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, 2010
[ ] 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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes [ ] 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 20, 2010
Common Stock, $1 Par Value 2,547,837
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010
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, 2010 (unaudited)
and December 31, 2009 (audited). 2
b. Consolidated statements of income (unaudited) - for
the six months and the three months ended
June 30, 2010 and 2009. 3
c. Consolidated statements of comprehensive income
(unaudited) - for the six months and the three months
ended June 30, 2010 and 2009. 4
d. Consolidated statements of cash flows (unaudited) for
the six months ended June 30, 2010 and 2009. 5
e. Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 4(T). CONTROLS AND PROCEDURES 28
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS 29
SIGNATURE 29
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2010 and December 31, 2009
(Unaudited) (Audited)
June 30, December 31,
2010 2009
ASSETS
Cash and due from banks $ 7,303,847 $ 10,049,545
Interest-bearing deposits in other banks 30,594,075 13,246,872
Cash and cash equivalents 37,897,922 23,296,417
Investment securities available for sale,
at fair value 42,677,101 62,008,044
Investment securities held to maturity
(fair value approximates $36,384,445
and $24,177,393) 35,638,196 24,195,377
Federal Home Loan Bank stock, at cost 1,649,900 1,649,900
Total investment securities 79,965,197 87,853,321
Loans 159,382,843 160,260,026
Less: Unearned income ( 26,458) ( 29,773)
Allowance for loan losses ( 2,908,967) ( 2,532,856)
Loans, net 156,447,418 157,697,397
Premises and equipment, net 8,857,465 7,777,080
Foreclosed assets, net 3,669,991 3,831,663
Intangible assets 744,695 848,514
Other assets 9,158,519 9,703,862
Total assets $ 296,741,207 $ 291,008,254
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
NOW accounts $ 30,133,562 $ 25,074,884
Money Market 48,124,523 45,694,205
Savings 22,759,694 21,364,824
Certificates of deposit $100,000 and over 31,914,855 30,190,008
Other time accounts 68,824,982 72,085,244
Total interest-bearing deposits 201,757,616 194,409,165
Noninterest-bearing deposits 38,229,793 41,021,846
Total deposits 239,987,409 235,431,011
Short-term borrowed funds 5,000,000 5,000,000
Long-term debt 21,000,000 21,000,000
Other liabilities 3,643,106 4,047,262
Total liabilities 269,630,515 265,478,273
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 17,382,395 16,324,463
Accumulated other comprehensive income (loss) ( 153,276) ( 676,055)
Treasury stock, at cost 1,745,998 shares
for 2010 and 2009 ( 26,113,795) ( 26,113,795)
Total stockholders' equity 27,110,692 25,529,981
Total liabilities and stockholders' equity $ 296,741,207 $ 291,008,254
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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)
2010 2009 2010 2009
Interest income:
Interest and fees on loans $ 2,564,250 $ 2,343,817 $ 4,964,877 $ 4,636,570
Interest on taxable securities
available for sale 496,012 780,846 1,095,555 1,619,555
Interest on taxable securities
held to maturity 160,805 38,777 290,750 93,940
Interest on tax exempt securities
available for sale 61,509 115,158 123,017 233,367
Interest on tax exempt securities
held to maturity 80,176 59,939 159,958 118,915
Interest on federal funds sold 0 87 0 97
Interest on deposits in other banks 15,817 9,440 29,688 16,153
Total interest income 3,378,569 3,348,064 6,663,845 6,718,597
Interest expense:
Interest on deposits 535,064 733,938 1,115,813 1,518,737
Interest on federal funds purchased 2 0 2 84
Interest on other short-term borrowings 35,168 0 69,949 122,104
Interest on long-term debt 173,126 175,434 344,350 252,690
Total interest expense 743,360 909,372 1,530,114 1,893,615
Net interest income 2,635,209 2,438,692 5,133,731 4,824,982
Provision for loan losses 150,000 60,000 300,000 245,709
Net interest income after
provision for loan losses 2,485,209 2,378,692 4,833,731 4,579,273
Noninterest income:
Service charges on deposit accounts 401,330 453,071 786,497 849,171
Income from trust services 66,536 58,982 120,892 110,415
Income from retail brokerage services 109,695 71,996 170,808 134,955
Income from insurance services 291,379 266,721 610,380 565,265
Income from mortgage banking services 360,457 313,687 688,597 626,981
Provision for foreclosed asset losses ( 125,000) 0 ( 125,000) 0
Net gain on disposition of assets 0 0 2,816 0
Net gain on sale of securities 627,678 0 534,973 0
Other income 41,753 42,864 134,799 137,411
Total noninterest income 1,773,828 1,207,321 2,924,762 2,424,198
Noninterest expense:
Salaries and employee benefits 1,758,490 1,543,320 3,438,380 3,171,458
Occupancy expense 211,366 207,827 415,136 418,593
Equipment expense 184,598 164,303 359,888 328,163
Data processing expense 174,114 174,346 351,393 349,865
Amortization of intangible assets 51,910 51,911 103,819 103,819
Other operating expenses 632,485 1,264,777 1,282,800 1,971,669
Total noninterest expenses 3,012,963 3,406,484 5,951,416 6,343,567
Income before income taxes 1,246,074 179,529 1,807,077 659,904
Provision for income taxes 340,257 ( 79,675) 494,361 20,063
Net income $ 905,817 $ 259,204 $ 1,312,716 $ 639,841
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Earnings per share of common stock:
Net income, basic $ 0.36 $ 0.10 $ 0.52 $ 0.25
Net income, diluted $ 0.36 $ 0.10 $ 0.52 $ 0.25
Dividends paid per share $ - $ - $ 0.10 $ 0.07
Weighted average shares outstanding 2,547,837 2,547,837 2,547,837 2,547,837
Diluted average shares outstanding 2,547,837 2,547,837 2,547,952 2,547,837
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)
2010 2009 2009 2008
Net income 905,817 259,204 1,312,716 639,841
Other comprehensive income, net of tax:
Unrealized gain on securities
available for sale, net of tax expense
of $0 and $(231,780) for the quarter
$269,311 and $(84,532) for the year ( 1) (449,925) 522,780 (164,090)
Total comprehensive income 905,816 (190,721) 1,835,496 475,751
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months
Ended June 30,
(Unaudited) (Unaudited)
2010 2009
Cash flows from operating activities:
Net income $ 1,312,716 $ 639,841
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 300,000 245,709
Depreciation 369,337 362,185
Net amortization and (accretion) of
investment securities 103,728 ( 43,274)
Amortization of intangibles 103,819 103,819
Net (gain) loss on sale of equity securities
and disposal of assets ( 537,789) 0
Funds held related to mortgage banking activities ( 126,751) ( 200,661)
Change in:
Other assets 284,214 ( 769,239)
Other liabilities ( 277,405) 682,015
Net cash provided by operating activities 1,531,869 1,020,395
Cash flows from investing activities:
Proceeds from calls and maturities of
securities held to maturity 0 2,000,000
Proceeds from calls, paydowns and maturities
of securities AFS 5,280,561 21,439,221
