Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SGB > SEC Filings for SGB > Form 10-Q on 15-Nov-2012All Recent SEC Filings

Show all filings for SOUTHWEST GEORGIA FINANCIAL CORP

Form 10-Q for SOUTHWEST GEORGIA FINANCIAL CORP


15-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical information, this Form 10-Q report contains forward-looking statements within the meaning of the federal securities laws. The Corporation cautions that there are various factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the Corporation's forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized.

These factors include risks related to:

the conditions in the banking system, financial markets, and general economic conditions;
the Corporation's ability to raise capital;
the Corporation's ability to maintain liquidity or access other sources of funding;
the Corporation's construction and land development loans;
asset quality;
the adequacy of the allowance for loan losses;
technology difficulties or failures;
the Corporation's ability to execute its business strategy;
the loss of key personnel;
competition;
the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations;
changes in regulation and monetary policy;
losses due to fraudulent and negligent conduct of customers, service providers or employees;
acquisitions or dispositions of assets or internal restructuring that may be pursued by the Corporation;
changes in or application of environmental and other laws and regulations to which the Corporation is subject;
political, legal and local economic conditions and developments;
financial market conditions and the results of financing efforts;
changes in commodity prices and interest rates; and
weather, natural disasters and other catastrophic events and other factors discussed in the Corporation's other filings with the Securities and Exchange Commission.

Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of the Corporation. Any such statement speaks only as of the date the statement was made. The Corporation undertakes no obligation to update or revise any forward-looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in the Corporation's current and subsequent filings with the Securities and Exchange Commission.

Overview

The Corporation is a full-service community bank holding company headquartered in Moultrie, Georgia. The community of Moultrie has been served by the Bank since 1928. We provide comprehensive financial services to consumer, business and governmental customers, which, in addition to conventional banking products, include a full range of mortgage banking, trust, investment and insurance services. Our primary market area incorporates Colquitt County, where we are headquartered, and Baker, Lowndes, Thomas, and Worth Counties, each contiguous with Colquitt County, and the surrounding counties of southwest Georgia. We have six full-service banking facilities and six automated teller machines.

Our strategy is to:

maintain the diversity of our revenue, including both interest and noninterest income through a broad base of business,
strengthen our sales and marketing efforts while developing our employees to provide the best possible service to our customers,
expand our market share where opportunity exists, and
grow outside of our current geographic market either through de-novo branching or acquisitions into areas proximate to our current market area.

We believe that investing in sales and marketing in this challenging market will provide us with a competitive advantage. To that end, we expanded geographically with a full-service banking center that was completed and opened in June of 2010 and a mortgage origination office that opened in January 2011 both in Valdosta, Georgia. Continuing our expansion in the Valdosta market, we opened our second banking center in March 2012.

The Corporation's profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets and the interest paid on interest-bearing liabilities. The Corporation's earning assets are primarily loans, securities, and short-term interest-bearing deposits with banks and the interest-bearing liabilities are principally customer deposits and borrowings. Net interest income is highly sensitive to fluctuations in interest rates. For example, after the overnight borrowing rate for banks reached 5.25% in September of 2007, the Federal Reserve Bank began decreasing it by 5% to a range of 0% to 0.25%. This historically low interest rate level has remained unchanged for the period from October 2008 through September 2012. To address interest rate fluctuations, we manage our balance sheet in an effort to diminish the impact should interest rates suddenly change.

Broadening our revenue sources helps to reduce the risk and exposure of our financial results to the impact of changes in interest rates, which are outside of our control. Sources of noninterest income include our insurance agency and Empire, the Corporation's commercial mortgage banking subsidiary, as well as fees on customer accounts, and trust and retail brokerage services. In the third quarter of 2012, noninterest income was 25.3% of the Corporation's total revenue.

