U.S. Securities and Exchange Commission
Washington, D. C. 20549
Form 10-K
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
[ ]
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
001-12053
Southwest Georgia Financial Corporation
58-1392259
Georgia
(I.R.S. Employer
(State Or Other Jurisdiction Of
Identification No.)
Incorporation Or Organization)
(Exact Name of Corporation as specified in its charter)
201 First Street, S.E.
Moultrie, Georgia
(Address of Principal Executive Offices)
31768
(Zip Code)
(Corporation’s telephone number, including area code)
(229) 985-1120
Securities registered pursuant to Section 12(b) of this Act:
Common Stock $1 Par Value
(Title of each class)
NYSE AMERICAN LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated file,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting company [X] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X ]
Aggregate market value of voting and non-voting stock held by nonaffiliates of the registrant as of June 30, 2018: $46,079,479 based on
2,029,933 shares at the price of $22.70 per share.
As of March 22, 2019, 2,545,776 shares of the $1.00 par value common stock of Southwest Georgia Financial Corporation were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for the 2019 annual meeting of shareholders, to be filed with the Commission are
incorporated by reference into Part III.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
ITEM 1. BUSINESS
PART I
Southwest Georgia Financial Corporation (the “Corporation”) is a Georgia bank holding company organized in
1980, which, in 1981, acquired 100% of the outstanding shares of Southwest Georgia Bank (the “Bank”). The
Bank commenced operations as Moultrie National Bank in 1928. The Bank is a state-chartered bank insured by
the Federal Deposit Insurance Corporation (the “FDIC”).
The Corporation’s primary business is providing banking services through the Bank to individuals and businesses
principally in the following counties: Colquitt, Baker, Worth, Lowndes, and Tift as well as the surrounding
counties of southwest Georgia. Empire Financial Services, Inc. (“Empire”), a provider of commercial mortgage
banking services has been wholly owned by the Bank since 2001. In December 2017, the Bank dissolved Empire.
The executive office of the Corporation is located at 25 Second Avenue, S. W., Moultrie, Georgia 31768, and its
telephone number is (229) 985-1120.
All references herein to the Corporation include Southwest Georgia Financial Corporation and the Bank unless
the context indicates a different meaning.
General
The Corporation is a registered bank holding company. The Bank is community-oriented and offers customary
banking services such as consumer and commercial checking accounts, NOW accounts, savings accounts,
certificates of deposit, lines of credit, VISA® business 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 Wealth Strategies division that performs corporate, pension, and personal trust
services and acts as trustee, executor, and administrator for estates and as administrator or trustee of various types
of employee benefit plans for corporations and other organizations. Also, the Wealth Strategies division has a
securities sales department which offers full-service brokerage services through a third party service provider.
The Bank’s Southwest Georgia Insurance Services Division offers property and casualty insurance, life, health,
and disability insurance
Markets
The Corporation conducts banking activities in five counties in southwest and south central Georgia. Population
characteristics in these counties range from rural to more metropolitan. In our most recent market, Tift County,
we opened a full service banking center in August 2018. The total population of Tift County is 40,598. Our largest
market is Lowndes County with a total population of 115,489 and the highest growth rate in our markets at 13.5%
from 2007 to 2017. Due primarily to the location of a state university and a large air force base in Lowndes County,
this market has a median age estimated at 30.1, younger than an average median age of 39.3 in the other four
counties that the Bank primarily serves. These counties, Colquitt, Baker, Worth, and Tift, have an average total
population of 27,542 and an average decline in population of (2.5)% from 2007 to 2017. Per capita income is
approximately $20,000 in the Bank’s markets. Agriculture plays a major economic role in the Bank’s markets.
Colquitt, Baker, Worth, Lowndes, and Tift Counties produce a large portion of our state’s crops, including cotton,
peanuts, and a variety of vegetables.
Deposits
The Bank offers a full range of depository accounts and services to both consumers and businesses. At December
31, 2018, the Corporation’s deposit base, totaling $455,639,585, consisted of $103,694,910 in noninterest-bearing
demand deposits (22.8% of total deposits), $222,617,030 in interest-bearing demand deposits including money
market accounts (48.9% of total deposits), $31,848,588 in savings deposits (7.0% of total deposits), $81,214,376
in time deposits in amounts less than $250,000 (17.7% of total deposits), and $16,264,681 in time deposits of
$250,000 or more (3.6% of total deposits).
3
Loans
The Bank makes both secured and unsecured loans to individuals, corporations, and other businesses. Both
consumer and commercial lending operations include various types of credit for the Bank’s customers. Secured
loans include first and second real estate mortgage loans. The Bank also makes direct installment loans to
consumers on both a secured and unsecured basis. At December 31, 2018, consumer installment, real estate
(including construction and mortgage loans), and commercial (including financial and agricultural) loans
represented approximately 1.3%, 75.2% and 23.5%, respectively, of the Bank’s total loan portfolio.
Lending Policy
The current lending policy of the Bank is to offer consumer and commercial credit services to individuals and
businesses that meet the Bank’s credit standards. The Bank provides each lending officer with written guidelines
for lending activities. Lending authority is delegated by the Board of Directors of the Bank to loan officers, each
of whom is limited in the amount of secured and unsecured loans which can be made to a single borrower or
related group of borrowers.
The Loan Committee of the Bank’s Board of Directors is responsible for approving and monitoring the loan policy
and providing guidance and counsel to all lending personnel. The committee approves all individual loan or
relationship requests that exceed $800,000. The Loan Committee is composed of the Chief Executive Officer and
President, and other executive officers of the Bank, as well as certain Bank directors.
Loan Review and Nonperforming Assets
The Bank regularly requires a review of its loan portfolio to determine deficiencies and corrective action to be
taken. An independent loan review is conducted by an outside third party firm on a semiannual basis with their
findings being reported annually to the Board’s Loan Committee and the Audit Committee. Also, the Bank’s
external auditors as well as an outside third party firm conduct independent loan review adequacy tests and their
findings are reviewed annually by the Audit Committee and the Board of Directors.
Certain loans are monitored more often by the Credit Administration Department and the Loan Committee. These
loans include nonaccruing loans, loans more than 90 days past due, and other loans, regardless of size, that may
be considered high risk-based on factors defined within the Bank’s loan review policy.
Asset/Liability Management
The Asset/Liability Management Committee (“ALCO”) is established by the Bank’s Board of Directors and is
charged with establishing policies to manage the assets and liabilities of the Bank. Its task is to manage asset
growth, net interest margin, liquidity, and capital in order to maximize income and reduce interest rate risk. To
meet these objectives while maintaining prudent management of risks, the ALCO manages the Bank’s overall
acquisition and allocation of funds. At its quarterly meetings, the ALCO reviews and discusses the asset and
liability funds budget and income and expense budget in relation to the actual composition and flow of funds; the
ratio of the amount of rate sensitive assets to the amount of rate sensitive liabilities; the ratio of loan loss reserve
to outstanding loans; and other variables, such as expected loan demand, investment opportunities, core deposit
growth within specified categories, regulatory changes, monetary policy adjustments, and the overall state of the
local, state, and national economy. The Board of Directors reviews ALCO data quarterly.
Investment Policy
The Bank’s investment portfolio policy is to maximize income consistent with liquidity, asset quality, and
regulatory constraints. The policy is reviewed periodically by the Board of Directors. Individual transactions,
portfolio composition, and performance are reviewed and approved monthly by the Board of Directors.
Employees
The Bank had 120 full-time employees and two part-time employees at December 31, 2018. The Bank is not a
party to any collective bargaining agreement, and the Bank believes that its employee relations are good.
4
Competition
The banking business is highly competitive. The Bank competes with other depository institutions and other
financial service organizations, including brokers, finance companies, financial technology companies, mutual
funds, savings and loan associations, credit unions and certain governmental agencies. Many of these competitors
have substantially greater resources than we do and offer services that we do not currently provide. Such
competitors may also have greater lending limits than the Bank. In addition, nonbank competitors are generally
not subject to the extensive regulations applicable to us. Price (the interest charged on loans and paid on deposits)
remains a means of competition within the services industry. Use and advances in technology, such as internet
and mobile banking, electronic payment processing channels, and cybersecurity
to have a
significant impact on the competitive landscape of the financial services industry. The Bank also competes on the
basis of service and convenience in providing financial services. The Bank ranks third out of twenty-one banks in
a six county region (Colquitt, Baker, Worth, Lowndes, Brooks, and Tift) in deposit market share.
are expected
Monetary Policies
The results of operations of the Bank are affected by credit policies of monetary authorities, particularly the Board
of Governors of the Federal Reserve System (the “Federal Reserve”). The instruments of monetary policy
employed by the Federal Reserve include open market operations in U. S. government agency securities, changes
in the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. In view of
changing conditions in the national economy and in the money markets, as well as the effect of action by monetary
and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand, or the business and earnings of the Bank.
Payment of Dividends
The Corporation is a legal entity separate and distinct from the Bank. Most of the revenue of the Corporation
results from dividends paid to it by the Bank. There are statutory and regulatory requirements applicable to the
payment of dividends by the Bank, as well as by the Corporation to its shareholders.
Under the regulations of the Georgia Department of Banking and Finance (“DBF”), a state bank with positive
retained earnings may declare dividends without DBF approval if it meets all the following requirements:
(a)
(b)
(c)
total classified assets as of the most recent examination of the bank do not exceed 80% of
equity capital (as defined by regulation);
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
the ratio of equity capital to adjusted assets is not less than 6%.
The payment of dividends by the Corporation and the Bank may also be affected or limited by other factors, such
as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending upon the financial condition of the bank, could include the payment of
dividends), such authority may require, after notice and hearing, that such bank cease and desist from such
practice. The FDIC has issued a policy statement providing that insured banks should generally only pay
dividends out of current operating earnings. In addition to the formal statutes and regulations, regulatory
authorities consider the adequacy of each of the Bank’s total capital in relation to its assets, deposits and other
such items. Capital adequacy considerations could further limit the availability of dividends to the Bank. At
December 31, 2018, net assets available from the Bank to pay dividends without prior approval from regulatory
authorities totaled $2,375,242. For 2018, the Corporation’s cash dividend payout to shareholders was $1,196,332.
5
Supervision and Regulation
The following is a brief summary of the supervision and regulation of the Corporation and the Bank as financial
institutions and is not intended to be a complete discussion of all NYSE American LLC, state or federal rules,
statutes and regulations affecting their operations, or that apply generally to business corporations or companies
listed on NYSE American LLC. Changes in the rules, statutes and regulations applicable to the Corporation and
the Bank can affect the operating environment in substantial and unpredictable ways.
General. The Corporation is a registered bank holding company subject to regulation by the Federal Reserve
under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Corporation is required to file
annual and quarterly financial information with the Federal Reserve and is subject to periodic examination by the
Federal Reserve.
The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before (1) it
may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does
not already control; (2) it or any of its non-bank subsidiaries may acquire all or substantially all of the assets of a
bank; and (3) it may merge or consolidate with any other bank holding company. In addition, a bank holding
company is generally prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of
any company engaged in non-banking activities. This prohibition does not apply to activities listed in the BHC
Act or found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined
by regulation or order to be closely related to banking are:
• making, acquiring or servicing loans and certain types of leases;
•
•
•
•
•
performing certain data processing services;
acting as fiduciary or investment or financial advisor;
providing brokerage services;
underwriting bank eligible securities;
underwriting debt and equity securities on a limited basis through separately capitalized
subsidiaries; and
• making investments in corporations or projects designed primarily to promote community
welfare.
Although the activities of bank holding companies have traditionally been limited to the business of banking and
activities closely related or incidental to banking (as discussed above), the Gramm-Leach-Bliley Act (the “GLB
Act”) relaxed the previous limitations and permitted bank holding companies to engage in a broader range of
financial activities. Specifically, bank holding companies may elect to become financial holding companies which
may affiliate with securities firms and insurance companies and engage in other activities that are financial in
nature. Among the activities that are deemed “financial in nature” include:
•
•
•
•
•
lending, exchanging, transferring, investing for others or safeguarding money or securities;
insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or
death, or providing and issuing annuities, and acting as principal, agent, or broker with respect
thereto;
providing financial, investment, or economic advisory services, including advising an
investment company;
issuing or selling instruments representing interests in pools of assets permissible for a bank to
hold directly; and
underwriting, dealing in or making a market in securities.
6
Under this legislation, the Federal Reserve serves as the primary “umbrella” regulator of financial holding
companies with supervisory authority over each parent company and limited authority over its subsidiaries. The
primary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted
by the subsidiary. For example, broker-dealer subsidiaries will be regulated largely by securities regulators and
insurance subsidiaries will be regulated largely by insurance authorities.
The Corporation has no current plans to register as a financial holding company.
The Corporation must also register with the DBF and file periodic information with the DBF. As part of such
registration, the DBF requires information with respect to the financial condition, operations, management and
intercompany relationships of the Corporation and the Bank and related matters. The DBF may also require such
other information as is necessary to keep itself informed concerning compliance with Georgia law and the
regulations and orders issued thereunder by the DBF have been complied with, and the DBF may examine the
Corporation and the Bank.
The Corporation is an “affiliate” of the Bank under the Federal Reserve Act of 1913 (the “Federal Reserve Act”),
which imposes certain restrictions on (1) loans by the Bank to the Corporation, (2) investments in the stock or
securities of the Corporation by the Bank, (3) the Bank taking the stock or securities of an “affiliate” as collateral
for loans by the Bank to a borrower, and (4) the purchase of assets from the Corporation by the Bank. Further, a
bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing of services.
The Bank is regularly examined by the FDIC. As a state banking association organized under Georgia law, the
Bank is subject to the supervision of and the regular examination of the DBF. Both the FDIC and the DBF must
grant prior approval of any merger, consolidation or other corporation reorganization involving the Bank.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted in 2010,
and resulted in sweeping changes in the regulation of financial institutions aimed at strengthening the sound
operation of the financial services sector. In 2017, both the House of Representatives and the Senate introduced
legislation that would repeal or modify provisions of the Dodd-Frank Act and significantly impact financial
services regulation. In May 2018, certain provisions of these bills were signed into law as part of the Economic
Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”) and repealed or modified
significant portions of the Dodd-Frank Act. Specifically, the Economic Growth Act delayed implementation of
rules related to the Home Mortgage Disclosure Act, reformed and simplified certain Volcker Rule requirements,
and raised the threshold for applying enhanced prudential standards to bank holding companies with total
consolidated assets equal to or greater than $50 billion to those with total consolidated assets equal to or greater
than $250 billion. While recent federal legislation, including the Economic Growth Act, has scaled back portions
of the Dodd-Frank Act, uncertainty about the timing and scope of such changes, as well as the cost of complying
with a new regulatory regime, remains.
Capital Adequacy. Banks and bank holding companies are subject to various regulatory capital requirements
administered by state and federal banking agencies. Capital adequacy guidelines involve quantitative measures
of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative judgments by regulators about components, risk
weighting and other factors.
The Federal Reserve and the FDIC have implemented substantially identical risk-based rules for assessing bank
and bank holding company capital adequacy. These regulations establish minimum capital standards in relation
to assets and off-balance sheet exposures as adjusted for credit risk. “Total capital” is composed of Tier 1 capital
and Tier 2 capital. “Tier 1 capital” includes common equity, retained earnings, qualifying non-cumulative
perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level,
minority interests in equity accounts of consolidated subsidiaries, less goodwill, most intangible assets and certain
other assets. “Tier 2 capital” includes, among other things, perpetual preferred stock and related surplus not
meeting the Tier 1 capital definition, qualifying mandatorily convertible debt securities, qualifying subordinated
debt and allowances for possible loan and lease losses, subject to limitations.
7
The Federal Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio to assess the capital
adequacy of banks and bank holding companies. The Federal Reserve will require a bank holding company to
maintain a leverage ratio well above minimum levels 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 FDIC, the Office of the
Comptroller of the Currency (the “OCC”) and the Federal Reserve will also require banks to maintain capital well
above minimum levels.
In July 2013, the Federal Reserve published the Basel III Capital Rules establishing a new comprehensive capital
framework applicable to all depository institutions, bank holding companies with total consolidated assets of a
certain threshold, and all savings and loan holding companies except for those that are substantially engaged in
insurance underwriting or commercial activities (collectively, “banking organizations”). The rules implement the
December 2010 framework proposed by the Basel Committee on Banking Supervision (the “Basel Committee”),
known as “Basel III”, for strengthening international capital standards as well as certain provisions of the Dodd-
Frank Act.
The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding
companies and depository institutions compared to the prior U.S. risk-based capital rules. The Basel III Capital
Rules:
• defined the components of capital and address other issues affecting the numerator in banking
•
•
•
•
institutions’ regulatory capital ratios;
addressed risk weights and other issues affecting the denominator in banking institutions’ regulatory
capital ratios and replaced the prior risk-weighting approach, which was derived from the Basel I
capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the
standardized approach in the Basel Committee’s 2004 “Basel II” capital accords;
introduced a new capital measure called “common equity Tier 1” (“CET1”);
specified that Tier 1 capital consists of CET1 and “additional Tier 1 capital” instruments meeting
specified requirements; and
implemented the requirements of Section 939A of the Dodd-Frank Act to remove references to credit
ratings from the federal banking agencies’ rules.
The Basel III Capital Rules became effective for the Bank on January 1, 2015, subject to a phase-in period ending
January 1, 2019, but are not applicable to bank holding companies, like the Corporation, with less than $1 billion
in total consolidated assets that meet certain criteria.
The Basel III Capital Rules require the Bank to maintain;
•
•
•
•
a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation
buffer”;
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6%, plus the 2.5% capital
conservation buffer (which is added to the 6% Tier 1 capital ratio effectively resulting in a minimum
Tier 1 capital ratio of 8.5%);
a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8%, plus
the 2.5% capital conservation buffer (which is added to the 8% Total capital ratio effectively resulting
in a minimum Total capital ratio of 10.5%); and
a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.
In addition, Section 38 of the Federal Deposit Insurance 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 provisions set forth five regulatory zones in which all banks are placed largely
based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank’s financial
condition declines. The FDIC is required to resolve a bank when its ratio of tangible equity to total assets reaches
2%. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with
lesser amounts of capital.
8
The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, as
revised by the Basel III Capital Rules effective January 1, 2015, which place financial institutions in the following
five categories based upon capitalization ratios: (1) a “well-capitalized” institution has a Total risk-based capital
ratio of at least 10%, a Tier 1 risk-based ratio of at least 8%, a CET1 risk-based ratio of 6.5% and a leverage ratio
of at least 5%; (2) an “adequately capitalized” institution has a Total risk-based capital ratio of at least 8%, a Tier
1 risk-based ratio of at least 6%, a CET1 risk-based ratio of 4.5% and a leverage ratio of at least 4%; (3) an
“undercapitalized” institution has a Total risk-based capital ratio of under 8%, a Tier 1 risk-based ratio of under
6%, a CET1 risk-based ratio of under 4.5% or a leverage ratio of under 4%; (4) a “significantly undercapitalized”
institution has a Total risk-based capital ratio of under 6%, a Tier 1 risk-based ratio of under 4%, a CET1 risk-
based ratio of under 3% or a leverage ratio of under 3%; and (5) a “critically undercapitalized” institution has a
ratio of tangible equity to total assets of 2% or less. Institutions in any of the three undercapitalized categories
would be prohibited from declaring dividends or making capital distributions. The FDIC regulations also allow it
to “downgrade” an institution to a lower capital category based on supervisory factors other than capital.
As of December 31, 2018, the Bank was “well-capitalized” under current regulations.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include,
for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences
that could not be realized through net operating loss carrybacks and significant investments in non-consolidated
financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all
such categories in the aggregate exceed 15% of CET1. Under prior capital standards, the effects of certain
accumulated other comprehensive income items included in capital were excluded for the purposes of determining
regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive
items are not excluded; however, certain banking organizations, including the Bank, may make a one-time
permanent election to continue to exclude these items. The Bank made this election in the first quarter of 2015 in
order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations
on the fair value of the Bank’s available-for-sale securities portfolio.
The “capital conservation buffer” is designed to absorb losses during periods of economic stress. Banking
organizations with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer
(or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied)
will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting
categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more
risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S.
government agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a
variety of asset categories. Consistent with the Dodd-Frank Act, the Basel III Capital Rules replace the ratings-
based approach to securitization exposures, which is based on external credit ratings, with the simplified
supervisory formula approach in order to determine the appropriate risk weights for these exposures.
Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to
a risk weight category or choose to assign such exposures a 1,250% risk weight. In addition, the Basel III Capital
Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through
a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes
of credit risk mitigation.
As of December 31, 2018, the Bank met all capital adequacy requirements under the Basel III Capital Rules on a
fully phased-in basis.
9
In November 2017, the federal banking agencies adopted a final rule to extend the regulatory capital treatment
applicable during 2017 under the capital rules for certain items, including regulatory capital deductions, risk
weights, and certain minority interest limitations. The relief provided under the final rule applies to banking
organizations that are not subject to the capital rules’ advanced approaches, such as the Corporation. Specifically,
the final rule extends the current regulatory capital treatment of mortgage servicing assets, deferred tax assets
arising from temporary differences that could not be realized through net operating loss carrybacks, significant
investments in the capital of unconsolidated financial institutions in the form of common stock, and common
equity tier 1 minority interest, tier 1 minority interest, and total capital minority interest exceeding the capital
rules’ minority interest limitations.
In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord,
generally referred to as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated
into the framework is to reduce excessive variability of risk-weighted assets (“RWA”), which will be
accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and
operational risk, which will facilitate the comparability of banks’ capital ratios; constraining the use of internally
modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a
revised and robust capital floor. Leadership of the federal banking agencies who are tasked with implementing
Basel IV supported the revisions. Although it is uncertain at this time, we anticipate some, if not all, of the Basel
IV accord may be incorporated into the capital requirements framework applicable to the Corporation.
