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, 2007
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________.
Commission file number 1-12053
Southwest Georgia Financial Corporation
(Exact Name of Corporation as specified in its charter)
Georgia 58-1392259
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
201 First Street, S. E. 31768
Moultrie, Georgia (Zip Code)
(Address of principal executive offices)
(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 (or for such shorter period that
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated file," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchage Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes [ ] No [X]
Aggregate market value of voting stock held by nonaffiliates of the
registrant as of June 30, 2007: $38,001,882 based on 1,933,938 shares at the
price of $19.65 per share.
As of March 24, 2008, 4,293,835 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 2008 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(T). 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
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 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, 2007, the Corporation's deposit
base, totaling $216,792,690, consisted of $35,373,243 in noninterest-bearing
demand deposits (16.3% of total deposits), $65,116,959 in interest-bearing
demand deposits including money market accounts (30.0% of total deposits),
$20,560,963 in savings deposits (9.5% of total deposits), $66,152,788 in time
deposits in amounts less than $100,000 (30.5% of total deposits), and
$29,588,737 in time deposits of $100,000 or more (13.7 % 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, 2007, consumer installment, real estate (including
construction and mortgage loans), and commercial (including financial and
agricultural) loans represented approximately 7.0%, 74.6% and 18.4%,
respectively, of the Bank's total loan portfolio.
Lending Policy
The current lending policy of the Bank is to offer consumer and commercial
credit services to individuals and businesses that meet the Bank's credit
standards. The Bank provides each lending officer with written guidelines
for lending activities. Lending authority is delegated by the Board of
Directors of the Bank to loan officers, each of whom is limited in the amount
of secured and unsecured loans which can be made to a single borrower or
related group of borrowers.
The Loan Committee of the Bank's Board of Directors is responsible for
approving and monitoring the loan policy and providing guidance and counsel
to all lending personnel. It also approves all extensions of credit over
$200,000. The Loan Committee is composed of the Chief Executive Officer and
President, and other executive officers of the Bank, as well as certain Bank
Directors.
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 2007, Bank revenue received from mortgage banking
services was $2,814,065 compared with $3,978,271 in 2006. All of this income
was from Empire except for $40,438 in 2007 and $34,091 in 2006, 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 115 full-time employees at December 31, 2007. 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 and Empire compete
with other depository institutions and other financial service
organizations, including brokers, finance companies, savings and loan
associations, credit unions and certain governmental agencies. The Bank
ranks first in deposit market share 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.
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 Federal Deposit Insurance Corporation
(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, 2007, net
assets available from the Bank to pay dividends without prior approval from
regulatory authorities totaled approximately $1.6 million. For 2007, the
Corporation's cash dividend payout to stockholders was $1.4 million, or 84%
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 Federal Reserve under the Bank Holding
Corporation Act of 1956, as amended (the "Act"). The Corporation is required
to file annual and quarterly financial information with the Federal Reserve
and is subject to periodic examination by the Federal Reserve.
The Act requires every bank holding company to obtain the Federal Reserve's
prior approval before (1) it may acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank that it does not
already control; (2) it or any of its non-bank subsidiaries may acquire all
or substantially all of the assets of a bank; and (3) it may merge or
consolidate with any other bank holding company. In addition, a bank holding
company is generally prohibited from engaging in, or acquiring, direct or
indirect control of the voting shares of any company engaged in non-banking
activities. This prohibition does not apply to activities listed in the 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 FDIC. As a state banking association
organized under Georgia law, 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.
Capital Adequacy.
The Federal Reserve and the FDIC have implemented substantially identical
risk-based rules for assessing bank and bank holding company capital
adequacy. These regulations establish minimum capital standards in relation
to assets and off-balance sheet exposures as adjusted for credit risk. Banks
and bank holding companies are required to have (1) a minimum level of Total
Capital to risk-weighted assets of 8%; and (2) a minimum Tier I Capital to
risk-weighted assets of 4%. In addition, the Federal Reserve and the FDIC
have established a minimum 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 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.
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, 2007 and 2006, the most recent notifications from the FDIC
categorized the Bank as "well capitalized" under current regulations.
Commercial Real Estate.
In December, 2007 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.
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 an Internet website at www.sec.gov where you can
access reports, proxy, information and registration statements, and other
information regarding Corporations that file electronically with the SEC
through the EDGAR system.
The Corporation's Internet website address is www.sgfc.com.
Executive Officers of the Corporation
Executive officers are elected by the Board of Directors annually in May and
hold office until the following May 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, 2008, are as
follows:
Officer of The
Principal Position Corporation and
Name (Age) of Corporation and Bank Bank Since
DeWitt Drew Chief Executive Officer and President 1999
(51) of the Corporation and Bank
John J. Cole, Jr. Executive Vice President of the 1984
(57) Corporation and Executive Vice President
and Cashier of the Bank
C. Wallace Sansbury Executive Vice President of the 1996
(65) Corporation and Bank
George R. Kirkland Senior Vice President and Treasurer 1991
(57) of the Corporation and Senior Vice
President and Comptroller of the Bank
Officer of The
Name (Age) Principal Position of Bank Bank Since
J. David Dyer, Jr. Senior Vice President of the Bank 2002
(60) and Chief Executive Officer and
President of Empire
Randall L. Webb, Jr. Senior Vice President of the Bank 1994
(59)
Geraldine Ferrone Luff Senior Vice President of the Bank 1995
(61)
J. Larry Blanton Senior Vice President of the Bank 2000
(61)
Vayden (Sonny) Senior Vice President of the Bank 2000
Murphy, Jr.
(55)
Morris I. Bryant Senior Vice President of the Bank 2004
(66)
The following is a brief description of the business experience of the
principal executive officers of the Corporation and Bank. Except as
otherwise indicated, each principal executive officer has been engaged in
their present or last employment, in the same or similar position, for more
than five years.
Mr. Drew is a director of 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 is a director of Southwest Georgia Financial Corporation and
Southwest Georgia Bank and 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 as well as serving other positions since 1984.
Mr. Sansbury became Executive Vice President of the Bank and Corporation in
December 2006. Previously, he had served as Vice President of the Bank and
Corporation since 1996.
Mr. Kirkland became Senior Vice President and Treasurer of the Corporation
and Senior Vice President and Comptroller of the Bank in 1993.
Mr. Dyer became Senior Vice President of the Bank 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. Webb became Senior Vice President of the Bank in 1997. Previously, he
had been Vice President of the Bank 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
in 1995. Previously, she had been Assistant Vice President of the Bank since
1988.
Mr. Blanton became Senior Vice President of the Bank in 2001. Previously, he
had served as Vice President of the Bank since 2000 and in various other
positions with the Bank since 1999.
Mr. Murphy became Senior Vice President of the Bank in 2007 and Vice
President of the Bank and Corporation in 2006. Previously, he had been
Assistant Vice President of the Bank since 2000.
Mr. Bryant became Senior Vice President of the Bank in 2004. Previously, he
was employed by Sylvester Banking Company in Sylvester, Georgia, as Vice
President and Cashier since 1969.
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, 2007,
2006, and 2005, 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, 2007
Average
Balance Interest Rate
ASSETS (Dollars in thousands)
Cash and due from banks $ 11,468 $ - - %
Earning assets:
Interest-bearing deposits with banks 3,559 174 4.90%
Loans, net (a) (b) (c) 124,853 10,352 8.29%
Taxable investment securities
held to maturity 111,187 4,535 4.08%
Nontaxable investment securities
held to maturity (c) 5,236 307 5.86%
Nontaxable investment securities
available for sale (c) 13,362 901 6.74%
Other investment securities 2,032 121 5.95%
Federal funds sold 0 0
Total earning assets 260,229 16,390 6.30%
Premises and equipment 6,462
Other assets 9,559
Total assets $ 287,718
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits $ 36,060 $ - - %
Interest-bearing liabilities:
NOW accounts 48,601 263 0.54%
Money market deposit accounts 21,257 605 2.85%
Savings deposits 22,371 399 1.78%
Time deposits 94,239 4,316 4.58%
Federal funds purchased 1,866 101 5.41%
Other borrowings 32,347 1,289 3.98%
Total interest-bearing liabilities 220,681 6,973 3.16%
Other liabilities 3,132
Total liabilities 259,873
Common stock 4,290
Surplus 31,661
Retained earnings 17,240
Less treasury stock ( 25,346)
Total shareholders' equity 27,845
Total liabilities and shareholders'
equity $ 287,718
Net interest income and margin $ 9,417 3.62%
(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 $405,000.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 %.
Year Ended December 31, 2006
Average
Balance Interest Rate
ASSETS (Dollars in thousands)
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%
Other investment securities 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 %.
Year Ended December 31, 2005
Average
Balance Interest Rate
ASSETS (Dollars in thousands)
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%
Other investment securities 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 %.
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)
2007 2006 (Decrease) Volume Rate
(Dollars in Thousands)
Interest earned on:
Interest-bearing
deposits with banks $ 174 $ 171 $ 3 $( 3) $ 6
Loans, net (b) 10,352 9,365 987 664 323
Taxable investment
securities held to maturity 4,535 5,350 ( 815) ( 751) ( 64)
Nontaxable investment
securities held to
maturity (b) 307 307 0 0 0
Nontaxable investment
securities available
for sale (b) 901 954 ( 53) ( 70) 17
Other investment securities 121 125 ( 4) ( 10) 6
Federal funds sold 0 202 ( 202) ( 101) ( 101)
Total interest income 16,390 16,474 ( 84) ( 271) 187
Interest paid on:
NOW accounts 263 315 ( 52) ( 36) ( 16)
Money market deposit accounts 605 827 ( 222) ( 19) ( 203)
Savings deposits 399 449 ( 50) ( 27) ( 23)
Time deposits 4,316 3,587 729 159 570
Federal funds purchased 101 26 75 75 0
Other borrowings 1,289 1,176 113 ( 67) 180
Total interest expense 6,973 6,380 593 85 508
Net interest earnings $ 9,417 $10,094 $( 677) $( 356) $( 321)
(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 2007
and 2006 in adjusting interest on nontaxable loans and securities
to a fully taxable basis.
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)
Other investment securities 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)
(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 and 2005 in adjusting interest on nontaxable loans and securities
to a fully taxable basis.
Table 3 - Investment Portfolio
The carrying values of investment securities for the indicated years are
presented below:
Year Ended December 31,
2007 2006 2005
(Dollars in thousands)
Securities held to maturity:
U. S. Government Agencies $ 82,991 $ 96,997 $ 100,002
State and municipal 5,235 5,236 6,777
Total securities held to maturity $ 88,226 $ 102,233 $ 106,779
Securities available for sale:
Equity securities $ 30 $ 1,059 $ 1,043
U. S. Government Agencies 17,890 18,473 32,925
State and municipal 12,973 13,381 13,500
Mortgage backed 295 410 575
Total securities available for sale $ 31,188 $ 33,323 $ 48,043
The following table shows the expected maturities of debt securities at
December 31, 2007, 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 payoffs.
MATURITY
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
Debt Securities:
U. S.
Government
Agencies $18,952 3.46% $81,929 4.15% $ - - % $ - - %
State and
municipal 3,818 6.90% 13,048 6.40% 1,342 7.04% - - %
Mortgage
backed - - % 183 5.92% 112 6.47% - - %
Total $22,770 4.04% $95,160 4.46% $1,454 7.00% $ - - %
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, 2007 and 2006, securities carried at approximately
$25,697,000, and $37,312,000 were pledged to secure public and trust deposits
as required by law, and $32,000,000 and $30,343,000 were pledged to secure
Federal Home Loan Bank advances.
