SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2008
[ ] Transition report under Section 13 or 15(d) of the Exchange Act.
For the transition period from __________ to __________
Commission file number 1-12053
SOUTHWEST GEORGIA FINANCIAL CORPORATION
(Exact Name Of Small Business Issuer as specified in its Charter)
Georgia 58-1392259
(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
201 FIRST STREET, S.E., MOULTRIE, GEORGIA 31768
Address Of Principal Executive Offices
(229) 985-1120
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the Act).
Large accelerated filer [ ] Non-accelerated filer [ ]
Accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding At July 21, 2008
Common Stock, $1 Par Value 2,547,837
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2008
TABLE OF CONTENTS
PAGE #
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are provided for
Southwest Georgia Financial Corporation as required
by this Item 1.
a. Consolidated balance sheets - June 30,
2008 (unaudited) and December 31, 2007 (audited). 2
b. Consolidated statements of income (unaudited)
- for the six months and the three months ended
June 30, 2008 and 2007. 3
c. Consolidated statements of comprehensive income
(unaudited) - for the six months and the three
months ended June 30, 2008 and 2007. 4
d. Consolidated statements of cash flows (unaudited)
for the six months ended June 30, 2008 and 2007. 5
e. Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 23
ITEM 4(T). CONTROLS AND PROCEDURES 24
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 25
ITEM 6. EXHIBITS 26
SIGNATURE 27
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2008 and December 31, 2007
(Unaudited) (Audited)
June 30, December 31,
2008 2007
ASSETS
Cash and due from banks $ 9,790,763 $ 8,736,079
Interest-bearing deposits in other banks 5,299,877 9,997,889
Federal funds sold 0 0
Cash and cash equivalents 15,090,640 18,733,968
Investment securities available for sale,
at fair value 91,630,836 31,188,277
Investment securities held to maturity
(fair value approximates $15,505,056
and $88,124,110) 15,590,345 88,226,049
Federal Home Loan Bank stock, at cost 1,393,300 1,652,800
Total investment securities 108,614,481 121,067,126
Loans 132,417,011 119,044,022
Less: Unearned income ( 34,589) ( 35,847)
Allowance for loan losses ( 2,385,046) ( 2,399,115)
Loans, net 129,997,376 116,609,060
Premises and equipment, net 6,104,325 6,290,658
Foreclosed assets, net 0 90,000
Intangible assets 1,159,971 1,283,096
Other assets 7,899,551 7,579,289
Total assets $ 268,866,344 $ 271,653,197
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
NOW accounts $ 26,112,376 $ 23,085,509
Money Market 39,533,717 42,031,450
Savings 22,808,073 20,560,963
Certificates of deposit $100,000
and over 32,512,417 29,588,737
Other time accounts 65,921,386 66,152,788
Total interest-bearing deposits 186,887,969 181,419,447
Noninterest-bearing deposits 33,651,407 35,373,243
Total deposits 220,539,376 216,792,690
Short-term borrowed funds 20,114,286 10,114,286
Long-term debt 0 15,000,000
Other liabilities 3,077,166 3,228,229
Total liabilities 243,730,828 245,135,205
Stockholders' equity:
Common stock - $1 par value, 5,000,000
shares authorized, 4,293,835
shares issued 4,293,835 4,293,835
Capital surplus 31,701,533 31,701,533
Retained earnings 17,828,024 17,038,881
Accumulated other comprehensive income ( 2,574,081) ( 466,235)
Treasury stock, at cost 1,745,998 shares
for 2008 and 1,744,198 shares for 2007 ( 26,113,795) ( 26,050,022)
Total stockholders' equity 25,135,516 26,517,992
Total liabilities and
stockholders' equity $ 268,866,344 $ 271,653,197
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For The Three Months For The Six Months
Ended June 30, Ended June 30,
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
2008 2007 2008 2007
Interest income:
Interest and fees on loans $ 2,282,569 $ 2,625,314 $ 4,704,122 $ 5,150,943
Interest on taxable securities
available for sale 965,147 185,826 1,407,251 377,482
Interest on taxable securities
held to maturity 115,702 958,807 582,784 1,941,307
Interest on tax exempt securities
available for sale 264,753 147,288 499,635 306,115
Interest on tax exempt securities
held to maturity 51,314 50,717 102,023 101,435
Dividends 22,040 31,382 50,269 61,847
Interest on federal funds sold 9,843 0 89,659 427
Interest on deposits in other banks 82,434 49,875 277,722 102,681
Total interest income 3,793,802 4,049,209 7,713,465 8,042,237
Interest expense:
Interest on deposits 1,176,343 1,389,453 2,471,973 2,767,412
Interest on federal funds purchased 0 2,056 0 9,045
Interest on other short-term borrowings 218,570 130,113 412,650 258,738
Interest on long-term debt 33,564 201,661 144,637 375,253
Total interest expense 1,428,477 1,723,283 3,029,260 3,410,448
Net interest income 2,365,325 2,325,926 4,684,205 4,631,789
Provision for loan losses 0 0 0 0
Net interest income after
provision for loan losses 2,365,325 2,325,926 4,684,205 4,631,789
Noninterest income:
Service charges on deposit accounts 406,882 421,230 804,526 837,799
Income from trust services 65,236 68,346 134,576 139,977
Income from retail brokerage services 94,624 81,073 187,194 172,001
Income from insurance services 265,967 257,735 623,028 631,097
Income from mortgage banking services 612,626 573,867 1,297,941 1,837,809
Net gain(loss) on disposition of assets 0 1,893 12,500 11,390
Other income 41,936 39,385 138,931 129,722
Total noninterest income 1,487,271 1,443,529 3,198,696 3,759,795
Noninterest expense:
Salaries and employee benefits 1,755,930 1,727,017 3,536,391 3,706,220
Occupancy expense 220,167 206,368 427,240 412,804
