SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998 or,
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
Commission file number 0-20099
SOUTHWEST GEORGIA FINANCIAL CORPORATION
(Exact Name of Registrant as specified in its charter)
Georgia 58-1392259
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 First Street, S. E.
Moultrie, Georgia 31768
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (912) 985-1120
Securities registered pursuant to Section 12(b) of this Act:
Title of each class Name of each exchange on which registered
Common Stock $1 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
Aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 1, 1999: $37,671,502 based on 1,712,341 shares at
the price of $22.00 per share.
As of March 26, 1999, 3,000,000 shares of the $1.00 par value Common Stock
of Southwest Georgia Financial Corporation were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1998, furnished to the Commission pursuant to Rule
14a-3(b), are incorporated by reference into Part II.
Portions of the Registrant's definitive Proxy Statement for the 1999 annual
meeting of shareholders, filed with the Commission, and Annual Report to Share-
holders for the fiscal year ended December 31, 1998, furnished to the Commission
pursuant to Rule 14a-3(b), are incorporated by reference into Part III.
<PAGE>
PART I
Item 1 - Business
Southwest Georgia Financial Corporation (the "Registrant") is a Georgia
bank holding company organized in 1980, which acquired 100% of the
outstanding shares of Southwest Georgia Bank (the "Bank"), formerly known
as Moultrie National Bank, in 1981. The Registrant's sole business is
providing banking services to individuals and businesses principally in
Colquitt County, Baker County and their surrounding counties of southwest
Georgia through the Bank, its only subsidiary. The Bank commenced
operations as a national banking association in 1928. Currently, it is an
FDIC insured, state-chartered commercial bank.
The Registrant's executive office is located at 201 First Street, S. E.,
Moultrie, Georgia 31768, and its telephone number is (912) 985-1120.
All references herein to the Registrant include Southwest Georgia Financial
Corporation and the Bank unless the context indicates a different meaning.
General
The Registrant is a registered bank holding company. All of the
Registrant's activities are currently conducted by the Bank. The Bank is
community-oriented and offers such customary banking services as consumer
and commercial checking accounts, NOW accounts, savings accounts,
certificates of deposit, lines of credit, Mastercard and VISA accounts, and
money transfers. The Bank finances commercial and consumer transactions,
makes secured and unsecured loans, and provides a variety of other banking
services. The Bank has a trust department that performs corporate,
pension, and personal trust services and acts as trustee, executor, and
administrator for estates and as administrator or trustee of various types
of employee benefit plans for corporations and other organizations.
Markets
The Registrant conducts banking activities in Colquitt, Baker and Thomas
Counties and their surrounding counties of Georgia. Agriculture plays an
important part in the Colquitt, Baker and Thomas County economy. Colquitt
and Thomas County grows a large portion of Georgia's produce crops,
including turnips, cabbage, sweet potatoes, and squash. Also, Colquitt and
Thomas County is home to producers of tobacco, peanuts, cotton, and pork.
Manufacturing firms employ a large number of Colquitt and Thomas County
residents. Apparel, lumber and wood products, and textile manufacturers
are located in the Colquitt and Thomas County area. Baker County's major
crops are cotton and peanuts. The remaining major employers are service
industries and retail stores. Approximately 40,000 persons reside in
Colquitt County while 3,700 and 43,000 persons reside in Baker and Thomas
Counties, respectively.
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Deposits
The Bank offers a full range of depository accounts and services to both
consumers and businesses. At December 31, 1998, the Registrant's deposit
base, totaling $191,087,059 consisted of $23,889,034 in noninterest-bearing
<PAGE>
demand deposits (12.50 percent of total deposits), $52,010,185 in
interest-bearing demand deposits including money market accounts (27.22
percent of total deposits), $13,877,136 in savings deposits (7.26 percent
of total deposits), $76,923,935 in time deposits in amounts less than
$100,000 (40.26 percent of total deposits), and $24,386,769 in time
deposits of $100,000 or more (12.76 percent of total deposits).
Loans
The Bank makes both secured and unsecured loans to individuals, firms, and
corporations; and both consumer and commercial lending operations include
various types of credit for the Bank's customers. Secured loans include
first and second real estate mortgage loans. The Bank also makes direct
installment loans to consumers on both a secured and unsecured basis. At
December 31, 1998, consumer installment, real estate (including
construction and mortgage loans), and commercial (including financial and
agricultural) loans represented approximately 9.8%, 76.8% and 13.4%,
respectively, of the Bank's total loan portfolio.
Lending Policy
The current lending policy of the Bank is to offer consumer and commercial
credit services to individuals and entities that meet the Bank's credit
standards. The Bank provides each lending officer with written guidelines
for lending activities. Lending authority is delegated by the Board of
Directors of the Bank to loan officers, each of whom is limited in the
amount of secured and unsecured loans which can be made to a single
borrower or related group of borrowers.
The Loan Committee (the "Committee") of the Bank's Board of Directors is
responsible for approving and monitoring the loan policy and providing
guidance and counsel to all lending personnel. The Committee also approves
all extensions of credit over $100,000. The Committee is composed of the
President and the other executive officers of the Bank, as well as certain
Bank Directors.
Loan Review and Nonperforming Assets
The Bank regularly reviews its loan portfolio to determine deficiencies and
corrective action to be taken. Senior lending officers conduct periodic
review of borrowers with total direct and indirect indebtedness of $100,000
or more and perform an ongoing review of all past due loans. A summary
report of past due loans is reviewed monthly by the Committee, which also
reviews all loans over $100,000, whether current or past due, at least
annually.
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Asset/Liability Management
The Committee is charged with establishing policies to manage the assets
and liabilities of the Bank. The Committee's task is to manage asset
growth, net interest margin and liquidity, and capital in order to maximize
income and reduce interest rate risk. To meet these objectives while
maintaining prudent management of risks, the Committee directs the Bank's
overall acquisition and allocation of funds. At its monthly meetings, the
<PAGE>
Committee reviews and discusses the monthly asset and liability funds
budget and income and expense budget in relation to the actual composition
and flow of funds; the ratio of the amount of rate sensitive assets to the
amount of rate sensitive liabilities; the ratio of loan loss reserve to
outstanding loans; and other variables, such as expected loan demand,
investment opportunities, core deposit growth within specified categories,
regulatory changes, monetary policy adjustments, and the overall state of
the local, state, and national economy.
Investment Policy
The Bank's investment portfolio policy is to maximize income consistent
with liquidity, asset quality, and regulatory constraints. The policy is
reviewed periodically by the Board of Directors. Individual transactions,
portfolio composition, and performance are reviewed and approved monthly by
the Board of Directors.
Employees
The Bank has 96 full-time employees. The Bank is not a party to any
collective bargaining agreement, and the Bank believes that its employee
relations are good. None of the Bank's executive officers, except Mr.
Clark, is employed pursuant to any employment contract. See Exhibit 10.3,
which is incorporated herein by reference.
Competition
The banking business is highly competitive. The Bank competes with two
other depository institutions in Colquitt County but no depository
institution in Baker County. The newly acquired branch in Pavo, Georgia
has no other depository institution in this town, but there are other
financial institutions within the county of Thomas. The Bank also competes
with other financial service organizations located outside Colquitt, Baker,
and Thomas Counties, including brokers, finance companies, credit unions
and certain governmental agencies. To the extent that banks must maintain
noninterest earning reserves against deposits, they may be at a competitive
disadvantage when compared with other financial service organizations that
are not required to maintain reserves against substantially equivalent
sources of funds. Further, changes in the laws applicable to banks,
savings and loan associations, and other financial institutions and the
increased competition from investment bankers, brokers, and other financial
service organizations may have a significant impact on the competitive
environment in which the Bank operates. See "Supervision and Regulation."
At December 31, 1998, the Registrant's total consolidated deposits and
assets were $191,087,059 and $230,198,031, respectively. The Registrant's
bank subsidiary is ranked as the largest among three depository
institutions in Colquitt County, Georgia.
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Monetary Policies
The results of operations of the Bank are affected by credit policies of
monetary authorities, particularly the Board of Governors of the Federal
Reserve System (the "Federal Reserve"). The instruments of monetary policy
employed by the Federal Reserve include open market operations in U. S.
<PAGE>
Government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank
deposits. In view of changing conditions in the national economy and in
the money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve, no prediction can be made as to
possible future changes in interest rates, deposit levels, loan demand, or
the business and earnings of the Bank.
Payment of Dividends
The Registrant is a legal entity separate and distinct from the Bank. Most
of the revenues of the Registrant result from dividends paid to it by the
Bank. Statutory and regulatory restrictions exist that are applicable to
the payment of dividends by the Bank as well as by the Registrant to its
shareholders.
The Bank is a state chartered bank regulated by the Department of Banking
and Finance (the "DBF") and the Federal Deposit Insurance Corporation (the
"FDIC"). Under the regulations of the DBF, dividends may not be declared
out of the retained earnings of a state bank without first obtaining the
written permission of the DBF unless such bank meets all the following
requirements:
(a) Total classified assets as of the most recent examination of the bank do
not exceed 80% of equity capital (as defined by regulation);
(b) The aggregate amount of dividends declared or anticipated to be declared
in the calendar year does not exceed 50% of the net profits after taxes
but before dividends for the previous calendar year; and,
(c) The ratio of equity capital to adjusted assets is not less than 6%.
The payment of dividends by the Registrant and the Bank may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines. In addition, if, in the
opinion of the applicable regulatory authority, a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending upon the financial condition of the bank, could
include the payment of dividends), such authority may require, after notice
and hearing, that such bank cease and desist from such practice. The FDIC
has issued a policy statement providing that insured banks should generally
only pay dividends out of current operating earnings. At December 31,
1998, retained earnings totaled $17.2 million of which $10.5 million has
been appropriated in order for the Bank to provide adequate lending limits
for a single borrower. The remaining $6.7 million of retained earnings are
available from the Bank to pay dividends. For 1998 the Registrant's cash
dividend payout to stockholders was 31.9% of net income.
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Supervision and Regulation
The Registrant is a registered bank holding company subject to regulation
by the Federal Reserve under the Bank Holding Company Act of 1956, as
amended (the "Act"). As a bank holding company, the Registrant is required
to file with the Federal Reserve an annual report of its operations at the
end of each fiscal year and such additional information as the Federal
Reserve may require pursuant to the Act. The Federal Reserve may also make
examinations of the Registrant.
<PAGE>
The Act requires every bank holding company to obtain prior approval of the
Federal Reserve (i) before it may acquire direct or indirect ownership or
control of more than five percent (5%) of the voting shares of any bank
that is not already controlled; (ii) before it or any of its subsidiaries,
other than a bank, may acquire all or substantially all of the assets of a
bank; and (iii) before it may merge or consolidate with any other bank
holding company. In addition, a bank holding company is generally
prohibited from engaging in non-banking activities or acquiring direct or
indirect control of voting shares of any company engaged in such
activities. This prohibition does not apply to activities found by the
Federal Reserve, by order or regulation, to be so closely related to
banking or managing or controlling banks as to be a proper incident
thereto. Some of the activities that the Federal Reserve has determined by
regulation or order to be closely related to banking are: making or
servicing loans and certain types of leases; performing certain data
processing services; acting as fiduciary, investment or financial advisors;
providing full-service brokerage under certain conditions; underwriting
bank eligible securities; underwriting debt and equity securities on a
limited basis through separately capitalized subsidiaries; and making
investments in corporations or projects designed primarily to promote
community welfare.
The laws of Georgia require annual registration with the DBF by all Georgia
bank holding companies. Such registration includes information with
respect to the financial condition, operations, management, and
intercompany relationships of a bank holding company and its subsidiaries
and related matters. The DBF may also require such other information as is
necessary to keep itself informed as to whether the provisions of Georgia
law and the regulations and orders issued thereunder by the DBF have been
complied with; and the DBF may make examinations of the Company and of the
Bank.
The Bank, as a member of the Federal Reserve System, is subject to the
supervision of, and is regularly examined by, the Federal Reserve and DBF.
Both the FDIC and the DBF must grant prior approval of any merger,
consolidation, or other corporate reorganization involving the Bank. A
bank can be held liable for any loss incurred by, or reasonably expected to
be incurred by, the FDIC in connection with the default of a
commonly-controlled institution.
The Registrant and the Bank are "affiliates" under the Federal Reserve Act,
which imposes certain restrictions on (i) loans by the Bank to affiliates,
(ii) investments in the stock of affiliates by the Bank, (iii) the Bank's
taking the stock of affiliates as collateral for loans by it to a borrower,
and (iv) the purchase of assets from the Company by the Bank. Further, a
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bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extensions of credit,
lease or sale of property, or furnishing of services.
Capital Adequacy
The Federal Reserve has risk-based rules for assessing bank and bank
holding company capital adequacy. These regulations establish minimum
capital standards in relation to assets and off-balance sheet exposures, as
adjusted for credit risk. Banks and bank holding companies are required to
<PAGE>
have (1) a minimum standard of total capital (as defined) to risk-rated
assets of eight percent (8%); (2) a minimum Tier One Capital (as defined)
to risk-rated assets of four percent (4%); and (3) a minimum stockholders'
equity to risk-based assets of four percent (4%). In addition, the Federal
Reserve has established a minimum of three percent (3%) leverage ratio of
Tier One Capital to total assets for the most highly rated banks. "Tier
One Capital" generally consists of common equity, minority interests in
equity accounts of consolidated subsidiaries, and certain perpetual
preferred stock less certain intangibles. The Federal Reserve will require
a bank holding company to maintain a leverage ratio greater than three
percent (3%) if it is experiencing or anticipating significant growth or is
operating with less than well- diversified risks in the opinion of the
Federal Reserve. The Federal Reserve uses the leverage ratio in tandem
with the risk-based ratio to assess capital adequacy of banks and bank
holding companies. The FDIC, the Office of Comptroller of Currency
("OCC"), and the Federal Reserve have amended, effective January 1, 1997,
the capital adequacy standards to provide for the consideration of interest
rate risk in the overall determination of a bank's capital ratio, requiring
banks with greater interest rate risk to maintain adequate capital for the
risk. The revised standards have not had a significant effect on the
Company's capital requirements.
Effective December 19, 1992, a new Section 38 to the Federal Deposit
Insurance Corporation Act implemented the prompt corrective action
provisions that Congress enacted as a part of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "1991 Act"). The "prompt
corrective action" program is based upon five regulatory zones for banks in
which all banks would be placed, largely based on their capital positions.
Regulators are permitted to take increasingly harsh action as a bank's
financial condition declines. Regulators are also empowered to place a
bank in receivership or require the sale of a bank to another depository
institution when a bank's capital leverage ratio reaches two percent.