Our profitability is impacted also by operating expenses such as salaries, employee benefits, occupancy, and income taxes. Our lending activities are significantly influenced by regional and local factors such as changes in population, competition among lenders, interest rate conditions and prevailing market rates on competing uses of funds and investments, customer preferences and levels of personal income and savings in the Corporation's primary market area.

The economic downturn continues to challenge our region; however, our strength and stability in the market and our focused efforts enabled us to achieve positive results in 2012. We continued to invest in our people and communities, fully aware of the near-term impact that would have on earnings. Although the economy is slowly recovering, regulatory burdens continue to outpace growth opportunities. Despite those challenges, we will continue to focus on our customers and believe that our strategic positioning, strong balance sheet and capital levels position us to sustain our franchise, capture market share and build customer loyalty.

The Corporation's nonperforming assets decreased $4.2 million to $2.6 million at the end of September 2012 compared with the same period last year. Foreclosed assets decreased $528 thousand compared with the third quarter last year.

Critical Accounting Policies

In the course of the Corporation's normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial statements of the Corporation. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates have on the Corporation's results of operations. We believe that the allowance for loan losses as of September 30, 2012, is adequate; however, under adverse conditions or assumptions, future additions to the allowance may be necessary. There have been no significant changes in the methods or assumptions used in our accounting policies that would have resulted in material estimates and assumptions changes. Note 1 to the Consolidated Financial Statements provides a description of our significant accounting policies and contributes to the understanding of how our financial performance is reported.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw their funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. In the ordinary course of business, the Corporation's cash flows are generated from interest and fee income as well as from loan repayments and the maturity or sale of other earning assets. In addition, liquidity is continuously provided through the acquisition of new deposits and borrowings or the rollover of maturing deposits and borrowings. The Corporation strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-earning liabilities so its short-term investments balance, at any given time, will adequately cover any reasonably anticipated immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks that could provide funds on short notice, if needed.

The liquidity and capital resources of the Corporation are monitored on a periodic basis by state and Federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Bank's liquidity ratios at September 30, 2012, were considered satisfactory. At that date, the Bank's short-term investments were adequate to cover any reasonably anticipated immediate need for funds. We are not aware of any known trends, events, or uncertainties that will have or that are reasonably likely to have a material adverse effect on the Corporation's liquidity or operations. At September 30, 2012, the Corporation's and the Bank's risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. During the nine months ended September 30, 2012, total capital increased $568 thousand to $29.1 million and increased $903 thousand from the same period last year. Also, the Corporation continues to maintain a healthy level of capital adequacy as measured by its equity-to-asset ratio of 8.76% as of September 30, 2012. The Corporation is not aware of any events or trends likely to result in a material change in capital resources other than the effects of normal operations on the retention of net earnings. Also, the Corporation's management is not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have a material effect on the Corporation's capital resources.

RESULTS OF OPERATIONS

The Corporation's results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since interest rates are determined by market forces and economic conditions beyond the control of the Corporation, the ability to generate net interest income is dependent upon the Bank's ability to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets.

Performance Summary

The Corporation's net income after taxes for the three-month period ending September 30, 2012, was $421 thousand, up $322 thousand from net income of $99 thousand for the third quarter of 2011. This increase in net income was primarily due to a $375 thousand lower provision for loan losses compared with the third quarter last year as well as a $316 thousand increase in interest and fees on loans. Partially offsetting this expense was a $170 thousand increase in noninterest expense.

On a per share basis, net income for the third quarter was $.17 per diluted share compared with $.04 per diluted share for the same quarter in 2011. The weighted average common diluted shares outstanding for the quarter were 2.548 million, the same as third quarter last year.

For the nine months ended September 30, 2012, net income after taxes was $1.3 million, up from $1.1 million for the same period in 2011. On a per share basis, net income for the first nine months of 2012 was $.51 per diluted share compared with $.42 per diluted share for the same period in 2011.

We measure our performance on selected key ratios, which are provided for the previous five quarterly periods.