Equipment expense 159,161 155,211 323,623 311,892
Data processing expense 141,535 168,370 303,063 335,067
Amortization of intangible assets 51,909 121,378 123,124 242,757
Other operating expenses 572,158 589,032 1,244,069 1,158,202
Total noninterest expenses 2,900,860 2,967,376 5,957,510 6,166,942
Income before income taxes 951,736 802,079 1,925,391 2,224,642
Provision for income taxes 188,318 181,662 422,854 592,517
Net income $ 763,418 $ 620,417 $ 1,502,537 $ 1,632,125
Earnings per share of common stock:
Net income, basic $ 0.30 $ 0.24 $ 0.59 $ 0.63
Net income, diluted $ 0.30 $ 0.24 $ 0.59 $ 0.63
Dividends declared $ 0.14 $ 0.14 $ 0.28 $ 0.28
Weighted average shares outstanding 2,548,196 2,582,290 2,548,017 2,601,845
Diluted average shares outstanding 2,556,093 2,592,188 2,556,175 2,612,174
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For The Three Months For The Six Months
Ended June 30, Ended June 30,
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
2008 2007 2008 2007
Net income 763,418 620,417 1,502,537 1,632,125
Other comprehensive income, net of tax:
Unrealized gain(loss) on securities
available for sale, net of tax expense (benefit)
of $(1,134,042) and $(94,924) for the quarter
$(1,085,984) and $(90,205) for the year (2,201,376) (183,970) (2,107,846) ( 175,104)
Total comprehensive income (1,437,958) 436,447 ( 605,309) 1,457,021
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months
Ended June 30,
(Unaudited) (Unaudited)
2008 2007
Cash flows from operating activities:
Net income $ 1,502,537 $ 1,632,125
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 360,457 367,550
Net amortization and (accretion) of
investment securities ( 47,072) ( 5,763)
Amortization of intangibles 123,124 242,757
Net loss(gain) on sale and disposal of assets ( 12,500) ( 11,390)
Funds held related to mortgage banking activities ( 156,892) 1,169,594
Change in:
Other assets 766,018 172,190
Other liabilities 6,374 ( 352,976)
Net cash provided by operating activities 2,542,046 3,214,087
Cash flows from investing activities:
Proceeds from calls and maturities of securities
held to maturity 72,900,000 4,000,000
Proceeds from calls, paydowns and maturities
of securities AFS 17,674,309 2,370,102
Purchase of securities held to maturity ( 260,000) 0
Purchase of securities available for sale (81,009,264) ( 219,800)
Net change in loans (13,388,316) ( 5,286,826)
Purchase of premises and equipment ( 174,122) ( 257,364)
Proceeds from sales of other assets 102,500 22,500
Net cash provided(used) for
investing activities ( 4,154,893) 628,612
Cash flows from financing activities:
Net change in deposits 3,746,686 ( 1,410,271)
Payment of short-term debt and short-term
portion of long-term debt (15,000,000) ( 5,000,000)
Proceeds from issuance of short-term debt 10,000,000 0
Proceeds from issuance of long-term debt 0 5,000,000
Cash dividends paid ( 713,394) ( 725,228)
Payment for common stock ( 63,773) ( 1,142,225)
Net cash provided(used) for
financing activities ( 2,030,481) ( 3,277,724)
Increase(decrease) in cash and cash equivalents ( 3,643,328) 564,975
Cash and cash equivalents - beginning of period 18,733,968 12,384,777
Cash and cash equivalents - end of period $ 15,090,640 $ 12,949,752
NONCASH ITEMS:
Increase in foreclosed properties and
decrease in loans $ 0 $ 150,763
Unrealized gain(loss) on securities
available for sale $( 3,194,069) $( 265,309)
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________
Basis of Presentation
Southwest Georgia Financial Corporation (the "Corporation"), a bank-holding
company organized under the laws of Georgia, provides deposit, lending, and
other financial services to businesses and individuals primarily in the
Southwest region of Georgia. The Corporation and its subsidiaries are
subject to regulation by certain federal and state agencies.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and footnotes necessary for a fair presentation
of financial position, results of operations, and changes in financial
position in conformity with generally accepted accounting principles. The
interim financial statements furnished reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the results for
the interim periods presented. The interim consolidated financial statements
should be read in conjunction with the Corporation's 2007 Annual Report on
Form 10-K.
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiaries (the "Corporation") conform to generally
accepted accounting principles and to general practices within the banking
industry. The following is a description of the more significant of those
policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Southwest
Georgia Financial Corporation and its wholly-owned direct and indirect
Subsidiaries, Southwest Georgia Bank (the "Bank") and Empire Financial
Services, Inc. ("Empire"). All significant intercompany accounts and
transactions have been eliminated in the consolidation.
Nature of Operations
The Corporation offers comprehensive financial services to consumer,
business, and governmental customers through its banking offices in southwest
Georgia. Its primary deposit products are savings and certificates of
deposit, and its primary lending products are consumer and commercial
mortgage loans. The Corporation provides, in addition to conventional
banking services, investment planning and management, trust management,
mortgage banking, and commercial and individual insurance products.
Insurance products and advice are provided by the Bank's Southwest Georgia
Insurance Services Division. Mortgage banking for primarily commercial
properties is provided by Empire, a mortgage banking services subsidiary.