Proceeds from sale of securities available for sale 17,973,354 0
Purchase of securities held to maturity (12,392,420) ( 275,000)
Purchase of securities available for sale ( 1,633,218) (16,934,148)
Net change in loans 829,814 ( 4,260,694)
Purchase of premises and equipment ( 1,465,317) ( 1,984,020)
Proceeds from sales of other assets 175,248 0
Net cash provided for investing activities 8,768,022 ( 14,641)
Cash flows from financing activities:
Net change in deposits 4,556,398 6,521,326
Decrease in federal funds purchased 0 ( 430,000)
Payment of short-term debt and short-term
portion of long-term debt 0 ( 5,000,000)
Cash dividends paid ( 254,784) ( 178,349)
Net cash provided for financing activities 4,301,614 912,977
Increase(decrease) in cash and cash equivalents 14,601,505 1,918,731
Cash and cash equivalents - beginning of period 23,296,417 7,499,684
Cash and cash equivalents - end of period $ 37,897,922 $ 9,418,415
NONCASH ITEMS:
Increase in foreclosed properties and
decrease in loans $ 120,165 $ 2,228,310
Unrealized gain (loss) on securities
available for sale $ 792,090 $( 248,622)
Re-class short-term debt to long-term due
to unexercised option $ 0 $ 10,000,000
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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 2009 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.
The Corporation's primary business is providing banking services through the
Bank to individuals and businesses principally in Colquitt County, Baker
County, Thomas County, Worth County, Lowndes County and the surrounding
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counties of southwest Georgia. The Bank also operates Empire Financial
Services, Inc. in Milledgeville, Georgia. Our new full-service banking
center in Valdosta, Georgia opened in June 2010.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with these evaluations, management
obtains independent appraisals for significant properties.
A substantial portion of the Corporation's loans are secured by real estate
located primarily in Georgia. Accordingly, the ultimate collection of these
loans is susceptible to changes in the real estate market conditions of this
market area.
Cash and Cash Equivalents and Statement of Cash Flows
For purposes of reporting cash flows, the Corporation considers cash and cash
equivalents to include all cash on hand, deposit amounts due from banks,
interest-bearing deposits in other banks, and federal funds sold. The
Corporation maintains its cash balances in several financial institutions.
Accounts at the financial institutions are secured by the Federal Deposit
Insurance Corporation up to $250,000 (up from $100,000). Uninsured deposits
aggregate to $578,465.54 at June 30, 2010.
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.
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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 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
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not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis
for commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collection of the principal is unlikely.
The allowance is an amount which management believes will be adequate to
absorb estimated losses on existing loans that may become uncollectible based
on evaluation of the collectability of loans and prior loss experience. This
evaluation takes into consideration such factors as changes in the nature and
volume of the loan portfolios, current economic conditions that may affect
the borrowers' ability to pay, overall portfolio quality, and review of
specific problem loans.
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 write-downs are included in
net expenses from foreclosed assets. If a valuation allowance for market
value changes is deemed appropriate for foreclosed properties, an allowance
is established and provisions are made to the allowance.
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.
-9-
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 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.
The Corporation reports income under Accounting Standards Codification Topic
740, Income Taxes, which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
The Corporation and the Bank file a consolidated income tax return. The Bank
computes its income tax expense as if it filed an individual return except
that it does not receive any portion of the surtax allocation. Any benefits
or disadvantages of the consolidation are absorbed by the parent company.
The Bank pays its allocation of federal income taxes to the parent company or
receives payment from the parent company to the extent that tax benefits are
realized.
The Corporation adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement 109 ("FIN
48"), as of June 30, 2006. A tax position is recognized as a benefit only if
it is "more likely than not" that the tax position would be sustained in a
tax examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50
percent likely of being realized on examination. For tax positions not
meeting the "more likely than not" test, no tax benefit is recorded.
The Internal Revenue Service recently completed an audit of the Corporation's
tax returns for periods ending December 31, 2009, 2008, and 2007. The result
of the audit did not have a material impact on the Corporation's financial
statements.
Recent Accounting Pronouncements
In July 2010, the Financial Accounting Standards Board issued Accounting
Standards Update ("ASU") No. 2010-20, "Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses which added
disclosure requirements about an entity's allowance for loan losses and the
credit quality of its financing receivables. The required disclosures include
a roll forward of the allowance for credit losses on a portfolio segment
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basis and information about modified, impaired, non-accrual and past due
loan and credit quality indicators. ASU 2010-20 will be effective for the
Corporation's reporting period ending December 31, 2010, as it relates to
disclosures required as of the end of a reporting period. Management has
determined the adoption of this guidance will not have a material effect on
the Corporation's financial position or results of operations.
In February 2010, the FASB issued Accounting Standards Update No. 2010-09,
"Subsequent Events (Topic 855): Amendments to Certain Recognition and
Disclosure Requirements." ASU 2010-09 addresses both the interaction of the
requirements of Topic 855 with the SEC's reporting requirements and the
intended breadth of the reissuance disclosures provisions related to
subsequent events. An entity that is an SEC filer is not required to
disclose the date through which subsequent events have been evaluated. ASU
2010-09 is effective immediately. The adoption of the new guidance did not
have a material impact on the Corporation's consolidated financial
statements.