Better capitalized institutions will generally be subject to less onerous
regulation and supervision than banks with lesser amounts of capital. The
Federal Reserve has adopted regulations implementing the prompt corrective
action provisions of the 1991 Act which place financial institutions in the
following five categories based upon capitalization ratios: (1) A "well
capitalized" institution has a total risk-based capital ratio of at least
10 percent, a Tier One risk-based ratio of at least 6 percent, and a
leverage ratio of at least 5 percent; (2) An "adequately capitalized"
institution has a total risk-based ratio of at least 8 percent, a Tier One
risk-based ratio of at least 4 percent, and a leverage ratio of at least 4
percent; (3) An "undercapitalized" institution has a total risk-based
capital ratio of under 8 percent, a Tier One risk-based capital ratio of
under 4 percent, or a leverage ratio of under 4 percent; (4) A
"significantly undercapitalized" institution has a total risk-based capital
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ratio of under 6 percent, a Tier One risk-based ratio of under 3 percent, or
a leverage ratio of under 3 percent; and (5) A "critically undercapitalized"
institution has a leverage ratio of 2 percent or less. Any institution in any
of the three undercapitalized categories would be prohibited from declaring
dividends or making capital distributions. The proposed regulations also
establish procedures for "downgrading" an institution to a lower capital
category based on supervisory factors other than capital. The Bank at December
31, 1998, would be considered to be a "well capitalized" institution if solely
viewed on the basis of capital ratios. As an institution drops below the
"well capitalized" category, it becomes subject to increasing scrutiny,
<PAGE>
decreasing management flexibility, and increasingly harsh regulatory
actions. It is therefore important for banks to remain in the "well
capitalized" category notwithstanding the minimum capital ratios described
above. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Capital Resources and Dividends" contained on
page 18 of the Registrant's 1998 Annual Report to Shareholders, which is
incorporated herein by reference, for the Registrant's capital position.
Recent Legislation
On April 19, 1995, the four federal bank regulatory agencies adopted
revisions to the regulations promulgated pursuant to the Community
Reinvestment Act (the "CRA") which are intended to set distinct assessment
standards for financial institutions. The revised regulations contain
three evaluation tests: (1) a lending test which will compare the
institution's market share of loans in low and moderate income areas to its
market share of loans in its entire service area and the percentage of a
bank's outstanding loans to low and moderate income areas or individuals,
(ii) a services test which will evaluate the provisions of services that
promote the availability of credit to low and moderate income areas, and
(iii) an investment test which will evaluate an institution's record of
investments in organizations designed to foster community development,
small and minority-owned businesses, and affordable housing lending,
including state and local government housing or revenue bonds. The
regulations are designed to reduce some paperwork requirements of the
current regulations and provide regulators, institutions, and community
groups with a more objective and predictable manner with which to evaluate
the CRA performance of financial institutions. The regulations became
effective on January 1, 1996, at which time evaluation under streamlined
procedures began for institutions with assets of less than $250 million
that are owned by a holding company with total assets of less than $1
billion. It is not expected that these regulations will have any
appreciable impact upon the Registrant and the Bank.
Congress, bank regulatory agencies, and various federal agencies such as
HUD, the Federal Trade Commission, and the Department of Justice
(collectively the "Federal Agencies") are responsible for implementing the
nation's fair lending laws and have been increasingly concerned that
prospective home buyers and other borrowers are experiencing discrimination
in their efforts to obtain loans. In recent years the Department of
Justice has filed suit against financial institutions which it determined
had discriminated against borrowers, seeking fines and restitution for
borrowers who allegedly suffered from discriminatory practices. Most, if
not all, of these suits have been settled (some for substantial sums)
without a full adjudication on the merits.
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On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and specify the factors the agencies
will consider in determining if lending discrimination exists, announced a
joint policy statement detailing specific discriminatory practices
prohibited under the Equal Opportunity Act and the Fair Housing Act. In
the policy statement, three methods of proving lending discrimination were
identified: (1) overt evidence of discrimination, when a lender blatantly
discriminates on a prohibited basis; (2) evidence of disparate treatment,
when a lender treats applicants differently based on a prohibited factor
even where there is no indication that the treatment was motivated by
<PAGE>
prejudice or a conscious intention to discriminate against a person; and
(3) evidence of disparate impact, when a lender applies a practice
uniformly to all applicants, but the practice has a discriminatory effect,
where such practices are neutral on their face and are applied equally,
unless the practice can be justified on the basis of business necessity.
On September 23, 1994, President Clinton signed the Reigle Community
Development and Regulatory Improvement Act of 1994 (the "Regulatory
Improvement Act"). The Regulatory Improvement Act contains funding for
community development projects through banks and community development
financial institutions and also numerous regulatory relief provisions
designed to eliminate certain duplicative regulations and paperwork
requirements.
On September 29, 1994, President Clinton signed the Reigle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Federal Interstate
Bill") which amends federal law to permit a bank holding company to acquire
existing banks in any state effective September 29, 1995. Further, any
interstate bank holding company is permitted to merge its various bank
subsidiaries into a single bank with interstate branches after May 31,
1997. States have the authority to authorize interstate branching prior to
June 1, 1997, or alternatively, to opt out of interstate branching prior to
that date. The Georgia Financial Institutions Code was amended in 1994 to
permit the acquisition of a Georgia bank or bank holding company by
out-of-state bank holding companies beginning July 1, 1995. On September
29, 1995, the interstate banking provisions of the Georgia Code were
superseded by the Federal Interstate Bill.
On January 26, 1996, the Georgia legislature adopted a bill (the "Georgia
Intrastate Bill") to permit, effective July 1, 1996, any Georgia bank or
group of affiliated banks under one holding company to establish up to an
aggregate of three new or additional branch banks anywhere within the State
of Georgia excluding any branches established by a bank in a county which
it is already located. After July 1, 1998, all restrictions on state-wide
branching were removed. Before adoption of the Georgia Intrastate Bill,
Georgia only permitted branching via merger or consolidation with an
existing bank or in certain other limited circumstances.
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Executive Officers Of The Registrant
Executive officers are elected by the Board of Directors annually in April
and hold office until the following April unless they resign or are removed
from office by the Board of Directors.
The executive officers of the Registrant and their ages, positions with the
Registrant, and terms of office as of January 31, 1999, are as follows:
<TABLE>
<CAPTION>
Officer Of The
Name (Age) Principal Position Registrant Since
<S> <C> <C>
John H. Clark Chief Executive Officer and Vice 1980
(61) Chairman of the Registrant and Bank
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Cecil Alvis Chief Operating Officer and President 1982
(64) of the Registrant and Bank
<PAGE>
Violet K. Weaver Executive Vice President and Secretary 1981
(63) of the Registrant and Bank
John J. Cole, Jr. Senior Vice President of the 1984
(48) Registrant and Senior Vice President
and Cashier of the Bank
George R. Kirkland Senior Vice President and Treasurer 1991
(48) of the Registrant and Senior Vice
President and Comptroller of the Bank
C. Broughton Williams Senior Vice President of the Registrant 1993
(62) and Bank
Frank E. Davis Senior Vice President of the Registrant 1996
(45) and Senior Vice President and Trust
Officer of the Bank
C. Wallace Sansbury Senior Vice President of the Registrant 1996
(56) and Bank
Randall L. Webb, Jr. Senior Vice President of the Registrant 1994
(50) and Bank
William T. Hand Senior Vice President of the Registrant 1998
(51) and Bank
Lamar F. Seay Vice President of the Registrant 1992
(59) and Bank
Judy M. Owens Vice President of the Registrant 1993
(54) and Vice President and Trust
Officer of the Bank
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Geraldine A. Ferrone Vice President of the Registrant 1995
(52) and Bank
Robert M. Carlton, Jr. Vice President of the Registrant 1995
(57) and Bank
Margaret H. Lewis Vice President of the Registrant 1995
(54) and Bank
Charles H. Bannister Vice President of the Registrant 1997
(40) and Bank
John W. Gandy Vice President of the Registrant 1997
(45) and Bank
Peggy C. Weeks Vice President of the Registrant 1997
(61) and Bank
Richard E. Holland Vice President of the Registrant 1998
(53) and Bank
</TABLE>
<PAGE>
The following is a brief description of the business experience of the
executive officers of the Registrant. Except as otherwise indicated, each
executive officer has been engaged in their present or last employment, in
the same or similar position, for more than five years.
Mr. Clark has served as Chief Executive Officer and Vice Chairman of the
Board of both the Bank and the Registrant since December 1996. Previously,
he has served as President and Director of the Bank since 1978 and
President and Director of the Registrant since 1980.
Mr. Alvis became Chief Operating Officer and President of the Bank and
Registrant in December 1996. Previously, he had been Executive Vice
President of the Bank and the Registrant since 1993. Also, he has served
as Senior Vice President of the Bank since 1986 and Vice President of the
Registrant since 1982.
Mrs. Weaver became Executive Vice President in December 1996. Previously,
she has served as Senior Vice President and Secretary of the Bank since
1986 and became Senior Vice President and Secretary of the Registrant in
1992. Previously, she has served in various positions with the Registrant
and the Bank since 1976.
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Mr. Cole became Senior Vice President and Cashier of the Bank and Senior
Vice President of the Registrant in 1992. Previously, he had been Senior
Vice President and Comptroller of the Bank from 1986 to 1992 and Vice
President and Treasurer of the Registrant since 1984.
Mr. Kirkland became Senior Vice President and Treasurer of the Registrant
and Senior Vice President and Comptroller of the Bank in 1993. Previously
he had been Vice President and Comptroller of the Bank and Vice President
and Treasurer of the Registrant since 1991.
Mr. Williams became Senior Vice President of the Bank and Registrant in
1994. Previously, he had been Vice President of the Bank and Registrant
since 1993. Also, he had served as Moultrie City President and Chairman of
the Local Board of Advisory Directors of NationsBank of Georgia, N.A. from
1987 to 1992.
Mr. Davis became Senior Vice President and Trust Officer of the Bank and
Senior Vice President of the Registrant in June 1996. Previously, he had
been Vice President and Trust Officer of First National Bank in
Gainesville, Georgia, from 1995 to 1996 and Vice President and Senior Trust
Officer of Centura Bank in Wilmington, N.C., from 1988 to 1995.
Mr. Sansbury became Senior Vice President of the Bank and Registrant in
December 1996. Previously, he had been Executive Vice President and Senior
Credit Officer at Regions Bank in Ellijay, Georgia, from 1994 to 1996 and
an Officer of Nationsbank of Georgia, N.A. from 1983 to 1994.
Mr. Webb became Senior Vice President of the Bank and Registrant in 1997.
Previously, he had been Vice President of the Bank and Registrant since
1994 and Assistant Vice President of the Bank since 1984.
<PAGE>
Mr. Hand became Senior Vice President of the Bank and Registrant in 1998.
Previously, he had been President, Chief Executive Officer, Trust Officer
and Director of First Bancorporation of Cleveland, Inc. and its banking
subsidiary First Bank & Trust located in Cleveland, Texas from 1990 to
1998.
Mr. Seay became Vice President of the Registrant in 1992 and has served as
Vice President of the Bank since 1988.
Mrs. Owens became Vice President and Trust Officer of the Bank and Vice
President of the Registrant in 1993. Previously, she had been Assistant
Vice President and Trust Officer of the Bank from 1991 to 1993 and
Assistant Trust Officer of the Bank since 1984.
Mrs. Ferrone became Vice President of the Bank and Registrant in 1995.
Previously, she had been Assistant Vice President of the Bank since 1988.
Mr. Carlton became Vice President of the Bank and Registrant in 1995.
Previously, he had been Assistant Vice President of the Bank since 1992.
Also, he had served as Vice President and Cashier of Citizens and Southern
National Bank of Georgia from 1969 to 1991.
Mrs. Lewis became Vice President of the Bank and Registrant in 1995.
Previously, she had been Assistant Vice President of the Bank since 1986.
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Mr. Bannister became Vice President of the Bank and Registrant in 1997.
Previously, he had been Assistant Vice President of the Bank since 1993 and
has served in various other positions with the Bank since 1989.
Mr. Gandy became Vice President of the Bank and Registrant in 1997.
Previously, he had been Assistant Vice President of the Bank since 1993.
Also, he had been Assistant Vice President of Nationsbank of Georgia, N.A.,
since 1985.
Mrs. Weeks became Vice President of the Bank and Registrant in 1997.
Previously, she had been Assistant Vice President of the Bank since 1994
and has served in various other positions with the Bank since 1991.
Mr. Holland became Vice President of the Bank and Registrant in 1998.
Previously, he had been Vice President City Manager of Nationsbank Florida,
N.A. from 1993 to 1998. Also, he had been Vice President Administration of
C&S/Sovran Corporation from 1987 to 1993.
-13-
Selected Statistical Information
The statements below show, for the periods indicated, the daily average
balances outstanding for the major categories of earning assets and
interest-bearing liabilities and the average interest rate earned or paid
thereon. Except for percentages, all data is in thousands of dollars.
Distribution of Assets, Liabilities, and Shareholders' Equity; Interest
Rates and Interest Differentials
Average Balance Sheets and Net Interest Income Analysis
<PAGE>
Condensed average balance sheets for the years indicated are presented
below:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Average
Balance Interest Rate
(Thousands Of Dollars)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 5,943 $ - - %
Earning assets:
Interest-bearing deposits 8,886 472 5.31%
Loans, net (a) (b) (c) 113,820 12,466 10.95%
Taxable investment securities
held to maturity 73,122 4,604 6.30%
Nontaxable investment securities
held to maturity (c) 810 53 6.54%
Nontaxable investment securities
available for sale (c) 2,124 149 7.02%
Other investment securities
available for sale 2,131 721 33.83%
Federal funds sold and securities
purchased with agreements to resell 2,128 114 5.36%
Total earning assets 203,021 18,579 9.15%
Premises and equipment 4,367
Other assets 4,505
Total assets $ 217,836
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 21,706 $ - - %
Interest-bearing liabilities:
Savings deposits 61,121 1,560 2.55%
Time deposits 96,887 5,399 5.57%
Federal funds purchased and securities
sold under agreements to repurchase 498 26 5.22%
Other borrowings 9,500 571 6.01%
Total interest-bearing liabilities 168,006 7,556 4.50%
Other liabilities 1,768
Total liabilities 191,480
Common stock 3,000
Surplus 2,070
Retained earnings 23,680
Less treasury stock ( 2,394)
Total shareholders' equity 26,356
Total liabilities and shareholders' equity $ 217,836
Net interest income and margin $ 11,023 5.43%
</TABLE>
<PAGE>
-14-
<TABLE>
<CAPTION>
Year Ended December 31, 1997
Average
Balance Interest Rate
(Thousands Of Dollars)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 5,361 $ - - %
Earning assets:
Interest-bearing deposits 5,132 283 5.51%
Loans, net (a) (b) (c) 117,029 12,630 10.79%
Taxable investment securities
held to maturity 70,601 4,487 6.36%
Nontaxable investment securities
held to maturity (c) 248 29 11.69%
Other investment securities
available for sale 2,000 496 24.80%
Federal funds sold and securities
purchased with agreements to resell 1,870 101 5.40%
Total earning assets 196,880 18,026 9.16%
Premises and equipment 3,419
Other assets 5,578
Total assets $ 211,238
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 20,918 $ - - %
Interest-bearing liabilities:
Savings deposits 60,612 1,600 2.64%
Time deposits 92,408 5,070 5.49%
Federal funds purchased and securities
sold under agreements to repurchase 1,939 107 5.52%
Other borrowings 9,500 572 6.02%
Total interest-bearing liabilities 164,459 7,349 4.47%
Other liabilities 2,026
Total liabilities 187,403
Common stock 3,000
Surplus 2,012
Retained earnings 21,238
Less treasury stock ( 2,415)
Total shareholders' equity 23,835
Total liabilities and shareholders' equity $ 211,238
Net interest income and margin $ 10,677 5.42%
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
Average
Balance Interest Rate
(Thousands Of Dollars)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,136 $ - - %
Earning assets:
Interest-bearing deposits 2,778 151 5.44%
Loans, net (a) (b) (c) 113,123 12,302 10.87%
Taxable investment securities
held to maturity 70,362 4,525 6.43%
Nontaxable investment securities
held to maturity (c) 500 56 11.20%
Other investment securities
available for sale 1,388 99 7.13%
Federal funds sold and securities
purchased with agreements to resell 1,984 104 5.24%
Total earning assets 190,135 17,237 9.07%
Premises and equipment 3,327
Other assets 5,718
Total assets $ 205,316
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 19,622 $ - - %
Interest-bearing liabilities:
Savings deposits 61,516 1,622 2.64%
Time deposits 89,227 4,902 5.49%
Federal funds purchased and securities
sold under agreements to repurchase 2,067 117 5.66%
Other borrowings 9,500 571 6.01%
Total interest-bearing liabilities 162,310 7,212 4.44%
Other liabilities 1,993
Total liabilities 183,925
Common stock 3,000
Surplus 1,972
Retained earnings 18,853
Less treasury stock ( 2,434)
Total shareholders' equity 21,391
Total liabilities and shareholders' equity $ 205,316
Net interest income and margin $ 10,025 5.27%
</TABLE>
-16-
<PAGE>
Interest Rates
(a) Average loans are shown net of unearned income and the allowance for
loan losses. Nonperforming loans are included.