The Economic Growth Act mandated the federal banking regulators, through notice and comment rulemaking, to
develop an “off-ramp” exempting certain banking organizations with less than $10.0 billion in consolidated assets
and a low-risk profile from generally applicable leverage capital and risk-based capital requirements if such
banking organization maintained a leverage ratio to be set by the federal banking regulators (the “Community
Bank Leverage Ratio”). The Economic Growth Act requires the federal banking regulators to set the Community
Bank Leverage Ratio between 8% and 10%. On November 21, 2018, the federal banking regulators proposed a
rule to implement Section 201 of the Economic Growth Act. The proposed rule would set the Community Bank
Leverage Ratio at 9%. To date, the proposed rule implementing Section 201 of the Economic Growth Act has not
been finalized.
Consumer Protection Laws. The Dodd-Frank Act centralized responsibility for consumer financial protection by
creating a new agency, the Consumer Financial Protection Bureau (“CFPB”), and giving it the power to
promulgate and enforce federal consumer protection laws. Depository institutions are subject to the CFPB’s rule
writing authority, and existing federal bank regulatory agencies retain examination and enforcement authority for
such institutions. The CFPB and the Corporation’s existing federal regulator, the FDIC, are focused on the
following:
risks to consumers and compliance with the federal consumer financial laws;
the markets in which firms operate and risks to consumers posed by activities in those markets;
•
•
• depository institutions that offer a wide variety of consumer financial products and services;
• depository institutions with a more specialized focus; and
• non-depository companies that offer one or more consumer financial products or services.
The CFPB and FDIC have authority to prevent unfair, deceptive or abusive practices in connection with offering
consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards
that are more stringent than those adopted at the federal level and, in certain circumstances, permits states’
attorneys general to enforce compliance with both state and federal laws and regulations.
Volcker Rule. The Dodd-Frank Act amended the BHC Act to require the federal bank regulatory agencies to adopt
rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring
certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory
provision is commonly called the “Volcker Rule”. The Volcker Rule and the final rules adopted by the Federal
Reserve thereunder, do not have a material effect on the Corporation and the Bank, as we do not engage in
businesses prohibited by the Volcker Rule. In the future, the Corporation may incur costs to adopt additional
policies and systems to ensure compliance with the Volcker Rule.
10
Commercial Real Estate. The federal bank regulatory agencies, including the FDIC, restrict concentrations in
commercial real estate lending and have noted that recent increases in banks’ commercial real estate
concentrations have created safety and soundness concerns in the event of a significant economic downturn. The
regulatory guidance mandates certain minimal risk management practices and categorizes banks with defined
levels of such concentrations as banks requiring elevated examiner scrutiny. Although management believes that
the Corporation’s credit processes and procedures meet the risk management standards dictated by this guidance,
regulatory outcomes could effectively limit increases in the real estate concentrations in the Bank’s loan portfolio
and require additional credit administration and management costs associated with those portfolios.
Source of Strength Doctrine. Federal Reserve regulations and policy requires bank holding companies to act as
a source of financial and managerial strength to their subsidiary banks. Under this policy, the Corporation is
expected to commit resources to support the Bank.
Loans. Inter-agency guidelines adopted by federal bank regulatory agencies mandate that financial institutions
establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an
allowable amount of non-conforming loans as a percentage of capital.
Transactions with Affiliates. Under federal law, all transactions between and among a state nonmember bank and
its affiliates, which include holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act
and Regulation W promulgated thereunder. Generally, these requirements limit these transactions to a percentage
of the bank’s capital and require all of them to be on terms at least as favorable to the bank as transactions with
non-affiliates. In addition, a bank may not lend to any affiliate engaged in non-banking activities not permissible
for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The FDIC is authorized to
impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a
bank. The regulations also set forth various reporting requirements relating to transactions with affiliates.
Financial Privacy. In accordance with the GLB Act, federal banking regulatory agencies adopted rules that limit
the ability of banks and other financial institutions to disclose non-public information about consumers to non-
affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.
The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors.
Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of governmental policy on financial
institutions in recent years has been aimed at combating terrorist financing. This has generally been accomplished
by amending existing anti-money laundering laws and regulations. The United States Department of the Treasury
has issued a number of implementing regulations which apply various requirements of the USA Patriot Act of
2001 to the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the
identity of their customers. Failure of a financial institution to maintain and implement adequate programs to
combat terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and
reputational consequences for the institution.
Incentive Compensation. The federal banking agencies have issued guidance on incentive compensation policies
(the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of financial
institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking.
The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the
risk profile of an institution, either individually or as part of a group, is based upon the key principles that a
financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage
risk-taking beyond the institution ability to effectively identify and manage risks, (ii) be compatible with effective
internal controls and risk management, and (iii) be supported by strong corporate governance, including active
and effective oversight by the institution’s board of directors.
11
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive
compensation arrangements of financial institutions like the Corporation that are not “large, complex banking
organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of
the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the
supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the
financial institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take
other actions. Enforcement actions may be taken against a financial institution if its incentive compensation
arrangements, or related risk-management control or governance processes, pose a risk to the institution’s safety
and soundness and the institution is not taking prompt and effective measures to correct the deficiencies.
The scope and content of banking regulators’ policies on executive compensation are continuing to develop and
are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with
such policies will adversely affect our ability to hire, retain and motivate our key employees.
Cybersecurity. Recent cyber-attacks against banks and other financial institutions that resulted in unauthorized
access to confidential customer information have prompted the federal bank regulatory agencies to issue
extensive guidance on cybersecurity. These agencies are likely to devote more resources to this part of their
safety and soundness examination than they may have in the past.
Fair Value. The Corporation’s impaired loans and foreclosed assets may be measured and carried at “fair value”,
the determination of which requires management to make assumptions, estimates and judgments. When a loan is
considered impaired, a specific valuation allowance is allocated or a partial charge-off is taken, if necessary, so
that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at
the fair value of collateral if repayment is expected solely from the collateral. In addition, foreclosed assets are
carried at the lower of cost or “fair value”, less cost to sell, following foreclosure. “Fair value” is defined by U.S.
generally accepted accounting principles (“GAAP”) “as the price that would be received to sell an asset in an
orderly transaction between market participants at the measurement date.” GAAP further defines an “orderly
transaction” as “a transaction that assumes exposure to the market for a period prior to the measurement date to
allow for marketing activities that are usual and customary for transactions involving such assets; it is not a forced
transaction (for example, a forced liquidation or distress sale).” Although management believes its processes for
determining the value of these assets use appropriate factors and allow the Corporation to arrive at a fair value,
the processes require management judgment and assumptions and the value of such assets at the time they are
revalued or divested may be significantly different from management’s determination of fair value. Because of
this increased subjectivity in fair value determinations, there is greater than usual grounds for differences in
opinions, which may result in increased disagreements between management and the Bank’s regulators,
disagreements which could impair the relationship between the Bank and its regulators.
Future Legislation. Various legislation affecting financial institutions and the financial industry is, from time to
time, introduced in Congress. Such legislation may change banking statutes and the operating environment of the
Corporation and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of
doing business, limit or expand permissible activities or affect the competitive balance depending upon whether
any of this potential legislation will be enacted, and, if enacted, the effect that it or any implementing regulations
would have on the financial condition or results of operations of the Corporation or any of its subsidiaries. With
the current economic environment, the nature and extent of future legislative and regulatory changes affecting
financial institutions is not known at this time.
Available Information
The Corporation’s website where you can find more information is located at www.sgb.bank. We make available
free of charge, through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, proxy statements and other reports filed or furnished pursuant to Section 13(a) or 15(d)
under the Securities Exchange Act of 1934 (the “Exchange Act”). These reports are available as soon as
reasonably practicable after those materials are electronically filed with the Securities and Exchange Commission
(the “SEC”).
12
Our SEC filings are publicly available at the SEC’s website located at www.sec.gov. You may also read and copy
any document we file with the SEC at its Public Reference Facilities at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information about the Public Reference Room operations by calling
the SEC at 1-800-SEC-0330. Information provided on our website is not part of this report, and is not
incorporated herein by reference unless otherwise specifically referenced as such in this report.
Executive Officers of the Corporation and the Bank
Executive officers are elected by the Board of Directors annually in May and hold office until the following May
at the pleasure of the Board of Directors. The principal executive officers of the Corporation and the Bank and
their ages, positions, and terms of office as of March 29, 2019, are as follows:
Name (Age)
DeWitt Drew
(62)
Donna S. Lott
(43)
Jeffery E. Hanson
(53)
Danny E. Singley
(64)
Karen T. Boyd
(50)
Principal Position
President and Chief Executive Officer of the
Corporation and Bank
Executive Vice President and Chief Administrative Officer of
the Corporation and Bank and Cashier of the Bank
Executive Vice President and Chief Banking Officer
of the Corporation and Bank
Executive Vice President and Chief Credit Officer of
the Bank
Senior Vice President and Treasurer of the Corporation
and Senior Vice President and Controller of the Bank
Jeffrey (Jud) Moritz
(42)
Executive Vice President of the Bank and Valdosta
Region President
Ross K. Dekle
(37)
Gregory P. Costin
(43)
Pamela J. Yeager
(50)
Chad J. Carpenter
(44)
Leslie W. Green
(44)
Executive Vice President of the Bank and Moultrie
Region President
Senior Vice President of the Bank
Senior Vice President of the Bank
Senior Vice President of the Bank and Tifton
Region President
Senior Vice President of the Bank
Executive
Officer Since
1999
2008
2011
2002
2010
2011
2011
2012
2015
2015
2018
None of the above officers are related and there are no arrangements or understandings between them and any
other person pursuant to which any of them was elected as an officer, other than arrangements or understandings
with directors or officers of the Corporation or Bank acting solely in their capacities as such.
13
The following is a brief description of the business experience of the principal executive officers of the
Corporation and the Bank. Except as otherwise indicated, each principal executive officer has been engaged in
their present or last employment, in the same or similar position, for more than five years.
Mr. Drew is a director of the Corporation and the Bank and was named President and Chief Executive Officer in
May 2002. Previously, he served as President and Chief Operating Officer beginning in 2001 and Executive Vice
President in 1999 of the Corporation and the Bank.
Ms. Lott became Chief Administrative Officer in 2018 and Executive Vice President of the Corporation and the
Bank in 2017. She is also Cashier of the Bank. Previously, she served as Senior Vice President of the Bank since
2014. Prior to that, she served as Vice President of the Bank since 2008 and Assistant Vice President of the Bank
since 2007.
Mr. Hanson became Executive Vice President of the Corporation in 2012 and Executive Vice President and Chief
Banking Officer of the Bank in 2011. Previously, he was employed by Park Avenue Bank in Valdosta, Georgia,
as Valdosta Market President and various other positions since 1994.
Mr. Singley became Executive Vice President and Chief Credit Officer of the Bank in 2014. Previously, he was
appointed President Moultrie Region and Senior Vice President of the Bank in 2011 and served as Senior Vice
President of the Bank since 2008. Prior to that, he had been Vice President of the Bank since 2002.
Ms. Boyd became Senior Vice President and Treasurer of the Corporation in 2017. She is also Senior Vice
President and Controller of the Bank since 2014. Previously, she served as Vice President of the Bank since 2010
and, prior to that, Assistant Vice President of the Bank since 2007.
Mr. Moritz became Executive Vice President of the Bank in 2018. Previously, he was appointed as Senior Vice
President of the Bank and Valdosta Region President in 2011. Prior to that, he was employed by Park Avenue
Bank in Valdosta, Georgia, for five years and Regions Bank for five years.
Mr. Dekle became Executive Vice President of the Bank in 2018. Previously, he was appointed Senior Vice
President of the Bank and Moultrie Region President in 2014. Prior to that, he served as Vice President of the
Bank since 2011 and, prior to that, Assistant Vice President of the Bank since 2007.
Mr. Costin became Senior Vice President of the Bank in 2015. Previously, he served as Vice President of the
Bank since 2012 and, prior to that, Assistant Vice President of the Bank since 2011.
Ms. Yeager became Senior Vice President of the Bank in 2015. Previously, she was employed for 11 years with
Commercial Banking Company in Valdosta, Georgia. Prior to that, she was employed for 18 years with First State
Bank and Trust in Valdosta, Georgia.
Mr. Carpenter became Senior Vice President of the Bank and Tifton Region President in 2015. Previously, he
was employed by BB&T in Tifton, Georgia, for 15 years where he most recently held the position of Area
President for the communities of Tifton, Valdosta and Douglas.
Ms. Green became Senior Vice President of the Bank in 2018. Previously, she served as Vice President of the
Bank since 2017. Prior to that, she was employed for 4 years with Thomas County Federal Savings and Loan in
Thomasville, Georgia.
14
Table 1 - Distribution of Assets, Liabilities, and Shareholders’ Equity; Interest Rates and Interest
Differentials
The following tables set forth, for the fiscal years ended December 31, 2018, 2017, and 2016, 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.
ASSETS
Cash and due from banks
Year Ended December 31, 2018
Average
Balance
$ 9,944
Interest
(Dollars in thousands)
$ 0
Rate
- %
Earning assets:
Interest-bearing deposits with banks
Loans, net (a) (b) (c)
Certificates of deposit in other banks
Taxable investment securities
held to maturity and available for sale
Nontaxable investment securities
held to maturity (c)
Nontaxable investment securities
available for sale (c)
Other investment securities
Total earning assets
Premises and equipment
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’
EQUITY
Noninterest-bearing demand deposits
Interest-bearing liabilities:
Interest bearing business checking
NOW accounts
Money market deposit accounts
Savings deposits
Time deposits
Federal funds purchased
Other borrowings
Total interest-bearing liabilities
Other liabilities
Total liabilities
Common stock
Surplus
Retained earnings
Less treasury stock
Total shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income and margin
485
18,782
48
1,363
1,204
236
144
$ 22,262
1.87%
5.42%
2.38%
2.52%
3.31%
3.20%
6.11%
4.69%
25,951
346,761
2,019
54,088
36,364
7,375
2,356
474,914
13,763
11,874
$ 510,495
$ 112,768
$ 0
- %
21,334
18,807
147,395
32,082
87,539
42
44,654
351,853
3,795
468,416
2,823
11,075
32,322
( 4,141)
42,079
$ 510,495
85
70
1,030
124
1,075
1
937
3,322
0.40%
0.37%
0.70%
0.39%
1.23%
2.38%
2.10%
0.94%
$ 18,940
3.99%
(a)
(b)
(c)
Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are
included.
Interest income includes loan fees of approximately $1,062 thousand.
Reflects taxable equivalent adjustments using a tax rate of 21%.
15
ASSETS
Cash and due from banks
Earning assets:
Interest-bearing deposits with banks
Loans, net (a) (b) (c)
Certificates of deposit in other banks
Taxable investment securities
held to maturity and available for sale
Nontaxable investment securities
held to maturity (c)
Nontaxable investment securities
available for sale (c)
Other investment securities
Total earning assets
Premises and equipment
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’
EQUITY
Noninterest-bearing demand deposits
Interest-bearing liabilities:
NOW accounts
Money market deposit accounts
Savings deposits
Time deposits
Federal funds purchased
Other borrowings
Total interest-bearing liabilities
Other liabilities
Total liabilities
Common stock
Surplus
Retained earnings
Less treasury stock
Total shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income and margin
Year Ended December 31, 2017
Interest
(Dollars in thousands)
$ 0
Rate
- %
195
16,345
35
1,285
1,713
287
103
$ 19,963
1.08%
5.20%
2.37%
2.42%
3.78%
3.95%
4.79%
4.52%
Average
Balance
$ 8,701
18,104
314,559
1,477
53,036
45,286
7,260
2,150
441,872
11,835
11,035
$ 473,443
$ 130,252
$ 0
- %
20,606
129,313
30,448
79,832
80
38,293
298,572
4,157
432,981
4,294
31,702
30,587
( 26,121)
40,462
$ 473,443
40
381
82
652
1
747
1,903
0.19%
0.29%
0.27%
0.82%
1.25%
1.95%
0.64%
$ 18,060
4.09%
(a)
(b)
(c)
Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are
included.
Interest income includes loan fees of approximately $965 thousand.
Reflects taxable equivalent adjustments using a tax rate of 34%.
16
ASSETS
Cash and due from banks
Earning assets:
Interest-bearing deposits with banks
Loans, net (a) (b) (c)
Certificates of deposit in other banks
Taxable investment securities
held to maturity and available for sale
Nontaxable investment securities
held to maturity (c)
Nontaxable investment securities
available for sale (c)
Other investment securities
Total earning assets
Premises and equipment
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’
EQUITY
Noninterest-bearing demand deposits
Interest-bearing liabilities:
NOW accounts
Money market deposit accounts
Savings deposits
Time deposits
Federal funds purchased
Other borrowings
Total interest-bearing liabilities
Other liabilities
Total liabilities
Common stock
Surplus
Retained earnings
Less treasury stock
Total shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income and margin
Year Ended December 31, 2016
Interest
(Dollars in thousands)
$ 0
Rate
- %
103
14,863
0
1,168
1,888
151
92
$ 18,265
0.52%
5.35%
0.00%
2.45%
3.69%
4.09%
4.74%
4.54%
Average
Balance
$ 7,479
19,759
277,908
17
47,620
51,151
3,696
1,941
402,092
11,355
10,155
$ 431,081
$ 113,122
$ 0
- %
17,623
112,434
29,621
80,204
1
35,861
275,744
3,845
392,711
4,294
31,702
28,489
( 26,115)
38,370
$ 431,081
30
285
50
570
0
677
1,612
0.17%
0.25%
0.17%
0.71%
0.00%
1.89%
0.58%
$ 16,653
4.14%
(a)
(b)
(c)
Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are
included.
Interest income includes loan fees of approximately $1,045 million.
Reflects taxable equivalent adjustments using a tax rate of 34%.
17
Table 2 – Rate/Volume Analysis
The following table sets forth, for the indicated years ended December 31, a summary of the changes in interest
paid resulting from changes in volume and changes in rate. The change due to volume is calculated by multiplying
the change in volume by the prior year’s rate. The change due to rate is calculated by multiplying the change in
rate by the prior year’s volume. The change attributable to both volume and rate is calculated by multiplying the
change in volume by the change in rate.
Interest earned on:
Interest-bearing deposits with banks
Loans, net (b)
Certificates of deposit in other banks
Taxable investment securities
held to maturity and available for sale
Nontaxable investment securities
held to maturity (b)
Nontaxable investment securities
available for sale (b)
Other investment securities
Total interest income
Interest paid on:
Interest bearing business checking
NOW accounts
Money market deposit accounts
Savings deposits
Time deposits
Federal funds purchased
Other borrowings
Total interest expense
Due To
Changes In (a)
2018
2017
Increase
(Decrease)
(Dollars in thousands)
Volume
$ 485
18,782
48
$ 195
16,345
35
$ 290
2,437
13
$ 108
1,723
13
Rate
$ 182
714
0
1,363
1,204
236
144
22,262
85
70
1,030
124
1,075
1
937
3,322
1,285
1,713
287
103
19,963
0
40
381
82
652
1
747
1,903
78
26
52
( 509)
( 311)
( 198)
( 51)
41
2,299
85
30
649
42
423
0
190
1,419
5
11
1,575
67
( 3)
60
4
68
0
130
326
( 56)
30
724
18
33
589
38
355
0
60
1,093
Net interest earnings
$18,940
$18,060
$ 880
$1,249
$( 369)
(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 21% for 2018 and 34% for 2017 in adjusting interest on
nontaxable loans and securities to a fully taxable basis.
18
Interest earned on:
Interest-bearing deposits with banks
Loans, net (b)
Certificates of deposit in other banks
Taxable investment securities
held to maturity and available for sale
Nontaxable investment securities
held to maturity (b)
Nontaxable investment securities
available for sale (b)
Other investment securities
Total interest income
Interest paid on:
NOW accounts
Money market deposit accounts
Savings deposits
Time deposits
Federal funds purchased
Other borrowings
Total interest expense
Net interest earnings
Due To
Changes In (a)
2017
2016
Increase
(Decrease)
(Dollars in thousands)
Volume
Rate
$ 195
16,345
35
$ 103
14,863
0
$ 92
1,482
35
$( 8)
1,889
18
$ 100
( 407)
17
1,285
1,713
287
103
19,963
40
381
82
652
1
747
1,903
$18,060
1,168
1,888
151
92
18,265
30
285
50
570
0
677
1,612
$16,653
117
131
( 14)
( 175)
( 224)
49
136
11
1,698
10
96
32
82
1
70
291
$ 1,407
141
10
1,957
6
46
1
( 3)
0
47
97
$1,860
( 5)
1
( 259)
4
50
31
85
1
23
194
$( 453)
(a)
Volume and rate components are in proportion to the relationship of the absolute dollar amounts of the change in each.
(b) Reflects taxable equivalent adjustments using a tax rate of 34% for 2017 and 2016 in adjusting interest on nontaxable
loans and securities to a fully taxable basis.
Table 3 - Investment Portfolio
The carrying values of investment securities for the indicated years are presented below:
Securities held to maturity:
State and municipal
Residential mortgage-backed
Total securities held to maturity
Securities available for sale:
U.S. government treasuries
U.S. government agencies
State and municipal
Residential mortgage-backed
Corporate notes
Total securities available for sale
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
$ 30,583
6,244
$ 36,827
$ 41,447
3,144
$ 44,591
$ 50,436
4,167
$ 54,603
$ 955
45,207
7,378
4,774
0
$ 58,314
$ 968
43,860
7,574
1,862
0
$ 54,264
$ 962
40,985
6,453
2,529
2,524
$ 53,453
At December 31, 2018, the total investment portfolio decreased to $95,140,650, down $3,813,832, compared with
$98,954,482 at December 31, 2017. The decrease in the portfolio resulted in various maturities and calls totaling
$11,475,000, sales of $2,879,000, and residential mortgage-backed securities principal paydowns of $1,572,462.