Table 4 - Loan Portfolio
The following table sets forth the amount of loans outstanding for the
indicated years according to type of loan.
Year Ended December 31,
2007 2006 2005 2004 2003
(Dollars in thousands)
Commercial, financial and
agricultural $ 21,851 $ 20,938 $ 12,370 $ 7,395 $ 8,312
Real estate:
Construction loans 11,564 13,238 10,669 3,793 1,235
Commercial mortgage loans 38,038 45,506 33,869 40,385 42,969
Residential loans 31,936 31,942 33,773 33,968 30,244
Agricultural loans 7,258 5,576 5,851 5,621 4,851
Consumer & Other 8,397 8,336 8,143 8,795 9,550
Total loans 119,044 125,536 104,675 99,957 97,161
Less:
Unearned income 36 44 40 42 46
Allowance for loan losses 2,399 2,417 2,454 2,507 2,338
Net loans $116,609 $123,075 $102,181 $ 97,408 $ 94,777
The following table shows maturities and interest sensitivity of the
commercial, financial, agricultural, and construction loan portfolio at
December 31, 2007.
Commercial,
Financial
Agricultural, and
Construction
(Dollars in thousands)
Distribution of loans which are due:
In one year or less $ 13,391
After one year but within five years 14,628
After five years 5,396
Total $ 33,415
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, 2007.
Loans With
Predetermined Loans With
Rates Floating Rates Total
(Dollars in thousands)
Commercial, financial,
agricultural and construction $ 16,219 $ 3,805 $ 20,024
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
Potential
Nonaccrual Past-Due Renegotiated Problem Foreclosed
Loans Loans Loans Loans Total Assets
(Dollars in thousands)
December 31, 2007 $ 3,222 $ 0 $ 69 $ 49 $ 3,340 $ 98
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
At December 31, 2007, there was one large $3,203,000 fully secured loan in
nonaccrual loans of which no loss is anticipated. Also, at December 31,
2006, one large $2,250,000 loan attributed to the increase of nonaccrual
loans which was foreclosed and sold with a loss of $110,000 in the fourth
quarter of 2007.
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.
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,
2007 2006 2005 2004 2003
(Dollars in thousands)
Average loans outstanding $127,267 $119,213 $104,552 $102,208 $ 99,589
Amount of allowance for
loan losses at beginning
of period $ 2,417 $ 2,454 $ 2,507 $ 2,338 $ 1,900
Amount of loans charged off
during period:
Commercial, financial and
agricultural 0 0 24 0 37
Real estate:
Commercial 0 0 0 79 0
Residential 7 0 51 25 71
Agricultural 0 0 0 0 0
Installment 45 60 151 176 169
Total loans charged off 52 60 226 280 277
Amount of recoveries during
period:
Commercial, financial, and
agricultural 0 0 1 88 147
Real estate:
Commercial 1 0 61 17 0
Residential 0 0 1 13 14
Agricultural 0 0 0 0 0
Installment 33 23 30 65 37
Total loans recovered 34 23 93 183 198
Net loans charged off
during period 18 37 133 97 79
Additions to allowance for
loan losses charged to
operating expense
during period 0 0 80 92 517
Purchased reserve 0 0 0 174 0
Amount of allowance for loan
losses at end of period $ 2,399 $ 2,417 $ 2,454 $ 2,507 $ 2,338
Ratio of net charge-offs
during period to average
loans outstanding for
the period .01% .03% .13% .10% .08%
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.
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, 2007 December 31, 2006 December 31, 2005
% of % of % of
Total Total Total
Category Allocation Loans Allocation Loans Allocation Loans
(Dollars in thousands)
Commercial, financial
and agricultural $ 441 18.4% $ 403 16.7% $ 290 11.8%
Real estate:
Construction 233 9.7% 254 10.5% 250 10.2%
Commercial 768 32.0% 875 36.2% 793 32.3%
Residential 643 26.8% 614 25.4% 793 32.3%
Agricultural 146 6.1% 106 4.4% 137 5.6%
Installment 168 7.0% 165 6.8% 191 7.8%
Total $2,399 100.0% $2,417 100.0% $2,454 100.0%
December 31, 2004 December 31,2003
% of % of
Total Total
Category Allocation Loans Allocation Loans
(Dollars in thousands)
Commercial, financial
and agricultural $ 186 7.4% $ 199 8.5%
Real estate:
Construction 95 3.8% 30 1.3%
Commercial 1,016 40.4% 1,034 44.2%
Residential 852 34.1% 727 31.1%
Agricultural 140 5.6% 117 5.0%
Installment 218 8.7% 231 9.9%
Total $ 2,507 100.0% $ 2,338 100.0%
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.
Table 5 - Deposits
The average amounts of deposits for the last three years are presented below.
Year Ended December 31,
2007 2006 2005
(Dollars in thousands)
Noninterest-bearing
demand deposits $ 36,060 $ 36,032 $ 35,422
NOW accounts 48,601 55,023 53,453
Money market deposit
accounts 21,257 21,759 13,458
Savings 22,371 23,928 27,565
Time deposits 94,238 90,353 91,215
Total interest-bearing 186,467 191,063 185,691
Total average deposits $ 222,527 $ 227,095 $ 221,113
The maturity of certificates of deposit of $100,000 or more as of December
31, 2007, are presented below.
(Dollars in thousands)
3 months or less $ 3,436
Over 3 months through 6 months 4,544
Over 6 months through 12 months 16,232
Over 12 months 5,376
Total outstanding certificates of deposit
of $100,000 or more $ 29,588
Return on Equity and Assets
Certain financial ratios are presented below.
Year Ended December 31,
2007 2006 2005
Return on average assets .60% 1.00% 1.44%
Return on average equity 6.17% 8.01% 10.93%
Dividend payout ratio
(dividends declared
divided by net income) 83.96% 50.50% 39.22%
Average equity to average
assets ratio 9.68% 12.45% 13.19%
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
$11.6 million at December 31, 2007, comprising 9.7% 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 75% 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
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.
The Corporation may be subject to losses due to fraudulent and negligent
conduct of the Bank's and Empire's loan customers, third party service
providers and employees.
When the Bank and Empire make loans to individuals or entities, they rely
upon information supplied by borrowers and other third parties, including
information contained in the applicant's loan application, property appraisal
reports, title information and the borrower's net worth, liquidity and cash
flow information. While they attempt to verify information provided through
available sources, they cannot be certain all such information is correct or
complete. The Bank and Empire's reliance on incorrect or incomplete
information could have a material adverse effect on the Corporation's
profitability or financial condition.
Technology difficulties or failures 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
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.
Name Address Square 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 2007 for a vote
of the security holders through the solicitation of proxies or otherwise.
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, 2007, was $17.75. Below
is a schedule of the high and low stock prices for each quarter of 2007 and
2006.
2007
For The
Quarter Fourth Third Second First
High $18.75 $19.95 $19.75 $20.13
Low $16.57 $18.50 $17.80 $18.80
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
As of December 31, 2007, there were 540 record holders of the Corporation's
common stock. Also, there were approximately 225 additional shareholders who
held shares through trusts and brokerage firms.
Dividends
Cash dividends paid on the Corporation's common stock were $.56 in 2007 and
$.52 in 2006. 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 bank 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-nine 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 2007 the stock repurchase program that began
in January 2000. In 2007, 95,286 shares were repurchased through the
repurchase program. Through the end of 2007, a total of 707,381 shares
have been repurchased since the beginning of the repurchase program.
The share repurchase program was not extended by the Board of Directors at
their meeting in January 2008.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents information as of December 31, 2007, with
respect to shares of common stock of the Corporation that may be issued under
the Key Individual Stock Option Plan. No additional option shares can be
granted under the Key Individual Stock Option Plan.
Number of
Securities to be Weighted Number of
Issued upon Average Securities Remaining
Exercise of Exercise Price Available for Future
Outstanding of Outstanding Issuance Under Equity
Plan Category Options Options Compensation
Equity compensation
plans approved
by shareholders(1) 107,165 $18.02 0
Equity Compensation
Plans Not Approved
by Shareholders(2) 0 0.00 0
Total 107,165 18.02 0
(1) The Key Individual Stock Option Plan
(2) Excludes shares issued under the 401(k) Plan.
Sales of Unregistered Securities.
The Corporation has not sold any unregistered securities in the past three
years.
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 27
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, 2002,
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, 2002.
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.
CAPTION>
2002 2003 2004 2005 2006 2007
Southwest Georgia Financial Corporation 100 124 152 150 136 129
Independent Bank Index 100 137 156 167 194 147
S&P 500 Index 100 129 143 150 173 183
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Selected Financial Data (1)
(Dollars in thousands, except
per share data and ratios) 2007 2006 2005 2004 2003
For The Year:
Earnings & Share Data
Interest income $ 15,886 $ 16,030 $ 14,818 $ 13,822 $ 13,126
Interest expense 6,973 6,380 4,576 3,401 3,387
Non-interest income 6,715 7,110 7,865 6,754 4,545
Non-interest expense 13,603 12,986 12,382 12,073 10,267
Net income 1,718 3,040 4,329 3,865 2,480
Earnings per share - diluted 0.66 0.96 1.31 1.18 0.80
Weighted average shares
outstanding - diluted (2) 2,593 3,153 3,294 3,281 3,084
Dividends declared per share $ 0.56 $ 0.52 $ 0.52 $ 0.46 $ 0.43
At Year End:
Balance Sheet Data
Total assets $271,653 $288,516 $301,274 $305,900 $246,153
Loans, less unearned income 119,008 125,492 104,634 99,915 97,115
Deposits 216,793 226,709 221,844 222,488 182,876
Shareholders' equity (2) 26,518 27,957 39,853 38,952 32,988
Book value per share (2) 10.40 10.59 12.23 11.88 10.83
Tangible book value
per share (2) $9.90 $ 9.93 $ 11.31 $ 10.77 $ 10.16
Common shares outstanding (2) 2,550 2,640 3,258 3,279 3,047
Selected Average Balances
Average total assets $287,718 $304,886 $300,394 $287,868 $241,861
Average loans 127,267 119,213 104,552 102,208 99,589
Average deposits 222,527 227,095 221,113 218,366 185,921
Average shareholders'
equity $ 27,845 $ 37,973 $ 39,608 $ 38,183 $ 33,237
Asset Quality
Non-performing assets to
total assets 1.22% .82% .04% .46% .90%
Non-performing assets $ 3,312 $ 2,357 $ 108 $ 1,405 $ 2,215
Net loan charge-offs
(recoveries) $ 18 $ 37 $ 133 $ 98 $ 79
Net loan charge-offs
(recoveries) to
average loans 0.01% 0.03% 0.13% 0.10% 0.08%
Reserve for loan losses
to loans 2.02% 1.93% 2.35% 2.51% 2.41%
Performance Ratios
Return on average total
assets .60% 1.00% 1.44% 1.34% 1.03%
Return on average
shareholders' equity 6.17% 8.01% 10.93% 10.12% 7.46%
Average shareholders'
equity to average
total assets 9.68% 12.45% 13.19% 13.26% 13.74%
Efficiency ratio 84.33% 75.48% 66.81% 68.54% 69.94%
Net interest margin 3.62% 3.66% 3.91% 4.14% 4.61%
Dividend payout ratio 83.96% 50.50% 39.22% 38.79% 53.57%
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For further information about the Corporation, see selected statistical
information on pages 13 - 31 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. After holding banks'
overnight borrowing rate at 5.25% for eight months of 2007, the Federal
Reserve Bank decreased short-term interest rates by 1% to 4.25% from
September 2007 to year end.