(b) Interest income includes loan fees as follows (in thousands): 1998 -
$416, 1997 - $470, and 1996 - $518.
(c) Reflects taxable equivalent adjustments using a tax rate of 34 percent
for 1998, 1997, and 1996.
Interest Differentials
The following table sets forth, for the indicated years ended December 31,
a summary of the changes in interest paid resulting from changes in volume
and changes in rate. The change due to volume is calculated by multiplying
the change in volume by the prior year's rate. The change due to rate is
calculated by multiplying the change in rate by the prior year's volume.
The change attributable to both volume and rate is calculated by
multiplying the change in volume by the change in rate.
<TABLE>
<CAPTION>
(a)
Due To
Increase Changes In
1998 1997 (Decrease) Volume Rate
(Thousands Of Dollars)
<S> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits $ 472 $ 283 $ 189 $ 199 $( 10)
Loans, net (b) 12,466 12,630 ( 164) ( 357) 193
Taxable investment
securities held to maturity 4,604 4,487 117 159 ( 42)
Nontaxable investment
securities held to
maturity (b) 53 29 24 30 ( 6)
Nontaxable investment
securities available
for sale (b) 149 - 149 149 -
Other securities available
for sale 721 496 225 34 191
Federal funds sold and
securities purchased
under agreements to resell 114 101 13 14 ( 1)
Total interest income 18,579 18,026 553 228 325
Interest paid on:
Savings deposits 1,560 1,600 ( 40) 12 ( 52)
Time deposits 5,399 5,070 329 253 76
Federal funds purchased
and securities sold under
agreements to repurchase 26 107 ( 81) ( 75) ( 6)
Other borrowings 571 572 ( 1) - ( 1)
Total interest expense 7,556 7,349 207 190 17
Net interest earnings $ 11,023 $ 10,677 $ 346 $ 38 $ 308
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
(a)
Due To
Increase Changes In
1997 1996 (Decrease) Volume Rate
(Thousands Of Dollars)
<S> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits $ 283 $ 151 $ 132 $ 130 $ 2
Loans, net (b) 12,630 12,302 328 416 ( 88)
Taxable investment
securities held to maturity 4,487 4,525 ( 38) 17 ( 55)
Nontaxable investment
securities held to
maturity (b) 29 56 ( 27) ( 29) 2
Other securities available
for sale 496 99 397 60 337
Federal funds sold and
securities purchased
under agreements to resell 101 104 ( 3) ( 6) 3
Total interest income 18,026 17,237 789 588 201
Interest paid on:
Savings deposits 1,600 1,622 ( 22) ( 22) -
Time deposits 5,070 4,902 168 168 -
Federal funds purchased
and securities sold under
agreements to repurchase 107 117 ( 10) ( 7) ( 3)
Other borrowings 572 571 1 - 1
Total interest expense 7,349 7,212 137 139 ( 2)
Net interest earnings $ 10,677 $ 10,025 $ 652 $ 449 $ 203
</TABLE>
-18-
<TABLE>
<CAPTION>
(a)
Due To
Increase Changes In
1996 1995 (Decrease) Volume Rate
(Thousands Of Dollars)
<S> <C> <C> <C> <C> <C>
Interest earned on:
Interest-bearing deposits $ 151 $ 234 $ ( 83) $ ( 66) $( 17)
Loans, net (b) 12,302 12,405 (103) ( 43) ( 60)
Taxable investment
securities held to maturity 4,523 4,173 352 417 ( 65)
Nontaxable investment
securities held to
maturity (b) 56 56 - - -
Other securities available
for sale 99 92 7 7 -
Federal funds sold and
securities purchased
under agreements to resell 104 163 ( 59) ( 44) ( 15)
Total interest income 17,237 17,123 114 271 (157)
<PAGE>
Interest paid on:
Savings deposits 1,622 1,850 (228) ( 9) (219)
Time deposits 4,902 4,703 199 49 150
Federal funds purchased
and securities sold under
agreements to repurchase 117 120 ( 3) ( 9) 6
Other borrowings 571 569 2 - 2
Total interest expense 7,212 7,242 ( 30) 31 ( 61)
Net interest earnings $ 10,025 $ 9,881 $ 144 $ 240 $( 96)
</TABLE>
(a) Volume and rate components are in proportion to the relationship of the
absolute dollar amounts of the change in each.
(b) Reflects taxable equivalent adjustments using a tax rate of 34 percent
for 1998, 1997, and 1996 in adjusting interest on nontaxable loans and
securities to a fully taxable basis.
-19-
Investment Portfolio
The carrying values of investment securities for the indicated years are
presented below:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(Thousands Of Dollars)
<S> <C> <C> <C>
Securities held to maturity:
U. S. Treasury and other
U. S. Government Agencies $ 63,806 $ 62,561 $ 71,475
State and municipal 5,280 2,080 2,580
Total securities held to maturity $ 69,086 $ 64,641 $ 74,055
Securities available for sale:
Equity securities $ 2,484 $ 2,185 $ 1,425
State and municipal $ 8,926 $ - $ -
Total securities available for sale $ 11,410 $ 2,185 $ 1,425
</TABLE>
The following table shows the maturities of debt securities at December 31,
1998, and the weighted average yields (for nontaxable obligations on a
fully taxable basis assuming a 34% tax rate) of such securities.
<PAGE>
<TABLE>
<CAPTION>
MATURITY
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Thousands Of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury
and other U.S.
Government
Agencies $ 14,015 6.68% $ 40,229 6.24% $ 9,562 5.88% $ - - %
State and
municipal - - % 1,575 6.74% 4,454 6.19% 8,177 6.97%
Total $ 14,015 6.68% $ 41,804 6.26% $ 14,016 5.98% $ 8,177 6.97%
</TABLE>
The calculation of weighted average yields is based on the cost and
effective yields of each security weighted for the scheduled maturity of
each security. At December 31, 1998 and 1997, securities carried at
approximately $28,614,000 and $24,872,000, respectively, were pledged to
secure public and trust deposits as required by law.
-20-
Loan Portfolio
Types of Loans
The amount of loans outstanding for the indicated years are shown in the
following table according to type of loan.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
(Thousands Of Dollars)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 15,490 $ 17,076 $ 18,450 $ 17,706 $ 14,827
Real estate - construction - - - - -
Real estate - mortgage 88,767 90,111 85,338 87,319 92,301
Other 150 448 208 45 60
Installment 11,219 12,052 12,369 11,700 11,343
Total loans 115,626 119,687 116,365 116,770 118,531
Less:
Unearned income 128 143 156 177 236
Allowance for loan losses 2,003 1,999 2,009 2,140 2,028
Net loans $ 113,495 $ 117,545 $ 114,200 $ 114,453 $ 116,267
</TABLE>
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table shows the distribution of the commercial, financial and
agricultural loan portfolio, excluding real estate mortgage and consumer
loans at December 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
Commercial,
Financial
and
Agricultural
(Thousands Of Dollars)
<S> <C>
Distribution of loans which are due:
In one year or less $ 11,853
After one year but within five years 2,525
After five years 1,112
Total $ 15,490
</TABLE>
-21-
The following table shows, for the selected loans above due after one year,
the amounts which have predetermined interest rates and the amounts which
have floating or adjustable interest rates at December 31, 1998.
<TABLE>
<CAPTION>
Loans With
Predetermined Loans With
Rates Floating Rates Total
(Thousands Of Dollars)
<S> <C> <C> <C>
Commercial, financial
and agricultural $ 557 $ 3,080 $ 3,637
</TABLE>
Risk Elements In The Loan Portfolio
The following table presents information concerning outstanding balances of
nonperforming loans for the indicated years ended December 31.
Nonperforming loans comprise: (a) loans accounted for on a nonaccrual
basis ("nonaccrual loans"); (b) loans which are contractually past due 90
days or more as to interest or principal payments ("past-due loans"); (c)
loans for which the terms have been renegotiated to provide a reduction or
deferral of interest or principal because of a deterioration in the
financial position of the borrower ("renegotiated loans"); and (d) loans
now current but where there are serious doubts as to the ability of the
borrower to comply with present loan repayment terms ("potential problem
loans").
<TABLE>
<CAPTION>
Nonaccrual Past-Due Renegotiated Potential
Loans Loans Loans Problem Loans Total
(Thousands Of Dollars)
<S> <C> <C> <C> <C> <C>
December 31, 1998 $ 1,806 $ 281 $ 0 $ 289 $ 2,376
December 31, 1997 $ 96 $ 385 $ 0 $ 211 $ 692
December 31, 1996 $ 225 $ 74 $ 70 $ 229 $ 598
December 31, 1995 $ 304 $ 35 $ 72 $ 302 $ 713
December 31, 1994 $ 3,910 $ 97 $ 0 $ 1,266 $ 5,273
</TABLE>
<PAGE>
The Registrant follows a policy of continuing to accrue interest on
consumer and bank card loans that are contractually past due up to the time
of charging the loan amount against the allowance for loan losses.
-22-
Summary of Loan Loss Experience
The following table is a summary of average loans outstanding during the
reported periods, changes in the allowance for loan losses arising from
loans charged off and recoveries on loans previously charged off by loan
category, and additions to the allowance which have been charged to
operating expenses.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
(Thousands Of Dollars)
<S> <C> <C> <C> <C> <C>
Average amount of net
loans outstanding $ 113,820 $ 117,029 $ 113,123 $ 113,515 $ 110,523
Amount of allowance for
loan losses at beginning
of period $ 1,999 $ 2,009 $ 2,140 $ 2,028 $ 1,825
Reserve for loan losses of
acquired affiliate - - - - 162
Amount of loans charged off
during period:
Commercial, financial and
agricultural 201 69 234 35 12
Real estate - mortgage 37 11 1 51 10
Installment 127 234 136 127 99
Total loans charged off 365 314 371 213 121
Amount of recoveries during
period:
Commercial, financial, and
agricultural 31 26 11 - 1
Real estate - mortgage 2 0 5 11 2
Installment 56 48 44 54 39
Total loans recovered 89 74 60 65 42
Net loans charged off
during period 276 240 311 148 79
Additions to allowance for
loan losses charged to
operating expense during
period 280 230 180 260 120
Amount of allowance for
loan losses at end
of period $ 2,003 $ 1,999 $ 2,009 $ 2,140 $ 2,028
<PAGE>
Ratio of net charge-offs
during period to average
loans outstanding for
the period .24% .21% .27% .13% .07%
</TABLE>
The allowance is based upon management's analysis of the portfolio under
current and expected economic conditions. This analysis includes a study
of loss experience, a review of delinquencies, and an estimate of the
possibility of loss in view of the risk characteristics of the portfolio.
Based on the above factors, management considers the current allowance to
be adequate.
-23-
Allocation of Allowance For Loan Losses
Management has allocated the allowance for loan losses within the
categories of loans set forth in the table below according to amounts
deemed reasonably necessary to provide for possible losses. The amount of
the allowance applicable to each category and the percentage of loans in
each category to total loans are presented below.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
Percent Of Percent Of Percent Of
Loans In Loans In Loans In
Category Allocation Category Allocation Category Allocation Category
(Thousands Of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial
and agricultural $ 268 13.4% $ 271 13.6% $ 402 15.9%
Real estate - mortgage 1,538 76.8% 1,523 76.2% 1,406 73.8%
Installment 197 9.8% 205 10.2% 201 10.3%
Total $ 2,003 100.0% $ 1,999 100.0% $ 2,009 100.0%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Percent Of Percent Of
Loans In Loans In
Category Allocation Category Allocation Category
(Thousands Of Dollars)
<S> <C> <C> <C> <C>
Domestic:
Commercial, financial
and agricultural $ 449 13.7% $ 440 12.5%
Real estate - mortgage 1,476 76.2% 1,388 77.8%
Installment 215 10.1% 200 9.7%
Total $ 2,140 100.0% $ 2,028 100.0%
</TABLE>
The calculation is based upon total loans including unearned interest.
Management believes that the portfolio is well diversified and, to a large
extent, secured without undue concentrations in any specific risk area.
<PAGE>
Control of loan quality is regularly monitored by management and is
reviewed by the Bank's Board of Directors which meets monthly. Independent
external review of the loan portfolio is provided by examinations conducted
by regulatory authorities. The amount of additions to the allowance for
loan losses charged to operating expense for the periods indicated were
based upon many factors, including actual charge offs and evaluations of
current and prospective economic conditions in the market area. Management
believes the allowance for loan losses is adequate to cover any potential
loan losses.
-24-
Deposits
The average amounts of deposits for the last three years are presented
below.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(Thousands Of Dollars)
<S> <C> <C> <C>
Domestic Bank Offices
Noninterest-bearing
demand deposits $ 21,706 $ 20,918 $ 19,622
NOW accounts 38,135 34,332 34,020
Money market deposit
accounts 9,164 11,905 11,894
Savings 13,822 14,373 15,602
Time deposits 96,887 92,409 89,227
Total interest-bearing 158,008 153,019 150,743
Total average deposits $ 179,714 $ 173,937 $ 170,365
</TABLE>
The maturity of certificates of $100,000 or more as of December 31, 1998,
are presented below.