The sales were U.S. government agency securities categorized as available for sale. These transactions resulted in
a net loss of $165,369. Partially offsetting these maturities, calls, and sales were purchases of $13,399,926 of
U.S. government agency securities, residential mortgage-backed securities, and municipal securities.
19
The following table shows the contractual maturities of debt securities at December 31, 2018, and the weighted
average yields (for nontaxable obligations on a fully taxable basis assuming a 21% tax rate) of such securities.
Mortgage-backed securities amortize in accordance with the terms of the underlying mortgages, including
prepayments as a result of refinancing and other early payoffs.
Within
One Year
MATURITY
After One
But Within
Five Years
After Five
But Within
Ten Years
After
Ten Years
Amount Yield
Amount Yield
Amount Yield
Amount Yield
(Dollars in thousands)
Debt Securities:
U.S. government treasuries
U.S. government agencies
State and municipal
Residential mortgage-
backed
$ 0
2,125
6,483
0%
1.34%
3.06%
$ 0
27,162
15,189
0%
2.65%
3.22%
$ 955
15,920
11,841
2.25%
2.30%
3.23%
$ 0
0
4,447
0%
0%
3.39%
0
0%
208
3.19%
3,288
3.18%
7,523
3.09%
Total
$ 8,608
2.64%
$42,559
2.86%
$32,004
2.73%
$11,970
3.21%
The calculation of weighted average yields is based on the carrying value and effective yields of each security
weighted for the scheduled maturity of each security. At December 31, 2018 and 2017, securities carried at
approximately $59,182,556 and $71,520,817, respectively, were pledged to secure public and trust deposits as
required by law. At December 31, 2018, approximately $4,400,000 was over pledged and could be released if
necessary for liquidity needs. At December 31, 2018 and 2017, no securities were pledged to secure our Federal
Home Loan Bank advances.
Table 4 - Loan Portfolio
The following table sets forth the amount of loans outstanding for the indicated years according to type of loan:
Commercial, financial and
agricultural
Real estate:
Construction loans
Commercial mortgage loans
Residential loans
Agricultural loans
Consumer & other
Total loans
Less:
Unearned interest and discount
Allowance for loan losses
Net loans
2018
2017
Year Ended December 31,
2016
(Dollars in thousands)
2015
2014
$ 88,403
$ 73,146
$ 70,999
$ 58,173
$ 47,861
24,891
123,477
103,348
31,562
5,086
376,767
17
3,429
$ 373,321
22,287
106,458
99,160
25,374
3,767
330,192
18
3,044
$ 327,130
25,999
91,733
83,271
16,580
3,961
292,543
19
3,124
$ 289,400
19,831
85,777
67,969
15,620
3,435
250,805
19
3,032
$ 247,754
12,257
76,916
69,305
14,996
3,091
224,426
26
3,114
$ 221,286
20
The following table shows maturities of the commercial, financial, agricultural, and construction loan portfolio at
December 31, 2018.
Distribution of loans which are due:
In one year or less
After one year but within five years
After five years
Total
Commercial,
Financial,
Agricultural and
Construction
(Dollars in thousands)
$ 32,388
57,432
23,474
$ 113,294
The following table shows, for such loans due after one year, the amounts which have predetermined interest rates
and the amounts which have floating or adjustable interest rates at December 31, 2018.
Commercial, financial,
agricultural and construction
Loans With
Predetermined
Rates
Loans With
Floating Rates
(Dollars in thousands)
Total
$ 77,458
$ 3,448
$ 80,906
The following table presents information concerning outstanding balances of nonaccrual, past-due, and
restructured loans as well as foreclosed assets for the indicated years. Respectively, they are defined as: (a) loans
accounted for on a nonaccrual basis (“nonaccruals”); (b) loans which are contractually past due 90 days or more
as to interest or principal payments and still accruing (“past-dues”); and (c) loans past due 30 days or more for
which the terms have been modified to provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower (“troubled debt restructured”). The Corporation’s
nonaccrual policy is located in Note 3 of the Corporation’s Notes to Consolidated Financial Statements.
Accruing Loans
Nonaccrual
Loans
90 Days
Past-Due
Troubled
Debt
Restructured
(Dollars in thousands)
December 31, 2018
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
December 31, 2013
$1,205
$1,675
$ 246
$1,546
$ 786
$ 913
$ 0
$ 0
$ 0
$ 1
$ 0
$ 0
$ 7
$ 4
$ 914
$2,290
$ 215
$ 256
Total
$1,212
$1,679
$1,160
$3,837
$1,001
$1,169
Foreclosed
Assets
$ 128
$ 759
$ 127
$ 82
$ 274
$ 406
In 2018, nonaccrual loans decreased due to settlement, payment, or restructuring. Items in foreclosed assets
includes one commercial real estate property totaling $90,000, and one residential real estate property totaling
$37,605.
The Bank performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher
than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of
weakness identified in the loan. All loans risk rated Watch, Other Assets Especially Mentioned (“OAEM”),
Substandard or Doubtful are listed on the Bank’s “watchlist.” Management monitors these loans closely and
reviews their performance on a regular basis to assess the level of risk and to ensure that appropriate actions are
being taken to minimize potential loss exposure. Loans identified as being Loss are fully charged off. In addition,
the Bank maintains a listing of “classified loans”, of which some loans may be potential problem loans, consisting
of Substandard and Doubtful loans which totaled $5,781,368 at December 31, 2018. Potential problem loans are
loans other than nonaccruals, past-dues and troubled debt restructured loans which management has doubt as to
the borrower’s ability to comply with the present loan repayment terms.
21
Management closely monitors the watchlist for signs of deterioration to mitigate the growth in nonaccrual loans.
At December 31, 2018, watchlist loans, inclusive of the “classified loans”, totaled $14,223,035, of which
$9,866,653 are not considered impaired. See Note 3 of the Corporation’s Notes to Consolidated Financial
Statements for further discussion on classification of potential problem loans.
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.
2018
2017
Year Ended December 31,
2016
(Dollars in thousands)
2015
2014
Average loans outstanding
$349,938
$317,724
$281,006
$235,939
$223,295
Amount of allowance for loan
losses at beginning of period
Amount of loans charged off
during period:
Commercial, financial and
agricultural
Real estate:
Construction
Commercial
Residential
Agricultural
Consumer & other
Total loans charged off
Amount of recoveries during period:
Commercial, financial and
agricultural
Real estate:
Construction
Commercial
Residential
Agricultural
Consumer & other
Total loans recovered
Net loans charged off during period
Additions to allowance for loan
losses charged to operating
expense during period
Amount of allowance for loan losses
at end of period
Ratio of net charge-offs during
period to average loans
outstanding for the period
$ 3,044
$ 3,124
$ 3,032
$ 3,114
$ 3,078
548
113
103
264
37
1
43
7
0
7
606
0
169
60
94
12
448
0
0
4
0
9
116
0
0
33
0
22
319
121
0
158
0
26
342
12
64
28
42
12
0
1
0
147
2
162
444
0
0
0
0
4
68
380
0
0
17
0
3
48
68
0
0
22
0
32
96
223
0
0
30
0
6
48
294
829
300
160
141
330
$ 3,429
$ 3,044
$ 3,124
$ 3,032
$ 3,114
.13%
.12%
.02%
.09%
.13%
The allowance is based upon management’s analysis of the portfolio under current economic conditions. This
analysis includes a study of loss experience, a review of delinquencies, and an estimate of the possibility of loss
in view of the risk characteristics of the portfolio. Based on the above factors, management considers the current
allowance to be adequate.
22
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
based on historical experience of net charge-offs. The allowance for loan losses allocated to each category is not
necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to
absorb losses in other categories. The amount of the allowance applicable to each category and the percentage of
loans in each category to total loans are presented below.
Category
Commercial, financial
and agricultural
Real estate:
Construction
Commercial
Residential
Agricultural
Consumer & other
Total
Category
Commercial, financial
and agricultural
Real estate:
Construction
Commercial
Residential
Agricultural
Consumer & other
Total
December 31, 2018
% of
Total
Loans
Allocation
December 31, 2017
% of
Total
Loans
(Dollars in thousands)
Allocation
December 31, 2016
% of
Total
Loans
Allocation
$ 402
23.5%
$ 324
22.2%
$ 191
24.3%
1,043
1,210
459
109
206
$ 3,429
6.6%
32.8%
27.4%
8.4%
1.3%
100.0%
1,043
1,057
416
12
192
$ 3,044
6.8%
32.2%
30.0%
7.7%
1.1%
100.0%
1,043
1,192
420
87
191
$ 3,124
8.9%
31.3%
28.5%
5.7%
1.3%
100.0%
December 31, 2015
% of
Total
Loans
Allocation
December 31, 2014
% of
Total
Loans
Allocation
$ 145
23.2%
$ 300
21.3%
1,043
1,192
382
86
184
$ 3,032
7.9%
34.2%
27.1%
6.2%
1.4%
100.0%
1,043
1,192
313
86
180
$ 3,114
5.4%
34.3%
30.9%
6.7%
1.4%
100.0%
The calculation is based upon total loans including unearned interest and discount. Management believes that the
portfolio is diversified and, to a large extent, secured without undue concentrations in any specific risk area.
Control of loan quality is regularly monitored by management, the loan committee, and is reviewed by the Bank’s
Board of Directors which meets monthly. Independent external review of the loan portfolio is provided by
examinations conducted by regulatory authorities. The amount of additions to the allowance for loan losses
charged to operating expense for the periods indicated were based upon many factors, including actual charge-
offs and evaluations of current economic conditions in the market area. Management believes the allowance for
loan losses is adequate to cover any potential loan losses.
23
Table 5 - Deposits
The average amounts of deposits for the last three years are presented below.
Noninterest-bearing demand deposits
Interest bearing business checking
NOW accounts
Money market deposit accounts
Savings
Time deposits
Total interest-bearing deposits
Total average deposits
2018
$112,767
21,335
18,807
147,395
32,082
87,539
307,158
$419,925
Year Ended December 31,
2017
(Dollars in thousands)
$130,252
0
20,606
129,313
30,448
79,832
260,199
$390,451
2016
$113,122
0
17,623
112,435
29,621
80,204
239,883
$353,005
The maturity of certificates of deposit of $100,000 or more as of December 31, 2018, are presented below.
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total outstanding certificates of deposit of $100,000 or more
Table 6 - Return on Equity and Assets
Certain financial ratios are presented below.
(Dollars in thousands)
$ 7,079
9,189
27,217
16,018
$ 59,503
Return on average assets
Return on average equity
Dividend payout
(dividends paid divided by net income)
Average equity to average assets
Forward-Looking Statements
2018
0.91%
11.04%
25.74%
8.24%
Year Ended December 31,
2017
0.80%
9.41%
29.44%
8.55%
2016
0.94%
10.51%
26.53%
8.90%
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements are intended to be covered by the safe harbor for forward-
looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are not statements of historical fact, and can be identified by the use of forward-looking terminology such as
“believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”,
“estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology.
Forward-looking statements include discussions of strategy, financial projections, guidance and estimates
(including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of
various transactions, and statements about the future performance, operations, products and services of the
Corporation and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on
such statements.
24
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 any 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 maintain profitability;
• the Corporation’s ability to raise capital;
• the Corporation’s ability to maintain liquidity or access other sources of funding;
• changes in the cost and availability 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 from financial institutions and other financial service providers;
• changes in technology;
• the impact of the Dodd-Frank Act and related regulations and other changes in financial services
laws and regulations or failures to comply with such laws and regulations;
• changes in regulatory capital and other requirements;
• changes in monetary policy;
• losses due to fraudulent and negligent conduct of customers, third party service providers or
employees;
• the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts
and developments related thereto;
• possible regulatory or judicial proceedings, board resolutions, informal memorandums of
understanding or formal enforcement actions imposed by regulators;
• the Corporation’s reliance on third parties to provide key components of our business infrastructure
and services required to operate our business;
• acquisitions or dispositions of assets or internal restructuring that may be pursued by the
Corporation;
• deteriorating conditions in the stock market, the public debt market and other capital markets;
• 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;
• the Corporation’s lack of geographic diversification;
• changes in commodity prices and interest rates;
• the Corporation’s accounting and reporting policies;
• the Corporation’s ability to maintain effective internal controls over financial reporting and
disclosure controls and procedure;
• a cybersecurity incident involving the misappropriation, loss or unauthorized disclosure or use of
confidential information of our customers; and
• weather, natural disasters and other catastrophic events and other factors discussed in the
Corporation’s other filings with the SEC.
The foregoing list of factors is not exclusive, and readers are cautioned not to place undue reliance on any forward-
looking statements. 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 SEC.
25
ITEM 1A. RISK FACTORS
An investment in the Corporation’s common stock and the Corporation’s financial results are subject to a number
of risks. Investors should carefully consider the risks described below and all other information contained in this
Annual Report on Form 10-K and the documents incorporated by reference. Additional risks and uncertainties,
including those generally affecting the industry in which the Corporation operates and risks that management
currently deems immaterial, may arise or become material in the future and affect the Corporation’s business.
As a bank holding company, adverse conditions in the general business or economic environment could
have a material adverse effect on the Corporation’s financial condition and results of operation.
Weaknesses or adverse changes in business and economic conditions generally or specifically in the markets in
which the Corporation operates could adversely impact our business, including causing one or more of the
following negative developments:
• a decrease in the demand for loans and other products and services offered by the Corporation;
• a decrease in the value of the Corporation’s loans secured by consumer or commercial real estate;
• an impairment of the Corporation’s assets, such as its intangible assets, goodwill, or deferred tax
assets; or
• an increase in the number of customers or other counterparties who default on their loans or other
obligations to the Corporation, which could result in a higher level of nonperforming assets, net
charge-offs and provision for loan losses.
One or more negative developments resulting from adverse conditions in the general business or economic
environment, some of which are described above, could have a material adverse effect on the Corporation’s
financial condition and results of operations.
The Corporation’s ability to raise capital could be limited, affect its liquidity, and could be dilutive to
existing shareholders.
The Corporation’s ability to raise capital will depend on conditions in the capital markets, which are outside of
our control, and on the Corporation’s financial performance. Accordingly, there is no guarantee that the
Corporation will be able to borrow funds or successfully raise additional capital at all or on terms that are favorable
or otherwise not dilutive to existing shareholders.
Capital resources and liquidity are essential to the Corporation’s businesses and it relies on external sources
to finance a significant portion of its operations.
Liquidity is essential to the Corporation’s businesses. We depend on access to a variety of sources of funding to
provide us with sufficient capital resources and liquidity to meet our commitments and business needs, and to
accommodate the transaction and cash management needs of our customers. Sources of funding available to us,
and upon which we rely as regular components of our liquidity and funding management strategy, include
traditional and brokered deposits, inter-bank borrowings, Federal Funds purchased, repurchase agreements and
Federal Home Loan Bank advances. We may also raise funds from time to time in the form of either short-or long-
term borrowings or equity issuances. The Corporation’s capital resources and liquidity could be negatively
impacted by disruptions in its ability to access these sources of funding. The cost of brokered and other out-of-
market deposits and potential future regulatory limits on the interest rate we pay for brokered deposits could make
them unattractive sources of funding. Further, factors that we cannot control, such as disruption of the financial
markets or negative views about the financial services industry generally, could impair our ability to access
sources of funds. Other financial institutions may be unwilling to extend credit to banks because of concerns about
the banking industry and the economy generally and there may not be a viable market for raising short or long-
term debt or equity capital. In addition, our ability to raise funding could be impaired if lenders develop a negative
perception of our long-term or short-term financial prospects. Such negative perceptions could be developed if
the Corporation is downgraded or put on (or remains on) negative watch by the rating agencies, suffers a decline
in the level of its business activity or regulatory authorities take significant action against it, among other reasons.
26
Among other things, if we fail to remain “well-capitalized” for bank regulatory purposes, because we do not
qualify under the minimum capital standards or the FDIC otherwise downgrades our capital category, it could
affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay
dividends on common stock, and our ability to make acquisitions, and we would not be able to accept brokered
deposits without prior FDIC approval. To be “well-capitalized”, a bank must generally maintain a common equity
Tier 1 capital ratio of 6.5%, Tier 1 leverage capital ratio of 5%, Tier 1 risk-based capital ratio of 8% and total risk-
based capital ratio of 10%. In addition, our regulators may require us to maintain higher capital levels. Our failure
to remain “well-capitalized” or to maintain any higher capital requirements imposed on us could negatively affect
our business, results of operations and financial condition.
If the Corporation is unable to raise funding using the methods described above, it would likely need to finance
or liquidate unencumbered assets to meet maturing liabilities. The Corporation may be unable to sell some of its
assets, or it may have to sell assets at a discount from market value, either of which could adversely affect its
results of operations and financial condition.
In addition, the Corporation is a legal entity separate and distinct from the Bank and depends on subsidiary service
fees and dividends from the Bank to fund its payment of dividends to its shareholders and of interest and principal
on its outstanding debt. The Bank is also subject to other laws that authorize regulatory authorities to prohibit or
reduce the flow of funds from the Bank to the Corporation. Any inability of the Corporation to pay its obligations,
or need to defer the payment of any such obligations, could have a material adverse effect on our business,
operations, financial condition, and the value of our common stock.
The Corporation’s construction and land development loans are subject to unique risks that could
adversely affect earnings.
The Corporation’s construction and land development loan portfolio was $24.9 million at December 31, 2018,
comprising 6.6% of total loans. Construction and land development loans are often riskier than home equity loans
or residential mortgage loans to individuals. In the event of a general economic slowdown, they would represent
higher risk due to slower sales and reduced cash flow that could impact the borrowers’ ability to repay on a timely
basis. As a result, these loans could represent higher risk due to slower sales and reduced cash flow that affect
the borrowers’ ability to repay on a timely basis which could result in a sharp increase in our total net charge-offs
and require us to significantly increase our allowance for loan losses, any of which could have a material adverse
effect on our financial condition or results of operations.
Recent performance may not be indicative of future performance.
Various factors, such as economic conditions, regulatory and legislative considerations, competition and the
ability to find and retain talented people, may impede the Corporation’s ability to remain profitable.
Deterioration in asset quality could have an adverse impact on the Corporation.
A significant source of risk for the Corporation arises from the possibility that losses will be sustained because
borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. With
respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of diverse
real and personal property that may be affected by changes in prevailing economic, environmental and other
conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal
policies of the federal government, environmental contamination and other external events. In addition, decreases
in real estate property values due to the nature of the Bank’s loan portfolio, over 75% of which is secured by real
estate, could affect the ability of customers to repay their loans. The Bank’s loan policies and procedures may not
prevent unexpected losses that could have a material adverse effect on the Corporation’s business, financial
condition, results of operations, or liquidity.
27
Changes in prevailing interest rates may negatively affect the results of operations of the Corporation and
the value of its assets.
The Corporation’s earnings depend largely on the relationship between the yield on earning assets, primarily loans
and investments, and the cost of funds, primarily deposits and borrowings. This relationship, known as the interest
rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest
rates, the volume and mix of interest-earning assets and interest-bearing liabilities and the level of nonperforming
assets. Fluctuations in interest rates affect the demand of customers for the Corporation’s products and services.
In addition, interest-bearing liabilities may re-price or mature more slowly or more rapidly or on a different basis
than interest-earning assets. Significant fluctuations in interest rates could have a material adverse effect on the
Corporation’s business, financial condition, results of operations or liquidity.
Changes in the level of interest rates may also negatively affect the value of the Corporation’s assets and its ability
to realize book value from the sale of those assets, all of which ultimately affect earnings.
The Corporation’s reported financial results depend on the accounting and reporting policies of the
Corporation, the application of which requires significant assumptions, estimates and judgments.
The Corporation’s accounting and reporting policies are fundamental to the methods by which we record and
report our financial condition and results of operations. The Corporation’s management must make significant
assumptions and estimates and exercise significant judgment in selecting and applying many of these accounting
and reporting policies so they comply with GAAP and reflect management’s judgment of the most appropriate
manner to report the Corporation’s financial condition and results. In some cases, management must select a policy
from two or more alternatives, any of which may be reasonable under the circumstances, which may result in the
Corporation reporting materially different results than would have been reported under a different alternative.
If the Corporation’s allowance for loan losses is not sufficient to cover actual loan losses, earnings would
decrease.
The Bank’s loan customers may not repay their loans according to their terms and the collateral securing the
payment of these loans may be insufficient to assure repayment. The Bank may experience significant loan losses
which would have a material adverse effect on the Corporation’s operating results. Management makes various
assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of
borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. The
Corporation maintains an allowance for loan losses in an attempt to cover any loan losses inherent in the portfolio.
In determining the size of the allowance, management relies on an analysis of the loan portfolio based on historical
loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and
nonaccruals, national and local economic conditions and other pertinent information. As a result of these
considerations, the Corporation has from time to time increased its allowance for loan losses. For the year ended
December 31, 2018, the Corporation recorded an allowance for possible loan losses of $3.43 million, compared
with $3.04 million for the year ended December 31, 2017. If these assumptions are incorrect, the allowance may
not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic
conditions or adverse developments in the loan portfolio.
The Corporation may be subject to losses due to fraudulent and negligent conduct of the Bank’s loan
customers, third party service providers and employees.
When the Bank makes loans to individuals or entities, they rely upon information supplied by borrowers and other
third parties, including information contained in the applicant’s loan application, property appraisal reports, title
information and the borrower’s net worth, liquidity and cash flow information. While they attempt to verify
information provided through available sources, they cannot be certain all such information is correct or
complete. The Bank’s reliance on incorrect or incomplete information could have a material adverse effect on the
Corporation’s profitability or financial condition.