Our profitability is impacted as well by operating expenses such as salaries
and employee benefits, occupancy costs 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 75.3%
of 2007 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 2007, we continued to focus on asset quality following significant
improvements two years ago made with respect to overall asset quality. At
the end of 2007, we had one large $3.2 million fully secured loan in
nonaccrual loans on which no loss is anticipated. In 2006, we had a single
$2.2 million nonaccrual loan which foreclosed and the collateral property was
sold for a loss of $110,000 during the fourth quarter of 2007.
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 million. The
tender offer caused a decrease in the number of shares outstanding,
stockholders' equity and book and tangible book value per share. The
Corporation's management and directors pursued the stock tender offer as an
appropriate use of capital considering our lack of expansion opportunities,
changes in our shareholder base, and our strong capital level which is
significantly above minimum legal requirements. We believed that the offer
resulted in a balance sheet and capital structure more appropriate for the
size and volume of the Corporation's current operations.
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,
2007 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 2007 was $1.7 million, a decrease of approximately $1.3
million, or 43%, when compared with $3.0 million in 2006. Our net income was
down primarily as a result of a $1.6 million loss sustained during the
fourth quarter by the Corporation's commercial mortgage banking subsidiary
realized as a result of covering the shortfall of participant banks related
to a sale of foreclosed commercial property. Also, other decreases in annual
net income were attributable to a decrease in interest income related to a
lower earning asset base and a 30% decline in revenue from mortgage banking
services. This decline was partially offset by a $248,000 gain on the sale
of the Corporation's retail credit card portfolio in September 2007. The
sale of the credit card portfolio was a move to reduce the risk profile of
the Bank.
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.
We measure our performance on selected key ratios, which are provided for the
last three years in the following table:
2007 2006 2005
Return on average total assets .60% 1.00% 1.44%
Return on average shareholders' equity 6.17% 8.01% 10.93%
Average shareholders' equity to average
total assets 9.68% 12.45% 13.19%
Net interest margin (tax equivalent) 3.62% 3.66% 3.91%
Net Interest Income
Net interest income for 2007 decreased $737,000, or 7.6%, compared with 2006.
Major factors contributing to the decline in net interest income compared
with 2006 were (1) a decline of $854,000 in interest income on a lower volume
of investment securities. This lower average volume is mainly due to the
selling of $14 million of investment securities in the last half of 2006 to
fund the stock tender offer and investment securities maturing in 2007 from
which proceeds were not reinvested in new investment securities, and (2) a
$593,000 increase in interest expense primarily related to higher rates on
deposits and debt. An increase of 61 basis points were paid on $94 million
of average time deposits and 57 basis points increase were paid on $32 million
of average debt.
Partly offsetting the lower interest income on investment securities and
higher interest expense was increased interest income from loans in 2007
compared with 2006. The majority of the increase in loan interest income for
the year resulted from a combination of volume and yield components. Average
loan volumes increased $8.1 million, or 6.9%, and the yield increased 27
basis points to 8.29%, resulting in an increase in interest income of
$914,000.
Net interest income for 2006 decreased $593,000, or 5.8%, compared with 2005.
The largest factor contributing 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 million or 8.2%, in 2006 compared with
2005. The majority of the $1.211 million 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
million. Average investment volumes decreased $13.4 million, or 8.1%,
primarily due to the sale of securities to fund the tender offer.
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 3.62% for 2007, a 4 basis point decrease from 3.66%
in 2006. The net interest margin in 2006 was down 25 basis points compared
with the net interest margin of 3.91% in 2005. Our net interest margin
declines in each year were primarily due to higher funding costs and the
shifting from long-term debt to short-term debt with higher rates. The flat
to somewhat inverted yield curve in most of 2007 made it a challenging
earnings environment.
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:
2007 2006 2005
(Dollars in Thousands)
Amount % Change Amount % Change Amount % Change
Service charges on
deposit accounts $1,736 1.2% $1,716 10.5% $1,553 * %
Income from trust services 286 (3.1) 295 (3.3) 305 (1.6)
Income from retail
brokerage services 346 16.9 296 11.7 265 8.2
Income from insurance
services 1,150 (1.5) 1,167 4.9 1,113 1.0
Income from mortgage
banking services 2,814 (29.3) 3,978 (9.9) 4,417 22.3
Gain (loss) on the sale or
abandonment of assets (97) 15 87.5 8 102.9
Gain (loss) on the sale of
credit card portfolio 248 100.0 0 0 0 0
Gain (loss) on the sale
of securities 0 100.0 (564) (100.0) 0 (100.0)
Other income 232 12.1 207 1.5 204 (1.9)
Total noninterest income $6,715 (5.6)% $7,110 (9.6)% $7,865 16.4%
* less than .1%
For the year 2007, total noninterest income was $6.715 million compared with
$7.110 million for 2006. The majority of the decline occurred in mortgage
banking services revenue, which decreased $1.164 million, or 29.3%, from the
same period last year. Also, there was a net loss of $97,000 in sales
of foreclosed property primarily related to the sale of one large commercial
property. Other year over year decreases in revenue included trust services
and insurance services. The declines in revenue were partially offset by a
$248,000 gain on the sale of the retail credit card portfolio in 2007.
In addition, retail brokerage services income had growth of $50,000, or
16.9%, and income from service charges on deposit accounts grew $20,000, or
1.2%, when compared with the prior year. Additionally, noninterest income in
2006 was negatively impacted by a nonrecurring $564,000 loss on the sale of
securities to fund the Corporation's stock tender offer in that year.
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, an 11% decrease from
the balance at December 31, 2005. This decline was primarily due to
numerous payoffs of serviced loans. Also, noninterest income was negatively
impacted in 2006 by the loss on the sale of securities to fund the tender
offer and a 3.3% decrease in fees from trust services.
Offsetting, in part, the declines in noninterest income, deposit service
charge income in 2006 increased $163,000 or 10.5%, 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 4.9% growth in fees related to
insurance services and an 11.7% increase in fees related to retail brokerage
services.
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:
2007 2006 2005
(Dollars in Thousands)
Amount % Change Amount % Change Amount % Change
Salaries and employee
benefits $ 7,011 ( 3.6)% $ 7,276 (0.7)% $ 7,324 9.8 %
Occupancy expense 840 0.6 835 3.1 810 10.2
Equipment expense 648 2.7 631 (3.8) 656 (0.6)
Data processing
expense 686 (1.2) 694 (4.3) 725 (5.4)
Amortization of
intangible assets 467 (49.1) 917 86.8 491 (2.2)
Losses related to
mortgage banking services 1,587 100.0 0 0 0 0
Other operating expenses 2,364 (10.2) 2,632 10.8 2,376 (13.3)
Total noninterest expense $13,603 4.8 % $12,985 4.9 % $12,382 2.6 %
Total noninterest expense increased $618,000, or 4.8%, in 2007 compared with
2006. The majority of this increase was related to the $1.587 million loss
sustained during the fourth quarter by the Corporation's commercial mortgage
banking subsidiary realized as a result of covering the shortfall of
participant banks related to the sale of foreclosed commercial property.
This increase is partially offset by decreases in salary and employee
benefits, amortization of intangible assets, and other operating expenses.
Salaries and employee benefits decreased as a result of a lower amount
required to fund the pension plan in 2007 of $520,000 compared with $1.184
million in 2006. Also, 2006 was the last year of contributions to the
deferred compensation plan,resulting in a $200,000 expense reduction in 2007.
Another factor in the decrease in salaries and employee benefits was the
decrease in officer performance compensation primarily related to the mortgage
banking subsidiary's lower profitability in 2007 compared with 2006. In 2007
the officer performance compensation was $367,000 compared with $676,000 in
2006. Amortization of intangible assets decreased $450,000 to $467,000 in
2007. This reduction resulted from returning to a normal level after
accelerating the amortization of our mortgage servicing assets due to the
large payoffs of serviced loans in 2006. Other operating expenses declined
$268,000 compared with 2006 due to professional services related to the
tender offer and to pension consulting expenses in 2006.
Total noninterest expense increased $603,000, or 4.9%, in 2006 compared with
2005. The majority of this increase of $429,000 was from the increased
amortization of intangible assets described above. Also,a 10.8% increase
occurred in other operating expenses due to higher professional service fees
related to the tender offer and to pension consulting. Occupancy expense
increased 3.1% due to normal inflationary adjustments.
These 2006 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 adjustments to operations. Salaries and employee benefits
decreased slightly due to a reduction in the number of full time employees
from 118 to 114, partially offset by an additional pension contribution of
$690,000. The additional pension funding was a one-time charge incurred
in connection with freezing the pension plan and was necessary for the
required minimum contribution.
The "efficiency ratio" (noninterest expense divided by total noninterest
income plus net interest income), a measure of productivity, increased to
84.3% for 2007, from 75.5% for 2006 and 66.8% for 2005. The higher
efficiency ratio was primarily due to the loss related to mortgage banking
services and to lower revenues.
Federal Income Tax Expense
The Corporation expensed $307,000, $734,000 and $1.32 million for federal
income taxes for the years ending December 31, 2007, 2006, and 2005,
respectively. These amounts resulted in an effective tax rate of 15.2%,
19.5%, and 23.3%, for 2007, 2006, and 2005, 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 2007, total average assets decreased $17.2 million, or 5.6%, to $287.7
million. The Corporation's earning assets, which include loans, investment
securities, deposits at the Federal Home Loan Bank, and federal funds sold
averaged $260.2 million in 2007, a 5.8% decrease over $276.1 million in 2006.
This decrease was primarily the result of decreased average volume in
investment securities and federal funds sold, which was offset by improved
average loan volume. The earning asset mix shifted towards higher average
loans. For 2007, average earning assets were comprised of 48% loans, 51%
investment securities, and 1% federal funds sold and funds at the Federal
Home Loan Bank. The ratio of average earning assets to average total assets
decreased slightly to 90.4% for 2007 compared with 90.6% for 2006.
Loans
Loans are one of the Corporation's largest earning assets and uses of funds.
Because of the importance of loans, most of the other assets and liabilities
are managed to accommodate the needs of the loan portfolio. During 2007,
average loans represented 48% of average earning assets and 43% of average
total assets.
The composition of the Corporation's loan portfolio at December 31, 2007,
2006, and 2005 was as follows:
2007 2006 2005
(Dollars in Thousands)
% % %
Category Amount Change Amount Change Amount Change
Commercial, financial,
and agricultural $ 21,851 4.4 % $ 20,938 69.3 % $ 12,370 67.3 %
Real estate:
Construction 11,564 (12.6)% 13,238 24.1 % 10,669 181.3 %
Commercial 38,038 (16.4)% 45,506 34.4 % 33,869 (16.1)%
Residential 31,936 0 % 31,942 (5.4)% 33,773 (0.6)%
Agricultural 7,258 30.2 % 5,576 (4.7)% 5,851 4.1 %
Installment 8,397 0.7 % 8,336 2.9 % 8,143 (7.4)%
Total loans $119,044 (5.2)% $125,536 20.0 % $104,675 4.7 %
Even though, year-over year loan balances are down due to recent payoffs,
average total loans increased $8.1 million in 2007 due to an increase in
local loan demand mainly in construction and commercial loans. The ratio of
total loans to total deposits at year end slightly decreased to 54.9% in 2007
compared with 55.4% in 2006. The loan portfolio mix at year end 2007
consisted of 9.7% loans secured by construction real estate, 32% loans
secured by commercial real estate, 26.8% of loans secured by residential real
estate, and 6.1% of loans secured by agricultural real estate. The loan
portfolio also included other commercial, financial, and agricultural
purposes of 18.4% and installment loans to individuals for consumer purposes
of 7%.