<TABLE>
<CAPTION>
(Thousands Of Dollars)
<S> <C>
3 months or less $ 7,198
Over 3 months through 6 months 6,078
Over 6 months through 12 months 6,884
Over 12 months 4,227
Total outstanding $ 24,387
</TABLE>
-25-
<PAGE>
Return On Equity And Assets
Certain financial ratios are presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Return on average assets 1.66% 1.62% 1.51%
Return on average equity 13.74% 14.37% 14.46%
Dividend payout ratio
(dividends declared
divided by net income) 31.88% 30.65% 21.52%
Average equity to average
assets ratio 12.10% 11.28% 10.42%
</TABLE>
Item 2 - Property
The executive offices of the Registrant and the main banking office of the
Bank are located in a 19,000 square foot facility at 201 First Street, S.
E., Moultrie, Georgia. Also, in 1991 the Registrant acquired an 11,000
square foot Federal Branch office, and an adjacent 5,000 square foot
building was renovated in 1992 for the Bank's Operations Center. The Trust
Division has been relocated to the federal branch building located at 25
Second Avenue, Moultrie, Georgia. In 1993 the Registrant purchased a
vacant building and lot located across the street from the main office at
205 Second Street, S. E., Moultrie, Georgia. This building was renovated
for the Bank's Administrative Services Division offices, training and
meeting rooms, and record storage. In 1994 the Registrant acquired a 4,400
square foot Baker County branch banking office located at the intersection
of Highways 91 and 200, Newton, Georgia. In 1998, the Registrant acquired
a 3,900 square foot Bank of Pavo branch banking office located at 1102 West
Harris Street, Pavo, Georgia. All of these facilities are adequate for
present operations.
All the buildings and land, which include parking and ten drive-in teller
stations, are owned by the Bank. There are two automated teller machines
on the Bank's main office premises, one in the Baker County branch office
and the Bank of Pavo branch office, and one additional automated teller
machine located in Doerun, Georgia. These automated teller machines are
linked to the Honor network of automated teller machines.
Item 3 - Legal Proceedings
There are no material pending legal proceedings to which the Registrant or
the Bank is a party or to which any of their property is subject.
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of 1998 for a
vote of the security holders through the solicitation of proxies or
otherwise.
-26-
<PAGE>
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters
Market for common equity and related stockholder matters appear under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operation" on pages 13 through 21 of the Registrant's 1998
Annual Report to Shareholders and is incorporated herein by reference.
Item 6 - Selected Financial Data
Five years of selected financial data appears on page 11 and 12 of the
Registrant's 1998 Annual Report to Shareholders and is incorporated herein
by reference.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis of financial condition and results of
operation appears under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 13 through 21 of
the Registrant's 1998 Annual Report to Shareholders and is incorporated
herein by reference. For further information about the Registrant, see
Selected Statistical Information on pages 14 - 26 of this report on Form
10-K.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Management's quantitative and qualitative information about market risk
appears under the caption "Quantitative and Qualitative Disclosures About
Market Risk" on pages 19 through 21 of the Registrant's 1998 Annual Report
to Shareholders and is incorporated herein by reference.
Item 8 - Financial Statements and Supplementary Data
The report of independent auditors, the consolidated financial statements,
and notes to the consolidated financial statements on pages 22 through 48
of the Registrant's 1998 Annual Report to Shareholders are incorporated
herein by reference.
Item 9 - Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
During the Registrant's two most recent fiscal years, the Registrant did
not change accountants and had no disagreement with its accountants on any
matter of accounting principles or practices or financial statement
disclosure.
-27-
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant
The information contained under the heading "Information About Nominees For
Director" in the definitive Proxy Statement used in connection with the
solicitation of proxies for the Registrant's annual meeting of shareholders
to be held on April 27, 1999, filed with the Commission, is incorporated
herein by reference. Information on Form 10-K relating to the executive
officers of the Registrant is included in Item 1 of this report.
Item 11 - Executive Compensation
The information contained under the heading "Executive Compensation" in the
definitive Proxy Statement used in connection with the solicitation of
proxies for the Registrant's annual meeting of shareholders to be held on
April 27, 1999, filed with the Commission, is incorporated herein by
reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Voting Securities and
Principal Holders" in the definitive Proxy Statement used in connection
with the solicitation of proxies for the Registrant's annual meeting of
shareholders to be held on April 27, 1999, filed with the Commission, is
incorporated herein by reference. For purposes of determining the
aggregate market value of the Registrant's voting stock held by
nonaffiliates, shares held by all directors and executive officers of the
Registrant have been excluded. The exclusion of such shares is not
intended to, and shall not, constitute a determination as to which persons
or entities may be "affiliates" of the Registrant as defined by the
Securities and Exchange Commission.
Item 13 - Certain Relationships and Related Transactions
The information contained under the heading "Certain Relationships and
Related Transactions" in the definitive Proxy Statement used in connection
with the solicitation of proxies for the Registrant's annual meeting of
shareholders to be held on April 27, 1999, filed with the Commission, is
incorporated herein by reference.
-28-
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. Exhibits:
The exhibits filed as part of this registration statement are as follows:
Exhibit
Number Description Of Exhibit
3.1 Articles of Incorporation of Southwest Georgia Financial
Corporation, as amended and restated (included as Exhibit 3.1 to the
<PAGE>
Registrant's Form 10-KSB dated December 31, 1996, previously filed with
the commission and incorporated herein by reference).
3.2 By-Laws of the Registrant as amended (included as Exhibit
3.2 to the Registrant's Form 10-KSB dated December 31, 1995, previously
filed with the Commission and incorporated herein by reference).
10.1 Pension Retirement Plan of the Registrant, as amended and
restated (included as Exhibit 10.1 to the Registrant's Form 10-KSB dated
December 31, 1994, and previously filed with the Commission and
incorporated herein by reference).*
10.2 Form of Directors' Deferred Compensation Plan of the
Registrant (included as Exhibit 10.3 to the Registrant's Form S-18 dated
January 23, 1990, previously filed with the Commission and incorporated
herein by reference).*
10.3 Employment Agreement of John H. Clark, as amended (included
as Exhibit 10.3 to the Registrant's Form 10-K dated December 31, 1997,
previously filed with the Commission and incorporated herein by
reference).*
10.4 Directors' and Executive Officers' Stock Purchase Plan of the
Registrant dated March 18, 1992 (included as Exhibit 10.7 to the
Registrant's Form 10-KSB dated December 31, 1992, previously filed
with the Commission and incorporated herein by reference).*
10.5 Advances, specific collateral pledged, and security agreement between
the Federal Home Loan Bank of Atlanta and the Bank dated January 27,
1992, and confirmation of credit services transaction for new money
advances in the amount of $4,000,000 dated February 10, 1992,
$2,500,000 dated September 4, 1992, and $1,500,000 dated September 8,
1992 (included as Exhibit 10.10 to the Registrant's Form 10-KSB dated
December 31, 1992, previously filed with the Commission and incorporated
herein by reference).
10.6a Supplemental Retirement Plan of the Registrant dated
December 21, 1994 (included as Exhibit 10.11 to the Registrant's Form
10-KSB dated December 31, 1994, previously filed with the Commission
and incorporated herein by reference).*
-29-
10.6b Trust under the Registrant's Supplemental Retirement
Plan, as amended (included as Exhibit 10.6b to the Registrant's Form
10-K dated December 31, 1997, previously filed with the Commission and
incorporated herein by reference).*
10.7 Employee Stock Ownership Plan and Trust of the Registrant as
amended by Amendment No. 2 (included as Exhibit 10.13 to the
Registrant's Form 10-KSB dated December 31, 1994, previously filed with
the Commission and incorporated herein by reference).*
10.8 Dividend Reinvestment and Share Purchases Plan of the Registrant as
amended and restated by Amendment No. 1 (included as Exhibit 99 to the
Registrant's Form S-3DPOS dated September 30, 1998, previously filed
with the Commission and incorporated herein by reference).
<PAGE>
10.9 Key Individual Stock Option Plan of the Registrant dated
March 19, 1997 (included as Exhibit 10.9 to the Registrant's Form 10-K
dated December 31, 1997, previously filed with the Commission and
incorporated herein by reference).*
13 Southwest Georgia Financial Corporation Annual Report to
Shareholders for the fiscal year ended December 31, 1998. With the
exception of information expressly incorporated herein, the 1998 Annual
Report to Shareholders is not deemed to be filed as part of this Report
on Form 10-K.
22 Subsidiaries of the Registrant (included as Exhibit 22 to
the Registrant's Form 10-KSB dated December 31, 1995, previously filed
with the Commission and incorporated herein by reference).
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form.
b. No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1998.
-30-
Exhibit Index
Exhibit Number Description Of Exhibit Page Number
13 Southwest Georgia Financial Corporation Annual 34
Report to Shareholders for the fiscal year ended
December 31, 1998. With the exception of
information expressly incorporated herein, the
1998 Annual Report to Shareholders is not deemed
to be filed as part of this Report on Form 10-K.
-31-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
Date:March 24, 1999 By: /s/ John H. Clark
JOHN H. CLARK
VICE CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ John H. Clark Date: March 24, 1999
JOHN H. CLARK
Vice Chairman and Chief Executive Officer
[Principal Executive Officer]
/s/ George R. Kirkland Date: March 24, 1999
GEORGE R. KIRKLAND
Senior Vice-President and Treasurer
[Principal Financial and Accounting Officer]
/s/ Leo T. Barber, Jr. Date: March 24, 1999
LEO T. BARBER, JR.
Chairman and Director
/s/ Albert W. Barber Date: March 24, 1999
ALBERT W. BARBER
Director
/s/ Jack Short Date: March 24, 1999
JACK SHORT
Director
-32-
/s/ Robert M. Duggan Date: March 24, 1999
ROBERT M. DUGGAN
Director
/s/ Richard L. Moss Date: March 24, 1999
RICHARD L. MOSS
Director
/s/ E. J. McLean, Jr. Date: March 24, 1999
E. J. MCLEAN, JR.
Director
/s/ Johnny R. Slocumb Date: March 24, 1999
JOHNNY R. SLOCUMB
Director
/s/ Roy Reeves Date: March 24, 1999
ROY REEVES
Director
/s/ Lee C. Redding Date: March 24, 1999
LEE C. REDDING
Director
/s/ Cecil W. Alvis Date: March 24, 1999
CECIL W. ALVIS
Chief Operating Officer and Director
-33-
<PAGE>
<TABLE>
SOUTHWEST GEORGIA FINANCIAL CORPORATION
Five Year Selected Financial Data
__________
<CAPTION>
Years Ended December 31
1998 1997 1996 1995 1994
(Thousands Of Dollars Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Statement of Condition:
Total assets $ 230,198 $ 213,957 $ 209,483 $ 207,364 $ 202,447
Loans, net 113,495 117,545 114,200 114,453 116,267
Deposits 191,087 176,435 172,869 173,810 170,215
Shareholders' equity 27,588 24,916 22,513 20,005 17,707
Average total assets 217,836 211,238 205,316 201,814 187,485
Average shareholders' equity 26,356 23,835 21,391 19,145 16,938
Book value per share 10.75 9.72 8.79 7.83 6.98
Cash dividends paid per share .44 .40 .32 .30 .26
Reserve for possible loan
losses to loans 1.73% 1.67% 1.73% 1.84% 1.71%
Statement of income:
Net income 3,621 3,426 3,092 2,949 2,669
Net income per share 1.41 1.34 1.21 1.16 1.06
Weighted average number of
shares outstanding 2,564,866 2,561,025 2,557,474 2,545,622 2,532,868
Ratios:
Return on average total assets 1.66% 1.62% 1.51% 1.46% 1.42%
Return on average
shareholders' equity 13.74% 14.37% 14.46% 15.40% 15.76%
Net interest margin 5.43% 5.42% 5.27% 5.31% 5.33%
Dividend payout ratio 31.88% 30.65% 21.52% 26.79% 26.61%
Average shareholders' equity
to average total assets 12.10% 11.28% 10.42% 9.49% 9.03%
</TABLE>
-34-
Introduction
The following financial review presents management's discussion and
analysis of significant changes in the consolidated financial position and
results of operations of Southwest Georgia Financial Corporation
("Corporation"). This commentary should be read in conjunction with
information provided in the Consolidated Financial Statements and
accompanying footnotes.
Earnings Overview
The Corporation's net income for 1998 increased 5.7 percent to $3.621
million from the $3.426 million earned in 1997. Between 1997 and 1996, net
income increased 10.8 percent. In 1998, the Corporation's earnings per
share increased to $1.41 compared to $1.34 in 1997 and $1.21 in 1996.
<PAGE>
The Corporation continues to show strong key performance measurements in
both return on average assets and return on average stockholders' equity.
In 1998, the Corporation's return on average assets, which reflects
utilization of assets, was 1.66 percent compared to 1.62 percent in 1997.
Return on average stockholders' equity, which measures return on
stockholders' investment, was 13.74 percent in 1998 compared to 14.37
percent in 1997.
The $195 thousand increase in net earnings for 1998 was primarily
attributable to higher net interest income, dividends received from the
purchase of stock of Empire Financial Services, and gains on the sale of
foreclosed property. Also, the operation of the Baker County branch,
acquired in December 1994, continues to contribute to the Corporation's
growth in net earnings.
RESULTS OF OPERATIONS
Net Interest Income
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. This level of net
interest income continues to impact the Corporation's earnings performance
in a positive way. Net interest income for 1998 increased $221 thousand, or
2.1 percent, compared to 1997. The amount of net interest income is
determined primarily by the volume of earning assets and the various rate
spreads between these assets and their funding sources.
The key performance measure for net interest income is the net interest
margin, defined as taxable equivalent net interest income divided by
average earning assets. The Corporation's net interest margin increased to
5.43 percent for 1998 compared to 5.42 percent for 1997.
After the prime rate remained unchanged from March 1997, it decreased 75
basis points in the fourth quarter of 1998. The prime interest rate
changed three times in 1998 compared to once in 1997 and 1996. The
Corporation's base rate decreased to 9.75 percent during the last quarter
of 1998 and remained at that level. This favorable level of loan rates for
most of 1998 provided the Corporation with significant interest income from
base-related loans.
A key factor influencing the Corporation's interest rate margins has been
the Corporation's mix of earning assets and interest-bearing liabilities.
Interest income from earning assets increased over $429 thousand in 1998
compared to 1997, while interest expenses increased $208 thousand for the
same period. This $429 thousand increase in interest income resulted
primarily from growth in the average investment portfolio of $5 million and
from dividends received in the purchase of stock of Empire Financial
-35-
Services. Another factor which had a positive effect on the Corporation's
net interest income for 1998 was the growth in average noninterest-bearing
deposits. During 1997, the $550 thousand increase in net interest income
resulted primarily from the growth in the average loan portfolio and
dividends received in the stock investment of Empire Financial Services.