In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics -
Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical
corrections to existing SEC guidance including the following topics:
accounting for subsequent investments, termination of an interest rate swap,
issuance of financial statements - subsequent events, use of residential
method to value acquired assets other than goodwill, adjustments in assets
and liabilities for holding gains and losses, and selections of discount rate
used for measuring defined benefit obligation. The adoption of the new
guidance did not have a material impact on the Corporation's consolidated
financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06,
"Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements." ASU 2010-06 amends Subtopic 820-10 to clarify
existing disclosures, require new disclosures, and includes conforming
amendments to guidance on employers' disclosures about postretirement benefit
plan assets. ASU 2010-06 is effective for interim and annual periods
beginning after December 15, 2009, except for disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. The adoption of the new guidance did not have a material impact on
the Corporation's consolidated financial statements.
On June 30, 2009, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 168, The FASB Accounting Standards Codification (ASC) and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162, which was subsequently incorporated into ASC Subtopic 105-
10, Generally Accepted Accounting Principles - Overall. This guidance
replaces The Hierarchy of Generally Accepted Accounting Principles and
establishes the FASB Accounting Standards Codification ("Codification") as
the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with U.S. GAAP. Rules and interpretive releases of
the SEC under federal securities laws are also sources of authoritative U.S.
GAAP for SEC registrants. All guidance contained in the Codification carries
an equal level of authority. This guidance was effective for financial
statements issued for interim and annual periods ending after September 15,
2009, and does not have a material impact on our financial position or
results of operations.
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On May 28, 2009, the FASB issued SFAS No. 165, "Subsequent Events" (SFAS 165)
which was codified into ASC 855. ASC 855 provides general standards of
accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. In addition, SFAS 165 requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date.
The adoption of ASC 855, effective September 30, 2009, did not impact the
Corporation's financial condition and results of operations.
In April 2009, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. 157-4 ("Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly") which was codified into ASC
820. This ASC provides guidance in determining fair values when there is no
active market or where the price inputs being used represent distressed
sales. It reaffirms what Statement 157 states is the objective of fair value
measurement to reflect how much an asset would be sold for in an orderly
transaction (as opposed to a distressed or forced transaction) at the date of
the financial statements under current market conditions. Specifically, it
reaffirms the need to use judgment to ascertain if a formerly active market
has become inactive and in determining fair values when markets have become
inactive. If it is determined that a transaction is not orderly, a reporting
entity should place little, if any, weight on that transaction price when
estimating fair value. The guidance in the ASC is effective for interim and
annual periods ending after September 15, 2009 with early adoption permitted.
The adoption of ASC 820 did not have an impact on our financial position or
results of operation.
In April 2009, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 111, which amends Topic 5.M. in the Staff
Accounting Bulletin Series entitled Other Than Temporary Impairment of
Certain Investments in Debt and Equity Securities ("Topic 5.M.") which was
codified into ASC 320. ASC 320 maintains the SEC staff's previous views
related to equity securities. It also amends Topic 5.M. to exclude debt
securities from its scope. ASC 320 interpretive responded that the phrase
"other than temporary" for equity securities classified as available-for-sale
in FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-
Temporary Impairments, should not be interpreted to mean "permanent."
In April 2009, the FASB issued FASB Staff Position No. 115-2 and FAS No. 124-
2 ("Recognition and Presentation of Other-Than-Temporary Impairments") which
was codified into ASC 320. This ASC changes the other-than-temporary
impairment guidance for debt securities. Prior to issuance of this ASC, if a
debt security was impaired and an entity had the ability and intent to hold
the security for a period of time sufficient to allow for any anticipated
recovery in fair value, then the impairment loss was not recognized in
earnings. The guidance of this ASC indicates that if an entity does not
intend to sell an impaired debt security that the entity should assess
whether it is more likely than not that it will be required to sell the
security before recovery. If the entity more likely than not, will be
required to sell the security before recovery, an other-than-temporary
impairment has occurred that would be recognized in earnings. If an entity
more likely than not will not be required to sell the debt security, but does
not expect to recover its cost, the entity should determine whether a credit
loss exists, and if so, the credit loss should be recognized in earnings and
the remaining impairment should be recognized in other comprehensive income.
The guidance in the ASC is effective for interim and annual periods ending
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after September 15, 2009, with early adoption permitted. The adoption of ASC
320 did not have an impact on our financial position or results of operation.
In April 2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1
("Interim Disclosures about Fair Value of Financial Instruments") which was
codified into ASC 825. Prior to issuing this ASC, fair values for financial
assets and liabilities were only disclosed once a year. The ASC now requires
disclosures of these fair values on a quarterly basis, providing qualitative
and quantitative information about fair value estimates for all those
financial instruments not measured on the balance sheet at fair value. The
guidance in the ASC is effective for interim and annual periods ending after
September 15, 2009, with early adoption permitted. This ASC expands fair
value annual disclosure to quarterly periods. The adoption of ASC 825 did not
have an impact on our financial position or results of operation.
In January 2009, the FASB issued FASB Staff Position (FSP) EITF 99-20-1,
"Amendments to the Impairment Guidance of EITF Issue No. 99-20." This FSP
affects all entities with certain beneficial interests in securitized
financial assets within the scope of EITF Issue No. 99-20. In determining
other-than-temporary-impairment, Issue 99-20 requires reliance on market
participant assumptions about future cash flows. While Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115) ,which was codified into ASC 320, uses
these same assumptions, it permits the use of reasonable management judgment
on the probability that the holder will be unable to collect all amounts due.
This ASC brings the impairment model on beneficial interest held by a
transferor in securitized financial assets, to be similar to the impairment
model of ASC 320. The ASC is effective for interim and annual reporting
periods ending after December 15, 2008. The adoption of this standard did not
have an impact on our financial position or results of operations.
In December 2008, the FASB issued FSP FAS 132(R)-1, "Employer's Disclosures
about Postretirement Benefit Plan Assets" which was codified into ASC 715.