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, 2007.
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 2% of total loans
outstanding, as of December 31, 2007. This level represented an $18,000
decrease from the corresponding 2006 year-end amount which was 1.9% of total
loans outstanding.
There was no provision for loan losses in 2007 and 2006. In 2005, we had an
$80,000 provision for loan losses. 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, 2007:
Securities Securities
Available for Sale Held to Maturity
Amounts Maturing In: (Dollars in Thousands)
One year or less $ 7,361 $ 12,000
After one through five years 16,739 70,991
After five through ten years 6,763 5,235
After ten years 0 0
Equity & mortgage-backed securities 325 0
Total investment securities $ 31,188 $ 88,226
The total investment portfolio decreased to $121.1 million from $137.5
million at year-end 2007 compared with year-end 2006, a decrease of $16.4
million, or 12%. The majority of this decrease was due to the maturing of
$10 million of U.S. Government Agency securities and the calling, by the
issuer, of $5 million of U.S. Government Agency securities. The average
total investment portfolio decreased to $131.8 million in 2007 compared with
$151.4 million for 2006.
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, renegotiated loans, potential problem loans and
property acquired by foreclosure. The level of nonperforming assets increased
$865,000 at year-end 2007 compared with year-end 2006. This increase
primarily resulted from large single loans held in nonaccrual loans at year
end. At the end of 2007, we had one large $3.2 million fully secured loan in
nonaccrual loans on which no loss is anticipated. In 2006, we had a single
$2.2 million nonaccrual loan which foreclosed and the collateral property was
sold for a loss of $110,000 during the fourth quarter of 2007. Nonperforming
assets were approximately $3.222 million, or 1.22% of total assets as of
December 31, 2007, compared with $2.357 million, or 0.82% of total assets at
year-end 2006.
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 2007, average deposits decreased 2.0% compared with 2006, from $227.1
million to $222.5 million. The majority of the decrease in average deposits
occurred in average money market deposit accounts and NOW account deposits.
Competitive interest rates during 2007 resulted in change in the deposit mix.
The majority of the decreases in money market accounts were attributable to
distributing money market funds held in a large estate account administered
by our trust department. Our strong level of money market accounts are
related to commercial customers using our cash management program which
provided money market rates of return for large cash balances. During the
latter part of the fourth quarter of 2007, many of our NOW accounts with low
transaction volume were reclassified to money market accounts. As of
December 31, 2007, the Corporation had a total of $29.6 million in
certificates of deposit of $100,000 or more each. This was a 15% increase
over the $25.7 million total in 2006.
We have used borrowings from the Federal Home Loan Bank to support our
residential mortgage lending activities. During 2007, the Corporation
borrowed $11.5 million as advances from the Federal Home Loan Bank and repaid
$21.5 million of short-term advances, and $10.1 million of advances will be
paid in 2008. Total long-term advances with the Federal Home Loan Bank were
$15 million at December 31, 2007. 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, 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 2007, operating
and investing activities generated cash flows of $24.5 million, while
financing activities used $18.2 million resulting in an increase in cash and
cash equivalents balances of $6.3 million. Net cash provided by 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 79.4% of total
deposits on December 31, 2007, compared with 79.9% in 2006.
Asset liquidity is provided through ordinary business activity, such as cash
which is received from interest and fee payments as well as from maturing
loans and investments. Additional sources include marketable securities and
short-term investments which can be easily converted to cash without
significant loss. The Corporation's investment securities maturing within
one year or less were $19.4 million on December 31, 2007, which represented
16% of the investment debt securities portfolio. Also, the Corporation has
$82 million of investment securities callable at the option of the issuer and
many are likely to be called during 2008 if interest rates drop more than
1%. These maturing and callable investment securities are sources for
repayment of our short-term and long-term debt obligations.
Due to the recent 2% drop in the short-term rate by the Federal Reserve,
we expect the majority of our callable securities to be called in 2008. If
these investment securities are called by the issuers, we anticipate that we
can improve our net interest income and profitability by repositioning our
callable securities balance. We expect to reinvest these proceeds from called
investment securities in new loans, new investment securities, and to repay
debt. We are not aware of any known trends, events, or uncertainties that
will have or that are reasonably likely to have a material adverse effect on
the Corporation's liquidity or operations.
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, 2007.
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.
Payments Due by Period
Contractual Obligations Less
(Dollars in Thousands) than 1 1-3 4-5 After 5
Total year years years years
Long-term debt $15,000 $ 0 $5,000 $ 0 $10,000
Operating leases 44 19 25 0 0
Total contractual obligations $15,044 $ 19 $5,025 $ 0 $10,000
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk which
arise in the normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend credit
in the form of loans or through letters of credit. The instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of
the amounts recognized in the financial statements. 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): 2007 2006
Commitments to extend credit $ 12,439 $ 20,471
Standby letters of credit $ 10 $ 10
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 9.68% in 2007 and 12.45% in
2006. 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 2007, we were well in excess of
the minimum requirements under the guidelines with a total risk-based capital
ratio of 19.39%, a Tier I risk-based capital ratio of 18.13%, and a leverage
ratio of 8.98%. To continue to conduct its business as currently conducted,
the Corporation and the Bank will need to maintain capital well above the
minimum levels.
The following table presents the risk-based capital and leverage ratios for
year-end 2007 and 2006 in comparison to the minimum regulatory guidelines:
Minimum
Regulatory
Risk Based Capital Ratios Dec. 31, 2007 Dec. 31, 2006 Guidelines
Tier I capital 18.13% 17.98% 4.00%
Total risk-based capital 19.39% 19.23% 8.00%
Leverage 8.98% 8.88% 3.00%
Forward-Looking Statements
In addition to historical information, this 2007 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 risks related to the Corporation's construction and
land development loans; asset quality; the adequacy of the allowance for loan
losses; technology difficulties or failures; the Corporation's ability to
execute its business strategy; the loss of key personnel; competition;
changes in regulation and monetary policy; losses due to fraudulent and
negligent conduct of customers, service providers and employees;
acquisitions or dispositions of assets or internal restructuring, that may be
pursued by the Corporation; changes in or application of environmental and
other laws and regulations to which the Corporation is subject; political,
legal and local economic conditions and developments; financial market
conditions and the results of financing efforts; changes in commodity prices
and interest rates; weather, natural disasters and other catastrophic events;
and other factors discussed in the Corporation's other filings with the
Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of the Corporation. Any such statement
speaks only as of the date the statement was made. The Corporation
undertakes no obligation to update or revise any forward-looking statements.
Additional information with respect to factors that may cause results to
differ materially from those contemplated by such forward-looking statements
is included in the Corporation's current and subsequent filings with the
Securities and Exchange Commission.
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 2007, our sensitivity ratio, or one-year cumulative rate-
sensitive assets relative to cumulative rate-sensitive liabilities, was 102%
compared with 72% for 2006. This change in the sensitivity ratio was a
result of the Corporation's management of its exposure to interest rate risk.
We are more asset-sensitive at the one year gap position compared with
being liability-sensitive in the previous year. These changes in assets and
liabilities occurred in: (1) increase in investment securities that will
mature of have the potential of being called within one year, (2) increase in
short-term investments, and (3) decrease in money market deposit type of
accounts. This asset sensitive position will increase the Corporation's
exposure to falling 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.
Interest Rate Sensitivity December 31, 2007
Expected Maturity/Repricing Dates
(Dollars in Thousands)
2013 Fair
2008 2009 2010 2011 2012 & Beyond Total Value
Rate-sensitive Assets: *
Short-term Investments $ 9,998 $ $ $ $ $ $ 9,998 $ 9,998
Average interest rate 4.25% 4.25%
Securities available for sale 10,589 6,928 27 7,115 1,484 5,045 31,188 31,188
Average interest rate 5.02% 5.25% 5.15% 5.00% 4.79% 5.02% 5.06%
Securities held to maturity** 15,000 36,000 25,000 7,000 5,226 88,226 88,124
Average interest rate 4.17% 4.02% 4.22% 4.29% 4.00% 4.12%
Federal Home Loan Bank stock 1,653 1,653 1,653
Average interest rate 6.00% 6.00%
Fixed-rate loans 30,655 11,693 10,006 5,893 4,121 10,820 73,188 71,562
Average interest rate 7.89% 7.66% 7.61% 7.67% 7.66% 6.71% 7.61%
Variable-rate loans 40,829 3,971 518 182 253 67 45,820 45,402
Average interest rate 7.35% 6.05% 6.51% 6.51% 6.06% 5.25% 7.21%
Total Rate-sensitive Assets $108,724 $58,592 $35,551 $20,190 $ 5,858 $21,158 $250,073 $247,927
Average interest rate 6.53% 5.03% 5.21% 5.55% 6.86% 5.63% 5.84%
Rate-sensitive Liabilities:
Time deposits $ 80,110 $13,821 $ 903 $ 376 $ 532 $ 95,742 $ 96,108
Average interest rate 4.58% 4.45% 4.68% 5.03% 5.03% 4.56%
Other interest-bearing deposits *** 16,554 20,737 20,737 6,912 6,912 13,826 85,678 85,678
Average interest rate 3.02% 0.85% 0.85% 0.85% 0.85% 0.85% 1.27%
Short-term borrowings 10,114 10,114 10,094
Average interest rate 3.93% 3.93%
Long-term borrowings 5,000 10,000 15,000 15,054
Average interest rate 5.24% 3.85% 4.31%
Total Rate-sensitive Liabilities $106,778 $39,558 $21,640 $ 7,288 $ 7,444 $23,826 $206,534 $206,934
Average interest rate 4.28% 2.66% 1.01% 1.07% 1.15% 2.11% 3.14%
GAP $ 1,946 $19,034 $13,911 $12,902 $(1,586) $(2,668) $ 43,539
Sensitivity Ratio 102% 114% 121% 127% 125% 121%
* 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.
Management's Report On Internal Control Over Financial Reporting
Management of Southwest Georgia Financial Corporation and subsidiaries (the
"Corporation") is responsible for establishing and maintaining effective
internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles.
Under the supervision and with the participation of management, including
the principal executive officer and principal financial officer, the
Corporation conducted an evaluation of the effectiveness of internal control
over financial reporting based on the framework in Internal Control over
Financial Reporting - Guidance for Smaller Public Companies issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation under the above framework, management of the Corporation has
concluded the Corporation maintained effective internal control over financial
reporting, as such term is defined in Securities Exchange Act of 1934 Rule
13a-15(f), as of December 31, 2007.
Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting can
also be circumvented by collusion or improper management override. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of
the consolidated financial statements and other financial information
contained in this report. The accompanying consolidated financial statements
were prepared in conformity with U.S. generally accepted accounting
principles and include, as necessary, best estimates and judgments by
management.
/s/ DeWitt Drew /s/ George R. Kirkland
DeWitt Drew George R. Kirkland
President and Senior Vice President and
Chief Executive Officer Treasurer
March 18, 2008
Thigpen, Jones, Seaton & Co., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
BUSINESS CONSULTANTS
1004 Hillcrest Parkway P.O. Box 400
Dublin Georgia 31040-0400
Tel 478-272-2030 Fax 478-272-3318
E-mail tjs@tjscpa.com
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, 2007 and 2006, and
the related consolidated statements of income, comprehensive income, changes
in shareholders' equity and cash flows for each of the years in the three
year period ended December 31, 2007. 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, 2007 and 2006, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United States of
America.