<PAGE>
Noninterest Income
Noninterest income totaled $1.8 million for 1998, representing an increase
of approximately $272 thousand, or 18.0 percent, from 1997. This increase
in noninterest income was primarily attributable to a $211 thousand
increase in income from gains on the sale of other real estate property
along with increases in service charges on deposit accounts and fees for
trust services. The largest components of noninterest income are service
charges and fees on deposit accounts, and these increased 2.9 percent in
1998 when compared to 1997.
Noninterest Expense
Noninterest expense totaled $6.9 million for 1998, an increase of 2.9
percent compared to 1997. Representing over one-half of the total
noninterest expense, salaries and employee benefits increased 1.3 percent
from 1997. Nearly all of this 1998 increase was from merit and promotional
increases. The level of full-time equivalent employees decreased by 2 to a
total of 100, comparing December 31, 1998 to the prior year end. Nearly
half of the increase in salary and employee benefits in 1997 compared to
1996 was due primarily to growth in management staff, and the remaining
increase was from merit and promotional increases.
Data processing expenses increased $100 thousand or 28 percent in 1998
compared to 1997. Nearly all of this increase from the previous year
resulted primarily from the increased price of data processing services
from the Corporation's primary data processing service bureau. This
increase was the result of the service bureau changing its method of
charging customers by using item counts.
The other operating expense component of noninterest expense decreased $15
thousand or nearly 1 percent in 1998 compared to 1997. The major 1998
decrease in other operating expenses occurred in amortization of purchased
deposit premium. The majority of the decrease in other operating expense
in 1997 compared to 1996 was due to reductions in FDIC deposit insurance
assessment.
The Corporation continues to emphasize the importance of strong budgetary
controls and is committed to maintaining a level of noninterest expenses
that keeps it in line with business volume levels. Also, management will
continue to monitor expenses closely with emphasis on seeking out more
efficient and cost effective ways to operate.
FINANCIAL CONDITION
Earning Assets
The Corporation, primarily through its banking subsidiary Southwest Georgia
Bank, acts as a financial intermediary. As such, its financial condition
should be considered in terms of how the Corporation manages its sources
and uses of funds. During 1998, total average assets of $218 million
increased $6.6 million, or 3.1 percent, compared to 1997.
-36-
<PAGE>
The Corporation's earning assets, which include loans, investment
securities, deposits at the Federal Home Loan Bank, and federal funds sold,
averaged $203 million in 1998. This year's average earning assets
represented a 3.1 percent increase from $197 million in 1997. The earning
asset mix remained relatively stable during the year. For 1998, average
earning assets were comprised of 56 percent loans, 39 percent investment
securities, and 5 percent federal funds sold and funds at the Federal Home
Loan Bank. The ratio of earning assets to total assets remained stable at
93.2 percent for both 1998 and 1997.
Loans
Loans are one of the Corporation's largest earning assets and users of
funds, and because of their importance, most of the other assets and
liabilities are managed to accommodate the needs of the loan portfolio.
During 1998, average net loans represented 56 percent of average earning
assets and 52 percent of average total assets. Average total loans
decreased $3.2 million, or 2.7 percent, in 1998. This drop in the loan
portfolio resulted from payoffs on some large loans, mostly those from
outside of the local service area. Also, the loan demand from the local
service area has been relatively flat for the past several years. In 1998,
the loan category of commercial, financial, and agricultural loans
decreased 9.3 percent from its December 31, 1997, level. Also, real estate
loans decreased 1.5 percent, while consumer loans decreased 6.9 percent
from the level of the previous year.
As a result of the decrease in loan growth, the ratio of total loans to
total deposits at year end decreased to 60.5 percent in 1998 from 67.8
percent in 1997. The mix of the loan portfolio for the 1998 year end
consisted of 30.1 percent of loans secured by 1-4 family residences, 3.6
percent of loans secured by multifamily residences, 5.9 percent of loans
secured by farmland, and 37.3 percent of loans secured by nonfarm and
nonresidential properties. Also, included in the mix of the loan portfolio
were 13.4 percent of loans for other commercial, industrial, and
agricultural purposes and 9.7 percent of loans to individuals for
household, family, and other personal expenditures.
Allowance and Provision for Possible Loan Losses
The allowance for possible loan losses was $2.0 million, or 1.73 percent of
total loans outstanding, at December 31, 1998. This level represented a $4
thousand increase from the corresponding 1997 year-end amount, which was
1.67 percent of total loans outstanding. The provision for loan losses was
$280 thousand in 1998, an increase from the prior year's provision by $50
thousand. This provision reflected management's assessment of the adequacy
of the allowance for loan losses to absorb write-offs in the loan
portfolio.
The Corporation's management has not changed the lending practices and
philosophy which have provided them with an exceptionally low charge-off
record over the past several years. Also, management has an extensive loan
review program in place which provides for the regular examination and
evaluation of the risk elements within the loan portfolio. The adequacy of
the allowance for loan losses is regularly evaluated based on the review of
all significant loans with particular emphasis on nonaccruing, past due,
and other loans that management has identified as potential problems.
<PAGE>
Nonperforming Assets
Nonperforming assets are defined as being all nonaccrual and renegotiated
loans and other real estate acquired by foreclosure and held for sale. The
level of nonperforming assets increased $315 thousand comparing year-end
1998 to year-end 1997. Primarily, this increase resulted from one large
nonaccrual loan in the process of foreclosure.
-37-
Nonperforming assets were approximately $2.1 million, or 1.82 percent of
total loans and other real estate, as of December 31, 1998, compared to
$1.8 million, or 1.48 percent of total loans and other real estate, at
year-end 1997.
Investment Securities and Federal Funds Sold
The Corporation's investment securities consist primarily of U.S.
Government and U.S. Government agency securities. The investment portfolio
serves several important functions for the Corporation, and investment
decisions are designed to complement loan demand and satisfy pledging
requirements in the most profitable way possible. The investment portfolio
is a source of liquidity when loan demand exceeds funding availability. It
is a vehicle for adjusting balance sheet sensitivity to cushion against
adverse rate movements and is a means of improving profitability. The
Corporation's investment portfolio provides adequate liquidity by
maintaining a portfolio with staggered maturities ranging from one to five
years.
The total investment portfolio increased to $80.6 million from $66.8
million comparing year-end 1998 to 1997, an increase of $13.8 million, or
20.6 percent. The average total investment portfolio increased to 78.2
million in 1998 compared to $72.8 million for 1997.
During 1998, average total investment securities accounted for 39 percent
of the average earning assets and 36 percent of the average total assets.
At December 31, 1998, the investment securities held to maturity had a
market value of $70.3 million and a carrying value of $69.1 million. The
growth in securities available for sale was primarily attributed to an $8.9
million investment in state and municipal securities. As of December 31,
1998, the securities available for sale had a market value of $11.5 million
and a carrying value of $11.4 million. The Corporation will continue to
actively manage the size, components, and maturity structure of the
investment securities portfolio. Future investment strategies will
continue to be based on profit objectives, economic conditions, and efforts
to maximize the balance sheet capacity.
Average federal funds sold and Federal Home Loan Bank deposits represented
approximately 5.4 percent of the average earning assets for 1998 compared
to 3.6 percent in 1997. These short-term money market investments were used
by the Corporation as liquid investment vehicles for short-term funds.
Deposits and Other Interest-Bearing Liabilities
The Corporation's 1998 level of average deposits grew 3.3 percent from the
previous year. Average deposits, the primary source of the Corporation's
funds, increased $5.8 million during 1998 compared to 1997. The
<PAGE>
Corporation's average core deposits remained relatively stable at
approximately 84 percent of average total deposits when compared to the
previous year. Core deposits are defined as total deposits less public
funds and time deposits of $100 thousand or more. This strong base of
core deposits, which has a lower cost than purchased funds, provides funds
for lending and investment activities. The average total deposits of
$179.7 million increased from the 1997 level of $173.9 million. The
majority of the average deposit growth occurred in average time deposits
and average NOW accounts partially offset by decreases in average money
market account deposits. During 1998, the Corporation's deposit mix
changed by shifting out of lower interest-paying deposit accounts to
certificates of deposit on which higher rates are paid. At December 31,
1998, the Corporation had a total of $24.4 million in certificates of
deposit with a value of $100 thousand or more each. This was a 19.0
percent increase from the $20.5 million total in 1997.
-38-
The Corporation maintains only a few customers' funds as securities sold
under agreements to repurchase. The 1998 average of $498 thousand of such
funds, represented a decrease of $1.4 million when compared to 1997. Also,
the Corporation continues to borrow $1.5 million at a fixed rate for one
year from the Federal Home Loan Bank to support its community investment
program lending. Long-term debt remained stable at $8 million comparing
December 31, 1998, to year-end 1997. This source of funds from the Federal
Home Loan Bank provides funding for the Corporation to support its longer-
term residential mortgage lending.
Liquidity
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. Many factors affect the ability to accomplish
these liquidity objectives successfully including the economic environment,
the Corporation's asset/liability mix, and the Corporation's overall
reputation and credit standing in the marketplace.
The Consolidated Statement of Cash Flow details the Corporation's cash flow
from operating, investing, and financing activities. During 1998,
operating activities generated cash flow of $3.8 million, while financing
activities provided $12.6 million. Investing activities consumed $15.2
million of this, resulting in a net increase in cash and cash equivalents
of $1.2 million. Generally, growth in loans has been funded by an increase
in deposits. Excess cash from acquired deposits that were not used to meet
loan demand was invested in securities. Cash produced from operations
continues to provide cash primarily for the payment of dividends and
repayment of long-term debt.
Liability liquidity represents the Corporation's ability to renew or
replace its short-term borrowings and deposits as they mature or are
withdrawn. The Corporation's deposit mix includes a significant amount of
core deposits which are defined as total deposits less public funds and
<PAGE>
time deposits of $100 thousand or more. These funds are stable in that
they are generally accounts of individual customers who are concerned not
only with rates paid, but with the value of services received, such as
efficient operations performed by helpful personnel. Total core deposits
represented 81.0 percent of total deposits at December 31, 1998, compared
to 83.6 percent in 1997.
Asset liquidity is provided through ordinary business activity such as cash
which is received from interest and fee payments as well as from maturing
loans and investments. Additional sources include marketable securities
and short-term investments which can be easily converted to cash without
significant loss. The Corporation's investment securities maturing within
one year or less amounted to $14.0 million at December 31, 1998, which
represented 17.9 percent of the investment debt securities portfolio.
The Corporation's management is not aware of any known trends, events, or
uncertainties that will have or that are reasonably likely to have a
material effect on the Corporation's liquidity or operations. Management
is not aware of any current recommendations by regulatory authorities
which, if they were to be implemented, would have such an effect.
-39-
Capital Resources and Dividends
Capital adequacy, a measure of the amount of capital needed to sustain
asset growth, continues to be a point of concentrated interest for the
entire banking industry. The Corporation continues to maintain a healthy
level of capital adequacy as measured by its average equity to average
assets ratio of 12.1 percent in 1998 and 11.3 percent in 1997.
The Federal Reserve Board has issued guidelines regarding risk-based
capital requirements for U.S. banks and bank holding companies. Overall,
these guidelines redefine the components of capital, require higher levels
of capital for higher risk assets and lower levels of capital for lower
risk assets, and include certain off-balance-sheet items in the calculation
of capital requirements. The risk-based capital regulations require banks
to maintain an 8 percent ratio, of which 4 percent must consist primarily
of tangible common shareholders' equity (tier one capital). At year-end
1998, the Corporation was well in excess of the minimum requirements under
the guidelines with a total risk-based capital ratio of 22.51 percent, a
tier one risk-based capital ratio of 21.25 percent, and a leverage ratio of
12.60 percent.
The following table presents the risk-based capital and leverage ratios for
year-end 1998 and 1997 in comparison to the minimum regulatory guidelines:
<TABLE>
<CAPTION>
Minimum
December 31, December 31, Regulatory
Risk-Based Capital Ratios 1998 1997 Guidelines
<S> <C> <C> <C>
Tier One Risk-Based 21.25% 21.15% 4.00%
Total Risk-Based 22.51% 19.89% 8.00%
Leverage 12.60% 11.51% 3.00%
</TABLE>
<PAGE>
As set forth in the table below, in 1998 the Corporation's stock traded as
high as $26 9/16, and the closing price at year-end was $24 3/8 per share.
Common Stock Market Prices
<TABLE>
<CAPTION>
1999
For The
Two Months Ended
February 28, 1999
<S> <C>
High ............................. $ 24 1/8
Low.............................. $ 20 7/8
</TABLE>
<TABLE>
<CAPTION>
1998
For The Quarter Fourth Third Second First
<S> <C> <C> <C> <C>
High ............... $ 26 $ 24 1/8 $ 26 9/16 $ 23 7/8
Low................. $ 18 1/2 $ 18 1/4 $ 23 1/8 $ 18 3/4
</TABLE>
-40-
<TABLE>
<CAPTION>
1997
For The Quarter Fourth Third Second First
<S> <C> <C> <C> <C>
High ............... $ 20 1/2 $ 18 $ 18 7/8 $ 18 1/2
Low................ $ 17 5/8 $ 17 1/8 $ 15 7/8 $ 16
</TABLE>
The principal market for trading of the common stock is the American Stock
Exchange under the symbol SGB.
As of December 31, 1998, there were 557 holders of record of the
Corporation's common stock. The cash dividends paid on the Corporation's
common stock were $.44 in 1998 and $.40 in 1997. The Corporation has a
policy objective of paying out a portion of earnings in dividends to its
shareholders. The Corporation's dividend paid was $1.128 million in 1998
and $1.024 million in 1997. The Corporation intends to continue paying
dividends. However, the amount and frequency of dividends will be
determined by the Corporation's Board of Directors in light of the
earnings, capital requirements and financial condition of the Corporation,
and no assurance can be given that dividends will be declared in the
future. The primary source of funds available to the parent Corporation is
the payment of dividends by its subsidiary bank. Federal and State banking
laws restrict the amount of dividends that can be paid without regulatory
approval. Southwest Georgia Bank has paid cash dividends on an annual,
semi-annual, or quarterly basis on common stock for the past seventy-one
consecutive years.
<PAGE>
The Corporation's management is not aware of any current recommendation by
the regulatory authorities which, if they were to be implemented, would
have a material effect on the Corporation's capital resources.
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 which is characterized by volatile short-term movements in
interest rates. Also, the Corporation has no interest rate swaps or other
derivative instruments which are either designated and effective as hedges
or which 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 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 management. The Corporation
maintains an investment portfolio which staggers maturities and provides
flexibility over time in managing exposure to changes in interest rates.
Any imbalances in the repricing opportunities at any point in time
constitute a financial institution's interest rate sensitivity.