This ASC amends SFAS No. 132(R), "Employers' Disclosures about Pensions and
Other Postretirement Benefits - An Amendment of FASB Statements No. 87, 88,
and 106" to require more detailed disclosures about plan assets of a defined
benefit pension or other postretirement plan, including investment
strategies; major categories of plan assets; concentrations of risk within
plan assets; inputs and valuation techniques used to measure the fair value
of plan assets; and the effect of fair-value measurements using significant
unobservable inputs on changes in plan assets for the period. ASC 715 is
effective for fiscal years ending after December 15, 2009, with earlier
application permitted. The adoption of this standard did not have and impact
on our financial position or results of operations.
On November 21, 2008, the FDIC adopted the final rule relating to the
Temporary Liquidity Guarantee Program ("TLG Program") which is also a part of
EESA. Under the TLG program the FDIC will (1) guarantee certain newly issued
senior unsecured debt and (2) provide full FDIC deposit insurance coverage
for non-interest bearing transaction accounts, NOW accounts paying less than
0.5 percent interest per annum and Interest on Lawyers Trust Accounts held at
participating FDIC insured institutions through December 31, 2010. The FDIC
has an option of extending it another 12 months. The Corporation has elected
to only participate in the full FDIC deposit insurance coverage program.
In response to the current financial crisis affecting the banking system and
financial markets, the Emergency Economic Stabilization Act of 2008 ("EESA")
was signed into law on October 3, 2008. This law established the Troubled
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Asset Relief Program ("TARP"). As part of TARP, the Treasury established the
Capital Purchase Program ("CPP") to provide up to $700 billion of funding to
eligible financial institutions through the purchase of capital Stock and
other financial instruments for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. After carefully reviewing and
analyzing the terms and conditions of the CPP, the Board of Directors and
management of the Corporation believed that, given its present financial
condition, participation in the CPP was unnecessary and not in the best
interests of the Corporation, its customers or shareholders.
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 2010 were $28,750 and
$70,359 for the six-month period.
NOTE 2
Fair Value Measurements
Effective January 1, 2008, the Corporation adopted ASC 820, which provides a
framework for measuring fair value under generally accepted accounting
principles. ASC 820 applies to all financial statement elements that are
being measured and reported on a fair value basis.
The Corporation utilizes fair value measurements to record fair value
adjustments to certain assets and liabilities and to determine fair value
disclosures. Securities available-for-sale are recorded at fair value on a
recurring basis. From time to time, the Corporation may be required to
record at fair value other assets on a nonrecurring basis, such as impaired
loans and foreclosed real estate. Additionally, the Corporation is required
to disclose, but not record, the fair value of other financial instruments.
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Fair Value Hierarchy:
Under ASC 820, the Corporation groups assets and liabilities at fair value in
three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair
value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments
traded inactive markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments
in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at
least one significant assumption not observable in the market. These
unobservable assumptions reflect estimates of assumptions that
market participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models,
discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used for assets and
liabilities which are either recorded or disclosed at fair value.
Cash and Cash Equivalents:
For disclosure purposes for cash, due from banks and federal funds sold, the
carrying amount is a reasonable estimate of fair value.
Investment Securities Available for Sale:
Investment securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are measured
using independent pricing models or other model-based valuation techniques
such as the present value of future cash flows, adjusted for the security's
credit rating, prepayment assumptions and other factors such as credit loss
assumptions. Level 1 securities include those traded on an active exchange,
such as the New York Stock Exchange and U.S. Treasury securities that are
traded by dealers or brokers in active over-the-counter market funds. Level
2 securities include mortgage-backed securities issued by government
sponsored enterprises and state, county and municipal bonds. Securities
classified as Level 3 include asset-backed securities in less liquid markets.
Investment Securities Held for Sale:
Investment securities held for sale are not recorded at fair value on a
recurring basis. For disclosure purposes, fair value measurement is based
upon quoted prices, if available.
Federal Home Loan Bank Stock:
For disclosure purposes the carrying value of other investments approximate
fair value.
Loans:
The Corporation does not record loans at fair value on a recurring
basis. However, from time to time, a loan is considered impaired and a
specific allocation is established within the allowance for loan
losses. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
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individually impaired, management measures impairment in accordance with ASC
310, Accounting by Creditors for Impairment of a Loans. The fair value of
impaired loans is estimated using one of three methods, including collateral
value, market value of similar debt, and discounted cash flows. Those
impaired loans not requiring an allowance represent loans for which the fair
value of the expected repayments or collateral exceed the recorded
investments in such loans. In accordance with ASC 820, impaired loans where
an allowance is established based on the fair value of collateral require
classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised
value, the Corporation records the impaired loan as nonrecurring Level
2. When an appraised value is not available or management determines the
fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Corporation records the impaired
loan as nonrecurring Level 3.
For disclosure purposes, the fair value of fixed rate loans which are not
considered impaired, is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with
similar credit ratings. For unimpaired variable rate loans, the carrying
amount is a reasonable estimate of fair value for disclosure purposes.
Foreclosed Assets:
Other real estate properties are adjusted to fair value upon transfer of the
loans to other real estate. Subsequently, other real estate assets are
carried at the lower of carrying value or fair value. Fair value is based
upon independent market prices, appraised values of the collateral or
management's estimation of the value of the collateral. When the fair value
of the collateral is based on an observable market price or a current
appraised value, the Corporation records the other real estate as
nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Corporation
records the other real estate asset as nonrecurring Level 3.
Deposits:
For disclosure purposes, the fair value of demand deposits, savings accounts,
NOW accounts and money market deposits is the amount payable on demand at the
reporting date, while the fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using current rates
at which comparable certificates would be issued.
Federal Funds Purchased:
For disclosure purposes the carrying amount for Federal funds purchased is a
reasonable estimate of fair value due to the short-term nature of these
financial instruments.
FHLB Advances:
For disclosure purposes the fair value of the FHLB fixed rate borrowing is
estimated using discounted cash flows, based on the current incremental
borrowing rates for similar types of borrowing arrangements.
Commitments to Extend Credit and Standby Letters of Credit:
Because commitments to extend credit and standby letters of credit are made
using variable rates and have short maturities, the carrying value and the
fair value are immaterial for disclosure.
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Assets Recorded at Fair Value on a Recurring Basis:
The table below presents the recorded amount of assets measured at fair value
on a recurring basis as of June 30, 2010.