/s/Thigpen, Jones, Seaton & Co., PC
Dublin, Georgia
March 18, 2008
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
__________
2007 2006
ASSETS
Cash and due from banks $ 8,736,079 $ 11,969,567
Interest-bearing deposits in other banks 9,997,889 83,210
Federal funds sold 0 332,000
Cash and cash equivalents 18,733,968 12,384,777
Investment securities available for sale,
at fair value 31,188,277 33,322,855
Investment securities to be held to
maturity (fair value approximates
$88,124,110 and $100,283,068) 88,226,049 102,232,804
Federal Home Loan Bank stock, at cost 1,652,800 1,966,900
Loans, net of allowance for loan
losses of $2,399,115 and $2,417,140 116,609,060 123,074,652
Premises and equipment, net 6,290,658 6,578,997
Foreclosed assets, net 90,000 0
Intangible assets 1,283,096 1,750,511
Other assets 7,579,289 7,204,926
Total assets $ 271,653,197 $ 288,516,422
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
NOW accounts $ 23,085,509 $ 55,013,082
Money market 42,031,450 24,376,607
Savings 20,560,963 22,228,442
Certificates of deposit $100,000 and over 29,588,737 25,725,026
Other time accounts 66,152,788 65,977,976
Total interest-bearing deposits 181,419,447 193,321,133
Noninterest-bearing deposits 35,373,243 33,387,979
Total deposits 216,792,690 226,709,112
Short-term borrowed funds 10,114,286 15,000,000
Long-term debt 15,000,000 15,228,571
Other liabilities 3,228,229 3,621,820
Total liabilities 245,135,205 260,559,503
Stockholders' equity:
Common stock - $1 par value, 5,000,000
shares authorized, 4,293,835 and
4,288,555 shares issued 4,293,835 4,288,555
Additional paid-in capital 31,701,533 31,644,063
Retained earnings 17,038,881 16,763,299
Accumulated other comprehensive income ( 466,235) ( 482,588)
Treasury stock, at cost 1,744,198 shares
for 2007 and 1,648,912 shares for 2006 ( 26,050,022) ( 24,256,410)
Total stockholders' equity 26,517,992 27,956,919
Total liabilities and stockholders' equity $ 271,653,197 $ 288,516,422
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 2007, 2006, and 2005
2007 2006 2005
Interest income:
Interest and fees on loans $10,256,774 $ 9,343,246 $ 7,718,967
Interest on debt securities:
Taxable 4,536,729 5,352,040 5,974,676
Tax-exempt 798,961 837,648 842,897
Dividends 119,088 123,520 90,120
Interest on deposits in other banks 174,395 171,065 181,515
Interest on other short-term
investments 427 201,951 10,274
Total interest income 15,886,374 16,029,470 14,818,449
Interest expense:
Deposits 5,583,588 5,177,729 3,393,485
Federal funds purchased 100,542 25,982 9,372
Other short-term borrowings 594,358 303,925 71,000
Long-term debt 694,642 872,229 1,101,787
Total interest expense 6,973,130 6,379,865 4,575,644
Net interest income 8,913,244 9,649,605 10,242,805
Provision for loan losses 0 0 80,000
Net interest income after provision
for loan losses 8,913,244 9,649,605 10,162,805
Noninterest income:
Service charges on deposit accounts 1,735,430 1,716,296 1,553,199
Income from trust services 286,217 295,133 305,483
Income from security sales 346,255 295,859 264,761
Income from insurance services 1,150,336 1,166,966 1,113,299
Income from mortgage banking services 2,814,065 3,978,271 4,416,543
Net gain (loss) on disposition
of assets (96,925) 15,047 7,595
Gain on sale of credit card portfolio 247,531 0 0
Net gain (loss) on sale
of securities 0 (564,455) 0
Other income 232,150 207,179 203,770
Total noninterest income 6,715,059 7,110,296 7,864,650
Noninterest expense:
Salaries and employee benefits 7,011,376 7,276,174 7,324,312
Occupancy expense 839,603 834,863 810,407
Equipment expense 647,561 631,586 656,071
Data processing expense 686,078 693,683 724,846
Amortization of intangible assets 467,416 917,054 490,884
Losses related to mortgage banking 1,587,253 0 0
Other operating expenses 2,363,965 2,632,006 2,375,725
Total noninterest expenses 13,603,252 12,985,366 12,382,245
Income before income taxes 2,025,051 3,774,535 5,645,210
Provision for income taxes 306,943 734,375 1,316,680
Net income $ 1,718,108 $ 3,040,160 $ 4,328,530
Basic earnings per share:
Net income $ 0.66 $ 0.97 $ 1.32
Weighted average shares outstanding 2,583,932 3,134,741 3,267,169
Diluted earnings per share:
Net income $ 0.66 $ 0.96 $ 1.31
Weighted average shares outstanding 2,593,021 3,153,449 3,293,534
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 2007, 2006, and 2005
Accumulated
Additional Other Total
Common paid-in Retained Comprehensive Treasury Stockholders'
Stock capital Earnings Income Stock Equity
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
Comprehensive income:
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
Net Income - - 1,718,108 - - 1,718,108
Changes in net gain(loss) on
securities available for sale - - - 239,980 - 239,980
Changes in net gain(loss) on
pension plan benefits - - - (223,627) - (223,627)
Total comprehensive income - - - - - 1,734,461
Common stock acquired
through purchase program - - - - (1,793,612) (1,793,612)
Cash dividend declared
$.56 per share - - (1,442,526) - - (1,442,526)
Exercise and issuance of
stock options 5,280 57,470 - - - 62,750
Balance at Dec. 31, 2007 $4,293,835 $31,701,533 $17,038,881 $ (466,235) $(26,050,022) $26,517,992
See accompanying notes to consolidated financial statements.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2007, 2006, and 2005
2007 2006 2005
Cash flows from operating activities:
Net income $ 1,718,108 $ 3,040,160 $ 4,328,530
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Provision for loan losses 0 0 80,000
Depreciation 743,695 758,970 749,278
Net amortization and (accretion)
of investment securities ( 10,494) ( 3,476) 14,371
Amortization of intangibles 467,416 917,054 490,884
Net loss (gain) on sale of credit
card portfolio ( 247,531) 0 0
Net loss (gain) on sale and
disposal of assets 96,925 559,078 ( 7,595)
Funds held related to mortgage
banking activities ( 88,006) 100,226 (2,125,225)
Changes in:
Other assets ( 382,788) ( 598,530) ( 669,669)
Other liabilities ( 659,020) 123,341 146,136
Net cash provided by operating
activities 1,638,305 4,896,823 3,006,710
Cash flows from investing activities:
Proceeds from maturities of
securities held to maturity 14,125,435 6,540,000 11,585,000
Proceeds from maturities of
securities available for sale 3,216,400 1,396,284 5,620,945
Proceeds from sale of securities
available for sale 0 13,435,545 0
Purchase of securities held
to maturity 0 ( 2,000,000) (2,325,000)
Purchase of securities available
for sale ( 512,300) 0 ( 255,400)
Proceeds from sale of credit
card portfolio 1,805,006 0 0
Net change in loans 2,269,484 (20,893,937) (5,092,257)
Purchase of premises and equipment ( 459,142) ( 498,343) ( 762,141)
Proceeds from sales of other assets 2,455,493 29,351 283,186
Net cash provided (used) for
investing activities 22,900,376 ( 1,991,100) 9,054,333
Cash flows from financing activities:
Net change in deposits ( 9,916,422) 4,864,721 ( 643,711)
Payment of short-term debt and
short-term portion of long-term deb (21,500,000) ( 5,000,000) (8,000,000)
Proceeds from issuance of
short-term debt 11,500,000 0 0
Payment of long-term debt ( 114,286) ( 114,286) ( 174,286)
Proceeds from issuance of
long-term debt 5,000,000 0 5,000,000
Cash dividends paid ( 1,427,920) ( 1,535,249) (1,697,608)
Proceeds from the exercise of
stock options 62,750 400,722 81,654
Payment for common treasury stock ( 1,793,612) (14,542,198) ( 555,070)
Net cash provided (used) for
financing activities (18,189,490) (15,926,290) (5,989,021)
Increase (decrease) in cash and
cash equivalents 6,349,191 (13,020,567) 6,072,022
Cash and cash equivalents -
beginning of year 12,384,777 25,405,344 19,333,322
Cash and cash equivalents -
end of year $ 18,733,968 $ 12,384,777 $ 25,405,344
Cash paid during the year for:
Income taxes $ 795,000 $ 1,265,000 $ 1,637,554
Interest paid $ 6,993,730 $ 6,238,088 $ 4,501,839
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
2007 2006 2005
NONCASH ITEMS:
Increase in foreclosed properties
and decrease in loans $ 2,638,633 $ 0 $ 239,434
Unrealized gain(loss) on
securities AFS $ 363,606 $ 430,121 $ (1,231,427)
Unrealized gain(loss) on
pension plan benefits $ (338,829) $ 981,792 $ (673,062)
See accompanying notes to consolidated financial statements.
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 Cash Equivalents and Statement of Cash Flows
For purposes of reporting cash flows, the Corporation considers cash and cash
equivalents to include all cash on hand, deposit amounts due from banks,
interest-bearing deposits in other banks, and federal funds sold. The
Corporation maintains its cash balances in several financial institutions.
Accounts at the financial institutions are secured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured deposits aggregate to
$5,589,000 at December 31, 2007.
Investment Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized
cost. Securities not classified as held to maturity or trading, including
equity securities with readily determinable fair values, are classified as
"available for sale" and recorded at fair value with unrealized gains and
losses reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that
are deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of
the issuer, and (3) the intent and ability of the Corporation to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the trade date and are determined using the
specific identification method.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation has been calculated primarily using the straight-
line method for buildings and building improvements over the assets estimated
useful lives. Equipment and furniture are depreciated using the modified
accelerated recovery system method over the assets estimated useful lives for
financial reporting and income tax purposes for assets purchased on or before
December 31, 2003. For assets acquired after 2003, the Corporation used the
straight-line method of depreciation. The following estimated useful lives
are used for financial statement purposes:
Land improvements 5 - 31 years
Building and improvements 10 - 40 years
Machinery and equipment 5 - 10 years
Computer equipment 3 - 5 years
Office furniture and fixtures 5 - 10 years
All of the Corporation's leases are operating leases and are not capitalized
as assets for financial reporting purposes. Maintenance and repairs are
charged to expense and betterments are capitalized.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and
the write-down would be material, an assessment of recoverability is
performed prior to any write-down of the asset. Impairment on intangibles is
evaluated at each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount should be assessed.
Impairment, if any, is recognized through a valuation allowance with a
corresponding charge recorded in the income statement.
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.
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
In February 2007, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 159 (The Fair Value Option for
Financial Assets and Financial Liabilities). The statement permits entities
to choose to measure many financial instruments and certain other items at
fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. The effective date for
entities that elect to apply its provisions is as of the beginning of an
entity's first fiscal year that begins after November 15, 2007. The effect
of applying the provisions of this statement should the Corporation elect to
apply its provisions have not been determined.
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, 2007 and 2006.
In September 2006, the Emerging Issue Task Force (EITF) issued EITF Issue No.
06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements," (EITF 06-
4). EITF 06-4 requires the accrual of post-retirement benefit over the
service period. EITF 06-4 is effective for fiscal years beginning after
December 31, 2007. The Corporation does not anticipate the new accounting
principle to have a material effect on its financial position or results of
operation.
In June 2006, the Financial Accounting Standards Board issued Interpretation
No. 48 (Accounting for Uncertainty in Income Taxes). This document is an
interpretation of Statement No. 109 (Accounting for Income Taxes). The
interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The interpretation also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The interpretation
was initially effective for fiscal years beginning after December 15, 2006
but has been extended until 2008. The effect of applying the provisions of
the interpretation has not been determined.