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Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with these evaluations, management
obtains independent appraisals for significant properties.
A substantial portion of the Corporation's loans are secured by real estate
located primarily in Georgia. Accordingly, the ultimate collection of these
loans is susceptible to changes in the real estate market conditions of this
market area.
Cash and Cash Equivalents and Statement of Cash Flows
For purposes of reporting cash flows, the Corporation considers cash and cash
equivalents to include all cash on hand, deposit amounts due from banks,
interest-bearing deposits in other banks, and federal funds sold. The
Corporation maintains its cash balances in several financial institutions.
Accounts at the financial institutions are secured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured deposits aggregate to
$6,692,205 at June 30, 2008.
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
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useful lives. Equipment and furniture are depreciated using the modified
accelerated recovery system method over the assets estimated useful lives for
financial reporting and income tax purposes for assets purchased on or before
December 31, 2003. For assets acquired since 2003, the Corporation used the
straight-line method of depreciation. The following estimated useful lives
are used for financial statement purposes:
Land improvements 5 - 31 years
Building and improvements 10 - 40 years
Machinery and equipment 5 - 10 years
Computer equipment 3 - 5 years
Office furniture and fixtures 5 - 10 years
All of the Corporation's leases are operating leases and are not capitalized
as assets for financial reporting purposes. Maintenance and repairs are
charged to expense and betterments are capitalized.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and
the write-down would be material, an assessment of recoverability is
performed prior to any write-down of the asset. Impairment on intangibles is
evaluated at each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount should be assessed.
Impairment, if any, is recognized through a valuation allowance with a
corresponding charge recorded in the income statement.
Loans and Allowances for Loan Losses
Loans are stated at principal amounts outstanding less unearned income and
the allowance for loan losses. Interest income is credited to income based
on the principal amount outstanding at the respective rate of interest except
for interest on certain installment loans made on a discount basis which is
recognized in a manner that results in a level-yield on the principal
outstanding.
Accrual of interest income is discontinued on loans when, in the opinion of
management, collection of such interest income becomes doubtful. Accrual of
interest on such loans is resumed when, in management's judgment, the
collection of interest and principal becomes probable.
Fees on loans and costs incurred in origination of most loans are recognized
at the time the loan is placed on the books. Because loan fees are not
significant, the results on operations are not materially different from the
results which would be obtained by accounting for loan fees and costs as
amortized over the term of the loan as an adjustment of the yield.
A loan is considered impaired when, based on current information and events,
it is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
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principal and interest owed. Impairment is measured on a loan by loan basis
for commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collection of the principal is unlikely.
The allowance is an amount which management believes will be adequate to
absorb estimated losses on existing loans that may become uncollectible based
on evaluation of the collectability of loans and prior loss experience. This
evaluation takes into consideration such factors as changes in the nature and
volume of the loan portfolios, current economic conditions that may affect
the borrowers' ability to pay, overall portfolio quality, and review of
specific problem loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based upon changes in economic
conditions. Also, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses. Such agencies may require the Corporation to recognize additions to
the allowance based on their judgments of information available to them at
the time of their examination.
Foreclosed Assets
Properties acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at the lower of cost or fair value at the
date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
Credit Related Financial Instruments
In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit, and standby letters of credit.
Such financial instruments are recorded when they are funded.
Retirement Plans
The Corporation and its subsidiaries have retirement plans covering
substantially all employees. The Corporation makes annual contributions to
the plans in amounts not exceeding the regulatory requirements.
Income Taxes
The Corporation, the Bank and its' subsidiary file a consolidated income tax
return. The Bank's subsidiary provides for income taxes based on its
contribution to income taxes (benefits) of the consolidated group.
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Deferred income tax assets and liabilities result from temporary differences
between the tax basis of assets and liabilities and their reportable amounts
in the financial statements that will result in taxable or deductible amounts
in future years. Recognition of deferred tax assets is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences and tax credits will be realized.
Recent Accounting Pronouncements
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.
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.
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Trust Department
Trust income is included in the accompanying consolidated financial
statements on the cash basis in accordance with established industry
practices. Reporting of such fees on the accrual basis would have no
material effect on reported income.
Servicing and Origination Fees on Loans
The Corporation from the Bank's subsidiary, Empire, recognizes as income in
the current period all loan origination and brokerage fees collected on loans
originated and closed for investing participants. Loan servicing fees are
based on a percentage of loan interest paid by the borrower and recognized
over the term of the loan as loan payments are received. Empire does not
directly fund any mortgages and acts as a service-oriented broker for
participating mortgage lenders. Fees charged for continuing servicing fees
are comparable with market rates charged in the industry. Based on these
facts and after a thorough analysis and evaluation of deferred mortgage
servicing costs as defined under FASB 122 and amended by FASB 140, they are
insignificant and immaterial to be recognized. Late charges assessed on past
due payments are recognized as income by the Corporation when collected.
Advertising Costs
It is the policy of the Corporation to expense advertising costs as they are
incurred. The Corporation does not engage in any direct-response advertising
and accordingly has no advertising costs reported as assets on its balance
sheet. Costs expensed during the second quarter of 2008 were $39,248 and
$87,879 for the six-month period.
NOTE 2
FAIR VALUE MEASUREMENTS AND FAIR VALUE OPTION
Fair Value Measurements
The Corporation adopted SFAS 157, "Fair Value Measurements," on January 1,
2008. SFAS 157 establishes a framework for measuring fair value, expands
disclosures about fair value measurements and provides new income recognition
criteria for certain derivative contracts. SFAS 157 requires that a fair
value measurement reflect assumptions market participants would use in
pricing an asset or liability.