-41-
<TABLE>
December 31, 1998
Expected Maturity/Repricing Dates
(Dollars In Thousands)
<CAPTION>
2004
and Fair
1999 2000 2001 2002 2003 Beyond Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Short-term investments $ 19,852 $ - $ - $ - $ - $ - $ 19,852 $ 19,852
Average interest rate 4.86% - - - - - 4.86% -
Securities available for sale - - - - - 11,544 11,544 11,544
Average interest rate - - - - - 11.50% 11.50% -
Securities held to maturity 18,070 25,799 9,357 4,542 5,550 5,768 69,086 70,309
Average interest rate 6.57% 6.40% 6.26% 5.75% 5.81% 6.20% 6.32% -
Fixed-rate loans 4,533 2,523 3,522 3,807 2,160 32,794 49,339 51,735
Average interest rate 10.43% 12.37% 11.10% 9.85% 10.05% 9.73% 10.05% -
Variable-rate loans 62,279 1,462 2,418 - - - 66,159 65,309
Average interest rate 9.15% 9.60% 8.54% - - - 9.14% -
<PAGE>
Financial Liabilities:
Time deposits 90,233 4,950 2,821 2,202 1,105 - 101,311 102,549
Average interest rate 5.32% 5.81% 5.97% 6.02% 5.82% - 5.38% -
Other interest-bearing
deposits* 65,887 - - - - - 65,887 65,887
Average interest rate 2.09% - - - - - 2.09% -
Short-term borrowings 1,865 - - - - - 1,865 1,867
Average interest rate 5.73% - - - - - 5.73% -
Long-term debt - - - - 8,000 - 8,000 8,127
Average interest rate - - - - 6.02% - 6.02% -
Unrecognized Financial Instruments:
Commitments to extend
credit 26,739 - - - - - 26,739 26,739
Standby letters of credit 45 - - - - - 45 45
</TABLE>
* Interest-bearing deposits with no maturity.
The table above provides information about the Corporation's financial
assets and liabilities that are sensitive to changes in interest rates.
For each financial asset and liability listed above, the table presents
principal cash flows and related weighted average interest rates by
expected maturity or the earliest possible repricing opportunity dates.
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, which is referred to as the "gap." A gap
analysis displays the earliest possible repricing opportunity for each
asset and liability category based upon contractual maturities and
repricing. At year-end 1998, the Corporation's one-year cumulative
rate-sensitive assets represented 106 percent of the cumulative
rate-sensitive liabilities compared to 109 percent for 1997. This change
in the cumulative gap is a result of the Corporation's management of its
exposure to interest rate risk. In a declining rate environment, the
Corporation has become less asset-sensitive at one year. This position
will be profitable to the Corporation by repricing assets less frequently
than liabilities if interest rates decrease. During the past few years,
-42-
the Corporation's exposure to interest rate risk declined as a result of
the Corporation acquiring long-term funds from the Federal Home Loan Bank
for a fixed rate of interest to help support real estate mortgage lending.
However, since all interest rates and yields do not adjust at the same
velocity, 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 to ensure that the
effects of interest rate movements in either direction are not significant
over time.
<PAGE>
Year 2000 Issue
Management of the Corporation and its subsidiary bank is acutely aware of
the Year 2000 issue arising from the widespread use of computer programs
that rely on two-digit date codes to perform computations or
decision-making functions. Management has an ongoing program designed to
ensure that its operational and financial systems will not be adversely
affected by Year 2000 software failures due to an inability to properly
interpret date codes beginning January 1, 2000.
In preparation for Year 2000, the Corporation has implemented a plan to
meet Year 2000 readiness and to evaluate risks associated with the Year
2000 issue. This plan is fully supported by management and the Board of
Directors. All areas of the Corporation and the Bank were reviewed to
determine the Year 2000 status of all outsourced systems and in-house
systems and equipment.
To facilitate the assessment of both outsourced and in-house systems and
equipment of the Corporation and Bank, the systems and equipment were
segregated into two basic areas for evaluation. These are: (1) systems
or equipment that are deemed mission critical, and (2) systems or equipment
that are not deemed to be mission critical. All mission critical systems
were identified by the end of the third quarter of 1997. In a large number
of instances, it was determined that the systems and equipment will not be
affected by the Year 2000 issue. As of September 30, 1998, the Corporation
had received written assurance from most of the companies listed in its
vendor inventory list indicating that their systems are or will be Year
2000-compliant. All systems and equipment Year 2000 renovations have been
substantially completed, and testing is in process to be completed by March
31, 1999. All Year 2000-compliant implementations are scheduled to be
fully completed by the end of the first quarter of 1999.
The most significant vendor to the Corporation, which acts as a service
bureau for the Bank's data processing, has completed its system renovation
and is in the testing process. The Corporation has and will continue to
participate in the testing and verification of Year 2000-related changes
made by that vendor. Other than normal upgrading software and equipment for
enhancements, the Corporation has not and does not expect to incur any
expenses directly associated with the Year 2000 compliance. It is
recognized that any Year 2000 compliance failures could result in
additional expenses to the Corporation.
In addition to assessing both its own and vendors' systems and equipment
for Year 2000 compliance, the Bank has examined closely all large borrowers
to determine their awareness of and plans to address the Year 2000 issue.
While management is diligently working to assure Year 2000 compliance,
compliance by the Bank is largely dependent upon compliance by vendors,
primarily in the area of data processing. Management is requiring its
computer system and software vendors to represent that the products are, or
will be, Year 2000-compliant and has planned a program for testing for
compliance.
Although management believes that the Bank's systems will be Year
2000-compliant, a written contingency plan has been developed to address
potential problems that might be caused from Year 2000-compliant system
failures. Management does not expect that the Year 2000 potential problems
addressed by the contingency plan are reasonably likely to occur.
-43-
SOUTHWEST GEORGIA FINANCIAL CORPORATION
MOULTRIE, GEORGIA
__________
CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1998 and 1997
-44-
<PAGE>
C O N T E N T S
__________
Pages
Independent Auditor's Report 46
Consolidated Financial Statements:
Balance Sheets 47
Statements of Income 48
Statements of Comprehensive Income 49
Statements of Changes in Stockholders' Equity 50
Statements of Cash Flows 51
Notes to Financial Statements 52-72
-45-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Directors and Stockholders of Southwest
Georgia Financial Corporation
We have audited the consolidated balance sheets of Southwest Georgia
Financial Corporation and Subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of income, statements of comprehensive
income, changes in stockholders' equity and cash flows for each of the
years in the three year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Southwest Georgia Financial Corporation and Subsidiary at
December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three year period ended December
31, 1998, in conformity with generally accepted accounting principles.
Albany, Georgia
January 26, 1999
-46-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
__________
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,284,746 $ 6,067,222
Interest-bearing deposits with banks 17,526,899 12,178,724
Federal funds sold 2,325,000 2,125,000
Investment securities available
for sale, at fair value 11,544,111 2,184,531
Securities to be held to maturity (estimated
fair value of $70,308,968 and $65,350,520) 69,086,187 64,640,817
Loans, less allowance for loan losses
of $2,003,410 and $1,998,822 113,494,643 117,545,273
Premises and equipment, net 4,802,630 3,925,835
Other assets 4,133,815 5,289,259
Total assets $ 230,198,031 $ 213,956,661
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 23,889,034 $ 21,366,320
NOW accounts 42,344,494 35,497,778
Money market 9,665,691 9,719,999
Savings 13,877,136 13,742,235
Certificates of deposit $100,000 and over 24,386,769 20,484,022
Other time accounts 76,923,935 75,625,128
Total deposits 191,087,059 176,435,482
Federal funds purchased and securities
sold under repurchase agreements 365,000 1,300,300
Other borrowed funds 1,500,000 1,500,000
Long-term debt 8,000,000 8,000,000
Other liabilities 1,658,425 1,804,814
Total liabilities 202,610,484 189,040,596
Stockholders' equity:
Common stock - par value $1; authorized
5,000,000 shares; issued 3,000,000 shares 3,000,000 3,000,000
Capital surplus 2,086,028 2,029,134
Retained earnings 24,761,418 22,294,875
Accumulated other comprehensive income 129,307 -
Treasury stock 434,401 shares for
1998 and 437,808 for 1997, at cost ( 2,389,206) ( 2,407,944)
Total stockholders' equity 27,587,547 24,916,065
Total liabilities and stockholders' equity $ 230,198,031 $ 213,956,661
</TABLE>
See accompanying notes to consolidated financial statements.
-47-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 12,461,509 $ 12,622,438 $ 12,292,142
Interest and dividends on securities:
Taxable 5,143,353 4,869,254 4,624,018
Tax exempt 133,613 18,750 37,500
Interest on deposits in banks 423,593 282,736 151,028
Interest on other short-term investments 161,945 101,375 103,864
Total interest income 18,324,013 17,894,553 17,208,552
Interest expense:
Deposits 6,959,312 6,668,404 6,523,468
Other borrowings 596,503 679,018 688,037
Total interest expense 7,555,815 7,347,422 7,211,505
Net interest income 10,768,198 10,547,131 9,997,047
Provision for loan losses 280,000 230,000 180,000
Net interest income after provision
for loan losses 10,488,198 10,317,131 9,817,047
Noninterest income:
Service charges on deposit accounts 933,648 907,006 867,332
Fees for trust services 269,777 246,951 240,975
Net gain (loss) on sale of assets 219,534 8,149 ( 13,406)
Other income 359,814 348,808 394,512
Total noninterest income 1,782,773 1,510,914 1,489,413
Noninterest expense:
Salaries and employee benefits 4,009,183 3,957,095 3,555,217
Occupancy expense 431,128 382,241 380,696
Equipment expense 434,802 424,781 423,914
Data processing expense 453,240 352,904 326,664
Other operating expenses 1,607,145 1,621,788 1,906,842
Total noninterest expenses 6,935,498 6,738,809 6,593,333
Income before income taxes 5,335,473 5,089,236 4,713,127
Provision for income taxes 1,714,600 1,663,200 1,621,000
Net income $ 3,620,873 $ 3,426,036 $ 3,092,127
Basic earnings per share:
Net income $ 1.41 $ 1.34 $ 1.21
Weighted average shares outstanding 2,564,866 2,561,025 2,557,474
</TABLE>
See accompanying notes to consolidated financial statements.
-48-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 1998, 1997, and 1996
__________
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income $ 3,620,873 $ 3,426,036 $ 3,092,127
Other comprehensive income, net of tax:
Unrealized gains on securities
available for sale:
Unrealized holding gains arising
during the period 134,205 - -
Federal income tax expense ( 4,898) - -
Other comprehensive income,
net of tax 129,307 - -
Total comprehensive income $ 3,750,180 $ 3,426,036 $ 3,092,127
</TABLE>
See accompanying notes to consolidated financial statements.
-49-
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1998, 1997, and 1996
__________
<CAPTION>
Accumulated
Other Total
Common Capital Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Income Stock Equity
<S> <C> <C> <C> <C>
Balance at
December 31, 1995 $ 3,000,000 $ 1,961,067 $ 17,492,226 $ - $(2,448,369) $ 20,004,924
Net income - - 3,092,127 - - 3,092,127
Sale of treasury stock - 48,979 - - 32,720 81,699
Cash dividend declared
$.26 per share - - ( 665,436) - - ( 665,436)
Balance at
December 31, 1996 3,000,000 2,010,046 19,918,917 - (2,415,649) 22,513,314
Net income - - 3,426,036 - - 3,426,036
Sale of treasury stock - 19,088 - - 7,705 26,793
Cash dividend declared
$.41 per share - - ( 1,050,078) - - ( 1,050,078)
<PAGE>
Balance at
December 31, 1997 3,000,000 2,029,134 22,294,875 - (2,407,944) 24,916,065
Net income - - 3,620,873 - - 3,620,873
Sale of treasury stock - 56,894 - - 18,738 75,632
Cash dividend declared
$.45 Per share - - ( 1,154,330) - - ( 1,154,330)
Unrealized holding gains - - - 129,307 - 129,307
Balance at
December 31, 1998 $ 3,000,000 $ 2,086,028 $ 24,761,418 $ 129,307 $(2,389,206) $ 27,587,547
</TABLE>
See accompanying notes to consolidated financial statements.
-50-
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,620,873 $ 3,426,036 $ 3,092,127
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 280,000 230,000 180,000
Depreciation 469,405 431,451 447,618
Net amortization and accretion of
investment securities 62,905 ( 60,871) 16,564
Net loss (gain) on sale and
disposal of assets ( 219,534) ( 8,149) 13,406
Changes in:
Other assets ( 227,381) ( 345,629) ( 182,157)
Other liabilities ( 151,287) ( 619,283) 185,039
Net cash provided by
operating activities 3,834,981 3,053,555 3,752,597
Investing activities:
Proceeds from maturities of
securities held to maturity 21,500,000 17,530,000 11,000,000
Proceeds from sale of securities
available for sale 69,300 - -
Purchases of securities
held to maturity (26,016,061) ( 7,299,804) (15,051,777)
Purchases of securities
available for sale ( 9,286,889) ( 755,387) -
Net change in other
short-term investments ( 200,000) ( 874,088) ( 2,042,600)
Net change in loans 3,770,630 ( 3,575,045) 72,953
Purchase of premises and equipment ( 1,363,918) ( 1,023,324) ( 533,604)
Proceeds from sales of other assets 1,620,077 937,971 483,688
Net (increase) decrease in interest-
bearing deposits with banks ( 5,348,175) (10,946,897) 3,184,768
Net cash used for
investing activities (15,255,036) ( 6,006,574) ( 2,886,572)
<PAGE>
Financing activities:
Net change in deposits 14,651,577 3,566,408 ( 940,882)
Net change in federal funds
purchased and securities sold
under repurchase agreements ( 935,300) ( 876,646) 366,946
Cash dividends declared ( 1,154,330) ( 1,050,078) ( 665,436)
Proceeds from sale of treasury stock 75,632 26,794 81,699
Net cash provided by (required for)
financing activities 12,637,579 1,666,478 ( 1,157,673)
Increase (decrease) in cash and
due from bank 1,217,524 ( 1,286,541) ( 291,648)
Cash and due from banks -
beginning of year 6,067,222 7,353,763 7,645,411
Cash and due from banks - end of year $ 7,284,746 $ 6,067,222 $ 7,353,763
Cash paid during the year for:
Income taxes $ 1,880,200 $ 1,912,592 $ 1,294,500
Interest paid $ 7,543,911 $ 7,390,423 $ 7,218,992
</TABLE>
See accompanying notes to consolidated financial statements.
-51-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1.Summary of Significant Accounting Policies
The accounting and reporting policies of Southwest Georgia Financial
Corporation and Subsidiary (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 Subsidiary, Southwest
Georgia Bank. All significant intercompany accounts and transactions have
been eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with these evaluations, management
obtains independent appraisals for significant properties.
<PAGE>
A substantial portion of the Corporation's loans is 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.
Securities Held to Maturity
Investments in debt securities are accounted for as securities to be held
in maturity when the Corporation has the positive intent and ability to
hold these debt securities to maturity. Investments are reported at cost,
adjusted for amortization of premiums and accretion of discounts, which are
recognized in interest income using the interest method over the period to
maturity. Gains or losses on the sale of investment securities are
recognized upon disposition of the related security.
A decline in the market value of any held-to-maturity investment below cost
that is deemed other than temporary is charged to earnings and establishes
a new cost basis for the security.