Level 1 Level 2 Level 3 Total
Investment securities available
for sale $ 43,412 $ 42,633,689 $ 0 $ 42,677,101
Assets Recorded at Fair Value on a Nonrecurring Basis:
The Corporation may be required, from time to time, to measure certain assets
at fair value on a nonrecurring basis in accordance with U.S. generally
accepted accounting principles. These include assets that are measured at
the lower of cost or market that were recognized at fair value below cost at
the end of the period. Assets measured at fair value on a nonrecurring basis
are included in the table below as of June 30, 2010.
Level 1 Level 2 Level 3 Total
Foreclosed assets $ 0 $3,669,991 $ 0 $3,669,991
Impaired loans 0 0 0 0
Total assets at fair value $ 0 $3,669,991 $ 0 $3,669,991
The carrying amount and estimated fair values of the Corporation's assets and
liabilities which are required to be either disclosed or recorded at fair
value at June 30, 2010, and December 31, 2009, are as follows:
June 30, 2010 December 31, 2009
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Dollars in thousands) (Dollars in thousands)
Assets:
Cash and cash equivalents $ 37,898 $ 37,898 $ 23,296 $ 23,296
Investment securities
available for sale 42,677 42,677 62,008 62,008
Investment securities
held to maturity 35,638 36,384 24,195 24,177
Federal Home Loan Bank stock 1,650 1,650 1,650 1,650
Loans $156,447 $155,222 $157,697 $155,579
Liabilities:
Deposits $239,988 $240,492 $235,431 $235,859
FHLB advances $ 26,000 $ 28,023 $ 26,000 $ 28,430
Limitations:
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial statement element.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
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Fair value estimates included herein are based on existing on- and off-
balance-sheet financial instruments without attempting to estimate the value
of anticipated future business and the fair value of assets and liabilities
that are not required to be recorded or disclosed at fair value like premises
and equipment. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Form 10-Q report contains
forward-looking statements within the meaning of the federal securities laws.
The Corporation cautions that there are various factors that could cause
actual results to differ materially from the anticipated results or other
expectations expressed in the Corporation's forward-looking statements;
accordingly, there can be no assurance that such indicated results will be
realized.
These factors include risks related to:
* the conditions in the financial markets and economic conditions generally;
* the Corporation's ability to raise capital;
* the Corporation's liquidity;
* the Corporation's construction and land development loans;
* asset quality;
* the adequacy of the allowance for loan losses;
* technology difficulties or failures;
* the Corporation's ability to execute its business strategy;
* the loss of key personnel;
* competition;
* changes in regulation and monetary policy;
* losses due to fraudulent and negligent conduct of customers, service
providers and employees;
* acquisitions or dispositions of assets or internal restructuring that may
be pursued by the Corporation;
* changes in or application of environmental and other laws and regulations
to which the Corporation is subject;
* political, legal and local economic conditions and developments;
* financial market conditions and the results of financing efforts;
* changes in commodity prices and interest rates;
* weather, natural disasters and other catastrophic events; and other
factors discussed in the Corporation's other filings with the Securities
and Exchange Commission.
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of the Corporation. Any such statement
speaks only as of the date the statement was made. The Corporation
undertakes no obligation to update or revise any forward-looking statements.
Additional information with respect to factors that may cause results to
differ materially from those contemplated by such forward-looking statements
is included in the Corporation's current and subsequent filings with the
Securities and Exchange Commission.
-18-
Overview
The Corporation is a full-service community bank holding company
headquartered in Moultrie, Georgia. The community of Moultrie has been
served by the Bank since 1928. We provide comprehensive financial services to
consumer, business and governmental customers, which, in addition to
conventional banking products, include a full range of mortgage banking,
trust, investment and insurance services. Our primary market area
incorporates Colquitt County, where we are headquartered, and Baker, Lowndes,
Thomas, and Worth Counties, each contiguous with Colquitt County, and the
surrounding counties of southwest Georgia. We have five 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 either through de-novo
branching or acquisitions into areas proximate to our current
market area.
We believe that investing in sales and marketing in this challenging market
will provide us with a competitive advantage. To that end, we have continued
with our plans to expand geographically with a new full-service banking
center in Valdosta, Georgia. The branch was completed and opened in June of
2010.
The Corporation's profitability, like most financial institutions, is
dependent to a large extent upon net interest income, which is the difference
between the interest received on earning assets, such as loans, securities
and federal funds sold, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings. Net interest income is
highly sensitive to the fluctuations in interest rates. For example, after
the overnight borrowing rate for banks reached 5.25% in 2007, the Federal
Reserve Bank decreased it by 5% to a range of 0% to 0.25%. This historically
low level has remained unchanged from September 2007 through June 2010.
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 rate
changes by broadening our revenue sources to reduce the risk and exposure of
our financial results to the impact of changes in interest rates, which is
outside of our control. Sources of noninterest income include our insurance
agency and Empire, the Corporation's commercial mortgage banking subsidiary,
as well as fees on customer accounts, trust and retail brokerage services.
Noninterest income was 67.3% of second quarter 2010 net interest income and
34.4% of second quarter 2010 total revenue.
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At June 30, 2010, the majority of non-performing assets included a large
foreclosed commercial property that was fully funded in the last half of
2009. This relationship accounted for eighty-one percent of all non
performing assets.
Since mid-2007, the financial markets and economic conditions generally were
materially and adversely affected by significant declines in the values of
nearly all asset classes and by a serious lack of liquidity. This was
initially triggered by declines in home prices and the values of subprime
mortgages, but spread to all commercial and residential mortgages as property
prices declined rapidly and to nearly all asset classes. The effect of the
market and economic downturn also spread to other areas of the credit markets
and severely affected the availability of liquidity. The magnitude of these
declines led to a crisis of confidence in the financial sector as a result of
concerns about the capital base and viability of certain financial
institutions. During this period, interbank lending and commercial paper
borrowing fell sharply, precipitating a credit freeze for both institutional
and individual borrowers. Unemployment has also increased significantly.