                                 3rd Qtr        2nd Qtr        1st Qtr        4th Qtr        3rd Qtr
                                   2012           2012           2012           2011           2011
Return on average total
assets                               0.53 %         0.38 %         0.71 %         0.53 %         0.13 %
Return on average total
equity                               5.76 %         4.16 %         7.88 %         5.57 %         1.39 %
Average shareholders' equity
to average total assets              9.14 %         9.18 %         8.98 %         9.46 %         9.41 %
Net interest margin (tax
equivalent)                          4.32 %         4.24 %         4.10 %         4.29 %         4.13 %

Comparison of Statements of Income for the Quarter

Total interest income increased $217 thousand to $3.4 million for the three months ended September 30, 2012, compared with the same period in 2011, reflecting $316 thousand higher interest income and fees from loans due to loan growth. This increase was partially offset by a decrease in interest income from investment securities of $109 thousand. Interest on deposits and certificates of deposit in other banks increased $5 thousand and $5 thousand, respectively, when compared with the third quarter of 2011.

Total interest expense decreased $60 thousand, or 11.3%, to $469 thousand in the third quarter of 2012 compared with the same period in 2011. Interest paid on deposits decreased $50 thousand, or 15.3%, during the third quarter of 2012 due to the low interest rate environment. The average rate paid on average time deposits for the quarter has decreased 32 basis points since September 30, 2011. Interest on total borrowings decreased $10 thousand compared with the same quarter in 2011.

The primary source of revenue for the Corporation is net interest income, which is the difference between total interest income on earning assets and interest expense on interest-bearing sources of funds. Net interest income improved $276 thousand to $3.0 million for the third quarter of 2012. Net interest income after provision for loan losses for the third quarter of 2012 was $2.9 million compared with $2.2 million for the same period in 2011. The provision for loan losses was $105 thousand in the third quarter of 2012 compared with $480 thousand for the third quarter of 2011. The Corporation's net interest margin was 4.32% for the third quarter of 2012, up 19 basis points from the same period last year. Continual improvements in the net interest margin are mainly attributed to changes in the earning asset mix. The growth in higher-yielding loans was funded by decreases in the lower-yielding investment securities portfolio.

Noninterest income, at 25.3% of the Corporation's total revenue for the quarter, was $1.2 million for the third quarter, down $25 thousand from the same period in 2011. The decrease in noninterest income was primarily due to a $156 thousand quarterly decrease in gains on the sale of securities. Also, income from service charges on deposit accounts decreased $39 thousand compared with the third quarter last year. Income from mortgage banking services decreased $6 thousand compared with the same period last year. Partially offsetting these decreases, we recognized a $127 thousand higher gain on the disposition of assets compared with the loss in the third quarter of 2011. Income from retail brokerage increased $8 thousand while income from trust and insurance services remained relatively flat.

Noninterest expense increased $170 thousand to $3.6 million for the third quarter of 2012 compared with the third quarter of 2011. The largest component of noninterest expense, salaries and employee benefits, increased $65 thousand to $2.0 million for the third quarter. Other expense also increased $65 thousand mainly due to higher employee training, advertising, legal and FDIC assessment expenses. Equipment and data processing expense also increased $22 thousand and $20 thousand, respectively, largely due to enhancing information technology infrastructure. Amortization of intangible assets and occupancy expense remained relatively flat compared with the third quarter of 2011.

Comparison of Statements of Income for the Nine-month Period

Total interest income for the first nine months of 2012 increased $322 thousand to $10.1 million when compared with the same period in 2011. This increase was primarily due to a $695 thousand increase in interest and fees on loans due to a $19.2 million higher average volume of loans compared with the first nine months of 2011. Interest on deposits and certificates of deposit in other banks increased $28 thousand compared with the first nine months of 2011. These increases were partially offset by a decrease in interest income from investment securities of $401 thousand due to a $17.0 million lower average volume of investments compared with the first nine months of last year.