-52-
Securities Available For Sale
Securities classified as available for sale are those debt and equity
securities that the Corporation intends to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in the maturity
mix of the Corporation's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains and losses
are reported as increases or decreases in stockholders' equity, net of the
related deferred tax effect. Realized gains and losses, determined on the
basis of the cost of specific securities sold, are included in earnings. A
decline in the market value of any available for sale security below cost
that is deemed other than temporary results in a charge to earnings and the
establishment of a new cost basis for the security.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation,
computed on straight-line or accelerated rates over the estimated useful
lives of the assets.
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 judgement, the
collection of interest and principal becomes probable.
<PAGE>
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 in accordance with generally accepted accounting principles.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes the collection of the principal is
unlikely. The allowance is an amount which management believes will be
adequate to absorb estimated losses on existing loans that may become
uncollectible based on evaluation of the collectibility of loans and prior
loss experience. This evaluation takes into consideration such factors as
changes in the nature and volume of the loan portfolios, current economic
conditions that may affect the borrowers ability to pay, overall portfolio
quality, and review of specific problem loans.
-53-
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based upon changes in economic
conditions. Also, various regulatory agencies, as an integral part of
their examination process, periodically review the Corporation's allowance
for loan losses. Such agencies may require the Corporation to recognize
additions to the allowance based on their judgements of information
available to them at the time of their examination.
Retirement Plans
The Corporation and its subsidiary have pension plans covering
substantially all employees. The Corporation makes annual contributions to
the plans in amounts not exceeding the regulatory requirements.
Income Taxes
The Corporation and its subsidiary file a consolidated income tax return.
The subsidiary provides for income taxes based on its contribution to
income taxes (benefits) of the consolidated group.
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effect of changes in tax
laws on the date of enactment.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
<PAGE>
financial statements. SFAS No. 130 requires all items that are required to
be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed in equal
prominence with the other financial statements. The term "comprehensive
income" is used in the SFAS to describe the total of all components of
comprehensive income including net income. "Other comprehensive income"
refers to revenues, expenses, gains and losses that are included in
comprehensive income but excluded from earnings under current accounting
standards. Currently, "other comprehensive income" for the Corporation
consists of items previously recorded directly in equity under SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
SFAS No. 130 is effective for both interim and annual financial statement
periods beginning after December 15, 1997.
-54-
Additionally, SFAS No. 132, "Employer's Disclosures About Pensions and
Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88
and 106" was issued with an effective date for fiscal years beginning after
December 15, 1997. Although the statement does not change the measurement
or recognition of employer pension and other postretirement benefit plans,
it standardizes the disclosure requirements, requires additional
information on changes in benefit obligations and fair values of plan
assets, and eliminates certain other unnecessary disclosures.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, the Corporation considers
cash and due from banks to include cash on hand and amounts due from banks,
including interest-bearing and noninterest-bearing deposits in other banks.
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.
2.Investment Securities
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amounts of
securities as shown in the consolidated balance sheets and their estimated
fair values at December 31 were as follows:
<TABLE>
Securities Available For Sale:
<CAPTION>
Carrying Unrealized Unrealized Estimated
Amount Gains Losses Fair Value
<S> <C> <C> <C> <C>
December 31, 1998
Equity securities $ 2,484,108 $ 23,356 $ 8,950 $ 2,498,514
State and municipal
securities 8,925,798 143,900 24,101 9,045,597
Total $ 11,409,906 $ 167,256 $ 33,051 $ 11,544,111
<PAGE>
December 31, 1997
Equity securities $ 2,184,531 $ - $ - $ 2,184,531
</TABLE>
-55-
<TABLE>
Securities Held to Maturity:
<CAPTION>
Carrying Unrealized Unrealized Estimated
Amount Gains Losses Fair Value
<C> <C> <C> <C> <C>
December 31, 1998
U. S. Treasury and
U. S. Government
Agency Securities $ 63,806,187 $ 944,608 $ 624 $ 64,750,171
State and municipal
securities 5,280,000 278,797 - 5,558,797
Total $ 69,086,187 $ 1,223,405 $ 624 $ 70,308,968
December 31, 1997
U. S. Treasury and
U. S. Government
Agency Securities $ 62,560,817 $ 575,675 $ 48,341 $ 63,088,151
State and municipal
securities 2,080,000 182,369 - 2,262,369
Total $ 64,640,817 $ 758,044 $ 48,341 $ 65,350,520
</TABLE>
At December 31, 1998 and 1997, securities with a par value of $28,481,000
and $24,821,000, respectively were pledged as collateral for public
deposits and other purposes as required by law.
There were no investments in obligations of state and municipal
subdivisions which exceeded 10 percent of the Corporation's stockholders'
equity at December 31, 1998.
The carrying amount and estimated fair value of debt securities at December
31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without penalties.
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
<S> <C> <C>
Amounts maturing in:
One year or less $ 14,014,956 $ 14,156,564
After one through five years 41,804,242 42,606,337
After five through ten years 14,015,842 14,126,477
After ten years 8,176,945 8,465,187
Total debt securities $ 78,011,985 $ 79,354,565
<PAGE>
</TABLE>
-56-
3. Loans and Allowance for Loan Losses
The composition of the Corporation's loan portfolio at December 31, 1998,
1997, and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Commercial, financial and
agricultural loans $ 15,489,570 $ 17,075,784 $ 18,449,820
Real estate mortgage loans 88,766,909 90,110,529 85,338,178
Other loans 150,564 448,264 208,474
Consumer loans 11,219,013 12,052,186 12,369,282
Loans outstanding 115,626,056 119,686,763 116,365,754
Unearned discount ( 128,003) ( 142,668) ( 156,871)
Allowance for loan losses ( 2,003,410) ( 1,998,822) ( 2,008,655)
Net loans $ 113,494,643 $ 117,545,273 $ 114,200,228
</TABLE>
The Corporation's only significant concentration of credit at December 31,
1998, occurs in real estate loans which totaled approximately $89 million.
However, this amount is not concentrated in any specific market or
geographic area.
In the normal course of business, the Corporation's banking subsidiary has
made loans at prevailing interest rates and terms to directors and
executive officers of the Corporation and its subsidiary, and to their
affiliates. The aggregate indebtedness to the Bank of these related
parties approximated $847,000 and $1,170,000, at December 31, 1998 and
1997, respectively. During 1998, approximately $816,000 of such loans were
made, and repayments totaled approximately $1,123,000. None of these loans
were restructured, nor were any related party loans charged off during
1998.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, January 1 $ 1,998,822 $ 2,008,655 $ 2,139,532
Provision charged to operations 280,000 230,000 180,000
Loans charged off ( 365,397) ( 313,773) ( 370,608)
Recoveries 89,985 73,940 59,731
Balance, December 31 $ 2,003,410 $ 1,998,822 $ 2,008,655
</TABLE>
Loans placed on nonaccrual status amounted to $1,805,679 at December 31,
1998. Past due loans over ninety days amounted to $280,626.
-57-
<PAGE>
4. Bank Premises and Equipment
The amounts reported as bank premises and equipment are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 1,100,248 $ 1,092,248
Building 4,291,059 3,499,588
Furniture and equipment 3,442,882 2,983,683
8,834,189 7,575,519
Less accumulated depreciation (4,031,559) (3,649,684)
Total $ 4,802,630 $ 3,925,835
</TABLE>
Depreciation of premises and equipment was $469,405, $431,451 and $447,618
in 1998, 1997, and 1996, respectively.
5. Deposits
At December 31, 1998, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<CAPTION>
(Dollars In
Thousands)
<S> <C>
1999 $ 90,233
2000 4,950
2001 2,821
2002 2,202
2003 and thereafter 1,105
Total $ 101,311
</TABLE>
6.Short-Term Borrowings
Federal funds purchased generally mature within one to four days.
Securities sold under repurchase agreements mature within one year or less.
Other borrowed funds consist of a Federal Home Loan Bank advance with
interest at 5.73% due May 1999.
The Federal Reserve Board requires that banks maintain reserves based on
their average deposits in the form of vault cash and average deposit
balances at the Federal Reserve Banks. For the year ended December 31,
1998, the Corporation's subsidiary bank's reserve requirements averaged
approximately $2,119,000.
-58-
Information concerning federal funds purchased, securities sold under
repurchase agreements, and Federal Home Loan Bank advances is summarized as
follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Average balance during the year $ 1,997,858 $ 3,439,712 $ 3,567,352
Average interest rate during the year 5.70% 5.73% 5.69%
Maximum month-end balance during
the year $ 2,380,300 $ 5,312,246 $ 5,075,306
</TABLE>
7.Long-Term Debt
Long-term debt of $8,000,000 at December 31, 1998 consisted of borrowings
from the Federal Home Loan Bank. The money was borrowed to provide funding
to support residential mortgage lending. The funds were financed for eight
years at a fixed rate of 6.02 percent and are collateralized by the
Corporation's investment securities. The borrowings can be repaid any time
subject to an interest penalty, if the future borrowing rates are lower
than the acquired borrowing rate.
No required annual principal payments on long-term debt are due until
December 15, 2001.
8.Employee Benefits Plan
Pension Plan
The Bank has a noncontributory defined benefit pension plan which covers
all employees who have attained the age of 21 years and completed one year
of continuous service. The Bank is providing for the cost of this plan as
benefits are accrued based upon actuarial determinations employing the
aggregate funding method.
The table of actuarially computed benefit obligations and net assets and
the related changes of the Plan at December 31, 1998, 1997, and 1996 is
presented below.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 4,109,831 $ 3,648,445 $ 3,283,093
Service cost 287,447 238,520 216,800
Interest cost 252,872 282,754 254,400
Actuarial gain 236,888 52,685 ( 2,059)
Benefits paid ( 142,638) ( 112,573) ( 103,789)
Benefit obligation at end of year 4,744,400 4,109,831 3,648,445
</TABLE>
-59-
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Change in Plan Assets
Fair value of plan assets at beginning
of year $ 4,111,054 $ 3,753,516 $ 3,491,715
Actual return on plan assets 343,386 256,118 175,448
IRS withholding ( 3,636) ( 3,000) ( 4,109)
Other - ( 48,548) -
Employer contribution 237,734 265,541 194,251
Benefits paid ( 142,638) ( 112,573) ( 103,789)
Fair value of plan assets at end
of year 4,545,900 4,111,054 3,753,516
Funded Status
Prepaid (accrued) benefit cost $( 198,500) $ 1,223 $ 105,071
</TABLE>
At December 31, 1998, the plan assets included cash and cash equivalents,
U. S. Treasury bonds and notes, other government agency securities, and
equity securities.
Assumptions used to determine net periodic pension costs as of December 31,
1998, 1997, and 1996, respectively were:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Weighted-Average Assumptions
As of December 31
Discount rate 7.25% 7.75% 7.75%
Expected return on plan assets 7.25% 7.25% 7.75%
Rate of compensation increase 6.00% 6.00% 6.00%
Components of Net Periodic
Benefit Cost
Service cost $ 287,447 $ 238,520 $ 216,800
Interest cost 252,872 282,754 254,400
Expected return on plan assets ( 343,350) ( 256,118) ( 175,448)
Net periodic benefit cost $ 196,969 $ 265,156 $ 295,752
</TABLE>
Employee Stock Ownership Plan
The Corporation has a nondiscriminatory Employee Stock Ownership Plan and
Trust to be administered by a trustee. The plan was established to
purchase and hold Southwest Georgia Financial Corporation stock for all
eligible employees. Contributions to the plan are made solely by the
Corporation and are at the discretion of the Board of Directors. The
contributions were $377,937 in 1998, $381,944 in 1997, and $354,659 in
1996.
-60-
<PAGE>
Directors Deferred Compensation Plan
The Corporation has a voluntary deferred compensation plan for the Board of
Directors administered by an insurance company. The plan stipulates that
if a director participates in the Plan for four years, the Bank will pay
the Director future monthly income for ten years beginning at normal
retirement age, and the Bank will make specified monthly payments to the
Director's beneficiaries in the event of his or her death prior to the
completion of such payments. The plan is funded by actual life insurance
policies with the Bank as the named beneficiary.
Directors and Executive Officers Stock Purchase Plan
The Corporation has adopted a stock purchase plan for the executive
officers and directors of Southwest Georgia Financial Corporation. The
stock offering is exempt under the Securities Act of 1933 Regulation D and
additionally exempt under Georgia law.
Under the plan, participants may elect to contribute up to $500 monthly of
salary or directors' fees and receive corporate common stock with an
aggregate value of 1.5 times their contribution. The expense incurred
during 1998, 1997, and 1996 on the part of the Corporation totaled $52,150,
$44,941, and $27,550, respectively.
Stock Option Plan
Effective March 19, 1997, the Corporation established a Key Individual
Stock Option Plan ("Plan") which provides for the issuance of options to
key employees and directors of the Corporation. In April 1997, the Plan
was approved by the Corporation's shareholders, and it will be effective
for ten years. A maximum of 150,000 shares of common stock have been
authorized for issuance with respect to options granted under the Plan. No
options were granted under the Plan to any employee or director during
1997. The Plan provides for the grant of incentive stock options and
nonqualified stock options to key employees of the Corporation. The Plan
will be administered by the Personnel Committee of the Board of Directors.
On April 29, 1998, the Corporation granted 83,500 stock options to its key
employees and directors. Under the Plan, the exercise price of each option
equals the market price of the Corporation's stock on the grant date for a
term of ten years. All of these options were vested as of the grant date
with the exception of 2,200 options, which will be vested January 2, 1999.
The fair value of each option grant is estimated on the grant date using an
option-pricing model with the following weighted-average assumptions:
dividend yield of 2.10 percent, risk-free interest rate of 5.00 percent,
expected lives of 5 years for the options, and a volatility rate of 21.00
percent.
-61-
<PAGE>
A summary of the status of the Corporation's Plan as of December 31, 1998,
and the changes during the year is presented below:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Weighted-
Average
Shares Exercise Plan
<S> <C> <C>
Fixed Options
Granted April 29, 1998 83,500 $ 25.50
Expired ( 1,500) 25.50
Outstanding at end of year 82,000 $ 25.50
Exercisable at December 31, 1998 79,800 $ 25.50
Weighted-average fair value of options
granted during the year $ 5.68
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
----------------------------------------------- ----------------------
Weighted-
Average Weighted Weighted
Actual Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price At 12/31/98 Life Price At 12/31/98 Plan
<S> <C> <C> <C> <C> <C>
$ 25.50 82,000 9.3 Years $ 25.50 79,800 $ 25.50
</TABLE>
If the Corporation had used the fair value based method of accounting for
its Plan, as prescribed by Statement of Financial Accounting Standard No.
123, compensation cost in net income for the year ended December 31, 1998,
would have increased by $453,000, resulting in net income of $3,349,000 net
of tax. Basic earnings per share would have declined from $1.41 to $1.31
and had no effect on diluted earnings per share.
If the Corporation had used the fair value based method of accounting for
its Plan for the year ended December 31, 1997, compensation cost and net
income would not have changed.