SFAS 157 defines "fair value" as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants in the principal market, or if none exists, the most
advantageous market, for the specific asset or liability at the measurement
date (referred to as an exit price). SFAS 157 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The three levels of the fair value hierarchy under SFAS 157 are:
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Level 1 Quoted prices (unadjusted) in active markets for identical
assets or liabilities at the measurement date.
Level 2 Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or
indirectly, for substantially the full term of the asset or
liability.
Level 3 Prices or valuation techniques that require inputs that are
both significant to the fair value measurement and
unobservable.
A financial instrument's level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value measurement.
SFAS 157 requires the Corporation to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value.
Determination of Fair Value
In determining fair value, the Corporation uses market prices of the same or
similar instruments whenever such prices are available. A fair value
measurement assumes that an asset or liability is exchanged in an orderly
transaction between market participants, and accordingly, fair value is not
determined based upon a forced liquidation or distressed sale.
Securities Activities
When available, the Corporation uses quoted market prices in active markets
to determine the fair value of securities. Such instruments are classified
within Level 1 of the fair value hierarchy. Examples include exchange-traded
equity securities and some highly liquid government securities such as U.S.
Treasuries.
When instruments are traded in secondary markets and quoted market prices do
not exist for such securities, the Corporation generally relies on internal
valuation techniques or on prices obtained from independent vendors. The
majority of fair values derived using internal valuation techniques are
verified against prices obtained from independent vendors. Vendors compile
prices from various sources and often apply matrix pricing for similar
securities when no price is observable. Securities measured with these
internal valuation techniques are generally classified within Level 2 of the
hierarchy and often involve using quoted market prices for similar
securities, pricing models or discounted cash flow analyses using inputs
observable in the market where available. Examples include corporate bonds
and U.S. Government agency and Government-sponsored entity mortgage-backed
securities and collateralized mortgage obligations.
-12-
Items Measured at Fair Value on a Recurring Basis
The following table presents the Corporation's assets that are measured at
fair value on a recurring basis at June 30, 2008, for each of the fair value
hierarchy levels.
Fair Value Measurements at June 30, 2008 Using
(Dollars in thousands)
Quoted Prices in Significant Significant
Active Markets Other Other
Fair Value for Identical Observable Observable
Measurements Assets Inputs Inputs
Description 6/30/08 (Level 1) (Level 2) (Level 3)
Assets:
Investment Securities
available for sale $ 91,631 $ 3,749 $ 87,882 $ 0
Total assets at
fair value $ 91,631 $ 3,749 $ 87,882 $ 0
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Form 10-Q report contains
forward-looking statements within the meaning of the federal securities laws.
The Corporation cautions that there are various factors that could cause
actual results to differ materially from the anticipated results or other
expectations expressed in the Corporation's forward-looking statements;
accordingly, there can be no assurance that such indicated results will be
realized.
These factors include risks related to the Corporation's construction and
land development loans; asset quality; the adequacy of the allowance for loan
losses; technology difficulties or failures; the Corporation's ability to
execute its business strategy; the loss of key personnel; competition;
changes in regulation and monetary policy; losses due to fraudulent and
negligent conduct of customers, service providers and employees; acquisitions
or dispositions of assets or internal restructuring, that may be pursued by
the Corporation; changes in or application of environmental and other laws
and regulations to which the Corporation is subject; political, legal and
local economic conditions and developments; financial market conditions and
the results of financing efforts; changes in commodity prices and interest
rates; weather, natural disasters and other catastrophic events; and other
factors discussed in the Corporation's other filings with the Securities and
Exchange Commission.
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of the Corporation. Any such statement
speaks only as of the date the statement was made. The Corporation
undertakes no obligation to update or revise any forward-looking statements.
Additional information with respect to factors that may cause results to
differ materially from those contemplated by such forward-looking statements
is included in the Corporation's current and subsequent filings with the
Securities and Exchange Commission.
Overview
The Corporation is a full-service community bank holding company
headquartered in Moultrie, Georgia. The community of Moultrie has been
served by the Corporation and its predecessors 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, Lowndes, and Worth Counties, each contiguous with Colquitt
County. We have four full service banking facilities, six automated teller
machines, and one loan production office.
Our strategy is to:
* maintain the diversity of our revenue, including growth in 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 footprint, through
acquisitions, into areas proximate to our current market area.
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We believe that investing in sales and marketing in this challenging market
will provide us with a competitive advantage. To that end, we have continued
with our plans to expand geographically with a loan production office in
Valdosta, Georgia. We have leadership in place and are looking to identify a
permanent site for a de novo branch.
The Corporation's profitability, like most financial institutions, is
dependent to a large extent upon net interest income, which is the difference
between the interest received on earning assets, such as loans, securities
and federal funds sold, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings. Net interest income is
highly sensitive to the fluctuations in interest rates. This quarter the
Federal Reserve Bank lowered short-term rates by 25 basis points to 2.00%
after dropping the rate by 2% during the first quarter of 2008 and 1% in the
latter part of 2007. After holding the banks overnight borrowing rate at
5.25% for 15 months, the Federal Reserve has decreased the short-term
interest rate by 3.25% since September 2007. With the rapid change in the
Federal funds rate, there was the same movement in our prime-indexed
adjustable loan rates. This rapid drop in the prime-indexed loan yields
combined with lagging changes in the interest cost of certificates of deposit
and other interest-bearing funds makes it a very challenging rate environment
in order to maintain our interest rate spread.