28
We rely on third parties to provide key components of our business infrastructure.
Third parties provide key components of our business operations such as data processing, recording and
monitoring transactions, online banking interfaces and services, internet connections and network access. While
we have selected these third party vendors carefully, we do not control their actions. Any problems caused by
these third parties, including those resulting from disruptions in communication services provided by a vendor,
failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of
a vendor to provide services for any reason or poor performance of services, could adversely affect our ability to
deliver products and services to our customers and otherwise conduct our business. Financial or operational
difficulties of a third party vendor could also hurt our operations if those difficulties interfere with the vendor's
ability to serve us. Furthermore, our vendors could also be sources of operational and information security risk to
us, including from breakdowns or failures of their own systems or capacity constraints. Replacing these third party
vendors could also create significant delay and expense. Accordingly, use of such third parties creates an
unavoidable inherent risk to our business operations.
Technology difficulties or failures or cyber security breaches of our network security could have a material
adverse effect on the Corporation.
The Corporation depends upon data processing, software, and communication and information exchange on a
variety of computing platforms and networks. The computer platforms and network infrastructure we use could
be vulnerable to unforeseen hardware and cyber security issues. The Corporation cannot be certain that all of its
systems are entirely free from vulnerability to cyber-attack or other technological difficulties or failures. The
Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If
information security is breached or other technology difficulties or failures occur, information may be lost or
misappropriated, services and operations may be interrupted and the Corporation could subject us to additional
regulatory scrutiny, damage our reputation, result in a loss of customers and expose us to claims from customers.
Any of these results could have a material adverse effect on the Corporation’s business, financial condition, results
of operations or liquidity. Although we have security measures designed to mitigate the possibility of break-ins,
breaches and other disruptive problems, including firewalls and penetration testing, there can be no assurance that
such security measures will be effective in preventing such problems.
The Corporation’s business is subject to the success of the local economies and real estate markets in which
it operates.
The Corporation’s banking operations are located in southwest Georgia. Because of the geographic concentration
of its operations, the Corporation’s success depends largely upon economic conditions in this area, which include
volatility in the agricultural market, influx and outflow of major employers in the area, and minimal population
growth throughout the region. Deterioration in economic conditions in the communities in which the Corporation
operates could adversely affect the quality of the Corporation’s loan portfolio and the demand for its products and
services, and accordingly, could have a material adverse effect on the Corporation’s business, financial condition,
results of operations or liquidity. The Corporation is less able than a larger institution to spread the risks of
unfavorable local economic conditions across a large number of more diverse economies.
The Corporation may face risks with respect to its ability to execute its business strategy.
The financial performance and profitability of the Corporation will depend on its ability to execute its strategic
plan and manage its future growth. Moreover, the Corporation’s future performance is subject to a number of
factors beyond its control, including pending and future federal and state banking legislation, regulatory changes,
unforeseen litigation outcomes, inflation, lending and deposit rate changes, interest rate fluctuations, increased
competition and economic conditions. Accordingly, these issues could have a material adverse effect on the
Corporation’s business, financial condition, results of operations or liquidity.
29
The Corporation depends on its key personnel, and the loss of any of them could adversely affect the
Corporation.
The Corporation’s success depends to a significant extent on the management skills of its existing executive
officers and directors, many of whom have held officer and director positions with the Corporation for many years.
The loss or unavailability of any of its key personnel, including DeWitt Drew, President and Chief Executive
Officer; Donna S. Lott, Executive Vice President and Chief Administrative Officer`; Jeffery E. Hanson, Executive
Vice President and Chief Banking Officer; Danny E. Singley, Executive Vice President and Chief Credit Officer;
and Karen T. Boyd, Senior Vice President & Treasurer, could have a material adverse effect on the Corporation’s
business, financial condition, and results of operations or liquidity.
Competition from financial institutions and other financial service providers may adversely affect the
Corporation.
The banking business is highly competitive, and the Corporation experiences competition in its markets from
other depository institutions and other financial service organizations, including brokers, finance companies,
financial technology companies, mutual funds, savings and loan associations, credit unions and certain
governmental agencies. The Corporation competes with these other financial institutions in attracting deposits
and in making loans. Many of its competitors are well-established, larger financial institutions that are able to
operate profitably with a narrower net interest margin and have a more diverse revenue base. The Corporation
may face a competitive disadvantage as a result of its smaller size, lack of geographic diversification and inability
to spread costs across broader markets. There can be no assurance that the Corporation will be able to compete
effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a
material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.
In addition, technology and other changes are allowing parties to complete financial transactions that historically
have involved banks through alternative methods. For example, consumers can now maintain funds that would
have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete
transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of
eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits,
which could have a material impact on our financial condition and results of operations.
The Corporation may not have the resources to effectively implement new technology, or we may
experience operational challenges when implementing new technology.
The financial services industry is changing rapidly, and to remain competitive, we must continue to enhance and
improve the functionality and features of our products, services and technologies. In addition to better serving our
customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.
Our future success will depend, at least in part, upon our ability to respond to future technological changes and
the ability to address the needs of our customers. We address the needs of our customers by using technology to
provide products and services that will satisfy customer demands for convenience as well as to create additional
efficiencies in our operations as we continue to grow and expand our products and service offerings. We may
experience operational challenges as we implement these new technology enhancements or products, which could
result in our not fully realizing the anticipated benefits from such new technology or require us to incur significant
costs to remedy any such challenges in a timely manner. In addition, complications during a conversion of our
core technology platform or implementation or upgrade of any software could negatively impact the experiences
or satisfaction of our customers, which could cause those customers to terminate their relationship with us or
reduce the amount of business that they do with us, either of which could adversely affect our business, financial
condition or results of operations.
Many of our larger competitors have substantially greater resources to invest in technological improvements.
Third parties upon which we rely for our technology needs may not be able to cost-effectively develop systems
that will enable us to keep pace with such developments. As a result, our competitors may be able to offer
additional or superior products compared to those that we will be able to provide, which would put us at a
competitive disadvantage. We may lose customers seeking new technology-driven products and services to the
extent we are unable to provide such products and services. The inability to keep pace with technological change
could adversely affect our business, financial condition and results of operations.
30
The short-term and long-term impact of the changing regulatory capital requirements is uncertain.
The Basel III Capital Rules established a common equity Tier 1 minimum capital requirement of 4.5%, a higher
minimum Tier 1 capital to risk-weighted assets requirement of 6% and Total capital to risk-weighted assets of
8%. In addition, to be considered “well-capitalized”, the rules include a common equity Tier 1 capital requirement
of 6.5% or greater and a higher Tier 1 capital to risk-weighted assets requirement of 8% or greater. Moreover,
the rules limit a banking organization’s capital distributions and certain discretionary bonus payments if such
banking organization does not hold a “capital conservation buffer” consisting of a 2.5% of common equity Tier 1
capital in addition to the 4.5% minimum common equity Tier 1 requirement and the other amounts necessary to
meet the minimum risk-based capital requirements.
The application of the more stringent capital requirements described above could, among other things, result in
lower returns on invested capital, require the raising of additional capital, and result in additional regulatory
actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk
weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or
additional capital conservation buffers could result in us modifying our business strategy and could restrict
dividends.
We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes
and regulations.
The federal Bank Secrecy Act, USA Patriot Act of 2001 and other laws and regulations require financial
institutions, among other duties, to institute and maintain effective anti-money laundering programs and file
suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement
Network, established by the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil
money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts
with the individual federal bank regulatory agencies, as well as the U.S. Department of Justice, Drug Enforcement
Administration and Internal Revenue Service. Federal bank regulatory agencies and state bank regulators also
have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies,
procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory
actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to
proceed with certain aspects of our business plan, which would negatively impact our business, financial condition
and results of operations.
We could be subject to changes in tax laws, regulations and interpretations or challenges to our income tax
provision.
We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Any
change in enacted tax laws, rules or regulatory or judicial interpretations, any adverse outcome in connection with
tax audits in any jurisdiction or any change in the pronouncements relating to accounting for income taxes could
adversely affect our effective tax rate, tax payments and results of operations. In addition, changes in enacted tax
laws, such as adoption of a lower income tax rate in any of the jurisdictions in which we operate, could impact
our ability to obtain the future tax benefits represented by our deferred tax assets.
31
Changes in monetary policy, laws and regulations or failures to comply with such laws and regulations
could adversely affect the Corporation.
Federal monetary policy, particularly as implemented through the Federal Reserve, significantly affects credit
conditions for the Corporation, and any unfavorable change in these conditions could have a material adverse
effect on the Corporation’s business, financial condition, results of operations or liquidity. Further, the
Corporation and the banking industry are subject to extensive regulation and supervision under federal and state
laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the
Corporation conducts its banking business, undertakes new investments and activities and obtains financing.
These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not
to benefit holders of the Corporation’s securities. Financial institution regulation has been the subject of
significant legislation in recent years and may be the subject of further significant legislation in the future, none
of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws
could have a material adverse effect on the Corporation’s business, financial condition, results of operations or
liquidity. See Part I, Item 1, “Supervision and Regulation.”
In 2017, both chambers of Congress proposed comprehensive financial regulatory reform bills that would amend
the Dodd-Frank Act and that could affect the banking industry as a whole, including our business and results of
operations, in ways that are difficult to predict. In May 2018, certain provisions of these bills were signed into law
as part of the Economic Growth Act and repealed or modified significant portions of the Dodd-Frank Act.
Specifically, the Economic Growth Act delayed implementation of rules related to the Home Mortgage Disclosure
Act, reformed and simplified certain Volcker Rule requirements, and raised the threshold for applying enhanced
prudential standards to bank holding companies with total consolidated assets equal to or greater than $50 billion
to those with total consolidated assets equal to or greater than $250 billion. While recent federal legislation,
including the Economic Growth Act, has scaled back portions of the Dodd-Frank Act, uncertainty about the timing
and scope of such changes, as well as the cost of complying with a new regulatory regime, remains and enactment
of any other regulatory relief is uncertain and none of which may lead to a meaningful reduction of our regulatory
burden and attendant costs. See Part I, Item 1, “Supervision and Regulation.”
Federal and state regulators have the ability to impose or request that we consent to substantial sanctions,
restrictions and requirements on the Bank if they determine, upon examination or otherwise, violations of laws,
rules or regulations with which we or the Bank must comply, or weaknesses or failures with respect to general
standards of safety and soundness. Such enforcement may be formal or informal and can include directors’
resolutions, memoranda of understanding, cease and desist or consent orders, civil money penalties and
termination of deposit insurance and bank closures. Enforcement actions may be taken regardless of the capital
level of the institution. In particular, institutions that are not sufficiently capitalized in accordance with regulatory
standards may also face capital directives or prompt corrective action. Enforcement actions may require certain
corrective steps (including staff additions or changes), impose limits on activities (such as lending, deposit taking,
acquisitions or branching), prescribe lending parameters (such as loan types, volumes and terms) and require
additional capital to be raised, any of which could adversely affect our financial condition and results of
operations. Enforcement actions, including the imposition of monetary penalties, may have a material impact on
our financial condition or results of operations, and damage to our reputation, and loss of our holding company
status. In addition, compliance with any such action could distract management’s attention from our operations,
cause us to incur significant expenses, restrict us from engaging in potentially profitable activities, and limit our
ability to raise capital. Closure of the Bank would result in a total loss of shareholder investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved comments from the SEC staff regarding the Corporation’s periodic or current reports
under the Exchange Act.
32
ITEM 2. PROPERTIES
The executive offices of the Corporation are located in the SGB Wealth Strategies office at 25 Second Avenue
S.W. Moultrie, Georgia. The main banking office and operations center of the Bank are located in a 22,000 square
foot facility at 201 First Street, S.E., Moultrie, Georgia. The Trust and Brokerage operations are located in the
SGB Wealth Strategies office. The Bank’s Administrative Services office is located across the street from the
main office at 205 Second Street, S.E., Moultrie, Georgia. This building is also used for training and meeting
rooms, record storage, and a drive-thru teller facility.
Name
Address
Main Office
Old Operations Center
SGB Wealth Strategies Office
Administrative Services
Southwest Georgia Ins. Services
Baker County Branch
Sylvester Branch
North Valdosta Branch
Valdosta Commercial Banking Center
Baytree Branch
Tifton Branch
201 First Street, SE, Moultrie, GA 31768
11 Second Avenue, SW, Moultrie, GA 31768
25 Second Avenue, SW, Moultrie, GA 31768
205 Second Street, SE, Moultrie, GA 31768
501 South Main Street, Moultrie, GA 31768
168 Georgia Highway 91, Newton, GA 39870
300 North Main Street, Sylvester, GA 31791
3500 North Valdosta Road, Valdosta, GA 31602
3520 North Valdosta Road, Valdosta, GA 31602
1404 Baytree Road, Valdosta, GA 31602
205 East Eighth Street, Tifton, GA 31794
Square
Feet
22,000
5,000
9,400
15,000
5,600
4,400
12,000
5,900
10,700
3,000
9,000
All of the buildings and land, which include parking and drive-thru teller facilities, are owned by the
Bank. Additionally, we have deployed nine In-Lobby teller machines throughout our footprint and replaced the
traditional drive-up automated teller machines (ATM) with ATMs that will take deposits.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of operations, the Corporation and the Bank are defendants in various legal proceedings.
Additionally, in the ordinary course of business, the Corporation and the Bank are subject to regulatory
examinations and investigations. In the opinion of management, there is no pending or threatened proceeding in
which an adverse decision will result in a material adverse change in the consolidated financial condition or results
of operations of the Corporation. No material proceedings terminated in the fourth quarter of 2018.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Corporation’s common stock trades on the NYSE American LLC under the symbol “SGB”. The closing
price on December 31, 2018, was $20.28. As of December 31, 2018, there were 382 record holders of the
Corporation’s common stock. Also, there were approximately 625 additional shareholders who held shares
through trusts and brokerage firms.
33
Dividends
Cash dividends paid on the Corporation’s common stock were $0.47 per share in 2018 and $0.44 per share in
2017. Our dividend policy objective is to pay out a portion of earnings in dividends to our shareholders in a
consistent manner over time. However, no assurance can be given that dividends will be declared in the future.
The amount and frequency of dividends is determined by the Corporation’s Board of Directors after consideration
of various factors, which include the Corporation’s financial condition and results of operations, investment
opportunities available to the Corporation, capital requirements, tax considerations and general economic
conditions. The primary source of funds available to the parent company is the payment of dividends by its
subsidiary bank. Federal and State banking laws restrict the amount of dividends that can be paid without
regulatory approval. See Part I, Item 1, “Business – Payment of Dividends.” The Corporation and its predecessors
have paid cash dividends for the past ninety consecutive years.
Share Repurchases
The table below summarizes the number of shares of our common stock that were repurchased during the three
months ended December 31, 2018 on behalf of the 2013 Omnibus Incentive Plan Restricted Stock Awards.
Month Ended
October 31, 2018
November 30, 2018
December 31, 2018
Total
Total Number of
Shares Purchased
815
6,129
6,372
13,316
Average Price
Paid per Share
21.7100
22.9529
23.1732
22.9823
Total Number of
Share Purchased as
Part of Publicly
Announced Plans
Maximum Number of
Shares That May Still
Be Purchased under
the Plan
815
6,129
6,372
13,316
119,914
113,785
107,413
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents information as of December 31, 2018, with respect to shares of common stock of the
Corporation that may be issued under the Directors and Executive Officers Stock Purchase Plan and the 2013
Omnibus Incentive Plan. During 2018, 13,316 shares of restricted stock were issued under the 2013 Omnibus
Incentive Plan.
Plan Category
Equity compensation plans
approved by shareholders(1)
Equity compensation plans not
approved by shareholders(2)
Total
Number of Securities
to be Issued upon
Exercise of
Outstanding Options
Weighted Average
Exercise Price of
Outstanding Options
Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation Plans
0
0
0
$0
0
$0
317,754
0
317,754
(1) The Directors and Executive Officers Stock Purchase Plan and the 2013 Omnibus Incentive Plan.
(2) Excludes shares issued under the 401(k) Plan.
Sales of Unregistered Securities
The Corporation has not sold any unregistered securities in the past three years.
34
Performance Graph
The following graph compares the cumulative total shareholder return of the Corporation’s common stock with
SNL’s Southeast Bank Index, SNL Bank $500M - $1B Index, the S&P 500 Index and the NASDAQ Composite
Index. SNL’s Southeast Bank Index is a compilation of the total return to shareholders over the past five years of
a group of 74 banks located in the southeastern states of Alabama, Arkansas, Florida, Georgia, Mississippi, North
Carolina, South Carolina, Tennessee, Virginia, and West Virginia. The SNL Bank $500M - $1B Index is a
compilation of the total return to shareholders over the past five years of a group of 36 banks in the United States
with assets between $500 million and $1 billion. The comparison assumes $100 was invested January 1, 2013,
and that all semi-annual and quarterly dividends were reinvested each period. The comparison takes into
consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2012.
The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of possible
future performance of the Corporation’s common stock.
Total Return Performance
Southwest Georgia Financial Corporation
SNL Bank $500M-$1B Index
SNL Southeast Bank Index
S&P 500 Index
NASDAQ Composite Index
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Index
Southwest Georgia Financial Corporation
SNL Bank $500M - $1B Index
SNL Southeast Bank Index
S&P 500 Index
NASDAQ Composite Index
12/31/13
100.00
100.00
100.00
100.00
100.00
12/31/14
127.09
109.71
112.63
113.69
114.75
12/31/15
144.90
123.83
110.87
115.26
122.74
12/31/16
186.54
167.20
147.18
129.05
133.62
12/31/17
228.80
203.98
182.06
157.22
173.22
12/31/18
197.50
196.88
150.42
150.33
168.30
Period Ending
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
35
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 trust, retail brokerage and insurance services. Our primary market area incorporates Colquitt County,
where we are headquartered, as well as Baker, Worth, Lowndes, and Tift Counties, each contiguous with Colquitt
County, and the surrounding counties of southwest Georgia. We have six full service banking facilities each with
a deposit automation teller machine, and nine In-Lobby teller machines throughout the six branches.
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 our markets and geographic expansion will provide us with a
competitive advantage. To that end, about seven years ago, we began expanding geographically in Valdosta,
Georgia, with two full-service banking centers, and added a commercial banking center in August 2014.
Continuing to expand our geographic footprint, a loan production office was opened in the neighboring community
of Tifton, Georgia, in January 2016. The loan production office was closed upon completion of a new full-service
banking center in Tifton, Georgia, that was opened in August 2018. We 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 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. 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, fees on customer accounts, and trust and retail brokerage services through our Wealth Strategies division.
In 2018, noninterest income, at 16.1% of the Corporation’s total revenue, decreased mostly due to lower income
from mortgage banking services when compared with 2017.
Our profitability is also impacted 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.
At the end of 2018, the Corporation’s nonperforming assets decreased to $1.33 million from $2.43 million at
December 31, 2017, due to decreases of $470 thousand in nonaccrual loans and a decrease of $631 thousand in
foreclosed assets when compared to the end of 2017.
36
Critical Accounting Policies
In the course of the Corporation’s normal business activity, management must select and apply many accounting
policies and methodologies that lead to the financial results presented in the consolidated financial statements of
the Corporation. Management considers the accounting policy relating to the allowance for loan losses to be a
critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance
needed to cover probable credit losses within the loan portfolio and the material effect that these estimates have
on the Corporation’s results of operations. We believe that the allowance for loan losses as of December 31, 2018,
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 Corporation’s Consolidated Financial
Statements provides a description of our significant accounting policies and contributes to the understanding of
how our financial performance is reported.
Results of Operations
Performance Summary
For the year ended December 31, 2018, net income was $4.65 million, up $840 thousand from net income of $3.81
million for 2017. The increase in net income is primarily due to the lower income tax rates based on the enactment
of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) resulting in a $951 thousand decrease to the provision for
income taxes. Net interest income for 2018 increased $1.33 million to $18.57 million due primarily to a $2.46
million increase in interest income and fees on loans compared with last year. Growth in net interest income more
than offset the $804 thousand increase in noninterest expense due mostly to higher employee, advertising,
telephone, and depreciation expenses related to the Tifton and Valdosta expansions. Provision for loan losses
increased $530 thousand when compared to 2017, which reflected our strong loan growth. Noninterest income
also decreased $106 thousand mainly due to lower income from mortgage banking services. Net income was
$1.83 per diluted share for 2018 compared with a net income of $1.49 per diluted share for 2017.
For the year ended December 31, 2017, net income was $3.81 million, down $226 thousand from net income of
$4.03 million for 2016. The decline in net income is due to the revaluation of net deferred tax assets based on
the enactment of the Tax Act resulting in a $419 thousand impact to provision for income taxes. Absent the
deferred tax impairment, net income would have been $4.23 million, or a 4.8% increase compared with the full
year 2016. Net interest income for 2017 increased $1.44 million to $17.24 million due primarily to a $1.50 million
increase in interest income and fees on loans compared with last year. Growth in net interest income more than
offset the $915 thousand increase in noninterest expense due in large part to higher professional fees, migration
to a new core processing provider, and investment in personnel. Noninterest income also decreased $147 thousand
mainly due to lower income from mortgage banking services. Net income was $1.49 per diluted share for 2017
compared with a net income of $1.58 per diluted share for 2016. Excluding the deferred tax impairment, net
income would have been $1.66 per diluted share for 2017.