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
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 2007, 2006, and 2005 were $200,705,
$191,625, and $176,341, 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, 2007
Equity securities $ 24,265 $ 6,121 $ 0 $ 30,386
State and municipal securities 12,528,297 444,826 0 12,973,123
U.S. Government Agency
Securities 17,990,946 8,184 108,817 17,890,313
Mortgage-backed securities 286,726 7,729 0 294,455
Total $30,830,234 $466,860 $ 108,817 $31,188,277
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
Securities Held to Maturity:
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
December 31, 2007
U.S. Government Agency
Securities $ 82,990,819 $ 38,747 $ 151,889 $ 82,877,677
State and Municipal Securities 5,235,230 54,032 42,829 5,246,433
Total $ 88,226,049 $ 92,779 $ 194,718 $ 88,124,110
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
At December 31, 2007 and 2006, securities with a carrying value of
$25,697,000 and $37,312,000, respectively were pledged as collateral for
public deposits and other purposes as required by law. Also, securities with
a carrying value of $32,000,000 and $30,343,000 were pledged to secure
Federal Home Loan Bank advances at December 31, 2007 and 2006, 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, 2007 this stock
investment was $1,652,800.
There were no investments in obligations of any state or municipal
subdivisions which exceeded 10 % of the Corporation's stockholders' equity at
December 31, 2007.
The amortized cost and estimated fair value of securities at December 31,
2007, 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.
Available for Sale:
Amortized Estimated
Cost Fair Value
Amounts maturing in:
One year or less $ 7,403,980 $ 7,360,748
After one through five years 16,609,739 16,739,507
After five through ten years 6,505,524 6,763,181
After ten years 0 0
Total debt securities $ 30,519,243 $ 30,863,436
Mortgage-backed securities 286,726 294,455
Equity securities 24,265 30,386
Total AFS securities $ 30,830,234 $ 31,188,277
Held to Maturity:
Amortized Estimated
Cost Fair Value
Amounts maturing in:
One year or less $ 11,999,510 $ 11,954,429
After one through five years 70,991,309 70,923,248
After five through ten years 5,235,230 5,246,433
After ten years 0 0
Total HTM securities $ 88,226,049 $ 88,124,110
For the years ended December 31, 2007, 2006, and 2005, proceeds from sales of
securities available for sale amounted to $0, $13,435,545, and $0,
respectively. Gross realized gains (losses) amounted to $0, $(564,455), and
$0, respectively. The loss during 2006 was due to liquidating securities to
fund a tender stock offer.
Information pertaining to securities with gross unrealized losses aggregated
by investment category and length of time that individual securities have
been in continuous loss position, follows:
December 31, 2007 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 $ 0 $ 0 $ 108,817 $14,890,312
State and municipal securities 0 0 0 0
Mortgage-backed securities 0 0 0 0
Total debt securities 0 0 108,817 14,890,312
Equity securities 0 0 0 0
Total securities available
for sale $ 0 $ 0 $ 108,817 $14,890,312
Securities Held to Maturity
U.S. Government and federal agency $ 0 $ 0 $ 151,889 $44,846,180
State and municipal securities 0 0 42,829 2,333,528
Total securities held to maturity $ 0 $ 0 $ 194,718 $47,179,708
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
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, 2007, the debt securities with unrealized losses have
depreciated 48.66% from the Corporation's amortized cost basis. These
unrealized losses relate principally to current interest rates for similar
types of securities. In analyzing an issuer's financial condition,
management considers whether the securities are issued by the federal
government, its agencies, or other governments, whether downgrades by bond
rating agencies have occurred, and the results of reviews of the issuer's
financial condition. 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.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the Corporation's loan portfolio at December 31, 2007,
2006, and 2005 was as follows:
2007 2006 2005
Commercial, financial and
agricultural loans $ 21,850,674 $ 20,937,732 $ 12,369,529
Real estate:
Construction loans 11,563,650 13,238,346 10,669,442
Commercial mortgage loans 38,037,762 45,506,441 33,869,136
Residential loans 31,936,066 31,942,371 33,773,198
Agricultural loans 7,257,608 5,576,468 5,850,641
Deposit account overdrafts 98,475 99,516 99,295
Consumer loans 8,299,787 8,234,881 8,044,000
Loans Outstanding 119,044,022 125,535,755 104,675,241
Unearned discount ( 35,847) ( 43,963) ( 40,837)
Allowance for loan losses ( 2,399,115) ( 2,417,140) ( 2,453,689)
Net loans $ 116,609,060 $ 123,074,652 $ 102,180,715
The Corporation's only significant concentration of credit at December 31,
2007, occurs in real estate loans which totaled approximately $89 million.
However, this amount is not concentrated in any specific segment within the
market or geographic area.
At December 31, 2007 and 2006, impaired loans amounted to $61,574 and $77,045
respectively. Included in the allowance for loan losses is $10,794 related
to impaired loans at December 31, 2007, and $17,767 related to impaired loans
at December 31, 2006. 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, 2007, 2006, and 2005, the average recorded
investment in impaired loans was $69,308, $125,520, and $191,722,
respectively. Interest income was recognized for cash payments received on
loans while they were impaired of $7,112 for 2007, $8,891 for 2006, and
$14,361 for 2005.
Loans placed on nonaccrual status amounted to $3,221,569 and $2,347,347 at
December 31, 2007 and 2006 respectively. Past due loans over ninety days and
still accruing at December 31, 2007 and 2006 were $0 and $9,670, respectively.
At year-end 2007, there was one large $3,203,000 fully secured loan in
nonaccrual loans on which no loss is anticipated. At year-end 2006, there
was one large $2,250,000 loan in nonaccrual loans which was foreclosed and
sold at a loss of $110,000 in the fourth quarter of 2006.
Changes in the allowance for loan losses are as follows:
2007 2006 2005
Balance, January 1 $ 2,417,140 $ 2,453,689 $ 2,506,837
Provision charged to operations 0 0 80,000
Loans charged off ( 52,758) ( 59,505) ( 226,641)
Recoveries 34,733 22,956 93,493
Purchased reserve 0 0 0
Balance, December 31 $ 2,399,115 $ 2,417,140 $ 2,453,689
4. PREMISES AND EQUIPMENT
The amounts reported as bank premises and equipment at December 31, 2007 and
2006 are as follows:
2007 2006
Land $ 1,177,059 $ 1,177,059
Building 7,875,208 7,872,203
Furniture and equipment 6,415,108 6,000,498
15,467,375 15,049,760
Less accumulated depreciation ( 9,176,717) ( 8,470,763)
Total $ 6,290,658 $ 6,578,997
Depreciation of premises and equipment was $743,695, $758,970, and $749,278
in 2007, 2006, and 2005, 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.
5. INTANGIBLE ASSETS
The following table lists the Corporation's intangible assets at December 31,
2007 and 2006. Core deposit premiums have 6-7 years of remaining
amortization, and customers' account base have 7-8 years remaining
amortization while mortgage banking has two remaining months to amortize.
During 2006, the Corporation accelerated the amortization of the mortgage
banking intangible asset by $429,000 due to numerous payoffs for serviced
loans.
2007 2006
Amortizing intangible assets
Core deposit premiums $ 1,118,272 $ 1,300,012
Customers' account base 145,519 171,416
Mortgage banking 19,305 279,083
Total intangible assets $ 1,283,096 $ 1,750,511
6. DEPOSITS
At December 31, 2007, the scheduled maturities of certificates of deposit are
as follows:
$ Amount
2008 $ 74,712,986
2009 19,048,170
2010 1,048,829
2011 383,809
2012 and thereafter 547,731
Total $ 95,741,525
7. SHORT-TERM BORROWED FUNDS
Federal funds purchased generally mature within one to four days. On
December 31, 2007, the Corporation had no federal funds purchased. Other
short-term borrowed funds consist of Federal Home Loan Bank advances of
$10,114,286 with interest at 3.93 % as of December 31, 2007 and $15,000,000
with interest at 3.43 % as of December 31, 2006.
Information concerning federal funds purchased and Federal Home Loan Bank
short-term advances are summarized as follows:
2007 2006 2005
Average balance during the year $14,205,793 $10,475,611 $3,124,427
Average interest rate during the year 4.18% 3.15% 2.57%
Maximum month-end bal. during the year $16,500,000 $20,000,000 $5,000,000
8. LONG-TERM DEBT
Long-term debt at December 31, 2007 and 2006 consisted of the following:
2007 2006
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),
(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 5.24%
fixed rate of interest maturing February 6, 2009. 5,000,000 0
Advance from Federal Home Loan Bank with a 5.21%
fixed rate of interest due in annual installments
maturing December 17, 2008,(transferred to
short-term borrowings). 0 228,571
Total long-term debt $15,000,000 $15,228,571
The advances from Federal Home Loan Bank are collateralized by the pledging
of investment securities. At December 31, 2007 and 2006, securities with a
carrying value of $32,000,000 and $30,343,000, 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, 2007, the
Corporation had approximately $45,000,000 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, 2007, there was no floating rate long-term debt; however, some
of the advances have convertible call features.
Fixed Rate
Due in: $ Amount
2008 $ 0
2009 5,000,000
2010 0
2011 0
2012 0
Later Years 10,000,000
Total long-term debt $15,000,000
9. EMPLOYEE BENEFITS AND RETIREMENT PLANS
Pension Plan
The Corporation has a noncontributory defined benefit pension plan which
covers most employees who have attained the age of 21 years and completed
one year of continuous service. The Corporation is providing for the cost of
this plan as benefits are accrued based upon actuarial determinations
employing the aggregate funding method.
The table of actuarially computed benefit obligations and net assets and the
related changes of the Plan at December 31, 2007, 2006, and 2005 is presented
below.
2007 2006 2005
Change in Benefit Obligation
Benefit obligation at beginning of year $11,183,684 $11,894,280 $11,053,754
Service cost 0 499,562 405,783
Interest cost 690,697 734,225 688,756
Amendments 0 (1,452,854) 0
Benefits paid (678,445) ( 678,512) ( 563,171)
Other - net 916,907 186,983 309,158
Benefit obligation at end of year $12,112,843 $11,183,684 $11,894,280
Change in Plan Assets
Fair value of plan assets at
beginning of year $10,458,052 $ 9,450,986 $ 9,233,482
Actual return on plan assets 574,832 675,672 286,943
Employer contribution 693,943 1,009,906 493,732
Benefits paid ( 678,445) ( 678,512) ( 563,171)
Fair value of plan assets at
end of year $11,048,382 $10,458,052 $ 9,450,986
2007 2006 2005
Funded status $(1,064,461) $ (725,632) $(2,443,294)
Unrecognized net actuarial (gain)/loss 0 1,380,424 2,686,806
Unrecognized prior service cost 0 0 289,695
Pension liability included in
other liabilities $(1,064,461) $ 654,792 $ 533,207
Accumulated benefit obligation $12,112,843 $11,183,684 $10,625,203
Amount recognized in consolidated
balance sheet consist of the following: 2007 2006 2005
Accrued Pension $ 1,064,461 $ 725,632 $ 1,707,424
Intangible assets $ 0 $ 0 $ 289,695
Deferred tax assets 361,917 246,715 482,028
Accumulated other comprehensive income 702,544 478,917 935,701
Total $ 1,064,461 $ 725,632 $ 1,707,424
Components of Pension Cost 2007 2006 2005
Service cost $ 0 $ 499,562 $ 405,783
Interest cost on benefit obligation 690,697 734,225 688,756
Expected return on plan assets ( 826,839) ( 792,327) ( 739,352)
Other - net 74,003 187,501 97,194
Net periodic pension cost $( 62,139) $ 628,961 $ 452,381
Other changes in plan assets and benefit obligations recognized in
comprehensive income:
2007 2006 2005
Net loss (gain) $ 338,829 $(981,792) $ 962,737
Prior service costs 0 0 0
Total recognized in other
comprehensive income $ 338,829 $(981,792) $ 962,737
Net periodic pension cost ( 62,139) 628,961 452,381
Total recognized in net periodic
pension cost and other
comprehensive income $ 276,690 $(352,831) $1,415,118
In 2007, the year after adopting Financial Accounting Standard No. 158,
Employer's Accounting for Deferred Benefit Pension Plan and Other
Postretirement Plans, and freezing its pension retirement plan, the
Corporation accrued $519,635 funding contributions to the plan. Also, the
Corporation recorded additional accrued pension liability of $338,829 and
other comprehensive income (loss) of ($338,829) or ($223,627) on a pre-tax
basis. The additional actuarial loss of $916,907 during 2007 was due to an
updated mortality table which reflected longer lives for participants in the
plan.