-62-
Dividend Reinvestment and Share Purchase Plan
In 1997, the Corporation's Board of Directors approved a dividend
reinvestment and share purchase plan. Also, the Board amended this plan on
September 16, 1998. The purpose of the plan is to provide shareholders of
record of the Corporation's common stock, who elect to participate in the
Plan, with a simple and convenient method of investing cash dividends and
<PAGE>
voluntary cash contributions in shares of the common stock without payment
of any brokerage commissions or other charges. Eligible participants may
purchase common stock through automatic reinvestment of common stock
dividends on all or partial shares and make additional voluntary cash
payments of not less than $5 nor more than $5,000 per month. The
participant's price of common stock purchased with dividends or voluntary
cash payments will be the average price of all shares purchased in the open
market, or if issued from unissued shares or treasury stock the price will
be the average of the high and low sales prices of the stock on the
American Stock Exchange on the dividend payable date. During the years
ended December 31, 1998 and 1997, 6,654 and 2,815 shares were issued
through the plan at an average of $23.01 and $18.33 per share,
respectively.
9. Income Taxes
Components of income tax expense for 1998, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current payable $ 1,847,600 $ 1,639,100 $ 1,576,800
Deferred taxes (benefit) ( 133,000) 24,100 44,200
Total income taxes $ 1,714,600 $ 1,663,200 $ 1,621,000
</TABLE>
The reasons for the difference between the federal income taxes in the
consolidated statements of income and the amount computed by the applying
the statutory federal income tax rate to income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Taxes at statutory income tax rate $ 2,134,189 $ 2,035,694 $ 1,885,251
Reductions in taxes resulting from
exempt income ( 48,528) ( 11,567) ( 19,063)
Other timing differences ( 371,061) ( 360,927) ( 245,188)
Total income taxes $ 1,714,600 $ 1,663,200 $ 1,621,000
</TABLE>
-63-
The sources of timing differences for tax reporting purposes and the
related deferred taxes recognized in 1998, 1997, and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Accretion of discount (net of maturities) $ 34,100 $ 80,000 $ 83,400
Nonqualified retirement plan
contribution ( 13,600) ( 9,300) -
Gain on disposition of discounted bonds (153,500) ( 46,600) ( 39,200)
Total deferred taxes $(133,000) $ 24,100 $ 44,200
</TABLE>
<PAGE>
10. Related Party Transactions
The Employee Stock Ownership Plan and Trust of Southwest Georgia Financial
Corporation presently holds 502,443 shares of the Corporation's stock of
which 7,416 shares have been pledged.
11. Commitments, Contingent Liabilities, and Financial Instruments With
Off-Balance-Sheet Risk
In the normal of business, various claims and lawsuits may arise against
the Corporation. Management, after reviewing with counsel all actions and
proceedings, considers that the aggregate liability or loss, if any,
resulting therefrom will not be material.
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own risk exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit in
the form of loans or through letters of credit. The instruments involve ,
to varying degrees, elements of credit and interest rate risk in excess of
the amounts recognized in the Consolidated Balance Sheets. The contract or
notional amounts of the instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments.
Commitments to extend credit are contractual obligations to lend to a
customer as long as all established contractual conditions are satisfied.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee by a customer.
Standby letters of credit and financial guarantees are conditional
commitments issued by the Corporation to guarantee the performance of a
customer to a third party. Standby letters of credit and financial
guarantees are generally terminated through the performance of a specified
condition or through the lapse of time.
-64-
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to commitments to extend credit and standby letters of
credit is represented by the contractual or notional amounts of these
instruments. As these off-balance-sheet financial instruments have
essentially the same credit risk involved in extending loans, the
Corporation generally uses the same credit and collateral policies in
making these commitments and conditional obligations as it does for
on-balance-sheet instruments. For interest rate contracts, the notional
amount does not represent exposure to credit loss. Instead, the amount
potentially subject to credit loss is substantially less. Since many of
the commitments to extend credit and standby letters of credit are expected
to expire without being drawn upon, the contractual or notional amounts do
not represent future cash requirements.
The contractual or notional amounts of financial instruments having credit
risk in excess of that reported in the Consolidated Balance Sheets are as
follows:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 26,739,000 $ 25,784,000
Standby letters of credit and
financial guarantees $ 45,000 $ 45,000
</TABLE>
12. Disclosures About Fair Value of Financial Instruments
The following information and tables present the carrying amounts and fair
values of the Corporation's financial instruments at December 31, 1998 and
1997. Where quoted prices are not available, fair values are based on
estimates using discounted cash flows and other valuation techniques.
Those techniques can be significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Corporation.
Cash and Short-Term Investments
For those short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities
For U. S. Government and U. S. Government Agency securities, fair values
are based on market prices or dealer quotes. For other investment
securities, fair value equals quoted market price if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities as the basis for a pricing matrix.
Loans
For all homogenous categories of loans, the fair value is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
-65-
Deposits
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at December 31, 1998. The
fair value of fixed-maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities.
<PAGE>
Short-Term Borrowings and Securities Sold Under Repurchase Agreements
For those short-term borrowings, the carrying amount is a reasonable
estimate of fair value. The fair value of securities sold under repurchase
agreements is estimated by discounting the future cash flow using the rates
currently offered for securities sold under repurchase agreements of
similar remaining maturities.
Long-Term Debt
Rates currently available to the Corporation for debt with similar terms
and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms
of the agreements, and the present credit worthiness of the counterparties.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of guarantees and letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligations with the counterparties.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Those estimates do not reflect any premium or discount that could result
from offering for sale at one time the Corporation's entire holdings of a
particular instrument. Because no market exists for a significant portion
of the financial instruments, fair value estimates are based on many
judgements. These estimates are subjective in nature and involve matters
of judgement and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
-66-
The carrying amount and estimated fair values of the Corporation's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Carrying
Amount Fair Value Amount Fair Value
(Thousands of Dollars) (Thousands of Dollars)
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 7,285 $ 7,285 $ 6,067 $ 6,067
Securities available for sale 11,544 11,544 2,185 2,185
Securities held to maturity 69,086 70,309 64,641 65,350
Short-term investments 19,852 19,852 14,304 14,304
Loans 115,498 117,044 119,544 118,146
Less: allowance for loan losses 2,003 2,003 1,999 1,999
<PAGE>
Financial liabilities:
Deposits 191,087 192,325 176,435 177,236
Securities sold under agreements
to repurchase 365 366 1,300 1,301
Short-term borrowings 1,500 1,501 1,500 1,500
Long-term debt 8,000 8,127 8,000 8,059
Unrecognized financial
instruments:
Commitments to extend credit 26,739 26,739 25,784 25,784
Standby letters of credit 45 45 45 45
</TABLE>
13. Supplemental Financial Data
Components of other operating expense in excess of one percent of gross
revenue for the respective periods are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Data processing $ 453,240 $ 352,904 $ 326,664
FDIC assessment fees $ - $ - $ 229,994
Purchased deposit fees $ - $ - $ 184,092
</TABLE>
-67-
14. Stockholder's Equity
Dividends paid by the Bank subsidiary are the primary source of funds
available to the parent company for payment of dividends to its
shareholders and other needs. Banking regulations limit the amount of
dividends that may be paid without prior approval of the Bank's regulatory
agency. At December 31, 1998, approximately $3.5 million of the Bank's net
assets were available for payment of dividends without prior approval from
the regulatory authorities.
Banking regulatory agencies have approved guidelines to implement a
risk-based capital framework that makes capital requirements more sensitive
to the risk profiles of individual banking companies. These guidelines
define capital as either Core (Tier One) capital or Supplementary (Tier
- -
<PAGE>
Two) capital. Tier One capital consists primarily of tangible common
stockholders' equity while Tier Two capital is comprised of certain debt
instruments and a portion of the reserve for loan losses. Risk-based
capital regulations required banks to maintain an eight percent total
risk-based capital ratio of which four percent must consist primarily of
tangible common stockholders' equity (Tier One capital). The Corporation's
ratios under these rules at December 31, 1998 and 1997 are set forth in the
table below. The Corporation's leverage ratio at December 31, 1998 was
12.60 percent.
As a result of regulatory limitations at December 31, 1998, approximately
$19,632,000 of the parent company's investment in net assets of the
subsidiary bank of $23,156,000, as shown in the accompanying condensed
<PAGE>
balance sheets, was restricted from transfer by the subsidiary bank to the
parent company in the form of cash dividends.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk-
weighted assets) $29,077,713 22.51% $10,334,961 > 8.00% $12,918,701 > 10.00%
Tier I Capital (to risk-
weighted assets) $27,458,078 21.25% $ 5,167,480 > 4.00% $ 7,751,220 > 6.00%
Tier I Capital (to
average assets) $27,458,078 12.60% $ 6,535,089 > 3.00% $10,891,816 > 5.00%
As of December 31, 1997:
Total capital (to risk-
weighted assets) $26,451,958 21.61% $ 9,792,681 > 8.00% $12,240,851 > 10.00%
Tier I Capital (to risk-
weighted assets) $24,916,065 20.35% $ 4,896,349 > 4.00% $ 7,344,511 > 6.00%
Tier I Capital (to
average assets) $24,916,065 11.80% $ 6,337,140 > 3.00% $10,561,901 > 5.00%
</TABLE>
-68-
15. Condensed Financial Information of Southwest Georgia Financial
Corporation Parent Company Only
<TABLE>
Condensed Balance Sheets
as of December 31, 1998 and 1997
(Thousands of Dollars)
__________
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash $ 3,758 $ 3,769
Investment in consolidated wholly-owned bank
subsidiary, at equity 23,156 21,002
Investment securities available for sale 362 -
Loans 165 -
Other assets 509 474
Total assets $ 27,950 $ 25,245
LIABILITES AND STOCKHOLDERS' EQUITY
Dividends payable $ 308 $ 282
Other liabilities 54 47
Total liabilities 362 329
<PAGE>
Stockholders' equity:
Common stock, $1 par value; authorized
5,000,000 shares; issued 3,000,000 shares 3,000 3,000
Capital surplus 2,086 2,029
Retained earnings 24,891 22,295
Treasury stock, 434,401 shares for 1998
and 437,808 shares for 1997 ( 2,389) ( 2,408)
Total stockholders' equity 27,588 24,916
Total liabilities and stockholders' equity $ 27,950 $ 25,245
</TABLE>
-69-
<TABLE>
Condensed Statements Of Income and Expense
for the years ended December 31, 1998, 1997 and 1996
(Thousands of Dollars)
__________
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income:
Dividend received from bank subsidiary $ 1,500 $ 1,200 $ 775
Interest on loan 14 - -
Other 205 210 197
Total income 1,719 1,410 972
Expenses:
Other 67 81 108
Income before income taxes and equity in
undistributed income of bank subsidiary 1,652 1,329 864
Income tax expense - allocated from
consolidated return ( 55) ( 47) ( 46)
Income before equity in undistributed
income of subsidiary 1,597 1,282 818
Equity in undistributed income of subsidiary 2,024 2,144 2,274
Net income 3,621 3,426 3,092
Retained earnings - beginning of year 22,295 19,919 17,492
Net unrealized gains (losses) on available
for sale securities 129 - -
Dividends ( 1,154) ( 1,050) ( 665)
Retained earnings - end of year $ 24,891 $ 22,295 $ 19,919
</TABLE>
-70-
<PAGE>
<TABLE>
Condensed Statements Of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
(Thousands of Dollars)
__________
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Operating activities:
Net income $ 3,621 $ 3,426 $ 3,092
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of
subsidiary ( 2,024) ( 2,144) ( 2,274)
Changes in:
Other assets ( 35) ( 142) ( 281)
Other liabilities 32 27 ( 163)
Net cash provided of operating activities 1,594 1,167 374
Investing activities:
Purchase of securities available for sale ( 362) - -
Net change in loans ( 165) - -
Net cash provided (used) for investing
activities ( 527) - -
Financing activities:
Dividends declared to stockholders ( 1,154) ( 1,050) ( 665)
Sale of treasury stock 76 27 81
Net cash provided (used) for financing
activities ( 1,078) ( 1,023) ( 584)
Increase (decrease) in cash ( 11) 144 ( 210)
Cash - beginning of year 3,769 3,625 3,835
Cash - end of year $ 3,758 $ 3,769 $ 3,625
</TABLE>
-71-
16.Business Combination
Effective December 11, 1998, the Corporation completed the acquisition of
certain assets and the assumption of deposits of a branch in Pavo, Georgia,
owned by Farmers and Merchants Bank of Monticello, Florida. The
Corporation acquired approximately $2.3 million of assets which included
cash and due from bank balances, certain loans and accrued interest
receivables, and premises and equipment. Also, the Corporation assumed
approximately $3.8 million of deposits and other liabilities. The
acquisition was accounted for as a purchase.
<PAGE>
17.Earnings Per Share
Effective January 1, 1997, the Corporation adopted SFAS No. 128 "Earnings
Per Share". The new statement simplifies the standards for computing
earnings per share and requires presentation of two new amounts, basic and
diluted earnings per share.
Earnings per share are based on the weighted average number of common
shares outstanding during the year.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Weighted Per
Average Share
Income Shares Amount
<S> <C> <C> <C>
Basic earnings per share:
Net income $ 3,620,873 2,564,866 $ 1.41
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
Weighted Per
Average Share
Income Shares Amount
<S> <C> <C> <C>
Basic earnings per share:
Net income $ 3,426,036 2,561,025 $ 1.34
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
Weighted Per
Average Share
Income Shares Amount
<S> <C> <C> <C>
Basic earnings per share:
Net income $ 3,092,127 2,557,474 $ 1.21
</TABLE>
Options to purchase 79,800 shares of common stock at $25.50 per share were
outstanding during the latter part of 1998, but were not included in the
computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares.
-72-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7285
<INT-BEARING-DEPOSITS> 17527
<FED-FUNDS-SOLD> 2325
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11544
<INVESTMENTS-CARRYING> 69086
<INVESTMENTS-MARKET> 81853
<LOANS> 115498
<ALLOWANCE> 2003
<TOTAL-ASSETS> 230198
<DEPOSITS> 191087
<SHORT-TERM> 1865
<LIABILITIES-OTHER> 1658
<LONG-TERM> 8000
<COMMON> 3000
0
0
<OTHER-SE> 24588
<TOTAL-LIABILITIES-AND-EQUITY> 230198
<INTEREST-LOAN> 12461
<INTEREST-INVEST> 5277
<INTEREST-OTHER> 586
<INTEREST-TOTAL> 18324
<INTEREST-DEPOSIT> 6959
<INTEREST-EXPENSE> 7556
<INTEREST-INCOME-NET> 10768
<LOAN-LOSSES> 280
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6935
<INCOME-PRETAX> 5335
<INCOME-PRE-EXTRAORDINARY> 5335
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3621
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
<YIELD-ACTUAL> 5.43
<LOANS-NON> 1806
<LOANS-PAST> 281
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 289
<ALLOWANCE-OPEN> 1999
<CHARGE-OFFS> 365
<RECOVERIES> 89
<ALLOWANCE-CLOSE> 2003
<ALLOWANCE-DOMESTIC> 1993
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 10
</TABLE>