We measure our performance on selected key ratios, which are provided in the following table:
Return on average total assets
Return on average shareholders’ equity
Average shareholders’ equity to average total assets
Net interest margin (tax equivalent)
2018
0.91%
11.04%
8.24%
3.99%
2017
0.80%
9.41%
8.55%
4.09%
2016
0.94%
10.51%
8.90%
4.14%
37
Net Interest Income
Net interest income after provision for loan losses increased $798 thousand, or 4.71%, to $17.74 million for 2018
when compared with 2017. Total interest income increased $2.75 million which more than offset an increase in
total interest expense of $1.42 million. The Corporation recognized a $830 thousand provision for loan losses in
2018, a $530 thousand increase compared with $300 thousand in 2017. Interest income and fees on loans
increased $2.46 million when compared with 2017 resulting from growth in average loans of $32.2 million. Also,
interest income on investment securities decreased by $18 thousand mainly due to a decrease in average
investment securities volume of $7.5 million compared with 2017. Interest on deposits in other banks also
increased $290 thousand compared with the same period last year. Partially offsetting these increases in net
interest income, interest paid on deposits increased $1.23 million to $2.38 million and interest paid on total
borrowings increased by $190 thousand when compared with the prior year. The average rate paid on average
time deposits of $87.5 million increased 41 basis points when compared with 2017. These rate increases were
primarily driven by rising rates in our markets.
Net interest income after provision for loan losses increased $1.30 million, or 8.3%, to $16.94 million for 2017
when compared with 2016. Total interest income increased $1.73 million which more than offset an increase in
total interest expense of $290 thousand. The Corporation recognized a $300 thousand provision for loan losses in
2017, a $140 thousand increase compared with $160 thousand in 2016. Interest income and fees on loans
increased $1.50 million when compared with 2016 resulting from growth in average loans of $36.7 million. Also,
interest income on investment securities increased $104 thousand mainly due to an increase in average investment
securities volume of $3.3 million compared with 2016. Interest on deposits in other banks also increased $92
thousand compared with the same period last year. Partially offsetting these increases in net interest income,
interest paid on deposits increased $218 thousand to $1.15 million and interest paid on total borrowings increased
by $72 thousand when compared with the prior year. The average rate paid on average time deposits of $79.8
million increased 11 basis points when compared with 2016.
Net Interest Margin
Net interest margin, which is the net return on earning assets, is a key performance ratio for evaluating net interest
income. It is computed by dividing net interest income by average total earning assets.
Net interest margin decreased 10 basis points to 3.99% for 2018 when compared with 2017. The decrease in net
interest margin was attributed to a decrease in the tax equivalency adjustment to our tax-free bond portfolio
necessitated by lower tax rates as well as increased volume and rate paid on interest bearing liabilities of 33 basis
points while the rate earned on earning assets for the year decreased by 17 basis points. Net interest margin was
4.09% for 2017, a 5 basis point decrease from 4.14% in 2016.
Noninterest Income
Noninterest income is an important contributor to net earnings. The following table summarizes the changes in
noninterest income during the past three years:
Service charges on deposit accounts
Income from trust services
Income from retail brokerage services
Income from insurance services
Income from mortgage banking services
Gain (loss) on the sale or disposition of assets
Gain (loss) on the sale of securities
Gain on extinguishment of debt
Other income
2018
2016
2017
(Dollars in thousands)
Amount % Change Amount % Change Amount % Change
$ 1,015
(3.1)%
235
399
1,604
2
(80)
(165)
318
879
(7.5)%
4.3
5.9
3.0
(56.2)
NM
10.7
NM
11.3
$ 1,086
210
342
1,478
354
38
169
0
782
$ 1,005
219
362
1,523
155
(9)
187
0
870
1.0%
7.3
10.2
5.3
(98.7)
NM
NM
NM
1.0
7.7
11.3
72.7
NM
NM
3.4
(14.3)
(18.8)
Total noninterest income
$ 4,207
(2.5)%
$ 4,312
(3.3)%
$ 4,459
4.7 %
*NM = not meaningful
38
For 2018, noninterest income was $4.21 million, down from $4.31 million in the same period of 2017. The
decrease was primarily attributed to a decline in income from mortgage banking services of $153 thousand
compared with 2017. Commercial mortgage banking fees from Empire ceased as the entity was dissolved in late
2017. A loss on the disposition of assets of $80 thousand was recognized in 2018 compared with a loss of $9
thousand in 2017. A loss on the sale of securities of $165 thousand was recognized in 2018 compared with a gain
of $187 thousand in 2017. These decreases were offset by increases in income from insurance services, income
from retail brokerage services, income from trust services, service charges on deposit accounts, and other income
of $80 thousand, $37 thousand, $16 thousand, $10 thousand, and $9 thousand, respectively, when compared with
2017. The Corporation also recognized a $318 thousand gain on the extinguishment of debt in 2018 compared
with a $0 gain recognized in 2017.
For 2017, noninterest income was $4.31 million, down from $4.46 million in the same period of 2016. The
decrease was primarily attributed to a decline in income from mortgage banking services of $199 thousand
compared with 2016. Commercial mortgage banking fees from Empire ceased as the entity was dissolved in late
2017. Service charges on deposit accounts also decreased $81 thousand compared with 2016. A loss on the
disposition of assets of $9 thousand was recognized in 2017 compared with a gain of $38 thousand in 2016. These
decreases were partially offset by increases in other income, income from insurance services and income from
retail brokerage services of $88 thousand, $45 thousand, and $20 thousand, respectively, when compared with
2016. Gain on the sale of securities increased $18 thousand to $187 thousand compared with 2016. Also, income
from trust services increased $9 thousand compared with 2016.
Noninterest Expense
Noninterest expense includes all expenses of the Corporation other than interest expense, provision for loan losses
and income tax expense. The following table summarizes the changes in the noninterest expenses for the past
three years:
2018
2017
(Dollars in thousands)
2016
Salaries and employee benefits
Occupancy expense
Equipment expense
Data processing expense
Amortization of intangible assets
Other operating expenses
Amount
$ 9,725
1,195
933
1,445
16
3,320
% Change Amount % Change Amount % Change
10.8 %
5.5 %
1.7
(1.4)
(6.7)
(1.3)
11.8
10.6
0.0
0.0
(2.4)
11.3
$ 9,251
1,124
850
1,513
16
3,075
$ 8,766
1,140
861
1,368
16
2,763
5.1 %
6.3
9.8
(4.5)
0.0
8.0
Total noninterest expense
$ 16,634
5.1 %
$ 15,829
6.1 %
$ 14,914
6.3 %
Noninterest expense increased $804 thousand to $16.6 million in 2018 compared with the same period in 2017.
Salaries and employee benefits increased $474 thousand when compared with 2017 as a result of staffing
expansion in the Tifton and Valdosta markets and greater incentive based income. Other operating expense
increased $245 thousand compared with 2017 due primarily to higher telephone expense, advertising expense,
and employee training expenses also related to expansion in the Tifton and Valdosta markets. Occupancy expense
increased $71 thousand and equipment expense increased $83 thousand compared with 2017 primarily due to
additional depreciation expense on the new bank building and equipment in Tifton. Data processing expense
decreased $68 thousand compared with 2017 largely related to the front-end core processor migration expenses
incurred in 2017.
For 2017, noninterest expense increased $915 thousand to $15.83 million compared with the same period in 2016.
Salaries and employee benefits increased $485 thousand when compared with 2016 as a result of staffing
expansion in the Tifton and Valdosta markets and greater incentive based income. Data processing expense also
increased $146 thousand compared with 2016 largely related to the core processor migration as well. Partially
offsetting these increases were decreases in occupancy and equipment expense of $16 thousand and $11 thousand,
respectively, compared with 2016.
39
The efficiency ratio, (noninterest expense divided by total noninterest income plus tax equivalent net interest
income), a measure of productivity, increased to 71.9% for 2018 when compared with 70.8% for 2017 and 70.6%
for year ending 2016. The efficiency ratio increased slightly during 2018 due to increased operating expenses as
we expanded to the Tifton, Georgia market, increased interest expense as we paid higher rates on interest bearing
deposit accounts, and the tax equivalent adjustment on tax-free loans and investment securities declined due to
the reduction in the corporate income tax rate from 34% to 21%. The improvement in the efficiency ratio for
2017 resulted from the large growth in interest income when compared with 2016.
Income Tax Expense
The Corporation had an expense of $668 thousand for income taxes in 2018 compared with an expense of $1.62
million in 2017 and $1.15 million for the year ending December 31, 2016. These amounts resulted in an effective
tax rate of 12.6%, 29.8%, and 22.2%, for 2018, 2017, and 2016, respectively. See Note 10 of the Corporation’s
Notes to Consolidated Financial Statements for further details of tax expense.
Uses and Sources of Funds
The Corporation, primarily through the Bank, acts as a financial intermediary. As such, our financial condition
should be considered in terms of how we manage our sources and uses of funds. Our primary sources of funds
are deposits and borrowings. We invest our funds in assets, and our earning assets are our primary source of
income.
Total average assets increased $37.1 million to $510.5 million in 2018 compared with 2017. The increase in total
average assets is primarily attributable to an increase in average loans of $32.2 million. Average investment
securities decreased by $7.5 million to $100.2 million while interest-bearing deposits with other banks increased
by $7.8 million. The Corporation’s earning assets, which include loans, investment securities, certificates of
deposit with other banks and interest-bearing deposits with banks, averaged $474.9 million in 2018, a 7.5%
increase from $441.9 million in 2017. The average volume for total deposits increased $29.5 million mostly due
to an increase in new interest-bearing business account deposits of $21.3 million and time deposit accounts of
$7.7 million compared with the prior year. For 2018, average earning assets were comprised of 73% loans, 21%
investment securities, and 6% deposit balances with banks. The ratio of average earning assets to average total
assets decreased slightly to 93.0% for 2018 compared with 93.3% for 2017.
Loans
Loans are one of the Corporation’s largest earning assets and uses of funds. Because of the importance of loans,
most of the other assets and liabilities are managed to accommodate the needs of the loan portfolio. During 2018,
average net loans represented 73% of average earning assets and 68% of average total assets.
The composition of the Corporation’s loan portfolio at December 31, 2018, 2017, and 2016 was as follows:
Category
Commercial, financial, and agricultural
Real estate:
Construction
Commercial
Residential
Agricultural
Consumer & other
Total loans
Unearned interest and discount
Allowance for loan losses
Net loans
2018 2017
(Dollars in thousands)
Amount % Change Amount % Change Amount % Change
2016
$ 88,403
20.9 %
$ 73,146
3.0 %
$ 70,999
22.1 %
22,287
106,458
99,160
25,374
3,767
$330,192
(18)
(3,044)
$327,130
(14.3)
16.1
19.1
53.0
(4.9)
12.9
5.3
2.6
13.0 %
25,999
91,733
83,271
16,580
3,961
$292,543
(19)
(3,124)
$289,400
31.1
6.9
22.5
6.2
15.3
16.6
0.0
3.0
16.8 %
24,891
123,477
103,348
31,562
5,086
$376,767
(17)
(3,429)
$373,321
11.7
16.0
4.2
24.4
35.0
14.1
(5.6)
12.6
14.1 %
40
Total year-end balances of loans increased $46.6 million while average total loans increased $32.2 million in 2018
compared with 2017. Construction, commercial, residential, and agricultural real estate loan categories as well as
commercial, financial, agricultural, consumer, and other loans experienced growth in 2018. The ratio of total
loans to total deposits at year end decreased to 82.7% in 2018 compared with 83.2% in 2017. The loan portfolio
mix at December 31, 2018 consisted of 6.6% loans secured by construction real estate, 32.8% loans secured by
commercial real estate, 27.4% of loans secured by residential real estate, and 8.4% of loans secured by agricultural
real estate. The loan portfolio also included other commercial, financial, and agricultural purposes of 23.5% and
installment loans to individuals for consumer purposes of 1.3%.
Allowance and Provision for Possible Loan Losses
The allowance for loan losses represents our estimate of the amount required for probable loan losses in the
Corporation’s loan portfolio. Loans, or portions thereof, which are considered to be uncollectible are charged
against this allowance and any subsequent recoveries are credited to the allowance. There can be no assurance
that the Corporation will not sustain losses in future periods which could be substantial in relation to the size of
the allowance for loan losses at December 31, 2018.
We have a loan review program in place which provides for the regular examination and evaluation of the risk
elements within the loan portfolio. The adequacy of the allowance for loan losses is regularly evaluated based on
the review of all significant loans with particular emphasis on non-accruing, past due, and other potentially
impaired loans that have been identified as possible problems.
The allowance for loan losses was $3.429 million, or 0.9% of total loans outstanding, as of December 31, 2018.
This level represented an $385 thousand increase from the corresponding 2017 year-end amount, which was also
0.9% of total loans outstanding.
There was a provision for loan losses of $830 thousand in 2018 compared with a provision for loan losses of $300
thousand in 2017. See Part I, Item 1, “Table 4 – Loan Portfolio” for details of the changes in the allowance for
loan losses.
Investment Securities
The investment portfolio serves several important functions for the Corporation. Investments in securities are
used as a source of income for excess liquidity that is not needed for loan demand and to satisfy pledging
requirements in the most profitable way possible. The investment portfolio is a source of liquidity when loan
demand exceeds funding availability, and is a vehicle for adjusting balance sheet sensitivity to cushion against
adverse rate movements. Our investment policy attempts to provide adequate liquidity by maintaining a portfolio
with significant cash flow for reinvestment. The Corporation’s investment securities represent 18.1% of our assets.
The portfolio includes 48% of U.S. government agency securities, 40% state, county and municipal securities,
12% of U.S. government sponsored pass-thru residential mortgage-backed securities, and 1% of U.S. government
treasury securities.
The following table summarizes the contractual maturity of investment securities at their carrying values as of
December 31, 2018:
Amounts Maturing In:
One year or less
After one through five years
After five through ten years
After ten years
Total investment securities
Securities
Available for Sale
Securities
Held to Maturity
(Dollars in thousands)
$ 6,483
12,885
11,035
6,424
$ 36,827
$ 2,125
29,674
20,968
5,547
$ 58,314
41
Total
$ 8,608
42,559
32,003
11,971
$ 95,141
At December 31, 2018, the total investment portfolio decreased $3.9 million, down to $95.1 million, compared
with $99.0 million at December 31, 2017. The decrease was mainly due to calls and maturities of $11.5 million
of municipal securities and U.S. government agency securities as well as residential mortgage-backed securities
principal paydowns of $1.6 million. Additionally, we sold $2.9 million of available for sale U.S. government
agency securities resulting in a net loss of $165 thousand. Partially offsetting these calls, maturities and sales
were purchases of $13.4 million of U.S. government agency securities, municipal securities, and residential
mortgage-backed securities.
We will continue to actively manage the size, components, and maturity structure of the investment securities
portfolio. Future investment strategies will continue to be based on profit objectives, economic conditions, interest
rate risk objectives, and balance sheet liquidity demands.
Nonperforming Assets
Nonperforming assets are defined as nonaccrual loans, loans that are 90 days past due and still accruing, other-
than-temporarily impaired preferred stock, and property acquired by foreclosure. The level of nonperforming
assets decreased $1.1 million at December 31, 2018 compared with December 31, 2017. Nonaccrual loans
decreased $470 thousand compared with 2017, and foreclosed assets decreased $631 thousand compared with
2017. Nonperforming assets were approximately $1.3 million, or 0.25% of total assets as of December 31, 2018,
compared with $2.4 million, or 0.50% of total assets at December 31, 2017.
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds is deposits. The Corporation offers a variety of deposit accounts having a wide range
of interest rates and terms. We rely primarily on competitive pricing policies and customer service to attract and
retain these deposits.
In 2018, average deposits increased from $390.5 million in 2017 to $419.9 million. This average deposit growth
occurred primarily in new interest-bearing business checking accounts, money market deposits, and certificates
of deposits. Average noninterest-bearing accounts decreased while NOW and Savings accounts remained
relatively flat. As of December 31, 2018, the Corporation’s balance of certificates of deposit of $250,000 or more
decreased to $16.3 million from $22.7 million at the end of 2017.
We have used borrowings from the Federal Home Loan Bank to support our residential mortgage lending
activities. During 2018, the Corporation borrowed $12 million in fixed rate credit advances, $5 million in daily
rate credit, repaid $16.8 million of the fixed-rate and daily rate advances, and made annual installment payments
of $6.2 million on five principal reducing credit advances from the Federal Home Loan Bank. The Corporation
also and made additional payments of $9.1 million for the early retirement of two principal reducing credit
advances from the Federal Home Loan Bank and recognized a gain of $318 thousand. During 2019, we expect to
make annual installment payments totaling $3.6 million on principal reducing credit advances and payoff other
advances of approximately $8 million. Total long-term advances with the Federal Home Loan Bank were $21.2
million at December 31, 2018. Details on the Federal Home Loan Bank advances are presented in Notes 7 and 8
of the Corporation’s Consolidated Financial Statements.
Liquidity
Liquidity is managed to assume that the Bank can meet the cash flow requirements of customers who may be
either depositors wanting to withdraw their funds or borrowers needing funds to meet their credit needs. Many
factors affect the ability to accomplish liquidity objectives successfully. Those factors include the economic
environment, our asset/liability mix and our overall reputation and credit standing in the marketplace. In the
ordinary course of business, our cash flows are generated from deposits, interest and fee income, loan repayments
and the maturity or sale of other earning assets.
The Corporation is a separate entity from the Bank and provides for its own liquidity. The Corporation is
responsible for the payment of dividends declared for shareholders, and interest and principal on its outstanding
debt. Substantially, all of the Corporation’s liquidity is obtained from dividends from the Bank.
42
The Consolidated Statement of Cash Flows details the Corporation’s cash flows from operating, investing, and
financing activities. During 2018, operating and financing activities provided cash flows of $48.6 million, while
investing activities used $47.2 million resulting in an increase in cash and cash equivalents balances of $1.4
million.
Liability liquidity represents our ability to renew or replace our short-term borrowings and deposits as they mature
or are withdrawn. The Bank’s deposit mix includes a significant amount of core deposits. Core deposits are
defined as total deposits less time deposits of $250,000 or more. These funds are relatively stable because they
are generally accounts of individual customers who are concerned not only with rates paid, but with the value of
the services they receive, such as efficient operations performed by helpful personnel. Total core deposits were
96.4% of total deposits on December 31, 2018 and 94.3% of total deposits on December 31, 2017.
Asset liquidity is provided through ordinary business activity, such as cash received from interest and fee
payments as well as from maturing loans and investments. Additional sources include marketable securities and
short-term investments that are easily converted into cash without significant loss. The Bank had $8.6 million of
investment securities maturing within one year or less on December 31, 2018, which represented 9.0% of the
investment debt securities portfolio. Also, the Bank has $3.5 million of U.S. government agency securities
callable at the option of the issuer within one year and approximately $1.9 million of expected annual cash flow
in principal reductions from payments of mortgage-backed securities.
During 2018 and 2017, no U.S. government agency securities with call features were called. We are not aware
of any other known trends, events, or uncertainties that will have or that are reasonably likely to have a material
adverse effect on the Corporation’s liquidity or operations.
Contractual Obligations
The chart below shows the Corporation’s contractual obligations and its scheduled future cash payments under
those obligations as of December 31, 2018.
The majority of the Corporation’s outstanding contractual obligations are long-term debt. The remaining
contractual are comprised of purchase obligations for data processing services. We have no capital lease
obligations.
Contractual Obligations
Long-term debt
Operating leases
Total contractual obligations
Total
$21,171
10
$21,181
Off-Balance Sheet Arrangements
Payments Due by Period
(Dollars in thousands)
Less
than 1
Year
$ 0
5
$ 5
1-3
Years
$12,314
5
$12,319
4-5
Years
$5,857
0
$5,857
After 5
Years
$3,000
0
$3,000
We are a party to financial instruments with off-balance-sheet risk which arise in the normal course of business
to meet the financing needs of our customers. These financial instruments include commitments to extend credit
in the form of loans or through letters of credit. The instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the financial statements and are unconditionally
cancelable. Since many of the commitments to extend credit and standby letters of credit are expected to expire
without being drawn upon, the contractual amounts do not necessarily represent future cash requirements.
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
Standby letters of credit
2018
(Dollars in thousands)
2017
$ 39,418
$ 4,343
$ 24,706
$ 3,135
43
The Corporation does not have any special purpose entities or off-balance sheet financing payment obligations.
Capital Resources and Dividends
Our average equity to average assets ratio was 8.24% in 2018 and 8.55% in 2017. At December 31, 2018, we were
well in excess of all applicable minimum capital requirements under the guidelines with a common equity Tier 1
capital ratio of 11.97%, Tier I risk-based capital ratio of 11.97%, Total risk-based capital ratio of 12.87%, and a
leverage ratio of 8.62%. To continue to conduct its business as currently conducted, the Corporation and the Bank
will need to maintain capital well above the minimum levels.
The following table presents the risk-based capital and leverage ratios at December 31, 2018 and 2017 in
comparison to both the minimum regulatory guidelines and the minimum for well capitalized:
Risk-Based Capital Ratios
2018
2017
2018
2017
Minimum
Regulatory
Guidelines
Corporation
Bank
Common Equity Tier 1
Tier I capital
Total risk-based capital
Leverage
Interest Rate Sensitivity
11.97%
11.97%
12.87%
8.62%
12.74%
12.74%
13.65%
8.79%
11.44% 12.02%
11.44% 12.02%
12.34% 12.93%
8.29%
8.24%
4.50%
6.00%
8.00%
4.00%
Minimum
For Well
Capitalize
d
≥ 6.50%
≥ 8.00%
≥ 10.00%
≥ 5.00%
The Corporation’s most important element of asset/liability management is the monitoring of its sensitivity and
exposure to interest rate movements which is the Corporation’s primary market risk. We have no foreign currency
exchange rate risk, commodity price risk, or any other material market risk. The Corporation has no trading
investment portfolio, nor do we have any interest rate swaps or other derivative instruments.