Critical Accounting Policies
In the course of the Corporation's normal business activity, management must
select and apply many accounting policies and methodologies that lead to the
financial results presented in the consolidated financial statements of the
Corporation. Management considers the accounting policy relating to the
allowance for loan losses to be a critical accounting policy because of the
uncertainty and subjectivity inherent in estimating the levels of allowance
needed to cover probable credit losses within the loan portfolio and the
material effect that these estimates can have on the Corporation's results of
operations. We believe that the allowance for loan losses as of June 30,
2010, is adequate; however, under adversely different conditions or
assumptions, future additions to the allowance may be necessary. There have
been no significant changes in the methods or assumptions used in our
accounting policies that require material estimates and assumptions. Note 1
to the Consolidated Financial Statements provides a description of our
significant accounting policies and contributes to the understanding of how
our financial performance is reported.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves the ability to meet the cash flow requirements
of customers who may be either depositors wanting to withdraw their funds or
borrowers needing assurance that sufficient funds will be available to meet
their credit needs. In the ordinary course of business, the Corporation's
cash flows are generated from interest and fee income as well as from loan
repayments and the maturity or sale of other earning assets. In addition,
liquidity is continuously provided through the acquisition of new deposits
and borrowings or the rollover of maturing deposits and borrowings. The
Corporation strives to maintain an adequate liquidity position by managing
the balances and maturities of interest-earning assets and interest-earning
liabilities so its short-term investments balance, at any given time, will
adequately cover any reasonably anticipated immediate need for funds.
Additionally, the Bank maintains relationships with correspondent banks that
could provide funds on short notice, if needed.
The liquidity and capital resources of the Corporation are monitored on a
periodic basis by state and Federal regulatory authorities. As determined
under guidelines established by these regulatory authorities, the Bank's
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liquidity ratios at June 30, 2010, were considered satisfactory. At that
date, the Bank's short-term investments were adequate to cover any reasonably
anticipated immediate need for funds. We are not aware of any known trends,
events, or uncertainties that will have or that are reasonably likely to have
a material adverse effect on the Corporation's liquidity or operations. At
June 30, 2010, 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, 2010, total capital
increased $1.6 million to $27.1 million and increased $3.3 million from the
same period last year. Also, the Corporation continues to maintain a healthy
level of capital adequacy as measured by its equity-to-asset ratio of 9.14%
as of June 30, 2010. The Corporation is not aware of any events or trends
likely to result in a material change in capital resources other than the
effects of normal operations on the retention of net earnings. Also, the
Corporation's management is not aware of any current recommendations by the
regulatory authorities which, if they were implemented, would have a material
effect on the Corporation's capital resources.
RESULTS OF OPERATIONS
The Corporation's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and
investment losses, to generate noninterest income and to control noninterest
expense. Since interest rates are determined by market forces and economic
conditions beyond the control of the Corporation, the ability to generate net
interest income is dependent upon the Bank's ability to obtain an adequate
spread between the rate earned on interest-earning assets and the rate paid
on interest-bearing liabilities. Thus, the key performance measure for net
interest income is the interest margin or net yield, which is taxable-
equivalent net interest income divided by average earning assets.
Performance Summary
The Corporation's net income after taxes for the three-month period ending
June 30, 2010, was $906 thousand, up $647 thousand, or 250%, from net income
of $259 thousand for the second quarter of 2009. The significant increase was
the result of $197 thousand higher net interest income, a $628 thousand gain
on the sale of securities, and a decline in operating expenses of $632
thousand due primarily to lower legal fees and FDIC assessments.
On a per share basis, net income for the second quarter was $0.36 per diluted
share compared with $0.10 per diluted share for the same quarter in 2009.
The weighted average common diluted shares outstanding for the quarter were
2.548 million, same as second quarter last year.
For the first six months of 2010, net income was $1.313 million compared with
net income of $640 thousand for the same period in 2009. Earnings per
diluted share for the first six months of 2010 were $0.52, up over 100%
compared with earnings per diluted share of $0.25 for the same period in
2009. The growth in net income reflects a $535 thousand net gain on the sale
of securities and a measurable decline in operating expenses related to legal
fees and the FDIC insurance assessments.
We measure our performance on selected key ratios, which are provided for the
previous five quarterly periods ended June 30, 2010.
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2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
2010 2010 2009 2009 2009
Return on average total assets 1.21% .55% .98% .67% .38%
Return on average total equity 13.56% 6.26% 11.11% 7.71% 4.37%
Average shareholders' equity
to Average total assets 8.95% 8.74% 8.84% 8.70% 8.66%
Net interest margin
(tax equivalent) 4.07% 3.93% 4.22% 4.13% 4.12%
Comparison of Statements of Income for the Quarter
Noninterest income, which was 34.4% of the Corporation's total revenue for
the quarter, increased $567 thousand or 47.0%, to $1.774 million when
compared with last year's second quarter. The majority of this increase was
related to previously noted $628 thousand gains on the sale of securities.
Also, positively impacting noninterest income was mortgage banking services
revenue, which increased $47 thousand, or 14.9%, and trust services and
retail brokerage services revenue, which increased $8 thousand and $38
thousand, respectively, in the second quarter of 2010. Income from insurance
services also increased $25 thousand, or 9.2%. These increases were
partially offset by a provision for market value losses in foreclosed assets
of $125 thousand and a decrease in service charges on deposit accounts of $52
thousand, or 11.4%, compared with the prior year's second quarter.
Total interest income increased $31 thousand to $3.379 million for the three
months ended June 30, 2010 compared with the same period in 2009. This
increase was primarily due to an increase in interest and fees on loans of
$220 thousand. Interest and fees on loans increased because of a higher
average loan volume of $10.7 million compared with the second quarter of 2009
despite a significantly lower interest rate environment. Partially
offsetting this increase was interest on investment securities, which
decreased $196 thousand, due to the sales of higher yielding securities. As
a result, total investment securities yield dropped 96 basis points compared
with the same quarter a year ago.
Total interest expense decreased $166 thousand, or 18.3%, in the second
quarter of 2010 compared with the same period in 2009. Interest on deposits
decreased $199 thousand, or 27.1%, during the second quarter of 2010
reflecting the lower interest rate environment. The average rate paid on
interest-bearing time deposits decreased 74 basis points for the quarter
compared with the same period a year ago. Interest on total borrowings
increased $33 thousand, or 18.8%, compared with the same quarter in 2009.