Total interest expense for the nine-month period ended September 30, 2012, decreased $254 thousand, or 15.0%, compared with the same period in 2011. The decrease in interest expense was primarily related to lower interest paid on interest-bearing deposits of $227 thousand, or 21.2%, compared with the first nine months of 2011 reflecting lower interest rates. Interest on total borrowings declined $27 thousand for the first nine months of 2012 compared with the same period last year.

Net interest income for the first nine months of 2012 was 7.1% higher at $8.7 million compared with $8.1 million for the same period in 2011, mainly as a result of lower interest paid on deposits and higher income from loans. Net interest income after provision for loan losses was $8.4 million for the first nine months of 2012 compared with $7.3 million for the same period in 2011. The provision for loan losses was $315 thousand in the first nine months of 2012 compared with $780 thousand for the same period last year. Net interest margin was 4.22% for the first nine months of 2012, up from 4.05% for the first nine months of 2011.

For the first nine months of 2012, noninterest income was $4.3 million, up 8.4% from the same period in 2011. The increase was primarily attributed to a $239 thousand increase in income from mortgage banking services. We recognized an $84 thousand lower loss on the disposition of assets and an $84 thousand increase in other income due mostly to debit card income for the first nine months of 2012 compared with the same period last year. Income from insurance and retail brokerage services increased $41 thousand and $34 thousand, respectively, compared with the first nine months of 2011. Partially offsetting these increases, service charges on deposit accounts declined $113 thousand when compared with the same period of 2011. Also, the net gain on the sale of securities was $39 thousand lower compared with the same period in 2011.

Noninterest expense increased $1.1 million for the first nine months of 2012 compared with the same period last year. The change was mainly due to a $949 thousand increase in salary and employee benefits related to the large pension contribution recognized in the second quarter 2012. Equipment, data processing and occupancy expense increased $105 thousand, $66 thousand and $25 thousand, respectively. Partially offsetting these increases, other operating expenses decreased by $6 thousand, a reflection of lower foreclosed asset expenses, insurance assessments to the FDIC, and professional fees partially offset by increased legal fees.

Comparison of Financial Condition Statements

At September 30, 2012, total assets were $332.2 million, an 8.7% increase from December 31, 2011. The increase in total assets was primarily due to solid loan growth funded by decrease in investment securities and growth in noninterest-bearing deposits. Total loans increased $21.2 million, or 11.7%, to $202.5 million compared with $181.3 million at December 31, 2011. Loan growth was driven primarily by our expansion into the Valdosta market. The Corporation continues to be conservative in its lending practices in order to maintain a quality loan portfolio. Loans, a major use of funds, represented 61.0% of total assets.

Investment securities and short-term investments which include Federal funds sold and interest-bearing deposits in other banks represented 30.1% of total assets at September 30, 2012. Compared with year-end, investment securities decreased $10.2 million and short-term investments increased $13.0 million. This resulted in an overall increase in investments of $2.8 million since the end of 2011.

Deposits increased to $277.7 million at the end of the third quarter of 2012, up $28.7 million from the end of 2011. The increase was primarily due to increases in noninterest-bearing transaction accounts. At September 30, 2012, total deposits represented 83.6% of total assets.

The following table shows the major contractual obligations for the Corporation.

Long-term debt consists of the following:

                                           September 30,        December 31,        September 30,
                                               2012                 2011                2011

Advance from Federal Home Loan Bank
with a 2.79% fixed rate of interest
maturing July 29, 2013 (transferred
to short-term borrowings).                            0           2,000,000            2,000,000

Advance from Federal Home Loan Bank
with a 3.85% fixed rate of interest
maturing April 30, 2014.                     10,000,000          10,000,000           10,000,000

Advance from Federal Home Loan Bank
with a 3.39% fixed rate of  interest
maturing August 20, 2018.
(convertible to a variable rate at
quarterly options of Federal Home
Loan Bank - no conversion option has
been made)                                    5,000,000           5,000,000            5,000,000

Advance from Federal Home Loan Bank
with a 2.78% fixed rate of interest
maturing September 10, 2018.
(convertible to a variable rate at
quarterly options of Federal Home
Loan Bank - no conversion option has
been made)                                    5,000,000           5,000,000            5,000,000

Total long-term debt                      $  20,000,000        $ 22,000,000        $  22,000,000

The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated monthly based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that management believes require attention.