Our primary source of earnings, net interest income, can fluctuate with significant interest rate movements. To
lessen the impact of these movements, we seek to maximize net interest income while remaining within prudent
ranges of risk by practicing sound interest rate sensitivity management. We attempt to accomplish this objective
by structuring the balance sheet so that the differences in repricing opportunities between assets and liabilities are
minimized. Interest rate sensitivity refers to the responsiveness of earning assets and interest-bearing liabilities
to changes in market interest rates. The Corporation’s interest rate risk management is carried out by the
Asset/Liability Management Committee which operates under policies and guidelines established by the Bank’s
Board of Directors. The principal objective of asset/liability management is to manage the levels of interest-
sensitive assets and liabilities to minimize net interest income fluctuations in times of fluctuating market interest
rates. To effectively measure and manage interest rate risk, the Corporation uses computer simulations that
determine the impact on net interest income of numerous interest rate scenarios, balance sheet trends and
strategies. These simulations cover the following financial instruments: short-term financial instruments,
investment securities, loans, deposits, and borrowings. These simulations incorporate assumptions about balance
sheet dynamics, such as loan and deposit growth and pricing, changes in funding mix, and asset and liability
repricing and maturity characteristics. Simulations are run under various interest rate scenarios to determine the
impact on net income and capital. From these computer simulations, interest rate risk is quantified and appropriate
strategies are developed and implemented. The Corporation also maintains an investment portfolio which receives
monthly cash flows from mortgage-backed securities principal payments, and staggered maturities and provides
flexibility over time in managing exposure to changes in interest rates. Any imbalances in the repricing
opportunities at any point in time constitute a financial institution’s interest rate sensitivity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
44
The information required by this item is filed herewith.
Management’s Report on Internal Control over Financial Reporting
Management of the Corporation is responsible for establishing and maintaining effective internal control over
financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP.
Under the supervision and with the participation of management, including the principal executive officer and
principal financial officer, the Corporation conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control over Financial Reporting - Guidance for Smaller
Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation under the above framework, management of the Corporation has concluded the Corporation
maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act
of 1934 Rule 13a-15(f), as of December 31, 2018. Internal control over financial reporting cannot provide absolute
assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment
and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented
by collusion or improper management override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible
to design into the process safeguards to reduce, though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of the consolidated financial
statements and other financial information contained in this report. The accompanying consolidated financial
statements were prepared in conformity with GAAP and include, as necessary, best estimates and judgments by
management.
/s/ DeWitt Drew
DeWitt Drew
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Karen T. Boyd
Karen T. Boyd
Senior Vice President and Treasurer
(Principal Financial Officer)
March 29, 2019
45
46
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
ASSETS
Cash and due from banks
Interest-bearing deposits in other banks
Cash and cash equivalents
Certificates of deposit in other banks
Investment securities available for sale, at fair value
Investment securities to be held to maturity (fair value
approximates $37,010,327 and $45,147,800)
Federal Home Loan Bank stock, at cost
Loans, net of allowance for loan losses of $3,428,869 and
$3,043,632
Premises and equipment, net
Bank property held for sale
Foreclosed assets, net
Intangible assets
Bank owned life insurance
Other assets
Total assets
2018
2017
$ 14,050,682
21,448,110
35,498,792
2,732,000
58,313,577
$ 11,143,494
22,994,927
34,138,421
1,985,000
54,263,261
36,827,073
1,820,300
44,590,841
2,438,200
373,321,368
14,573,974
0
127,605
3,907
6,779,242
4,835,329
$ 534,833,167
327,129,758
12,249,518
211,500
758,878
19,532
6,553,318
4,734,148
$ 489,072,375
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Interest bearing business checking
NOW accounts
Money market
Savings
Certificates of deposit $250,000 and over
Other time accounts
Total interest-bearing deposits
Noninterest-bearing deposits
Total deposits
Short-term borrowed funds
Long-term debt
Other liabilities
Total liabilities
Shareholders’ equity:
Common stock – $1 par value, 5,000,000 shares authorized,
2,545,776 shares and 4,293,835 shares issued for 2018 and 2017
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost, 0 shares for 2018 and 1,752,330 for 2017
Total shareholders’ equity
Total liabilities and shareholders’ equity
$ 28,070,871
35,816,115
158,730,044
31,848,588
16,264,681
81,214,376
351,944,675
103,694,910
455,639,585
10,457,143
21,171,429
3,946,066
491,214,223
$ 0
25,871,273
129,040,471
30,793,864
22,662,235
60,969,445
269,337,288
127,668,471
397,005,759
17,971,429
29,057,143
3,895,058
447,929,389
2,545,776
18,418,995
24,841,569
( 2,187,396)
( 0)
43,618,944
$ 534,833,167
4,293,835
31,701,533
33,020,030
( 1,629,619)
( 26,242,793)
41,142,986
$ 489,072,375
See accompanying notes to consolidated financial statements.
47
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 2018, 2017, and 2016
Interest income:
Interest and fees on loans
Interest on debt securities: Taxable
Interest on debt securities: Tax-exempt
Dividends
Interest on deposits in other banks
Interest on certificates of deposit in other banks
Total interest income
Interest expense:
Deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Noninterest income:
Service charges on deposit accounts
Income from trust services
Income from brokerage services
Income from insurance services
Income from mortgage banking services
Net gain (loss) on sale or disposition of assets
Net gain (loss) on sale of securities
Net gain on extinguishment of debt
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy expense
Equipment expense
Data processing expense
Amortization of intangible assets
Other operating expenses
Total noninterest expenses
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share:
Net income
Weighted average shares outstanding
Diluted earnings per share:
Net income
Weighted average shares outstanding
2018
2017
2016
$ 18,762,728
1,363,123
1,090,871
144,856
484,724
47,870
21,894,172
2,383,524
1,097
395,989
541,804
3,322,414
18,571,758
829,500
$ 16,299,091
1,286,473
1,228,479
102,360
195,032
34,879
19,146,314
1,153,609
1,068
224,144
523,344
1,902,165
17,244,149
300,000
$ 14,796,649
1,170,259
1,253,064
89,840
103,244
52
17,413,108
935,291
10
103,567
573,225
1,612,093
15,801,015
160,000
17,742,258
16,944,149
15,641,015
1,015,498
234,649
399,278
1,603,557
2,475
(79,529)
(165,369)
317,832
878,340
4,206,731
9,724,826
1,194,552
933,485
1,445,215
15,625
3,319,751
16,633,454
5,315,535
668,416
1,005,270
218,657
362,416
1,523,309
155,053
(9,022)
186,610
0
870,229
4,312,522
9,250,777
1,124,028
850,376
1,513,630
15,625
3,074,843
15,829,279
5,427,392
1,619,900
1,086,268
209,755
342,051
1,477,663
354,627
38,165
168,919
0
781,811
4,459,259
8,765,865
1,140,600
860,935
1,367,569
15,625
2,763,227
14,913,821
5,186,453
1,152,476
$ 4,647,119
$ 3,807,492
$ 4,033,977
$ 1.83
2,545,565
$ 1.49
2,547,421
$ 1.58
2,547,778
$ 1.83
2,545,565
$ 1.49
2,547,422
$ 1.58
2,547,778
See accompanying notes to consolidated financial statements.
48
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 2018, 2017, and 2016
Net income
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities
available for sale
Reclassification adjustment for (gain) loss realized
in income on securities available for sale
Unrealized gain (loss) on pension plan benefits
Federal income tax benefit (expense)
Other comprehensive income (loss), net of tax
Total comprehensive income
2018
2017
2016
$
4,647,119
$
3,807,492
$
4,033,977
(830,815)
326,684
(704,188)
165,369
(40,601)
(148,270)
(557,777)
4,089,342
$
(186,610)
503,167
486,869
156,372
3,963,864
$
(144,034)
(110,306)
(325,900)
(632,628)
3,401,349
$
See accompanying notes to consolidated financial statements.
49
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
for the years ended December 31, 2018, 2017, and 2016
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Total
Shareholders
’ Equity
Balance at Dec. 31, 2015
$ 4,293,835
$ 31,701,533
$ 27,369,480
$ (1,153,363)
$ (26,113,795)
$ 36,097,690
Net Income
Comprehensive income (loss):
Changes in net gain on
securities available for sale
Changes in net loss on
pension plan benefits
Cash dividend declared
$.42 per share
Purchase of 400 shares of
treasury stock
-
-
-
-
-
-
-
-
-
-
4,033,977
-
-
-
(1,070,047)
-
(559,826)
(72,802)
-
-
-
-
-
-
4,033,977
(559,826)
(72,802)
(1,070,047)
(6,658)
(6,658)
Balance at Dec. 31, 2016
4,293,835
31,701,533
30,333,410
(1,785,991)
(26,120,453)
38,422,334
-
-
-
-
-
-
-
-
-
-
3,807,492
-
-
-
(1,120,872)
-
93,675
62,697
-
-
-
-
-
-
3,807,492
93,675
62,697
(1,120,872)
(122,340)
(122,340)
$ 4,293,835
$ 31,701,533
$ 33,020,030
$ (1,629,619)
$ (26,242,793)
$ 41,142,986
-
-
-
-
-
-
-
-
-
-
-
-
(306,032)
17,627
(128,647)
4,647,119
-
-
(1,196,332)
-
-
-
-
(525,702)
(32,075)
-
-
-
-
-
(128,647)
4,647,119
(525,702)
(32,075)
(1,196,332)
-
-
-
-
(306,032)
(306,032)
306,032
-
-
17,627
26,242,793
-
Retirement of treasury stock
(1,748,059)
(12,994,133)
(11,500,601)
Balance at Dec. 31, 2018
$ 2,545,776
$ 18,418,995
$ 24,841,569
$ (2,187,396)
$ 0
$ 43,618,944
See accompanying notes to consolidated financial statements.
50
Net Income
Comprehensive income (loss):
Changes in net gain on
securities available for sale
Changes in net gain on
pension plan benefits
Cash dividend declared
$.44 per share
Purchase of 5,932 shares of
treasury stock
Balance at Dec. 31, 2017
Adjustment to correct
immaterial misstatement
of deferred compensation
expense and cash surrender
value in prior periods
Net Income
Comprehensive income (loss):
Changes in net gain on
securities available for sale
Changes in net gain on
pension plan benefits
Cash dividend declared
$.47 per share
Purchase of 13,316 shares of
treasury stock
Issue of restricted stock
awards
Stock-based compensation
SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2018, 2017, and 2016
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses
Depreciation
Net amortization of investment securities
Income on cash surrender value of bank owned life insurance
Amortization of intangibles
Disposal of fixed assets to charitable expense
Loss (gain) on sale/writedown of foreclosed assets
Net loss (gain) on disposal of fixed assets
Net loss (gain) on sale of securities
Net loss on disposal of bank property held for sale
Net gain on extinguishment of debt
Stock-based compensation
Change in:
Other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from calls, paydowns and maturities of securities HTM
Proceeds from calls, paydowns and maturities of securities AFS
Proceeds from Federal Home Loan Bank Stock repurchase
Proceeds from sale of securities available for sale
Proceeds from sale of securities held to maturity
Proceeds from maturity of certificates of deposit in other banks
Purchase of securities held to maturity
Purchase of securities available for sale
Purchase of Federal Home Loan Bank Stock
Purchase certificates of deposit in other banks
Net change in loans
Purchase bank owned life insurance
Purchase of premises and equipment
Proceeds from sales of fixed assets and foreclosed assets
Proceeds from the sale of bank property held for sale
Net cash used by investing activities
Cash flows from financing activities:
Net change in deposits
Payment of short-term portion of long-term debt
Payments for early retirement of long-term debt
Proceeds from issuance of short-term debt
Proceeds from issuance of long-term debt
Cash dividends paid
Payments for treasury stock
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of period
2018
4,647,119 $
2017
3,807,492 $
2016
4,033,977
$
829,500
1,036,986
356,101
(147,824)
15,625
0
(17,974)
753
165,369
96,750
(317,832)
17,627
71,733
(193,157)
6,560,776
12,252,434
795,028
1,164,500
2,879,000
0
0
(4,637,047)
(8,762,879)
(546,600)
(747,000)
(47,511,765)
0
(3,382,015)
1,131,894
114,750
(47,249,700)
58,633,827
(22,971,429)
(9,110,739)
8,000,000
9,000,000
(1,196,332)
(306,032)
42,049,295
1,360,371
34,138,421
300,000
881,000
396,899
(133,398)
15,625
13,045
8,892
1,594
(186,610)
0
0
0
489,903
288,505
5,882,947
10,070,453
635,818
705,100
5,741,211
0
0
(265,000)
(7,039,139)
(1,269,100)
(1,985,000)
(38,895,975)
(1,063,237)
(1,955,067)
233,553
0
(35,086,383)
25,512,772
(13,447,619)
0
7,857,143
18,142,857
(1,120,872)
(122,340)
36,821,941
7,618,505
26,519,916
160,000
923,578
309,185
(125,290)
15,625
0
0
(36,701)
(168,919)
0
0
0
(253,894)
324,142
5,181,703
5,952,271
10,354,337
413,700
11,933,634
576,834
245,000
(478,559)
(25,129,827)
(418,700)
0
(41,850,494)
0
(1,455,043)
304,825
0
(39,552,022)
32,477,143
(7,590,476)
0
857,143
5,142,857
(1,070,047)
(6,658)
29,809,962
(4,560,357)
31,080,273
Cash and cash equivalents - end of period
$
35,498,792 $
34,138,421 $
26,519,916
See accompanying notes to consolidated financial statements.
51
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
CASH PAID DURING THE YEAR FOR:
Income taxes
Interest paid
NONCASH ITEMS:
2018
2017
2016
$ 365,000
$ 3,246,847
$ 895,000
$ 1,881,924
$ 964,000
$ 1,600,593
Increase in foreclosed properties and decrease in loans
Unrealized gain (loss) on securities AFS
Unrealized gain (loss) on pension plan benefits
Net reclass between short and long-term debt
Sale of fixed assets through loans
Sale of foreclosed properties through loans
Property moved from fixed assets to property held for sale
Retirement of treasury stock
$ 503,655
$ (665,446)
$ (40,601)
$ 7,457,143
$ 13,000
$ 0
$ 0
$ 26,242,793
$ 903,842
$ 140,074
$ 503,167
$ 15,114,286
$ 0
$ 38,000
$ 0
$ 0
$ 44,963
$ (848,222)
$ (110,306)
$ 7,590,476
$ 0
$ 0
$ 211,500
$ 0
See accompanying notes to consolidated financial statements.
52
SOUTHWEST GEORGIA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Southwest Georgia Financial Corporation (the “Corporation”) and its
direct and indirect subsidiaries, including its wholly-owned banking subsidiary, Southwest Georgia Bank (the
“Bank”), conform to U.S. generally accepted accounting principles (“GAAP”) 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 the Corporation and its direct and indirect
subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation.
Nature of Operations
The Corporation offers comprehensive financial services to consumer, business, and governmental entity
customers through its banking offices in southwest Georgia. Its primary deposit products are money market,
NOW, savings and certificates of deposit, and its primary lending products are consumer and commercial
mortgage loans. In addition to conventional banking services, the Corporation provides investment planning
and management, trust management, and commercial and individual insurance products. Insurance products and
advice are provided by the Bank’s Southwest Georgia Insurance Services Division.
The Corporation’s primary business is providing banking services through the Bank to individuals and
businesses principally in the counties of Colquitt, Baker, Worth, Lowndes, Tift and the surrounding counties of
southwest Georgia. The Bank operates six branch offices in its trade area. Trust and retail brokerage services
are offered at an office building located at 25 2nd Avenue SW in Moultrie, and lending services are offered in
Valdosta at 3520 North Valdosta Road.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the
allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with these evaluations, management obtains independent appraisals for
significant properties.
A substantial portion of the Corporation’s loans are secured by real estate located primarily in Georgia.
Accordingly, the ultimate collection of these loans is susceptible to changes in the real estate market conditions
of this market area.
Cash and Cash Equivalents and Statement of Cash Flows
For purposes of reporting cash flows, the Corporation considers cash and cash equivalents to include all cash on
hand, deposit amounts due from banks, interest-bearing deposits in other banks, and federal funds sold. The
Corporation maintains its cash balances in several financial institutions. Accounts at the financial institutions
are secured by the Federal Deposit Insurance Corporation (the “FDIC”) up to $250,000. There were uninsured
deposits of $61,822 at December 31, 2018.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Investment Securities
Investment securities that management has the positive intent and ability to hold to maturity are classified as
“held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading are
classified as available for sale and recorded at fair value with unrealized gains and losses (net of tax effect)
reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of
the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that
are deemed to be other-than-temporarily impaired are reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers (1) the length of time and the extent to which
the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3)
the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the
trade date and are determined using the specific identification method.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation has
been calculated primarily using the straight-line method for buildings and building improvements over the assets
estimated useful lives. Equipment and furniture are depreciated using the modified accelerated recovery system
method over the assets estimated useful lives for financial reporting and income tax purposes for assets
purchased on or before December 31, 2003. For assets acquired after 2003, the Corporation used the straight-
line method of depreciation. The following estimated useful lives are used for financial statement purposes:
Land improvements
Building and improvements
Machinery and equipment
Computer equipment
Office furniture and fixtures
5 – 31 years
10 – 40 years
5 – 10 years
3 – 5 years
5 – 10 years
All of the Corporation’s leases are operating leases and are not capitalized as assets for financial reporting
purposes. Maintenance and repairs are charged to expense and betterments are capitalized.
Long-lived assets are evaluated regularly for other-than-temporary impairment. If circumstances suggest that
their value may be impaired and the write-down would be material, an assessment of recoverability is performed
prior to any write-down of the asset. Impairment on intangibles is evaluated at each balance sheet date or
whenever events or changes in circumstances indicate that the carrying amount should be assessed. Impairment,
if any, is recognized through a valuation allowance with a corresponding charge recorded in the income
statement.
Bank Property Held for Sale
In 2016, the Bank’s former branch in Pavo, Georgia, was transferred from premises to bank property held for
sale and depreciation was discontinued. The property was booked at the lower of cost or market value based on
the current appraisal of $211,500. On November 30, 2018, the Corporation sold this property and recorded a
loss in the amount of $96,750.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Loans and Allowances for Loan Losses
Loans are stated at principal amounts outstanding less unearned income and the allowance for loan losses.
Interest income is credited to income based on the principal amount outstanding at the respective rate of interest
except for interest on certain installment loans made on a discount basis which is recognized in a manner that
results in a level-yield on the principal outstanding.
Accrual of interest income is discontinued on loans when, in the opinion of management, collection of such
interest income becomes doubtful. Accrual of interest on such loans is resumed when, in management’s
judgment, the collection of interest and principal becomes probable.
Fees on loans and costs incurred in origination of most loans are recognized at the time the loan is placed on the
books. Because loan fees are not significant, the results on operations are not materially different from the
results which would be obtained by accounting for loan fees and costs as amortized over the term of the loan as
an adjustment of the yield.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation
will be unable to collect the scheduled payments of principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future cash flows discounted at the
loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly,
the Corporation does not separately identify individual consumer and residential loans for impairment
disclosures.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes the collection of the principal is
unlikely. The allowance is an amount which management believes will be adequate to absorb estimated losses
on existing loans that may become uncollectible based on evaluation of the collectability of loans and prior loss
experience. This evaluation takes into consideration such factors as changes in the nature and volume of the
loan portfolios, current economic conditions that may affect the borrowers’ ability to pay, overall portfolio
quality, and review of specific problem loans.
Management believes that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may be necessary based upon
changes in economic conditions. Also, various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the
Corporation to recognize additions to the allowance based on their judgments of information available to them at
the time of their examination.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Foreclosed Assets
In accordance with policy guidelines and regulations, properties acquired through, or in lieu of, loan foreclosure
are held for sale and are initially recorded at the fair market value less costs to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or fair value less cost to sell. A valuation allowance is
established to record market value changes in foreclosed assets. Revenue and expenses from operations and
changes in the valuation allowance are included in net expenses from foreclosed assets. There was no valuation
allowance for foreclosed asset losses at December 31, 2018. Foreclosed assets totaled $127,605 at December
31, 2018, down from $758,878 at December 31, 2017.
Intangible Assets
Intangible assets are amortized over a determined useful life using the straight-line basis. These assets are
evaluated annually as to the recoverability of the carrying value. The remaining intangibles will fully amortize
in March 2019.
Credit Related Financial Instruments
In the ordinary course of business, the Corporation has entered into commitments to extend credit, including
commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such
financial instruments are recorded when they are funded.
Retirement Plans
The Corporation and its direct and indirect subsidiaries have post-retirement plans covering substantially all
employees. The Corporation makes annual contributions to the plans in amounts not exceeding the regulatory
requirements.
Bank Owned Life Insurance
The Bank owns life insurance policies on a group of employees. Banking laws and regulations allow the Bank to
purchase life insurance policies on certain employees in order to help offset the Bank’s overall employee
compensation costs. The beneficial aspects of these life insurance policies are tax-free earnings and a tax-free
death benefit, which are realized by the Bank as the owner of the policies. The cash surrender value of these
policies is included as an asset on the balance sheet, and any increases in cash surrender value are recorded as
noninterest income on the statement of income. At December 31, 2018 and 2017, the policies had a value of
$6,779,242 and $6,553,318, respectively, and were 15.5% and 15.9%, respectively, of shareholders’ equity.
These values are within regulatory guidelines.