Our profitability is impacted as well by operating expenses such as salaries
and employee benefits, occupancy and other operating expenses, including
income taxes. Our lending activities are significantly influenced by regional
and local factors. Some specific factors include changes in population,
competition among lenders, interest rate conditions and prevailing market
rates on competing uses of funds and investments, customer preferences and
levels of personal income and savings in the Corporation's primary market
area.
To address interest rate fluctuations out of our control, we manage our
balance sheet in an effort to diminish the impact of sudden interest rates
changes by broadening our revenue sources to reduce the risk and exposure of
our financial results to the impact of changes in interest rates, which is
outside of our control. As a result of our strategy to diversify revenue,
noninterest income has grown over the last few years and was 63% of second
quarter 2008 net interest income and 28% of second quarter 2008 total
revenue. 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.
Critical Accounting Policies
In the course of the Corporation's normal business activity, management must
select and apply many accounting policies and methodologies that lead to the
financial results presented in the consolidated financial statements of the
Corporation. Management considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy because of the
uncertainty and subjectivity inherent in estimating the levels of allowance
needed to cover probable credit losses within the loan portfolio and the
material effect that these estimates can have on the Corporation's results of
operations. We believe that the allowance for loan losses as of June 30,
2008 is adequate, however, under adversely different conditions or
assumptions, future additions to the allowance may be necessary. There have
been no significant changes in the methods or assumptions used in our
accounting policies that require material estimates and assumptions. Note 1
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to the Consolidated Financial Statements provides a description of our
significant accounting policies and contributes to the understanding of how
our financial performance is reported.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves the ability to meet the cash flow requirements
of customers who may be either depositors wanting to withdraw their funds or
borrowers needing assurance that sufficient funds will be available to meet
their credit needs. In the ordinary course of business, the Corporation's
cash flows are generated from interest and fee income as well as from loan
repayments and the maturity or sale of other earning assets. In addition,
liquidity is continuously provided through the acquisition of new deposits
and borrowings or the rollover of maturing deposits and borrowings. The
Corporation strives to maintain an adequate liquidity position by managing
the balances and maturities of interest-earning assets and interest-earning
liabilities so its short-term investments balance, at any given time, will
adequately cover any reasonably anticipated immediate need for funds.
Additionally, the Bank maintains relationships with correspondent banks that
could provide funds on short notice, if needed.
The liquidity and capital resources of the Corporation are monitored on a
periodic basis by state and Federal regulatory authorities. As determined
under guidelines established by these regulatory authorities, the Bank's
liquidity ratios at June 30, 2008, were considered satisfactory. At that
date, the Bank's short-term investments were adequate to cover any reasonably
anticipated immediate need for funds. Due to the drop in the short-term rate
by the Federal Reserve, as expected we have had $7 million of our callable
securities called in the second quarter of 2008, and a total of $86 million
callable securities called in the past six months. When the investment
securities are called by the issuers, we continue to improve our net interest
income and profitability by repositioning our callable securities balance.
We reinvest these proceeds from called investment securities in new loans,
new investment securities, and to repay debt. The Corporation is aware of no
events or trends likely to result in a material change in liquidity. At June
30, 2008, the Corporation's and the Bank's risk-based capital ratios were
considered adequate based on guidelines established by regulatory
authorities. During the six months ended June 30, 2008, total capital
decreased $1.383 million to $25.1 million. The majority of this decrease was
a result of recording unrealized losses on securities available for sale due
to temporary market rate changes.
Under a share repurchase program adopted by the Board in January 2000, the
Corporation repurchased 1,800 shares of its common stock during the first six
months of 2008 at an average price of $17.75 per share. The share repurchase
authorization expired in January 2008 and as part of its capital management
planning, the Corporation and its Board of Directors elected not to extend
the authorization. For the six-month period of 2007, the Corporation
repurchased 58,700 shares of its common stock at an average price of $19.46
per share. Also, the Corporation continues to maintain a healthy level of
capital adequacy as measured by its equity-to-asset ratio of 9.3% as of June
30, 2008. The Corporation is not aware of any events or trends likely to
result in a material change in capital resources other than the effects of
normal operations on the retention of net earnings, and paying dividends to
shareholders. Also, the Corporation's management is not aware of any current
recommendations by the regulatory authorities which, if they were implemented,
would have a material effect on the Corporation's capital resources.
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RESULTS OF OPERATIONS
The Corporation's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and
investment losses, to generate noninterest income and to control noninterest
expense. Since interest rates are determined by market forces and economic
conditions beyond the control of the Corporation, the ability to generate net
interest income is dependent upon the Bank's ability to obtain an adequate
spread between the rate earned on interest-earning assets and the rate paid
on interest-bearing liabilities. Thus, the key performance measure for net
interest income is the interest margin or net yield, which is taxable-
equivalent net interest income divided by average earning assets.
Performance Summary
The Corporation's net income after taxes for the three-month period ending
June 30, 2008, was $764 thousand compared with a net income of $620 thousand
for the same period in 2007, representing an increase of $144 thousand. The
majority of the increase in quarterly earnings was due to lower interest
expense on deposits and debt and a decrease in the amortization of intangible
assets.
On a per share basis, net income for the second quarter increased 25% to $.30
per diluted share compared with $.24 per diluted share for the same quarter
in 2007. The weighted average common diluted shares outstanding for the
quarter were 2.556 million, down 1.4% from the previous year's comparable
quarter.