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.
Incremental Effect of Applying SFAS No. 158 and curtailment of the Plan on
Individual Line Items in the Statement of Financial Position at December 31,
2006:
Before Adjustments After
Intangible Assets $ 2,040,206 $(289,695) $ 1,750,511
Other assets including
deferred tax assets 7,440,239 (235,313) 7,204,926
Total assets 289,041,430 (525,008) 288,516,422
Other liabilities including
pension liability 4,603,612 (981,792) 3,621,820
Accumulated other comprehensive
income ( 939,372) 456,784 ( 482,588)
Total stockholder's equity $ 27,500,135 $ 456,784 $ 27,956,919
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 shows the effects of before and after
the curtailment of the pension plan.
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
Less 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).
At December 31, 2007, the plan assets included cash and cash equivalents,
U.S. Treasury bonds and notes, other government agency securities, and equity
securities.
Assumptions used to determine the benefit obligation as of December 31, 2007
and 2006, respectively were:
2007 2006
Weighted-Average Assumptions As of December 31
Discount rate 6.25% 6.25%
Rate of compensation increase N/A N/A
For the years ended December 31, 2007, 2006, and 2005, the assumptions used
to determine net periodic pension costs are as follows:
2007 2006 2005
Discount rate 6.25% 6.25% 6.50%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase N/A 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.
2007 2006
Planned Asset Allocation as of December 31
Equity 25% 25%
Fixed income 62% 70%
Cash & cash equivalents 13% 5%
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 are allowed, but are 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 must 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 $250,000 to this pension plan in 2008.
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:
2008 $ 808,100
2009 814,000
2010 869,800
2011 861,900
2012 897,300
Years 2013 - 2017 $ 4,561,300
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 defer into the
plan. The plan does allow for discretionary match in excess of the four
percent and that the participants are allowed to defer the maximum amount of
salary. During 2007, the Corporation matched the employee participants for
the first four percent of salary contributing $164,170 to the plan.
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
$309,809 in 2007, $0 in 2006, and $538,675 in 2005. Contributions to
eligible participants are based on percentage of annual compensation. As of
December 31, 2007, the ESOP holds 327,478 shares of the Corporation's
outstanding shares of common stock. All 326,914 released shares are
allocated to the participants. The 564 unreleased shares are pledged as
collateral for a $10,000 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 and that was amended on November 15,
2006. Under this employment 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. Based on
the agreement, annual contributions ended in 2006; therefore, no
contributions were made in 2007. Also, under the amended agreement monthly
installment payments commence six months after the date of the executive
officer's termination and continue each month thereafter until the deferred
compensation account is exhausted.
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 2007, 2006, and
2005 on the part of the Corporation totaled $68,400, $62,100, and $64,550,
respectively.
Stock Option Plan
Effective March 19, 1997, the Corporation established a Key Individual Stock
Option 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 April of 2007, the Key Individual Stock Option Plan, which was effective
for ten years, concluded as related to granting new stock options. In 2007,
there were no stock options granted to the Corporation's key employees and/or
directors. In 2006, 4,500 incentive stock options (ISO) were granted, and in
2005, the Corporation granted 1,500 stock options. 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.
2007 2006 2005
Number of stock options granted 0 4,500 1,500
Average fair value of stock options granted 0 $ 3.90 $ 4.11
Number of option shares exercisable 107,165 108,605 131,480
Average price of stock options exercisable $ 18.02 $ 17.66 $ 17.67
Weighted-average assumptions:
Dividend yield 2.9% 2.6% 2.4%
Risk-free interest rate 4.5% 4.8% 3.9%
Volatility rate 20.0% 20.0% 20.0%
Expected life 5 years 5 years 5 years
A summary of the status of the Corporation's Plan as of December 31, 2007,
2006 and 2005, and the changes in stock options during the years are
presented below:
No. of Shares Average Price
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
Granted 0 0
Expired ( 660) 19.32
Exercised ( 5,280) 11.88
Outstanding at December 31, 2007 107,165 $ 18.02
The following table summarizes information about fixed stock options
outstanding and exercisable at December 31, 2007.
Outstanding Stock Options Exercisable Stock Options
Weighted-
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price Range at 12/31/07 Life Price at 12/31/07 Price
$11 to $12 1,320 4.5 Years $ 11.93 1,320 $ 11.63
$12 to $13 4,620 3.5 Years 12.09 4,620 12.09
$13 to $14 17,160 3.4 Years 13.09 17,160 13.09
$19 to $20 80,765 2.8 Years 19.37 80,765 19.37
$21 to $23 3,300 8.5 Years 21.52 3,300 21.52
$11 to $23 107,165 $ 18.02 107,165 $ 18.02
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 no stock options in 2007. 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 is required to be recorded in the financial statements
as compensation cost.
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, 2007, 2006, and 2005, 10,821, 11,782, and
12,747, respectively, shares were issued through the plan at an average of
$19.15, $21.89, and $22.84, 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 2007, 2006, and 2005 are as follows:
2007 2006 2005
Current payable $ 321,785 $ 1,051,925 $ 1,716,781
Deferred taxes (benefit) ( 14,842) ( 317,550) ( 400,101)
Total income taxes $ 306,943 $ 734,375 $ 1,316,680
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:
2007 2006 2005
Amount % Amount % Amount %
Taxes at statutory
income tax rate $ 688,517 34.0 $ 1,283,342 34.0 $ 1,919,371 34.0
Reductions in taxes
resulting from
exempt income (292,724) (14.4) ( 254,729) (6.7) ( 250,890) (4.5)
Other timing
differences ( 88,850) ( 4.4) ( 294,238) (7.8) ( 351,801) (6.2)
Total income taxes $ 306,943 15.2 $ 734,375 19.5 $ 1,316,680 23.3
The sources of timing differences for tax reporting purposes and the related
deferred taxes recognized in 2007, 2006, and 2005 are summarized as follows:
2007 2006 2005
Accretion of discount (net of maturities) $ 5,800 $ 8,200 $ 13,700
Nonqualified retirement plan
contribution / payments 8,600 ( 7,500) 9,300
Gain on disposition of discounted bonds (15,300) ( 16,900) ( 34,600)
Bad debt expense in excess of tax 6,100 (198,840) (275,200)
Deferred compensation 0 ( 68,000) ( 67,900)
Book and tax depreciation difference (20,042) ( 34,510) ( 45,401)
Total deferred taxes $(14,842) $(317,550) $(400,101)
December 31
2007 2006
Deferred tax assets:
Bad debt expense in excess of tax $ 467,940 $ 474,040
Pension plan 361,917 246,715
Unrealized loss on securities
available for sale 0 1,891
Deferred compensation 360,817 369,500
Total deferred tax assets 1,190,674 1,092,146
Deferred tax liabilities:
Accretion on securities 19,700 29,200
Depreciation on fixed assets 105,347 125,472
Unrealized gain on securities
available for sale 121,735 0
Total deferred tax liabilities 246,782 154,672
Net deferred tax assets $ 943,892 $ 937,474
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
564 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 $2,885,000 and $2,647,000 at December
31, 2007 and 2006, respectively. During 2007, approximately $2,276,000 of
such loans were made, and repayments totaled approximately $2,038,000. None
of these above mentioned loans were restructured, nor were any related party
loans charged off during 2007 or 2006. Also, during 2007 and 2006, directors
and executive officers had approximately $2,030,000 and $2,017,000,
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.
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, 2007 Dec. 31, 2006
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 12,439,064 $ 20,471,344
Standby letters of credit and
financial guarantees $ 10,000 $ 10,000
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, 2007 and
2006. 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, 2007. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of
similar remaining maturities.
Short-Term Borrowings and Securities Sold Under Repurchase Agreements
For those short-term borrowings, the carrying amount is a reasonable estimate
of fair value. The fair value of securities sold under repurchase agreements
is estimated by discounting the future cash flow using the rates currently
offered for securities sold under repurchase agreements of similar remaining
maturities.
Long-Term Debt
Rates currently available to the Corporation for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements, and the present credit worthiness of the counter parties.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of guarantees and letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counter parties.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. Those
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a
particular instrument. Because no market exists for a significant portion of
the financial instruments, fair value estimates are based on many judgments.
These estimates are subjective in nature and involve matters of judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The carrying amount and estimated fair values of the Corporation's financial
instruments are as follows:
December 31, 2007 December 31, 2006
Carrying Fair Carrying Fair
Amount Value Amount Value
(Dollars in Thousands) (Dollars in Thousands)
Financial assets:
Cash and cash equivalents $ 18,734 $ 18,734 $ 12,385 $ 12,385
Securities available for sale 31,188 31,188 33,323 33,323
Securities held to maturity 88,226 88,124 102,233 100,283
Federal Home Loan Bank stock 1,653 1,653 1,967 1,967
Loans 119,008 116,964 125,492 123,114
Less: allowance for loan losses 2,399 2,399 2,417 2,417
Financial liabilities:
Deposits 216,793 217,159 226,709 226,887
Short-term borrowings 10,114 10,094 15,000 14,818
Long-term debt 15,000 15,054 15,229 14,934
Unrecognized financial
instruments:
Commitments to extend credit 12,439 12,439 20,471 20,471
Standby letters of credit 10 10 10 10
14. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expense in excess of one percent of gross
revenue for the respective periods are as follows:
Years Ended December 31
2007 2006 2005
Other professional fees $257,378 $475,580 $306,271
Directors & board committee fees $244,091 $239,916 $227,500
15. STOCKHOLDERS' 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, 2007, approximately $874,000 of the Bank's net assets was 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, 2007, the
Bank's reserve requirements averaged approximately $4,925,000.
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, 2007 and 2006, that the Corporation and the Bank meets all
capital adequacy requirements to which they are subject.
As of December 31, 2007, 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, 2007 and 2006 are also
presented in the table.
As a result of regulatory limitations at December 31, 2007, approximately
$24,725,000 of the parent company's investment in net assets of the
subsidiary bank of $25,584,000, 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.