The primary source of revenue for the Corporation is net interest income,
which is the difference between total interest income on earning assets and
interest expense on interest-bearing sources of funds. Net interest income
improved to $2.635 million for the second quarter of 2010 compared with
$2.439 million in net interest income in the 2009 second quarter due to lower
costs of deposits and higher interest and fees on loans. Net interest income
after provision for loan losses for the second quarter of 2010 was $2.485
million compared with $2.379 million for the same period in 2009. The
provision for loan losses increased to $150 thousand compared with a $60
thousand provision for loan losses during last year's second quarter. The
Corporation's net interest margin was 4.07% for the second quarter of 2010,
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down 5 basis points from the same period last year. The decline in net
interest margin was mainly impacted from the reinvestment of securities which
were either called, matured, and/or sold into overnight balances carried at
the Federal Reserve Bank. Some longer term mortgage-backed securities were
sold in November 2009 and May 2010 to shorten the duration of our portfolio.
Also, the remaining $5 million of corporate notes were sold in June 2010 to
reduce credit risk in the portfolio.
Total noninterest expense decreased 11.6% to $3.013 million from $3.406
million for the second quarter of 2009. The decrease was primarily due to a
$632 thousand decrease in other operating expenses when compared with the
prior year's second quarter as a result of lower legal expenses and FDIC
insurance assessments. This decrease was partially offset by an increase in
salaries and employee benefits of $215 thousand, or 13.9%, mainly due to
staffing the full-service banking center in Valdosta, Georgia, and accruals
for performance incentives and benefit plan expenses. Also, occupancy and
equipment expense increased $4 thousand and $20 thousand, respectively, while
all other categories remained flat.
Comparison of Statements of Income for the Six-month Period
For the first six months of 2010, noninterest income was $2.925 million, up
20.7% from the same period in 2009. As previously noted, the majority of the
increase was due to a $535 thousand net gain on the sale of securities.
Income from insurance services increased $45 thousand, or 8.0%, when compared
with the six-month period in 2009. Revenue from trust services and income
from retail brokerage services increased $10 thousand and $36 thousand,
respectively when compared with the same period in 2009. These increases in
revenue were partially offset by $125 thousand provision for market value
losses in foreclosed assets and a decrease in service charges on deposit
accounts of $63 thousand, or 7.4%, when compared with the same period of
2009.
Total interest income for the first six months of 2010 decreased $55 thousand
to $6.664 million when compared with the same period in 2009. This decrease
was primarily due to a $396 thousand decrease in interest on investment
securities due to the sale of higher yielding securities. This decrease was
mostly offset by an increase in interest and fees on loans of $328 thousand
due to an $11 million higher average volume of loans compared with the first
half of last year. Interest on deposits in other banks increased $14
thousand compared with the first half of 2009.
Total interest expense for the six-month period ended June 30, 2010,
decreased $364 thousand, or 19.2%, compared with the same period in 2009.
The decrease in interest expense was primarily related to lower interest paid
on interest-bearing deposits of $403 thousand, or 26.5%, compared with the
second quarter of 2009 reflecting lower interest rates. Interest on
borrowings increased $39 thousand, or 10.5%, for the first six months of 2010
compared with the same period last year due to higher volume of borrowings.
Net interest income for the first six months of 2010 was 6.4% higher at
$5.134 million compared with $4.825 million for the same period in 2009,
mainly as a result of lower interest paid on deposits and higher income from
loans. Net interest income after provision for loan losses was $4.834
million for the first half of 2010 compared with $4.579 for the same period
in 2009. A provision for loan losses of $300 thousand was recognized in the
first six months of 2010 compared with a provision for loan losses of $246
thousand in the same period last year. Net interest margin was 4.00% for the
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first six months of 2010, down from 4.10% for the first half of 2009 mainly
due to the repositioning of our investment portfolio.
Noninterest expense decreased $392 thousand for the first six months of 2010
compared with the same period last year. The change was due to a $689
thousand, or 34.9% decrease in other operating expenses, a reflection of
lower legal expense and insurance assessments to the FDIC, partially offset
by an increase in salary and employee benefits of $267 thousand, which was
related to staffing Valdosta's full-service banking center and increases in
employee benefits. Equipment expense increased $32 thousand while all other
categories of noninterest expense remained relatively flat.
Comparison of Financial Condition Statements
At June 30, 2010, total assets were $296.7 million, up $5.7 million from
December 31, 2009. Most of the increase in assets was a result of a $17.3
million increase in funds held overnight at the Federal Reserve Bank. Also,
premises and equipment increased $1.1 million due to the completed
construction of our new full-service banking center in Valdosta which opened
in June 2010. These increases were partially offset by a decline of $7.9
million in investment securities. This decrease in investment securities was
due to the sale of $17.4 million of mortgage-backed securities and corporate
notes in order to reposition our investment portfolio and reduce credit risk
as well as receiving $5.3 million in principal payments from mortgage-backed
securities. The proceeds from the sale of the investment securities were
reinvested in $14.0 million of new securities.
The Corporation's loan portfolio of $159.4 million remained relatively flat
from the December 31, 2009, level of $160.3 million. Total loans have grown
5.5% since June 30, 2009, due mostly to our loan production office in
Valdosta, Georgia. In June 2010, the loan production office closed and the
full-service banking center opened. 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 53.7% of total assets.
Investment securities and short-term investments which include interest-
bearing deposits in other banks represent 37.3% of total assets. Investment
securities decreased $7.9 million and short-term investments increased $17.3
million since December 31, 2009. This resulted in an overall increase in
investments of $9.5 million.
Deposits increased to $240.0 million at the end of the second quarter of
2010, up $4.6 million from the end of 2009. The bulk of the deposit growth
was in NOW accounts and money market deposits. At June 30, 2010, total
deposits represented 80.9% of total assets.
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The following table shows the major contractual obligations for the
Corporation.