For the first six months of 2008, net income was $1.503 million compared with
net income of $1.632 million for the same period in 2007. Earnings per
diluted share for the first six months of 2008 were $0.59, down 6.4% compared
with earnings per diluted share of $.63 for the same period in 2007. Lower
net income was primarily due to $540 thousand, or 29%, lower revenue from the
Corporation's mortgage banking subsidiary, Empire Financial. The Corporation
continues to expend a great deal of resources on four problem loans serviced
by Empire. Our focus has been on resolving the problems in the current
portfolio rather than originating new loans. Empire's performance should
improve when credit markets become more normalized, more funding sources are
available and the problem loans are resolved.
We measure our performance on selected key ratios, which are provided for the
previous five quarterly periods ended June 30, 2008.
2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
2008 2008 2007 2007 2007
Return on average total assets 1.10% 1.03% ( .99)% 1.09% 0.85%
Return on average total equity 11.43% 10.85% (9.91)% 11.17% 8.92%
Average shareholders' equity to
Average total assets 9.60% 9.47% 9.95 % 9.76% 9.57%
Net interest margin
(tax equivalent) 3.97% 3.75% 3.36 % 3.71% 3.72%
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Comparison of Statements of Income for the Quarter
Noninterest income, which was 28.2% of the Corporation's total revenue for
the quarter, was $1.487 million for the second quarter, up 3% from the same
period in 2007. The largest contributor to noninterest income, mortgage
banking services, increased 6.6% to $612 thousand compared with last year's
second quarter. The level and timing of recognizing income from the mortgage
banking business is dependent on many factors related to originating and
closing relatively large commercial mortgage loans, and therefore can
fluctuate from quarter to quarter. Currently, the mortgage banking business
has a strong pipeline of approximately $405 million in projects. In addition
to fees generated through the lending process, it also earns fees for
servicing a $382 million portfolio of non-recourse loans. The increase in
mortgage banking revenue combined with higher revenue from retail brokerage
and insurance services more than offset the 3.3% decline in revenue from
service charges on deposit accounts which was $407 for the quarter. Revenue
from insurance services increased to $266 thousand, a 3.1% increase compared
with the second quarter of 2007, while brokerage service revenue was also up
$6 thousand.
Total interest income decreased $255 thousand, or 6.3%, for the three months
ended June 30, 2008 compared with the same period in 2007. This decline for
the three-month period resulted from decreases in interest and fees on loans.
This decrease was partially offset by an increase in interest and dividends
on securities available for sale.
Total interest expense decreased $294 thousand, or 17.1%, in the second
quarter of 2008 compared with the same period in 2007. Interest on deposits
decreased $213 thousand, or 15.3%, during the second quarter of 2008, and
interest on total borrowings decreased $81 thousand during the period.
Looking ahead, the challenge will be to manage funding costs in a higher rate
environment. Our focus on cost discipline, retaining and expanding customer
relationships, and identifying acquisition opportunities are central to the
core components of our growth strategy.
The primary source of revenue for the Corporation is net interest income,
which is the difference between total interest income on earning assets and
interest expense on interest-bearing sources of funds. Net interest income
for the second quarter of 2008 was $2.37 million compared with $2.33 million
for the same period in 2007 as lower levels and costs of borrowing as well as
lower costs of deposits offset the decline in interest income. Interest
income was impacted by the 3.25% drop in the prime rate since August 2007.
In addition, the Corporation sold its retail credit card portfolio in the
third quarter of 2007 and placed a large, fully secured loan on interest
nonaccrual late last year. The Corporation's net interest margin improved to
3.97% for the second quarter of 2008, compared with 3.72% from the same
period a year ago, and compared with 3.75% for the first quarter 2008. Total
interest expense was $1.429 million for the second quarter, down $294
thousand from the same period a year ago, due primarily to decreased interest
expense on deposits. The average rate paid on interest-bearing time deposits
decreased 46 basis points for the quarter compared with the same period a
year ago.
No provision for loan losses was recorded for the second quarter of 2008 and
2007 due to the quality of the loan portfolio and the adequacy of the
allowance for loan losses.
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Noninterest expense decreased to $2.901 million from $2.967 million for the
second quarter of last year. The bulk of this decrease was due to a $69
thousand, or 57%, decline in the amortization of mortgage servicing
intangible assets. The purchased mortgage service intangible asset was fully
amortized during the first quarter of 2008. The decrease in data processing
expense was mainly attributable to a reduction of servicing time required
because of the sale of the retail credit card loan portfolio. Higher
occupancy expense was mostly related to a new loan production office which
opened this year.
Comparison of Statements of Income for the Six-month Period
For the first six months of 2008, noninterest income was $3.199 million, down
14.9% from the same period in 2007. The majority of the decline was a result
of mortgage banking services revenue decreasing $540 thousand, or 29.4%, from
the same period last year. Income from insurance services decreased $8
thousand, or 1.3%, revenue from trust services decreased $5 thousand, or
3.6%, and service charges on deposit accounts decreased $33 thousand, or 3.9
%. These decreases in revenue were partially offset by an increase in income
from retail brokerage services of $15 thousand, or 8.7%, when compared with
the same period last year.
For the first six months of 2008, total interest income decreased $328
thousand when compared with the same period in 2007. This decrease in the
six-month period of 2008 was primarily due to a $447 thousand decrease in
interest and fees on loans resulting from lower levels and costs of
borrowings compared with the same period last year.
Total interest expense for the six-month period ended June 30, 2008 decreased
$381 thousand, or 11.1%, compared with the same period in 2007. Over this
period, the average balances on interest-bearing deposits decreased $1.401
million. However, the decrease in interest expense was primarily related to
lower rates paid on interest-bearing deposits. The rate on time deposits
decreased 27 basis points comparing the first six months of 2008 with the
same period in 2007. Interest on long-term debt decreased $231 thousand, or
61.3%, for the first six months of 2008, while interest on other short-term
borrowings increased $145 thousand for the first six months of 2008 on
increased short-term debt.
