5 $ 631
Amounts included in the "Other" column are as follows:
Other
Net interest Income:
Parent Company $ 62
Noninterest Income:
Executive office miscellaneous income 3
Noninterest Expenses:
Parent Company corporate expenses 96
Executive office expenses not
allocated to segments 1,574
Provison for Income taxes:
Parent Company income taxes (benefit) (91)
Executive office income taxes not
allocated to segments (558)
Net Income: $ (956)
Segment assets:
Parent Company assets, after
intercomany elimination $ 530
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Segment Reporting
For the year ended December 31, 2004
Trust and
Retail and Commercial Retail
Commercial Mortgage Insurance Brokerage Financial Inter-segment
Banking Banking Services Services Management Elimination Other Totals
(Dollars in Thousands)
Net Interest Income (expense)
external customers $ 4,762 (301) 5,911 48 $ 10,420
Net intersegment interest
income (expense) 4,346 (66) (37) 806 (5,049)
Net Interest Income 9,108 (66) (37) 505 862 48 10,420
Provision for Loan Losses 92 92
Noninterest Income (expense)
external customers 1,642 3,612 1,102 555 77 (234) 6,754
Intersegment noninterest
income (expense) 45 (30) (15) 39 (39)
Total Noninterest Income 1,687 3,582 1,087 594 77 (39) (234) 6,754
Noninterest Expenses:
Depreciation 475 42 38 30 71 44 700
Amortization of intangibles 155 278 57 37 (25) 502
Noninterest Income (expense)
external customers 5,751 1,666 900 575 588 1,391 10,871
Total Noninterest Expenses 6,381 1,986 995 642 659 (25) 1,435 12,073
Pre-tax Income 4,322 1,530 55 457 280 (14) (1,621) 5,009
Provision for Income Taxes 1,069 581 15 112 120 (4) (749) 1,144
Net Income $ 3,253 949 40 345 160 (10) (872) $ 3,865
Assets $283,114 5,759 1,159 22,634 187,462 (194,693) 465 $305,900
Expenditures for Fixed Assets $ 1,391 49 33 26 33 $ 1,532
Amounts included in the "Other" column are as follows:
Other
Net interest Income:
Parent Company $ 48
Noninterest Income:
Administrative office expenses related to
loss on disposition of assets (234)
Noninterest Expenses:
Parent Company corporate expenses 168
Administrative office expenses not
allocated to segments 1,267
Provison for Income taxes:
Parent Company income taxes (benefit) (146)
Administrative office income taxes not
allocated to segments (603)
Net Income: $ (872)
Segment assets:
Parent Company assets, after
intercomany elimination $ 465
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the past three years, 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
The Corporation's management, including the Chief Executive Officer and Chief
Financial Officer, supervised and participated in an evaluation of the
effectiveness of the Corporations's disclosure controls and procedures (as
defined in federal securities rules) as of December 31, 2006. Based on, and
as of the date of, that evaluation, the Corporation's Chief Executive Officer
and Chief Financial Officer have concluded that the Corporation's disclosure
controls and procedures were effective in accumulating and communicating
information to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosures of that information under the Securities and Exchange
Commission's rules and forms and that the Corporation's disclosure controls
and procedures are designed to ensure that the information required to be
disclosed in reports that are filed or submitted by the Corporation under the
Securities Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
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 AND 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, 2007, to be filed with the Commission, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Corporation's annual meeting of shareholders to be held on
May 22, 2007, to be filed with the Commission, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
STOCKHOLDER RELATED MATTERS
The information contained under the heading "Voting Securities and Principal
Holders" and "Equity Compensation Plan Information" in the definitive Proxy
Statement to be used in connection with the solicitation of proxies for the
Corporation's annual meeting of shareholders to be held on May 22, 2007, to
be filed with the Commission, 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 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, 2007, to be filed with the
Commission, is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained under the heading "Information Concerning the
Company'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, 2007, to be filed with the
Commission, is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1). Financial Statements
The following consolidated financial statements and supplementary information
for the fiscal years ended December 31, 2006, 2005, and 2004 are included in
Part II, Item 8 herein:
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets - December 31, 2006 and 2005
(iii) Consolidated Statements of Income - Years ended December 31, 2006,
2005, and 2004
(iv) Consolidated Statements of Shareholders' Equity - Years ended
December 31, 2006, 2005, and 2004
(v) Consolidated Statements of Cash Flows - Years ended December 31, 2006,
2005, and 2004
(vi) Notes to Consolidated Financial Statements - December 31, 2006
(a)(2). Financial Statement Schedules
All applicable financial statement schedules required have been included in
the Notes to the Consolidated Financial Statements.
(b)(3). Exhibits:
The exhibits filed as part of this registration statement are as follows:
Exhibit
Number Description Of Exhibit
3.1 Articles of Incorporation of Southwest Georgia Financial Corporation,
as amended and restated (included as Exhibit 3.1 to the Corporation's
Form 10-KSB dated December 31, 1996, previously filed with the
commission and incorporated herein by reference).
3.2 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 Commission and incorporated herein by reference).
10.1 Pension Retirement Plan of the Corporation, as amended effective as
of November 15, 2006.
10.2 Form of Directors' Deferred Compensation Plan of the Corporation
(included as Exhibit 10.3 to the Corporation's Form S-18 dated
January 23, 1990, previously filed with the Commission and
incorporated herein by reference).*
10.3 Directors' and Executive Officers' Stock Purchase Plan of the
Corporation dated March 18, 1992 (included as Exhibit 10.7 to the
Corporation's Form 10-KSB dated December 31, 1992, previously filed
with the Commission and incorporated herein by reference).*
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10.4 Advances, specific collateral pledged, and security agreement between
the Federal Home Loan Bank of Atlanta and the Bank dated January 27,
1992, and confirmation of credit services transaction for new money
advances in the amount of $4,000,000 dated February 10, 1992,
$2,500,000 dated September 4, 1992, and $1,500,000 dated September 8,
1992 (included as Exhibit 10.10 to the Corporation's Form 10-KSB
dated December 31, 1992, previously filed with the Commission and
incorporated herein by reference).