Other factors used in determining the adequacy of the reserve are management's judgment about factors affecting loan quality and their assumptions about the local and national economy. The allowance for loan losses was 1.36% of total loans outstanding at September 30, 2012, compared with 1.71% of loans outstanding at December 31, 2011, and 1.59% at September 30, 2011. Net charge-offs in the 2012 third quarter were $270 thousand compared with net charge-offs of $488 thousand in the third quarter of 2011. Management considers the allowance for loan losses as of September 30, 2012, adequate to cover potential losses in the loan portfolio. For more information about loans, see

Part I, Item 1, "Note 4 - Loans and Allowance for Loan Losses."

Nonperforming assets were $2.6 million, or 0.78% of total assets, in the third quarter of 2012, down from $3.6 million, or 1.18% of total assets, at the end of 2011, and down from $6.8 million, or 2.32% of total assets in the same period last year. Nonaccrual loans were $669 thousand in the third quarter of 2012. There were $1.8 million of foreclosed properties in nonperforming assets at the end of the third quarter of 2012 compared with $2.4 million at the end of last year's third quarter.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance-sheet risk to meet the financing needs of our customers and reduce risk exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit in the form of loans or through letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. Since many of the commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, the contractual or notional amounts do not represent future cash requirements.

Financial instruments whose contract amounts
     represent credit risk (dollars in               September 30,          September 30,
                thousands):                              2012                   2011
Commitments to extend credit                        $      16,802          $       8,326
Standby letters of credit and financial
guarantees                                          $          10          $          35

The Corporation does not have any special purpose entities or off-balance sheet financing arrangements.

Capital Resources and Dividends

At September 30, 2012, the Corporation's and the Bank's risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. Our total risk based capital ratio now stands at 15.64%, which is over 56 percent in excess of the regulatory standard for a "well-capitalized" bank. Southwest Georgia Financial Corporation's and Southwest Georgia Bank's risk based capital ratios are shown in the following table.

  SOUTHWEST GEORGIA FINANCIAL CORPORATION
         Risk Based Capital Ratios






                                            Southwest Georgia
                                          Financial Corporation                 Regulatory Guidelines
                                                                          For Well
Risk Based Capital Ratios                   September 30, 2012          Capitalized          Minimum Guidelines
Tier 1 capital                                      14.39 %                    6.00 %                     4.00 %
Total risk based capital                            15.64 %                   10.00 %                     8.00 %
Tier 1 leverage ratio                                9.27 %                    5.00 %                     3.00 %

                                          Southwest Georgia
                                                 Bank                       Regulatory Guidelines
                                                                      For Well
Risk Based Capital Ratios                 September 30, 2012        Capitalized          Minimum Guidelines
Tier 1 capital                                    13.82 %                  6.00 %                     4.00 %
Total risk based capital                          15.07 %                 10.00 %                     8.00 %
Tier 1 leverage ratio                              8.90 %                  5.00 %                     3.00 %

In September 2012, the Corporation paid a quarterly cash dividend of $0.04 per common share. In June and March 2012, the Corporation paid a cash dividend of $0.04 per common share after announcing plans to resume paying cash dividends on a quarterly basis. The Board of Directors will continue to assess conditions for future dividend payments.

Interest Rate Sensitivity

The Corporation's most important element of asset/liability management is the monitoring of its sensitivity and exposure to interest rate movements which is the Corporation's primary market risk. We have no foreign currency exchange rate . . .

  Add SGB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SGB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.