Net interest income for the first six months of 2008 was slightly higher at
$4.684 million compared with $4.632 million for the same period in 2007 as a
result of higher yields on investment securities and lower interest paid on
deposits which were partially offset by a decline in interest earned on
loans. Net interest margin was 3.86% for the first six months of 2008, an
improvement of 16 basis points from the same period a year ago.
The six-month provision for loan losses of $0 remained unchanged from the
comparable period of 2007. Noninterest expense decreased $210 thousand for
the first six months of 2008 compared with the same period last year, due
primarily to reductions in salary and employee benefits, data processing
expense, and amortization of intangible assets. The decrease in salary and
employee benefits was mainly the result of a decline in incentive
compensation related to our mortgage banking operations. The intangible
asset associated with the purchase of the mortgage servicing business was
fully amortized during the first quarter. The decrease in data processing
expense was attributable to the divestiture of our retail credit card loan
portfolio, and the increase in occupancy expense was the result of expenses
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from opening a loan production office. The year to year change in other
operating expenses was mainly due to a large reimbursed legal expense in
2007.
Comparison of Financial Condition Statements
At June 30, 2008, total assets were down to $268.9 million from $287.4
million at mid-year 2007. Total loans increased 1.4% to $132.4 million
compared with $130.6 million at June 30, 2007, and increased $13.4 million
from the end of 2007. Deposits declined slightly to $220.5 million at the end
of the second quarter of 2008, from $225.3 million from the same period in
2007.
The Corporation's loan portfolio of $132.4 million increased 11.3% from the
December 31, 2007, level of $119.0 million. Some of this loan growth was
originated from strong local economic development due to affordability of
real estate and abundance of natural resources. The Corporation continues to
be conservative in its lending practices in order to maintain a quality loan
portfolio. Loans, a major use of funds, represent 49.3% of total assets.
Investment securities and other short-term investments which include federal
funds sold and interest-bearing deposits in banks represent 42.4% of total
assets. Investment securities decreased $12.5 million and short-term
investments decreased $4.7 million since December 31, 2007. This resulted in
an overall decrease in investments of $17.2 million. This decrease in
investment securities was due to the $85 million of callable U.S. Government
Agency securities which were called by the issuers and $5.6 million of the
maturing securities during the first six months of 2008. The majority of the
proceeds were reinvested in securities and the rest was used to fund the
$13.4 million increase in loans and to payoff $5 million in borrowings.
Deposits decreased to $220.5 million at the end of the second quarter of 2008
down $4.8 million from the same period in 2007 and up $3.7 million from the
end of last year. At June 30, 2008, total deposits represented 82.0% of
total assets.
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The following table shows the major contractual obligations for the
Corporation.
June 30, December 31, June 30,
2008 2007 2007
Long-term debt consists of the following:
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). 0 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). 0 10,000,000 10,000,000
Advance from Federal Home Loan Bank with
a 5.24% fixed rate of interest maturing
February 6, 2009. 0 5,000,000 5,000,000
Advance from Federal Home Loan Bank with
a 5.21% fixed rate of interest due in
annual installments maturing
December 17, 2008. 0 0 228,571
Total long-term debt $ 0 $15,000,000 $20,228,571
Total short-term debt 20,114,000 10,114,000 10,000,000
Total debt $20,114,000 $25,114,000 $30,228,571
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan losses is
evaluated monthly based on a review of all significant loans, with a
particular emphasis on nonaccruing, past due, and other loans that management
believes require attention.
Other factors used in determining the adequacy of the reserve are
management's judgment about factors affecting loan quality and their
assumptions about the local and national economy. The allowance for loan
losses was 1.80% of total loans outstanding at June 30, 2008, compared with
2.02% of loans outstanding at December 31, 2007. Non-performing assets as a
percentage of total assets were 1.19%, a 35 basis point increase over last
year. The increase in non-performing assets is primarily related to one
large, fully secured commercial real estate loan. Management considers the
allowance for loan losses as of June 30, 2008, adequate to cover potential
losses in the loan portfolio.
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Off-Balance Sheet Arrangements
In the normal course of business, we are a party to financial instruments
with off-balance-sheet risk to meet the financing needs of our customers and
reduce risk exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit in the form of loans or
through letters of credit. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the financial statements. Since many of the commitments to extend credit
and standby letters of credit are expected to expire without being drawn
upon, the contractual or notional amounts do not represent future cash
requirements.
Financial instruments whose contract June 30, June 30,
amounts represent credit risk 2008 2007
(dollars in thousands):
Commitments to extend credit $ 20,718 $ 19,299
Standby letters of credit and
financial guarantees $ 10 $ 36
The Corporation does not have any special purpose entities or off-balance
sheet financing arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risk lies within its exposure to interest
rate movement. The Corporation has no foreign currency exchange rate risk,
commodity price risk, or any other material market risk. The Corporation
has no trading investment portfolio. As a result, it does not hold any
market risk-sensitive instruments, which would be subject to a trading
environment characterized by volatile short-term movements in interest rates.