Income Taxes
The Corporation and its direct and indirect subsidiaries file a consolidated income tax return. Each subsidiary
computes its income tax expense as if it filed an individual return except that it does not receive any portion of
the surtax allocation. Any benefits or disadvantages of the consolidation are absorbed by the parent
company. Each subsidiary pays its allocation of federal income taxes to the parent company or receives
payment from the parent company to the extent that tax benefits are realized.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The Corporation reports income under the Financial Accounting Standards Board Accounting Standards
Codification (“ASC”) Topic 740, Income Taxes, which requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Recognition of deferred tax assets is based on management’s belief that
it is more likely than not that the tax benefit associated with certain temporary differences and tax credits will be
realized.
The Corporation will recognize a tax position as a benefit only if it is more likely than not that the tax position
would be sustained in a tax examination, with an examination being presumed to occur. The amount recognized
is the largest amount of a tax benefit that is greater than fifty percent likely of being realized on examination. No
benefit is recorded for tax positions that do not meet the more than likely than not test.
The Corporation recognizes penalties related to income tax matters in income tax expense. The Corporation is
subject to U.S. federal and Georgia state income tax audit for returns for the tax period ending December 31,
2016 and subsequent years.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes all changes in shareholders’ equity during a period,
except those resulting from transactions with shareholders. Besides net income, other components of the
Corporation’s accumulated other comprehensive income (loss) includes the after tax effect of changes in the net
unrealized gain/loss on securities available for sale and the unrealized gain/loss on pension plan benefits.
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.
Advertising Costs
It is the policy of the Corporation to expense advertising costs as they are incurred. The Corporation does not
engage in any direct-response advertising and accordingly has no advertising costs reported as assets on its
balance sheet. Costs that were expensed during 2018, 2017, and 2016 were $264,269, $192,016, and $173,595,
respectively.
Regulatory Developments
The Corporation and the Bank are subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Corporation and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under
regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments
by the federal banking agencies about components, risk weightings and other factors.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank
to maintain minimum Tier 1 leverage, Tier 1 risk-based capital and Total risk-based capital ratios. In July 2013,
the Board of Governors of the Federal Reserve System published the Basel III Capital Rules. These rules
establish a comprehensive capital framework applicable to all depository institutions, certain bank holding
companies with total consolidated assets below a certain threshold and all and savings and loan holding
companies except for those that are substantially engaged in insurance underwriting or commercial activities.
These rules implement higher minimum capital requirements for banks and certain bank holding companies,
include a new common equity Tier 1 capital requirement and establish criteria that instruments must meet to be
considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital.
The Basel III Capital Rules became effective for the Bank on January 1, 2015, subject to a phase-in period, but
are not applicable to bank holding companies, like the Corporation, with less than $1 billion in total
consolidated assets that meet certain criteria.
The minimum capital level requirements applicable to the Bank under the Basel III Capital Rules are: (i) a
common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased
from 4%); (iii) a Total risk-based capital ratio of 8% (unchanged from the rules effective for the year ended
December 31, 2014); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital
will consist of retained earnings and common stock instruments, subject to certain adjustments.
The Basel III Capital Rules set forth changes in the methods of calculating certain risk-weighted assets, which in
turn affect the calculation of risk-based ratios. The new risk weightings are more punitive for assets held by
banks that are deemed to be of higher risk. These changes were also effective beginning January 1, 2015.
The Basel III Capital Rules also introduce a “capital conservation buffer”, which is in addition to each capital
ratio and is phased-in over a three-year period beginning in January 2016.
As of December 31, 2018, the Bank is considered to be well-capitalized under the Basel III Capital Rules. There
have been no conditions or events since December 31, 2018, that management believes has changed the Bank’s
status as “well-capitalized.” The capital ratios of the Corporation and Bank are presented in Note 15 of the
Corporation’s Notes to Consolidated Financial Statements.
Adoption of New Accounting Standards
In March 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
("ASU") 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118. The purpose of this ASU is to codify the SEC's guidance issued in Staff Accounting Bulletin
118. The amendments in this update were effective upon issuance. The adoption of ASU 2018-05 had no material
impact on the Corporation’s consolidated financial statements.
In March 2018, FASB issued ASU 2018-04, Investment - Debt Securities (Topic 320) and Regulated Operations
(Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC
Release No. 33-9273. The purpose of this ASU is to codify the SEC's guidance issued in Staff Accounting Bulletin
117. The amendments in this update were effective upon issuance. The adoption of ASU 2018-04 had no material
impact on the Corporation’s consolidated financial statements.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In February 2018, FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments
- Overall (Subtopic 825-10). This Update clarifies certain aspects of the guidance issued in ASU 2016-01
including (i) an entity measuring an equity security using the measurement alternative may make an irrevocable
election to change its measurement approach to a fair value method under Topic 820 for that security and any
identical or similar investments of the same issuer, (ii) fair value adjustments under the measurement alternative
should be as of the date the observable transaction for a similar security occurred, (iii) requiring the remeasurement
of the entire value of forward contracts and purchased options when observable transactions occur on the
underlying equity securities, (iv) financial liabilities for which the fair value option is elected should follow the
guidance in paragraph 825-10-45-5, (v) changes in the fair value of financial liabilities for which the fair value
option is elected relating to the instrument-specific credit risk should first be measured in the currency of
denomination and then both components of the change in fair value should be remeasured into the reporting
entity's functional currency using end-of-period spot rates, and (vi) the prospective transition approach should
only be applied for instances in which the measurement alternative is applied. The guidance was effective for
interim periods beginning after June 15, 2018 and may be early adopted provided ASU 2016-01 was adopted. The
Company adopted the amendments in this ASU effective January 1, 2018. The adoption of ASU 2018-03 had no
material impact on the Corporation’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.”
This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted
for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions
or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer
changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to
make certain non-substantive changes to awards without accounting for them as modifications. It does not change
the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning
after December 15, 2017; early adoption is permitted. The adoption of ASU 2017-09 had no material impact on
the Corporation’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving
the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The updated
accounting guidance requires changes to the presentation of the components of net periodic benefit cost on the
income statement by requiring service cost to be presented with other employee compensation costs and other
components of net periodic pension cost to be presented outside of any subtotal of operating income. This ASU
also stipulates that only the service cost component of net benefit cost is eligible for capitalization. This ASU is
effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The adoption of ASU 2017-07 had no material impact on the Corporation’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which provides a new
framework for determining whether transactions should be accounted for as acquisitions or disposals of assets or
businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years
beginning after December 15, 2017. Early adoption will be permitted and should apply it to transactions that have
not been reported in financial statements that have been issued or made available for issuance. The adoption of
ASU 2017-01 had no material impact on the Corporation’s consolidated financial statements.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU (i)
requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value
recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily
determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the
requirement for public business entities to disclose the methods and significant assumptions used to estimate the
fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance
sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific
credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option
for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by
measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial
statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax
asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The
accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December
15, 2017. The Corporation adopted the amendments in this ASU effective January 1, 2018. The adoption of
2016-01 had no material impact on the Corporation’s consolidated financial statements.
In May 2014, the FASB began issuing guidance to change the recognition of revenue from contracts with
customers. The last guidance was issued in February 2017. The standards issued during this time are as follows:
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2015-14 Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08 Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU
2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC
Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at
the March 3, 2016 EITF Meeting, ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-
Scope Improvements and Practical Expedients, ASU 2016-20 Technical Corrections and Improvements to Topic
606, Revenue from Contracts with Customers, and ASU 2017-05 Other Income - Gains and losses from the
Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance
and Accounting for Partial Sales of Nonfinancial Assets. This new guidance, which does not apply to financial
instruments, provides that revenue should be recognized for the transfer of goods and services to customers in an
amount equal to the consideration it receives or expects to receive. The guidance also includes expanded disclosure
requirements that provide comprehensive information about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2017. The Corporation adopted the
amendments in this ASU effective January 1, 2018, using the modified retrospective method. Since there was no
change to net income upon adoption of the new guidance, a cumulative effect adjustment to opening retained
earnings was not necessary. See below for additional information related to revenue generated from contracts with
customers.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Revenue Recognition
On January 1, 2018, the Corporation adopted ASC Topic 606, using the modified retrospective method.
Disclosures of revenue from contracts with customers for periods beginning after January 1, 2018, are presented
under ASC Topic 606 and have not materially changed from the prior year amounts. Noninterest income, within
the scope of this guidance, is recognized as services are transferred to customers in an amount that reflects the
considerations expected to be entitled to in exchange for those services. The Corporation's revenue streams that
were in scope include service charges on deposit accounts, income from insurance services, income from trust
services, Automated Teller Machine (“ATM”) surcharge and other noninterest income.
Services Charges on Deposit Accounts - Service charges on deposit accounts primarily consist of monthly
maintenance charges, analysis charges and Non-sufficient funds (“NSF”) charges. The NSF charges and certain
service charges are fixed and the performance obligation is typically satisfied at the time of the related transaction.
The consideration for analysis charges and monthly maintenance charges are variable as the fee can be reduced if
the customer meets certain qualifying metrics. The Corporation's performance obligations are satisfied either at
the time of the transaction or over the course of a month.
Income from Insurance Services – Income from insurance services consists primarily of property and casualty
insurance, life, health, and disability insurance. Property and casualty, life, health, and disability insurance
includes the brokerage of both personal and commercial coverages. The placement of the policy is completion of
the Corporation's performance obligation and revenue is recognized at that time. The Corporation's commission
is primarily a percentage of the premium.
Income from Trust Services – Income from Trust services consists of revenue generated from services provided
for corporate, pension, and personal trusts, trustee services, and administrative services for employee benefit plans.
The Corporation’s performance obligation and revenue is recognized once the service has been performed.
ATM Surcharge - ATM surcharge represents revenues earned from certain terminal activity. ATM surcharges
primarily consist of charges assessed to our customers for using a non-Bank ATM or a non-Bank customer using
our ATM. Such surcharges generally are recognized concurrently with the delivery of services on a daily basis.
Other - Other noninterest income primarily consists of transaction based revenue where the performance
obligation is satisfied concurrent with the revenue recognition.
Recent Accounting Pronouncements
In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial
Instruments – Credit Losses. On June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit
loss methodology for the impairment of financial assets measured at amortized cost basis. That methodology
replaces the probable, incurred loss model for those assets. The amendments in ASU No. 2018-19 align the
implementation date for nonpublic entities’ annual financial statements with the implementation date for their
interim financial statements and clarify the scope of the guidance in the amendments in Update 2016-13. The
amendments also clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-
20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with
Topic 842, Leases. The adoption of ASU 2018-19 is not expected to have a material impact on the Corporation’s
consolidated financial statements.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework – Changes to the Disclosure
Requirements for Defined Benefit Plans. ASU 2018-14 removes the requirements to disclose the amounts in
accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost
over the next fiscal year, the amount and timing of plan assets expected to be returned to the employer, related
party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and
significant transactions between the employer or related parties and the plan, and the effects of a one-percentage-
point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost
components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. The
ASU adds requirements to disclose the weighted-average interest crediting rates for cash balance plans and other
plans with promised interest crediting rates and the reasons for significant gains and losses related to changes in
the benefit obligation for the period. The update also clarifies the requirements to disclose the projected benefit
obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets, and the accumulated
benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. This update
is effective for fiscal years beginning after December 15, 2020. The adoption of ASU 2018-14 is not expected to
have a material impact on the Corporation’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement. ASU 2018-13 removes the requirements for public entities to disclose
the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for
timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The ASU
modifies the disclosure requirement for investments in certain entities that calculate net asset value, and clarifies
that the measurement uncertainty disclosure is to communicate measurement uncertainties as of the reporting date.
The ASU also requires public entities to disclose the changes in unrealized gains and losses for the period included
in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting
period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements. This update is effective for fiscal years beginning after December 15, 2019. The adoption of ASU
2018-13 is not expected to have a material impact on the Corporation’s consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income. ASU 2018-02 provides guidance on accounting for
the effects of the Tax Cuts and Jobs Act, which was enacted in December, 2017. The guidance allows
reclassification of the tax effects that were stranded in accumulated other comprehensive income as a result of
the tax rate change from accumulated other comprehensive income to retained earnings. This guidance is
effective for fiscal years beginning after December 15, 2018. The adoption of ASU 2018-02 is not expected to
have a material impact on the Corporation’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic
310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization
period for certain callable debt securities held at a premium. The premium on individual callable debt securities
shall be amortized to the earliest call date. This guidance does not apply to securities for which prepayments are
estimated on a large number of similar loans where prepayments are probable and reasonable estimable. The
amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early adoption is permitted. This update should be adopted on a modified
retrospective basis with a cumulative effect adjustment to retained earnings on the date of adoption. The
adoption of ASU 2017-08 is not expected to have a material impact on the Corporation’s consolidated financial
statements.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which requires
an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Rather,
impairment will be measured using the difference between the carrying amount and the fair value of the
reporting unit. This ASU is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Entities may early adopt the standard for goodwill impairment tests with
measurement dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material
impact on the Corporation’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and
Investments-Equity Method and Joint Ventures (Topic 323), which incorporates into the FASB ASC recent SEC
guidance about disclosing, under SEC Staff Accounting Bulletin, Topic 11.M, the effect on financial statements
of adopting the revenue, leases, and credit losses standards. The effective date varies as each topic addressed in
this ASU has its own effective date. The adoption of ASU 2017-03 is not expected to have a material impact on
the Corporation’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which is essentially the final rule on use of the so-
called CECL model, or current expected credit losses. Among other things, the amendments in this ASU require
the measurement of all expected credit losses for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other
organizations will now use forward-looking information to better inform their credit loss estimates. Many of the
loss estimation techniques applied today will still be permitted, although the inputs to those techniques will
change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for
credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For
SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies
and other organizations. Early adoption will be permitted for all organizations for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2016-13 is
being reviewed for any material impact on the Corporation’s consolidated financial statements.
In 2016, the FASB issued ASU 2016-02 – Leases (Topic 842). ASU 2016-02 amends the existing standards for
lease accounting effectively requiring most leases be carried on the balance sheets of the related lessees by
requiring them to recognize a right-of-use asset and a corresponding lease liability. ASU 2016-02 includes
qualitative and quantitative disclosure requirements intended to provide greater insight into the nature of an
entity’s leasing activities. The standard must be adopted using a modified retrospective transition with a
cumulative-effect adjustment to equity as of the beginning of the period in which it is adopted. ASU 2016-02 is
effective for annual reporting periods beginning after December 15, 2018, and interim periods within those
annual periods with early adoption permitted. The adoption of ASU No. 2016-02 is being reviewed for any
material impact on the Corporation’s consolidated financial statements.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
2. INVESTMENT SECURITIES
Investment securities have been classified in the consolidated balance sheets according to management’s intent.
The amortized costs of securities as shown in the consolidated balance sheets and their estimated fair values at
December 31 were as follows:
Securities Available For Sale:
December 31, 2018
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
U.S. government treasury securities
U.S. government agency securities
State and municipal securities
Residential mortgage-backed securities
Total debt securities AFS
$ 982,044
45,823,595
7,394,278
4,769,668
$ 58,969,585
$ 0 $ 27,474
881,157
46,922
17,180
$ 972,733
264,567
30,579
21,579
$ 316,725
$ 954,570
45,207,005
7,377,935
4,774,067
$ 58,313,577
December 31, 2017
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
U.S. government treasury securities
U.S. government agency securities
State and municipal securities
Residential mortgage-backed securities
Total debt securities AFS
$ 979,983
43,978,023
7,482,912
1,812,905
$ 54,253,823
$ 0 $ 12,213
698,299
38,454
2,844
$ 751,810
580,366
129,231
51,651
$ 761,248
$ 967,770
43,860,090
7,573,689
1,861,712
$ 54,263,261
Securities Held to Maturity:
December 31, 2018
Amortized
Cost
Unrealized
Gains
State and municipal securities
Residential mortgage-backed securities
Total securities HTM
$ 30,582,785
6,244,288
$ 36,827,073
$ 208,480
49,490
$ 257,970
December 31, 2017
Amortized
Cost
Unrealized
Gains
State and municipal securities
Residential mortgage-backed securities
Total securities HTM
$41,447,092
3,143,749
$44,590,841
$ 527,632
77,542
$ 605,174
Unrealized
Losses
$ 67,434
7,282
$ 74,716
Unrealized
Losses
$ 48,083
132
$ 48,215
Estimated
Fair Value
$ 30,723,831
6,286,496
$ 37,010,327
Estimated
Fair Value
$41,926,641
3,221,159
$45,147,800
At December 31, 2018, securities with a carrying value of $59,182,556 and a market value of $58,502,416 were
pledged as collateral for public deposits and other purposes as required by law. Of these amounts,
approximately $4,400,000 was over pledged and could be released if necessary for liquidity needs. At
December 31, 2017, securities with a carrying value of $71,520,817 and a market value of $71,648,073 were
pledged as collateral for public deposits and other purposes as required by law.
At December 31, 2018 and 2017, we had both 1 – 4 family and multifamily mortgage loans pledged to secure
Federal Home Loan Bank (“FHLB”) advances. The FHLB requires the Bank to hold a minimum investment of
stock, based on membership and the level of activity. As of December 31, 2018, this stock investment was
$1,820,300.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
There were no investments in obligations of any state or municipal subdivisions which exceeded 10% of the
Corporation’s shareholders’ equity at December 31, 2018.
The amortized cost and estimated fair value of debt securities at December 31, 2018, 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.
December 31, 2018
Available for Sale:
Amounts maturing in:
One year or less
After one through five years
After five through ten years
After ten years
Total debt securities AFS
Held to Maturity:
Amounts maturing in:
One year or less
After one through five years
After five through ten years
After ten years
Total debt securities HTM
Amortized
Cost
Estimated
Fair Value
$ 2,147,059
29,691,474
21,585,776
5,545,276
$ 58,969,585
Amortized
Cost
$ 6,483,464
12,885,021
11,035,146
6,423,442
$ 36,827,073
$ 2,124,645
29,674,236
20,968,318
5,546,378
$ 58,313,577
Estimated
Fair Value
$ 6,497,910
12,961,209
11,097,382
6,453,826
$ 37,010,327
The following tables summarize the activity of security sales by intention and year for years ending 2018, 2017,
and 2016.
Securities Available For Sale:
December 31,
2018
2017
2016
Proceeds of sales
Gross gains
Gross losses
Net gains (losses) on sales of available for sale securities
Securities Held to Maturity:
$ 2,879,000
$ 5,741,211
$ 11,933,634
$ 0
$ 186,610
$ 152,102
(165,369)
$ (165,369)
0
$ 186,610
(8,068)
$ 144,034
December 31,
2018
2017
2016
Amortized cost of securities sold
Proceeds from sales
Net gains on sales of held to maturity securities
$ 0
0
$ 0
$ 0
0
$ 0
$551,949
576,834
$24,885
Sales of held to maturity securities during years ended December 31, 2016 included small lots of mortgage-
backed securities which were paid down by over 85% of face value.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Information pertaining to securities with gross unrealized losses aggregated by investment category and length
of time that individual securities have been in continuous loss position, follows:
December 31, 2018
Securities Available for Sale
Temporarily impaired debt securities:
U.S. government treasury securities
U.S. government agency securities
State and municipal securities
Residential mortgage-backed securities
$
Total debt securities available for sale
$
Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities
Residential mortgage-backed securities
Total securities held to maturity
December 31, 2017
Securities Available for Sale
Temporarily impaired debt securities:
U.S. government treasury securities
U.S. government agency securities
State and municipal securities
Residential mortgage-backed securities
$
$
$
Total debt securities available for sale
$
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Twelve Months or More
Gross
Unrealized
Losses
Fair
Value
0 $
33,077
3,209
14,199
50,485 $
0 $
6,073,337
306,792
3,032,237
9,412,366 $
27,474 $
848,080
43,713
2,981
922,248 $
954,570
20,015,052
1,813,173
129,410
22,912,205
20,209 $
5,671
25,880 $
7,359,536 $
879,487
8,239,023 $
47,225 $
1,611
48,836 $
2,782,627
89,464
2,872,091
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Twelve Months or More
Gross
Unrealized
Losses
Fair
Value
12,213 $
34,083
16,836
0
63,132 $
967,770 $
4,988,630
975,900
0
6,932,300 $
0 $
664,216
21,618
2,844
688,678 $
0
18,347,439
877,798
188,081
19,413,318
Securities Held to Maturity
Temporarily impaired debt securities:
State and municipal securities
Residential mortgage-backed securities
Total securities held to maturity
$
$
15,954 $
132
16,086 $
5,521,443 $
146,203
5,667,646 $
32,129 $
0
32,129 $
1,281,797
0
1,281,797
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length
of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
At December 31, 2018, sixty-six debt securities had unrealized losses with aggregate depreciation of 2.35%
from the Corporation’s amortized cost basis. At December 31, 2017, forty-eight debt securities had unrealized
losses with aggregate depreciation of 2.35%. These unrealized losses relate principally to current interest rates
for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the
securities are issued by the federal government, its agencies, or other governments, whether downgrades by
bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. Management
has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for
sale. Also, no declines in debt securities are deemed to be other-than-temporary.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the Corporation’s loan portfolio at December 31, 2018 and 2017 was as follows:
Commercial, financial and agricultural loans
Real estate
Construction loans
Commercial mortgage loans
Residential loans
Agricultural loans
Consumer & other loans
Loans outstanding
Unearned interest and discount
Allowance for loan losses
Net loans
2018
2017
$ 88,403,215
$ 73,146,397
24,890,536
123,477,369
103,347,898
31,561,686
5,086,984
376,767,688
22,287,012
106,458,342
99,159,607
25,373,621
3,766,332
330,191,311
( 17,451)
( 3,428,869)
$ 373,321,368
( 17,921)
( 3,043,632)
$ 327,129,758
The Corporation’s only significant concentration of credit at December 31, 2018, occurred in real estate loans
which totaled approximately $283 million. However, this amount was not concentrated in any specific segment
within the market or geographic area.