The Corporation's ratios under the above rules at December 31, 2007 and 2006
are set forth in the following table. The Corporation's leverage ratio at
December 31, 2007 was 8.98%. 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, 2007:
Total capital (to
risk-weighted
assets) $27,498,970 19.39% $11,345,440 >8.00% $14,181,800 >10.00%
Tier I capital (to
risk-weighted
assets) $25,718,507 18.13% $ 5,672,720 >4.00% $ 8,509,080 > 6.00%
Tier I capital (to
average assets) $25,718,507 8.98% $ 8,588,929 >3.00% $14,314,882 > 5.00%
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%
16. PARENT COMPANY FINANCIAL DATA
Southwest Georgia Financial Corporation's condensed balance sheets as of
December 31, 2007 and 2006, and its related condensed statements of
operations and cash flows for the years ended are as follows:
Condensed Balance Sheets
as of December 31, 2007 and 2006
(Dollars in thousands)
___________
2007 2006
ASSETS
Cash $ 608 $ 1,631
Investment in consolidated wholly-owned bank
subsidiary, at equity 25,582 25,308
Investment securities available for sale 18 32
Loans 42 200
Other assets 627 1,167
Total assets $ 26,877 $ 28,338
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 357 $ 343
Other liabilities 2 38
Total liabilities 359 381
Stockholders' equity:
Common stock, $1 par value, 5,000,000 shares
authorized, 4,293,835 shares for 2007 and
4,288,555 for 2006 issued 4,294 4,289
Additional paid-in capital 31,701 31,644
Retained earnings 17,039 16,763
Accumulated other comprehensive income ( 466) ( 483)
Treasury stock, at cost, 1,744,198 for 2007
and 1,648,912 shares for 2006 (26,050) (24,256)
Total stockholders' equity 26,518 27,957
Total liabilities and stockholders' equity $ 26,877 $ 28,338
16. PARENT COMPANY FINANCIAL DATA (continued)
Condensed Statements of Income and Expense
for the years ended December 31, 2007, 2006, and 2005
(Dollars in thousands)
__________
2007 2006 2005
Income:
Dividend received from bank
subsidiary $ 1,500 $ 15,000 $ 3,000
Interest on loan 16 42 3
Other 34 69 61
Total income 1,550 15,111 3,064
Expenses:
Other 169 357 97
Income before income taxes and
equity in undistributed income
of bank subsidiary 1,381 14,754 2,967
Income tax expense - allocated from
consolidated return ( 89) ( 147) ( 91)
Income before equity in undistributed
income of subsidiary 1,470 14,901 3,058
Equity in undistributed income of
subsidiary 248 (11,861) 1,271
Net income 1,718 3,040 4,329
Retained earnings - beginning of year 16,763 15,258 12,627
Cash dividend declared (1,442) ( 1,535) ( 1,698)
Retained earnings - end of year $ 17,039 $ 16,763 $ 15,258
__________
16. PARENT COMPANY FINANCIAL DATA (continued)
Condensed Statements of Cash Flows
for the years ended December 31, 2007, 2006, and 2005
(Dollars in thousands)
__________
2007 2006 2005
Cash flow from operating activities:
Net income $ 1,718 $ 3,040 $ 4,329
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Equity (deficit) in undistributed earnings of
Subsidiary ( 248) 11,861 (1,271)
Changes in:
Other assets 490 953 (1,079)
Other liabilities 16 ( 92) 56
Net cash provided for operating activities 1,976 15,762 2,035
Cash flow from investing activities:
Net change in loans 158 ( 195) 20
Net cash provided (used) for investing
activities 158 ( 195) 20
Cash flow from financing activities:
Cash dividend paid to stockholders (1,427) ( 1,535) (1,698)
Purchase of treasury stock (1,793) (14,542) ( 555)
Proceeds from issuance of common stock 63 401 75
Net cash provided (used) for financing
activities (3,157) (15,676) (2,178)
Increase (decrease) in cash (1,023) ( 109) ( 123)
Cash - beginning of year 1,631 1,740 1,863
Cash - end of year $ 608 $ 1,631 $ 1,740
17. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
outstanding during the year.
Year Ended December 31, 2007
Weighted Per
Average Share
Income Shares Amount
Basic earnings per share:
Net income $ 1,718,108 2,583,932 $ 0.66
Diluted earnings per share:
Net income $ 1,718,108 2,593,021 $ 0.66
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
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
18. QUARTERLY DATA
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY DATA
(UNAUDITED)
(Dollars in Thousands)
For the Year 2007
Fourth Third Second First
Interest and dividend income $ 3,751 $ 4,093 $ 4,049 $ 3,993
Interest expense 1,735 1,828 1,723 1,687
Net interest income 2,016 2,265 2,326 2,306
Provision for loan losses 0 0 0 0
Net interest income after provision for
loan losses 2,016 2,265 2,326 2,306
Noninterest income 1,176 1,779 1,444 2,316
Noninterest expenses 4,441 2,995 2,967 3,200
Income before income taxes (1,249) 1,049 803 1,422
Provision(benefit) for income taxes ( 557) 271 182 411
Net income (loss) $( 692) $ 778 $ 621 $ 1,011
Earnings (loss) per share of common stock:
Basic $ (.27) $ .30 $ .24 $ .39
Diluted $ (.27) $ .30 $ .24 $ .39
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
19. 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.
20. SEGMENT REPORTING (continued)
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 revenue and operates in one geographical area.
Information about reportable business segments, and reconciliation of such
information to the consolidated financial statements for the years ended
December 31, 2007, 2006, and 2005, are as follows:
Segment Reporting
For the year ended December 31, 2007
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 $ 4,597 ( 4) 20 0 4,250 50 $ 8,913
Net intersegment interest
income (expense) 3,920 ( 6) (18) 8 (3,904)
Net Interest Income 8,517 (10) 2 8 346 50 8,913
Provision for Loan Losses
Noninterest Income (expense)
external customers 2,072 2,784 1,136 632 80 0 11 6,715
Intersegment noninterest
income (expense) 9 (11) 2 56 (56)
Total Noninterest Income 2,081 2,773 1,138 688 80 (56) 11 6,715
Noninterest Expenses:
Depreciation 498 63 28 24 41 90 744
Amortization of intangibles 182 261 32 18 (26) 467
Other Noninterest expenses 5,623 3,193 913 616 554 0 1,493 12,392
Total Noninterest Expenses 6,303 3,517 973 658 595 (26) 1,583 13,603
Pre-tax Income 4,295 (754) 167 38 (169) (30) (1,522) 2,025
Provision for Income Taxes 879 (285) 42 5 (42) (292) 307
Net Income $ 3,416 (469) 125 33 (127) (30) (1,230) $ 1,718
Assets $314,612 4,053 1,257 459 139,161 (188,483) 594 $271,653
Expenditures for Fixed Assets $ 373 72 7 2 5 $ 459
Amounts included in the "Other" column are as follows:
Other
Net interest Income:
Parent Company $ 50
Noninterest Income:
Executive office miscellaneous income 11
Noninterest Expenses:
Parent Company corporate expenses 169
Executive office expenses not
allocated to segments 1,414
Provison for Income taxes:
Parent Company income taxes (benefit) (89)
Executive office income taxes not
allocated to segments (203)
Net Income: $ (1,230)
Segment assets:
Parent Company assets, after
intercomany elimination $ 594
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) (124) (576) 734
Net Income $ 3,402 746 188 (68) (1) (15) (1,212) $ 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
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 $ 632
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
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(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Corporation's management, including the Chief Executive Officer and Chief
Financial Officer, supervised and participated in an evaluation of the
effectiveness of the Corporation's disclosure controls and procedures (as
defined in federal securities rules) as of December 31, 2007. Based on, and
as of the date of, that evaluation, the Corporation's Chief Executive Officer
and Chief Financial Officer have concluded that the Corporation's disclosure
controls and procedures were effective in accumulating and communicating
information to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosures of that information under the Securities and Exchange
Commission's rules and forms and that the Corporation's disclosure controls
and procedures are designed to ensure that the information required to be
disclosed in reports that are filed or submitted by the Corporation under the
Securities Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
Management's Annual Report on Internal Control over Financial Reporting
The Corporation's management is responsible for establishing and maintaining
adequate internal control over financial reporting. Managment's assessment of
the effectiveness of the Corporation's internal control over financial
reporting as of December 31, 2007 is included in Item 8 of this Report under
the heading "Management's Report on Internal Controls Over Financial
Reporting".
Changes in Internal Control Over Financial Reporting
No changes were made to the Corporation's internal control over financial
reporting during the last fiscal quarter that materially affected or could
reasonably likely to materially affect the Corporation's internal controls
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS 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 27, 2008, 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 27, 2008, to be filed with the Commission, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
STOCK RELATED MATTERS
The information contained under the heading "Voting Securities and Principal
Holders" and "Equity Compensation Plan Information" in the definitive Proxy
Statement to be used in connection with the solicitation of proxies for the
Corporation's annual meeting of shareholders to be held on May 27, 2008, 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 27, 2008, 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 27, 2008, to be filed with the
Commission, is incorporated herein by reference.
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, 2007, 2006, and 2005 are included in
Part II, Item 8 herein:
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets - December 31, 2007 and 2006
(iii) Consolidated Statements of Income - Years ended December 31,
2007, 2006, and 2005
(iv) Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2007, 2006, and 2005
(v) Consolidated Statements of Cash Flows - Years ended December 31,
2007, 2006, and 2005
(vi) Notes to Consolidated Financial Statements - December 31, 2007
(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 (included as Exhibit 10.1
to the Corporation's Form 10-K dated December 31, 2006,
previously filed with the Commission and incorporated
herein by reference.)*
10.2 Form of Directors' Deferred Compensation Plan of the
Corporation (included as Exhibit 10.3 to the Corporation's
Form S-18 dated January 23, 1990, previously filed with the
Commission and incorporated herein by reference).*
10.3 Directors' and Executive Officers' Stock Purchase Plan of
the Corporation dated March 18, 1992 (included as Exhibit
10.7 to the Corporation's Form 10-KSB dated December 31,
1992, previously filed with the Commission and incorporated
herein by reference).*
10.4 Advances, specific collateral pledged, and security
agreement between the Federal Home Loan Bank of Atlanta
and the Bank dated January 27, 1992, and confirmation of
credit services transaction for new money advances in the
amount of $4,000,000 dated February 10, 1992, $2,500,000
dated September 4, 1992, and $1,500,000 dated September
8, 1992 (included as Exhibit 10.10 to the 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 (included as Exhibit
10.17 to the Corporation's Form 10-K dated December 31,
2006, previously filed with the Commission and incorporated
herein by reference).*
14 Code of Ethical Conduct dated February 27, 2008 (included
as Exhibit 14 to the Corporation's Form 8-K dated February
27, 2008, previously filed with the Commission and
incorporated herein by reference).
21 Subsidiaries of the Corporation (included as Exhibit 21
to the Corporation's Form 10-K dated December 31, 2002,
previously filed with the Commission, incorporated
herein by reference).
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.
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, 2008 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, 2008
DEWITT DREW
President and Chief Executive Officer
[Principal Executive Officer]
/s/ George R. Kirkland Date: March 28, 2008
GEORGE R. KIRKLAND
Senior Vice-President and Treasurer
[Principal Financial and Accounting Officer]
/s/ Michael J. McLean Date: March 28, 2008
MICHAEL J. MCLEAN
Chairman
/s/ Richard L. Moss Date: March 28, 2008
RICHARD L. MOSS
Vice Chairman
/s/ Cecil H. Barber Date: March 28, 2008
CECIL H. BARBER
Director
/s/ John J. Cole, Jr. Date: March 28, 2008
JOHN J. COLE, JR.
Director
/s/ Roy Reeves Date: March 28, 2008
ROY REEVES
Director
/s/ Johnny R. Slocumb Date: March 28, 2008
JOHNNY R. SLOCUMB
Director
/s/ M. Lane Wear Date: March 28, 2008
M. LANE WEAR
Director
/s/ Marcus R. Wells Date: March 28, 2008
MARCUS R. WELLS
Director
/s/ C. Broughton Williams Date: March 28, 2008
C. BROUGHTON WILLIAMS
Director
Exhibit Index
Exhibit Number Description of Exhibit
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.