Also, the Corporation has no interest rate swaps, or other derivative
instruments, that are both designated and effective as hedges or modify the
interest rate characteristics of specified assets or liabilities. The
Corporation's primary source of earnings, net interest income, can fluctuate
with significant interest rate movements. To lessen the impact of these
movements, the Corporation seeks to maximize net interest income while
remaining within prudent ranges of risk by practicing sound interest rate
sensitivity management. The Corporation attempts to accomplish this
objective by structuring the balance sheet so differences in repricing
opportunities between assets and liabilities are minimized. Interest rate
sensitivity refers to the responsiveness of earning assets and interest-
bearing liabilities to changes in market interest rates. The Corporation's
interest rate risk management is carried out by the Asset/Liability
Management Committee operating under policies and guidelines established by
Management. The principal objective of asset/liability management is to
manage the levels of interest-sensitive assets and liabilities to minimize
net interest income fluctuations in times of fluctuating market interest
rates. To effectively measure and manage interest rate risk, the Corporation
uses computer simulations that determine the impact on net interest income of
numerous interest rate scenarios, balance sheet trends and strategies. These
simulations cover the following financial instruments: short-term financial
instruments, investment securities, loans, deposits, and borrowings. These
simulations incorporate assumptions about balance sheet dynamics, such as
loan and deposit growth and pricing, changes in funding mix, and asset and
liability repricing and maturity characteristics. Simulations are run under
various interest rate scenarios to determine the impact on net income and
capital. From these computer simulations, interest rate risk is quantified
and appropriate strategies are developed and implemented. The Corporation
maintains an investment portfolio that staggers maturities and provides
flexibility over time in managing exposure to changes in interest rates. At
any point in time, any imbalances in the repricing opportunities constitute a
financial institution's interest rate sensitivity.
The Corporation uses a number of tools to measure interest rate risk. One of
the indicators for the Corporation's interest rate sensitivity position is
the measurement of the difference between its rate-sensitive assets and rate-
sensitive liabilities, referred to as the "gap." A gap analysis displays the
earliest possible repricing opportunity for each asset and liability category
based upon contractual maturities and repricing. As of June 30, 2008, the
Corporation's one-year cumulative rate-sensitive assets represented 84% of
the cumulative rate-sensitive liabilities compared with 102% at prior year
end and 68% at the same period a year ago. This level of cumulative gap is a
result of the Corporation's management of its exposure to interest rate risk.
We are less liability-sensitive at the one year gap position compared with
being more liability-sensitive in the previous year. These changes in assets
and liabilities occurred in: (1) increase in investment securities that will
mature or 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 reduction in liability sensitive position will decrease the
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Corporation's exposure to changing interest rates. All interest rates and
yields do not adjust at the same velocity; therefore, the interest rate
sensitivity gap is only a general indicator of the potential effects of
interest rate changes on net interest income. The Corporation's asset and
liability mix is monitored ensuring the effects of interest rate movements in
either direction are not significant over time.
ITEM 4(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Corporation's management, including the Chief Executive Officer and Chief
Financial Officer, supervised and participated in an evaluation of the
effectiveness of its disclosure controls and procedures (as defined in
federal securities rules) as of the end of the period covered by this report.
Based on, and as of the date of, that evaluation, the Corporation's Chief
Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures were effective in
accumulating and communicating information to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures of that information under the
Securities and Exchange Commission's rules and forms and that the
Corporation's disclosure controls and procedures are designed to ensure that
the information required to be disclosed in reports that are filed or
submitted by the Corporation under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
Management's Annual Report on Internal Control over Financial Reporting
The Corporation's management is responsible for establishing and maintaining
adequate internal control over financial reporting. Management's assessment
of the effectiveness of the Corporation's internal control over financial
reporting as of December 31, 2007 was included in Item 8 of the 10K form,
dated December 31, 2007, under the heading "Management's Report on Internal
Controls Over Financial Reporting".
The annual report form 10K, dated December 31, 2007, does not include an
attestation report of the Corporation's registered public accounting firm
regarding internal control over financial reporting. Management's report was
not subject to attestation by the Corporation's registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission
that permits the Corporation to provide only management's report in the
annual report.
Changes in Internal Control over Financial Reporting
No changes were made to the Corporation's internal control over financial
reporting during this quarter that materially affected or could reasonably
likely to materially affect the Corporation's internal controls over
financial reporting.
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PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Corporation was held on May 27,
2008. Total shares eligible to vote amounted to 2,547,837. A total of
1,916,995 shares (75.24%) were represented by shareholders in attendance or
by proxy.
The following directors were elected to serve one year until the next
annual meeting.
Director Votes For Votes Withheld
Cecil H. Barber 1,867,154 49,841
John J. Cole, Jr. 1,866,083 50,912
DeWitt Drew 1,791,222 125,773
Michael J. McLean 1,867,154 49,841
Richard L. Moss 1,866,954 50,041
Roy H. Reeves 1,861,374 55,621
Johnny R. Slocumb 1,907,290 9,705
Marcus R. Wells 1,866,954 50,041
Lane M. Wear 1,867,154 49,841
Director Emeritus:
Leo T. Barber, Jr.
John H. Clark
Robert M. Duggan
E. J. McLean, Jr.
Jack Short
Mrs. Hugh Turner
Violet K. Weaver
C. Broughton Williams, Jr.
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ITEM 6. EXHIBITS
Exhibit 31.1 Section 302 Certification of Periodic Financial Report
by Chief Executive Officer.
Exhibit 31.2 Section 302 Certification of Periodic Financial Report
by Chief Financial Officer.
Exhibit 32.1 Section 906 Certification of Periodic Financial Report
by Chief Executive Officer.
Exhibit 32.2 Section 906 Certification of Periodic Financial Report
by Chief Financial Officer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
BY: /s/ George R. Kirkland
__________________________________
GEORGE R. KIRKLAND
SENIOR VICE-PRESIDENT AND TREASURER
(FINANCIAL AND ACCOUNTING OFFICER)
Date: August 14, 2008
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