10.5 Supplemental Retirement Plan of the Corporation dated December 21,
1994 (included as Exhibit 10.11 to the Corporation's Form 10-KSB
dated December 31, 1994, previously filed with the Commission and
incorporated herein by reference).*
10.6 Trust under the Corporation's Supplemental Retirement Plan, as
amended (included as Exhibit 10.6b to the Corporation's Form 10-K
dated December 31, 1997, previously filed with the Commission and
incorporated herein by reference).*
10.7 Employee Stock Ownership Plan and Trust of the Corporation as amended
and restated (included as Exhibit 10.7 to the Corporation's Form 10-K
dated December 31, 2005, previously filed with the Commission and
incorporated herein by reference).*
10.8 Dividend Reinvestment and Share Purchases Plan of the Corporation as
amended and restated by Amendment No. 1 (included as Exhibit 99 to
the Corporation's Form S-3DPOS dated September 30, 1998, previously
filed with the Commission and incorporated herein by reference).
10.9 Key Individual Stock Option Plan of the Corporation dated March 19,
1997 (included as Exhibit 10.9 to the Corporation's Form 10-K dated
December 31, 1997, previously filed with the Commission and
incorporated herein by reference).*
10.10 Employment Agreement of J. David Dyer, Jr. (included as Exhibit 10.10
to the Corporation's Form 10-K dated December 31, 2002, previously
filed with the Commission and incorporated herein by reference).*
10.11 Employment Agreement of DeWitt Drew (included as Exhibit 10.11 to the
Corporation's Form S-4 dated January 6, 2004, previously filed with
the Commission and incorporated herein by reference).*
10.15 Consulting Agreement of John H. Clark (included as Exhibit 10.15 to
the Corporation's Form S-4 dated January 6, 2004, previously filed
with the Commission and incorporated herein by reference).*
10.16 Form of Employment Agreement by and between the Corporation and Bank
and John J. Cole, Jr. and George R. Kirkland (included as Exhibit
10.16 to the Corporation's Form 10-K dated December 31, 2005,
previously filed with the Commission and incorporated herein by
reference).*
10.17 Southwest Georgia Bank 401(K) Plan as adopted by the Board of
Directors on November 15, 2006.
14 Code of Ethical Conduct dated January 28, 2004 (included as Exhibit
14 to the Corporation's Form 10-K dated December 31, 2003, previously
filed with the Commission and incorporated herein by reference).
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21 Subsidiaries of the Corporation (included as Exhibit 21 to the
Corporation's Form 10-K dated December 31, 2002, previously filed
with the Commission, incorporated herein by reference).
23.1 Consent of Thigpen, Jones, Seaton & Co., P.C.
31.1 Section 302 Certification of Periodic Financial Report by
Chief Executive Officer.
31.2 Section 302 Certification of Periodic Financial Report by
Chief Financial Officer.
32.1 Section 906 Certification of Periodic Financial Report by
Chief Executive Officer.
32.2 Section 906 Certification of Periodic Financial Report by
Chief Financial Officer.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form.
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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 28, 2007 By: /s/ DeWitt Drew
DEWITT DREW
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the dates indicated.
/s/ DeWitt Drew Date: March 28, 2007
DEWITT DREW
President and Chief Executive Officer
[Principal Executive Officer]
/s/ George R. Kirkland Date: March 28, 2007
GEORGE R. KIRKLAND
Senior Vice-President and Treasurer
[Principal Financial and Accounting Officer]
/s/ Michael J. McLean Date: March 28, 2007
MICHAEL J. MCLEAN
Chairman
/s/ Richard L. Moss Date: March 28, 2007
RICHARD L. MOSS
Vice Chairman
/s/ Cecil H. Barber Date: March 28, 2007
CECIL H. BARBER
Director
/s/ John H. Clark Date: March 28, 2007
JOHN H. CLARK
Director
/s/ John J. Cole, Jr. Date: March 28, 2007
JOHN J. COLE, JR.
Director
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SIGNATURES, continued
/s/ Roy Reeves Date: March 28, 2007
ROY REEVES
Director
/s/ Johnny R. Slocumb Date: March 28, 2007
JOHNNY R. SLOCUMB
Director
/s/ M. Lane Wear Date: March 28, 2007
M. LANE WEAR
Director
/s/ Marcus R. Wells Date: March 28, 2007
MARCUS R. WELLS
Director
/s/ C. Broughton Williams Date: March 28, 2007
C. BROUGHTON WILLIAMS
Director
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Exhibit Index
Exhibit
Number Description Of Exhibit
10.1 Pension Retirement Plan of the Registrant, as amended effective as of
November 15, 2006.
10.17 Southwest Georgia Bank 401(K) Plan as adopted by the Board of Directors
on November 15, 2006.
23.1 Consent of Thigpen, Jones, Seaton & Co., P.C.
31.1 Section 302 Certification of Periodic Financial
Report by Chief Executive Officer.
31.2 Section 302 Certification of Periodic Financial
Report by Chief Financial Officer.
32.1 Section 906 Certification of Periodic Financial
Report by Chief Executive Officer.
32.2 Section 906 Certification of Periodic Financial
Report by Chief Financial Officer.
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