Long-term debt consists of the following:
June 30, December 31, June 30,
2010 2009 2009
Advance from Federal Home Loan Bank with
a 3.39% fixed rate of interest maturing
August 20, 2018. (convertible to a
variable rate at option of Federal Home
Loan Bank on August 22, 2011). 5,000,000 5,000,000 5,000,000
Advance from Federal Home Loan Bank with
a 3.85% fixed rate of interest maturing
April 30, 2014. 10,000,000 10,000,000 10,000,000
Advance from Federal Home Loan Bank with
a 2.78% fixed rate of interest maturing
September 10, 2018. (convertible to a
variable rate at option of Federal Home
Loan Bank on September 10, 2010),
(transferred to short-term borrowings). 0 0 5,000,000
Advance from Federal Home Loan Bank with
a 1.57% fixed rate of interest maturing
July 25, 2011. 2,000,000 2,000,000 0
Advance from Federal Home Loan Bank with
a 2.23% fixed rate of interest maturing
July 30, 2012. 2,000,000 2,000,000 0
Advance from Federal Home Loan Bank with
a 2.79% fixed rate of interest maturing
July 29, 2013. 2,000,000 2,000,000 0
Total long-term debt $21,000,000 $21,000,000 $20,000,000
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan losses is
evaluated monthly based on a review of all significant loans, with a
particular emphasis on nonaccruing, past due, and other loans that management
believes require attention.
Other factors used in determining the adequacy of the reserve are
management's judgment about factors affecting loan quality and their
assumptions about the local and national economy. The allowance for loan
losses was 1.83% of total loans outstanding at June 30, 2010, compared with
1.58% of loans outstanding at December 31, 2009, and 1.66% at June 30, 2009.
Management considers the allowance for loan losses as of June 30, 2010,
adequate to cover potential losses in the loan portfolio. Nonperforming loans
to total loans in the current period declined to 0.29%.
Nonperforming assets were $4.2 million, or 1.40% of total assets, in the
second quarter of 2010, down from $5.5 million, or 1.88% of total assets, at
the end of 2009, and up from $2.8 million, or 1.03% of total assets in the
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same period last year. Nonperforming assets increased over the prior year
period primarily due to fully funding a large foreclosed commercial property
in the last half of 2009. There were $3.7 million of foreclosed properties
in nonperforming assets at the end of the current quarter compared with $2.4
million at the end of last year's second quarter.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to financial instruments
with off-balance-sheet risk to meet the financing needs of our customers and
reduce risk exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit in the form of loans or
through letters of credit. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the financial statements. Since many of the commitments to extend credit
and standby letters of credit are expected to expire without being drawn
upon, the contractual or notional amounts do not represent future cash
requirements.
Financial instruments whose contract amounts June 30, June 30,
represent credit risk (dollars in thousands): 2010 2009
Commitments to extend credit $ 11,154 $ 12,259
Standby letters of credit and financial guarantees $ 10 $ 10
The Corporation does not have any special purpose entities or off-balance
sheet financing arrangements.
Capital Resources and Dividends
At June 30, 2010, the Corporation's and the Bank's risk-based capital ratios
were considered adequate based on guidelines established by regulatory
authorities. Our total risk based capital ratio now stands at 17.58%, which
is more than 75 percent in excess of the regulatory standard for a "well-
capitalized" bank. Southwest Georgia Financial Corporation's and Southwest
Georgia Bank's risk based capital ratios are shown in the following table.
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SOUTHWEST GEORGIA FINANCIAL CORPORATION
Risk Based Capital Ratios
Southwest Georgia
Financial Corporation Regulatory Guidelines
For Well Minimum
Risk Based Capital Ratios June 30, 2010 Capitalized Guidelines
Tier 1 capital 16.33% 6.00% 4.00%
Total risk based capital 17.58% 10.00% 8.00%
Tier 1 leverage ratio 8.86% 5.00% 3.00%
Southwest Georgia
Bank Regulatory Guidelines
For Well Minimum
Risk Based Capital Ratios June 30, 2010 Capitalized Guidelines
Tier 1 capital 15.47% 6.00% 4.00%
Total risk based capital 16.73% 10.00% 8.00%
Tier 1 leverage ratio 8.38% 5.00% 3.00%
In February 2010, the Corporation paid a cash dividend of $0.10 per common
share, an increase from $0.07 per common share that was paid in the first
half of 2009. The Corporation had suspended its regular quarterly cash
dividend in March of 2009 to retain sufficient equity required to support
efforts to capture greater market share and expand outside of its historic
footprint.
Interest Rate Sensitivity
The Corporation's most important element of asset/liability management is the
monitoring of its sensitivity and exposure to interest rate movements which
is the Corporation's primary market risk. We have no foreign currency
exchange rate risk, commodity price risk, or any other material market risk.
The Corporation has no trading investment portfolio, nor do we have any
interest rate swaps or other derivative instruments.
Our primary source of earnings, net interest income, can fluctuate with
significant interest rate movements. To lessen the impact of these
movements, we seek to maximize net interest income while remaining within
prudent ranges of risk by practicing sound interest rate sensitivity
management. We attempt to accomplish this objective by structuring the
balance sheet so that the differences in repricing opportunities between
assets and liabilities are minimized. Interest rate sensitivity refers to
the responsiveness of earning assets and interest-bearing liabilities to
changes in market interest rates. The Corporation's interest rate risk
management is carried out by the Asset/Liability Management Committee which
operates under policies and guidelines established by the Bank. 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
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simulations incorporate assumptions about balance sheet dynamics, such as
loan and deposit growth and pricing, changes in funding mix, and asset and
liability repricing and maturity characteristics. Simulations are run under
various interest rate scenarios to determine the impact on net income and
capital. From these computer simulations, interest rate risk is quantified
and appropriate strategies are developed and implemented. The Corporation
also maintains an investment portfolio which receives monthly cash flows from
mortgage-backed securities principal payments, and staggered maturities and
provides flexibility over time in managing exposure to changes in interest
rates. Any imbalances in the repricing opportunities at any point in time
constitute a financial institution's interest rate sensitivity.
ITEM 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, 2009, was included in Item 8 of the 10K form,
dated December 31, 2009, under the heading "Management's Report on Internal
Controls Over Financial Reporting".
The annual report form 10K, dated December 31, 2009, 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 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWEST GEORGIA FINANCIAL CORPORATION
/s/George R. Kirkland
BY: _____________________________________
GEORGE R. KIRKLAND
SENIOR VICE-PRESIDENT AND TREASURER
(FINANCIAL AND ACCOUNTING OFFICER)
Date: August 16, 2010
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