At December 31, 2018, the lendable collateral value of the 1-4 family and multifamily mortgage loans that were
pledged to FHLB to secure outstanding advances was $61,443,772. FHLB has a blanket lien on the 1-4 family
and multifamily portfolios, which totaled $120,023,526.
Appraisal Policy
When a loan is first identified as a problem loan, the appraisal is reviewed to determine if the appraised value is
still appropriate for the collateral. For the duration that a loan is considered a problem loan, the appraised value
of the collateral is monitored on a quarterly basis. If significant changes occur in market conditions or in the
condition of the collateral, a new appraisal will be obtained.
Nonaccrual Policy
The Corporation does not accrue interest on any loan (1) that is maintained on a cash basis due to the
deteriorated financial condition of the borrower, (2) for which payment in full of principal or interest is not
expected, or (3) upon which principal or interest has been past due for ninety days or more unless the loan is
well secured and in the process of collection.
A loan subsequently placed on nonaccrual status may be returned to accrual status if (1) all past due interest and
principal is paid with expectations of any remaining contractual principal and interest being repaid or (2) the
loan becomes well secured and in the process of collection.
Loans placed on nonaccrual status amounted to $1,204,861 and $1,674,656 at December 31, 2018 and 2017,
respectively. There were no past due loans over 90 days and still accruing at December 31, 2018 or 2017. The
accrual of interest is discontinued when the loan is placed on nonaccrual. Interest income that would have been
recorded on these nonaccrual loans in accordance with their original terms totaled $64,015 and $41,496 as of
December 31, 2018 and 2017, respectively.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The following tables present an age analysis of past due loans and nonaccrual loans segregated by class of loans.
Age Analysis of Past Due Loans
As of December 31, 2018
30-89 Days
Past Due
Greater
than 90
Days
Total Past
Due Loans
Nonaccrual
Loans
Current Loans Total Loans
$ 247,397 $ 0
$ 247,397
$ 36,157 $ 88,119,661
$ 88,403,215
0
0
1,560,913
321,319
36,654
0
0
0
0
0
$ 2,166,283 $ 0
0
0
1,560,913
321,319
36,654
24,890,536
123,477,369
103,347,898
31,561,686
5,086,984
$ 2,166,283 $ 1,204,861 $ 373,396,544 $ 376,767,688
24,890,536
122,454,819
101,640,831
31,240,367
5,050,330
0
1,022,550
146,154
0
0
Age Analysis of Past Due Loans
As of December 31, 2017
30-89 Days
Past Due
Greater
than 90
Days
Total Past
Due Loans
Nonaccrual
Loans
Current Loans Total Loans
$ 364,527
$ 0
$ 364,527 $ 394,455 $ 72,387,415
$ 73,146,397
198,861
645,214
2,023,517
0
30,033
$3,262,152
0
0
0
0
0
$ 0
198,861
645,214
2,023,517
0
30,033
$3,262,152
0
22,088,151
757,085 105,056,043
96,617,789
518,301
25,373,621
0
3,731,484
4,815
$1,674,656 $325,254,503
22,287,012
106,458,342
99,159,607
25,373,621
3,766,332
$330,191,311
Commercial, financial and
agricultural loans
Real estate:
Construction loans
Commercial mortgage loans
Residential loans
Agricultural loans
Consumer & other loans
Total loans
Commercial, financial and
agricultural loans
Real estate:
Construction loans
Commercial mortgage loans
Residential loans
Agricultural loans
Consumer & other loans
Total loans
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Corporation
will be unable to collect the scheduled payments of principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future cash flows discounted at the
loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
At December 31, 2018 and 2017, impaired loans amounted to $4,356,381 and $4,895,730, respectively. A
reserve amount of $518,230 and $331,779, respectively, was recorded in the allowance for loan losses for these
impaired loans as of December 31, 2018 and 2017.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The following tables present impaired loans, segregated by class of loans as of December 31, 2018 and 2017:
Unpaid
Principal
Balance
Recorded Investment
With
Allowance
With No
Allowance
Total
Related
Allowance
Year-to-date
Average
Recorded
Investment
Interest
Income
Received
During
Impairment
$ 184,899
$ 87,525 $ 568,816 $ 656,341 $ 276,392
$ 370,038
$ 52,411
December 31, 2018
Commercial, financial and
agricultural loans
Real estate:
281,434
Construction loans
402,234
1,277,611
Commercial mortgage loans 1,787,305
1,027,647
1,801,002
Residential loans
12,526
Agricultural loans
12,526
0
Consumer & other loans
0
$4,187,966 $2,686,743
Total loans
0
281,434
0
51,854
1,611,503
333,892
188,368
1,780,090
752,443
0
12,526
0
14,487
1,616
14,487
$1,669,638 $4,356,381 $518,230
281,434
1,544,299
1,594,390
12,526
14,487
$3,817,174
25,364
45,403
127,806
5,530
820
$257,334
Unpaid
Principal
Balance
Recorded Investment
With
Allowance
With No
Allowance
Total
Related
Allowance
Year-to-date
Average
Recorded
Investment
Interest
Income
Received
During
Impairment
$ 459,003 $ 208,032 $ 250,971 $ 459,003 $ 44,468
$ 169,930
$ 10,920
December 31, 2017
Commercial, financial and
agricultural loans
Real estate:
428,799
Construction loans
549,599
1,107,654
Commercial mortgage loans 1,615,811
316,230
2,476,728
Residential loans
142,966
142,966
Agricultural loans
21,815
Consumer & other loans
846
$5,265,922 $2,204,527
Total loans
0
428,799
0
57,403
1,447,094
339,440
224,916
2,396,053
2,079,823
0
142,966
0
20,969
4,992
21,815
$2,691,203 $4,895,730 $331,779
162,698
1,071,663
2,233,562
142,966
9,003
$ 3,789,822
24,487
54,582
108,472
8,198
521
$207,180
For the period ending December 31, 2016, the average recorded investment for impaired loans was $8,325,530
and the interest income received during impairment was $192,071.
At December 31, 2018 and 2017, included in impaired loans were $7,458 and $4,243, respectively, of troubled
debt restructurings.
Troubled Debt Restructurings
Loans are considered to have been modified in a troubled debt restructuring, or TDR, when due to a borrower’s
financial difficulty the Corporation makes certain concessions to the borrower that it would not otherwise
consider for new debt with similar risk characteristics. Modifications may include interest rate reductions,
principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid
foreclosure or repossession of the collateral. Each potential loan modification is reviewed individually and the
terms of the loan are modified to meet the borrower’s specific circumstances at a point in time. Not all loan
modifications are TDRs. However, performance prior to the modification, or significant events that coincide
with the modification, are included in assessing whether the borrower can meet the new terms and may result in
the loan being returned to accrual status at the time of loan modification or after a shorter performance period.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Loan modifications are reviewed and recommended by the Corporation’s senior credit officer, who determines
whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are
evaluated in determining whether the loan is classified as a TDR include:
•
Interest rate reductions – Occur when the stated interest rate is reduced to a nonmarket rate or a rate
the borrower would not be able to obtain elsewhere under similar circumstances.
• Amortization or maturity date changes – Result when the amortization period of the loan is
extended beyond what is considered a normal amortization period for loans of similar type with
similar collateral.
• Principal reductions – Arise when the Corporation charges off a portion of the principal that is not
fully collateralized and collectability is uncertain; however, this portion of principal may be
recovered in the future under certain circumstances.
The following tables present the amount of troubled debt restructuring by loan class, classified separately as
accrual and nonaccrual at December 31, 2018 and 2017, as well as those currently paying under restructured
terms and those that have defaulted under restructured terms as of December 31, 2018 and 2017. Loans
modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 or more days
past due.
December 31, 2018
Under restructured terms
Accruing
Non-
accruing
Commercial, financial, and
agricultural loans
Real estate:
Construction loans
Commercial mortgage loans
Residential loans
Agricultural loans
Consumer & other loans
$
5,570
$
0
0
1,888
0
0
Total TDR’s
$
7,458
$
0
0
0
0
0
0
0
#
Current
1
$
5,570
0
0
1
0
0
2 $
0
0
1,888
0
0
7,458
#
0
0
0
0
0
0
0
$
$
Default
0
0
0
0
0
0
0
Accruing
Non-
accruing
Commercial, financial, and
agricultural loans
Real estate:
Construction loans
Commercial mortgage loans
Residential loans
Agricultural loans
Consumer & other loans
$
0
$
0
0
3,397
0
846
Total TDR’s
$
4,243
$
0
0
0
0
0
0
0
69
December 31, 2017
Under restructured terms
#
Current
0
$
0
0
0
1
0
1
2 $
0
0
3,397
0
846
4,243
#
0
0
0
0
0
0
0
$
$
Default
0
0
0
0
0
0
0
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The following table presents the amount of troubled debt restructurings by types of concessions made, classified
separately as accrual and nonaccrual at December 31, 2018 and 2017.
Type of concession:
Payment modification
Rate reduction
Rate reduction, payment modification
Forbearance of interest
Total
December 31, 2018
December 31, 2017
Accruing
#
Balance
Nonaccruing
Balance
#
Accruing
Nonaccruing
#
Balance
#
Balance
0 $
0
1
1
2 $
0
0
1,888
5,570
7,458
0 $
0
0
0
0 $
0
0
0
0
0
0 $
0
2
0
2 $
0
0
4,243
0
4,243
0 $
0
0
0
0 $
0
0
0
0
0
As of December 31, 2018 and 2017, the Corporation had a balance of $7,458 and $4,243, respectively, in
troubled debt restructurings. The Corporation had no charge-offs on such loans as of December 31, 2018, and
no charge-offs as of December 31, 2017. The Corporation’s balance in the allowance for loan losses allocated
to such troubled debt restructurings was $0 at both December 31, 2018 and 2017. The Corporation had no
unfunded commitment to lend to a customer that has a troubled debt restructured loan as of December 31, 2018.
Credit Risk Monitoring and Loan Grading
The Corporation employs several means to monitor the risk in the loan portfolio including volume and severity
of loan delinquencies, nonaccrual loans, internal grading of loans, historical loss experience and economic
conditions.
Loans are subject to an internal risk-grading system which indicates the risk and acceptability of that loan. The
loan grades used by the Corporation are for internal risk identification purposes and do not directly correlate to
regulatory classification categories or any financial reporting definitions.
The general characteristics of the risk grades are as follows:
Grade 1 – Exceptional – Loans graded 1 are characterized as having a very high credit quality, exhibit minimum
risk to the Corporation and have low administrative cost. These loans are usually secured by highly liquid and
marketable collateral and a strong primary and secondary source of repayment is available.
Grade 2 – Above Average – Loans graded 2 are basically sound credits secured by sound assets and/or backed
by the financial strength of borrowers of integrity with a history of satisfactory payments of credit obligations.
Grade 3 – Acceptable – Loans graded 3 are secured by sound assets of sufficient value and/or supported by the
sufficient financial strength of the borrower. The borrower will have experience in their business area or
employed a reasonable amount of time at their current employment. The borrower will have a sound primary
source of repayment, and preferably a secondary source, which will allow repayment in a prompt and reasonable
period of time.
Grade 4 – Fair – Loans graded 4 are those which exhibit some weakness or downward trend in financial
condition and although the repayment history is satisfactory, it requires supervision by bank personnel. The
borrower may have little experience in their business area or employed only a short amount of time at their
current employment. The loan may be secured by good collateral; however, it may require close supervision as
to value and/or quality and may not have sufficient liquidation value to completely cover the loan.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Grade 5a – Watch – Loans graded 5a contain a discernible weakness; however, the weakness is not sufficiently
pronounced so as to cause concern for the possible loss of interest or principal. Loans in this category may
exhibit outward signs of stress, such as slowness in financial disclosures or recent payments. However, such
signs are not of long duration or of sufficient severity that default appears imminent. Loans in this category are
not so deficient as to cause alarm, but do require close monitoring for further deterioration and possible
downgrade.
Grade 5b – Other Assets Especially Mentioned (OAEM) – Loans graded 5b may otherwise be classified more
severely except that the loan is well secured by properly margined collateral, it is generally performing in
accordance with the original contract or modification thereof and such performance has seasoned for a period of
90 days, or the ultimate collection of all principal and interest is reasonably expected. Loans in this grade are
unsupported by sufficient evidence of the borrower’s sound net worth or repayment capacity or may be subject
to third party action that would cause concern for future prompt repayment.
Grade 6 – Substandard – Loans graded 6 contain clearly pronounced credit weaknesses that are below
acceptable credit standards for the Corporation. Such weaknesses may be due to either collateral deficiencies or
inherent financial weakness of the borrower, but in either case represents less than acceptable credit risk. Loans
in this grade are unsupported by sufficient evidence of the borrower’s sound net worth, repayment capacity or
acceptable collateral.
Grade 7 – Doubtful – Loans graded 7 have such pronounced credit weaknesses that the Corporation is clearly
exposed to a significant degree of potential loss of principal or interest. Theses loan generally have a defined
weakness which jeopardizes the ultimate repayment of the debt.
Grade 8 – Loss – Loans graded 8 are of such deteriorated credit quality that repayment of principal and interest
can no longer be considered. These loans are of such little value that their continuance as an active bank asset is
not warranted. As of December 31, 2018, all Grade 8 loans have been charged-off.
The following tables present internal loan grading by class of loans at December 31, 2018 and 2017:
December 31, 2018
Rating:
Grade 1- Exceptional
Grade 2- Above Avg.
Grade 3- Acceptable
Grade 4- Fair
Grade 5a- Watch
Grade 5b- OAEM
Grade 6- Substandard
Grade 7- Doubtful
Total loans
Commercial,
Financial,
and
Agricultural
$ 1,237,602
0
23,821,846
58,753,931
473,616
3,079,098
787,309
249,813
$88,403,215
Construction
Real Estate
Commercial
Real Estate
Residential
Real Estate
Agricultural
Real Estate
Consumer
and Other
Total
$ 22,905
$ 0 $ 0
0
0
0
25,839,646
30,398,565
1,860,003
73,114,310
88,122,957
22,749,099
722,441
2,411,710
0
1,299,587
446,841
0
2,349,009
2,097,296
281,434
0
0
0
$24,890,536 $123,477,369 $103,347,898
$ 0 $ 210,045 $ 1,470,552
43,711
43,711
99,934,655
1,151,239
261,095,735
3,657,108
3,613,973
6,206
4,827,694
2,168
5,531,555
16,507
0
249,813
$5,086,984 $376,767,688
0
16,863,356
14,698,330
0
0
0
0
$31,561,686
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
December 31, 2017
Rating:
Grade 1- Exceptional
Grade 2- Above Avg.
Grade 3- Acceptable
Grade 4- Fair
Grade 5a- Watch
Grade 5b- OAEM
Grade 6- Substandard
Grade 7- Doubtful
Total loans
Commercial,
Financial,
and
Agricultural
$ 1,371,135
0
27,024,359
42,821,117
120,626
557,070
945,238
306,852
$73,146,397
Construction
Real Estate
Commercial
Real Estate
Residential
Real Estate
Agricultural
Real Estate
Consumer
and Other
Total
$ 0 $ 0
0
0
2,085,620
30,090,030
19,772,593
70,518,545
0
1,027,581
0
3,073,051
428,799
1,749,135
0
0
$22,287,012 $106,458,342
$ 23,919
0
26,304,640
68,103,351
757,628
1,226,841
2,743,228
0
$99,159,607
$ 0 $ 325,236 $ 1,720,290
51,421
51,421
866,455
97,442,348
2,494,509
217,491,441
7,572
1,952,751
1,357
5,197,060
19,782
6,029,148
306,852
0
$3,766,332 $330,191,311
0
11,071,244
13,781,326
39,344
338,741
142,966
0
$25,373,621
Allowance for Loan Losses Methodology
The allowance for loan losses (ALL) is determined by a calculation based on segmenting the loans into the
following categories: (1) impaired loans and nonaccrual loans, (2) loans with a credit risk rating of 5b, 6, 7 or 8,
(3) other outstanding loans, and (4) other commitments to lend. In addition, unallocated general reserves are
estimated based on migration and economic analysis of the loan portfolio.
The ALL is calculated by the addition of the estimated loss derived from each of the above categories. The
impaired loans and nonaccrual loans are analyzed on an individual basis to determine if the future collateral
value is sufficient to support the outstanding debt of the loan. If an estimated loss is calculated, it is included in
the estimated ALL until it is charged to the loan loss reserve. The calculation for loan risk graded 5b, 6, 7 or 8,
other outstanding loans and other commitments to lend is based on assigning an estimated loss factor based on a
twelve quarter rolling historical weighted average net loss rate. The estimated requirement for unallocated
general reserves from migration and economic analysis is determined by considering (1) trends in asset quality,
(2) level and trends in charge-off experience, (3) macroeconomic trends and conditions, (4) microeconomic
trends and conditions and (5) risk profile of lending activities. Within each of these categories, a risk factor
percentage from a rating of excessive, high, moderate or low will be determined by management and applied to
the loan portfolio. By adding the estimated value from the migration and economic analysis to the estimated
reserve from the loan portfolio, a total estimated loss reserves is obtained. This amount is then compared to the
actual amount in the loan loss reserve. The calculation of ALL is performed on a monthly basis and is presented
to the Loan Committee and the Board of Directors.
Changes in the allowance for loan losses are as follows:
Balance, January 1
Provision charged to operations
Loans charged off
Recoveries
2018
2017
2016
$ 3,043,632
829,500
( 606,345)
162,082
$ 3,124,611
300,000
( 447,747)
66,768
$ 3,032,242
160,000
( 116,006)
48,375
Balance, December 31
$ 3,428,869
$ 3,043,632
$ 3,124,611
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The following tables detail activity in the ALL by class of loans for the years ended December 31, 2018 and
2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to
absorb losses in other categories.
December 31, 2018
Allowance for loan
losses:
Beginning balance,
December 31, 2017
Charge-offs
Recoveries
Net charge-offs
Provisions charged to
operations
Balance at end of
period, December 31,
2018
Ending balance -
Individually evaluated
for impairment
Collectively evaluated
for impairment
Balance at end of
period
Loans :
Ending balance -
Individually evaluated
for impairment
Collectively evaluated
for impairment
Balance at end of
period
Commercial,
Financial,
and
Agricultural
Construction
Real Estate
Commercial
Real Estate
Residential
Real Estate
Agricultural
Real Estate
Consumer
and Other
Total
$ 324,260
$ 1,043,083
$ 1,056,595
$ 416,474
$ 11,560
$ 191,660
$ 3,043,632
548,460
12,025
536,435
783
0
783
43,349
590
42,759
6,909
0
6,909
0
147,252
(147,252)
6,844
2,215
4,629
606,345
162,082
444,263
614,426
727
196,466
49,306
(49,934)
18,509
829,500
$ 402,251
$ 1,043,027
$ 1,210,302
$ 458,871
$ 108,878
$ 205,540
$ 3,428,869
$ 276,392
$ 0
$ 51,854
$ 188,368
$ 0
$ 1,616
$ 518,230
125,859
1,043,027
1,158,448
270,503
108,878
203,924
2,910,639
$ 402,251
$ 1,043,027
$ 1,210,302
$ 458,871
$ 108,878
$ 205,540
$ 3,428,869
$ 656,341
$ 281,434
$ 1,611,503
$ 1,929,214
$ 12,526
$ 14,487
$ 4,505,505
87,746,874
24,609,102
121,865,866
101,418,684
31,549,160
5,072,497
372,262,183
$88,403,215
$24,890,536
$123,477,369
$103,347,898
$31,561,686
$5,086,984
$376,767,688
At December 31, 2018, of the $4,505,505 loans that were individually evaluated for impairment, only
$4,356,381 were deemed impaired.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Commercial,
Financial,
and
Agricultural
Construction
Real Estate
Commercial
Real Estate
Residential
Real Estate
Agricultural
Real Estate
Consumer
and Other
Total
$ 191,267
$ 1,043,083
$ 1,192,098
$ 420,189
$ 86,656
$ 191,318 $ 3,124,611
113,334
63,486
49,848
0
0
0
168,717
0
168,717
59,764
0
59,764
93,503
0
93,503
12,429
3,282
9,147
447,747
66,768
380,979
182,841
0
33,214
56,049
18,407
9,489
300,000
$ 324,260
$ 1,043,083
$ 1,056,595
$ 416,474
$ 11,560
$ 191,660 $ 3,043,632
$ 44,468
$ 0
$ 57,403
$ 224,916
$ 0
$ 4,992 $ 331,779
279,792
1,043,083
999,192
191,558
11,560
186,668
2,711,853
$ 324,260
$ 1,043,083
$ 1,056,595
$ 416,474
$ 11,560
$ 191,660 $ 3,043,632
$ 459,003
$ 428,799 $ 4,561,198
$ 2,448,531
$ 142,966
$ 21,815 $ 8,062,312
72,687,394
21,858,213
101,897,144
96,711,076
25,230,655
3,744,517
322,128,999
$73,146,397
$22,287,012 $106,458,342
$99,159,607
$25,373,621
$3,766,332 $330,191,311
December 31, 2017
Allowance for loan
losses:
Beginning balance,
December 31, 2016
Charge-offs
Recoveries
Net charge-offs
Provisions charged to
operations
Balance at end of
period, December 31,
2017
Ending balance -
Individually
evaluated
for impairment
Collectively
evaluated for
impairment
Balance at end of
period
Loans :
Ending balance -
Individually
evaluated
for impairment
Collectively
evaluated for
impairment
Balance at end of
period
At December 31, 2017, of the $8,062,312 loans that were individually evaluated for impairment, only
$4,895,730 were deemed impaired.
The following table is a summary of amounts included in the ALL for the impaired loans with specific reserves
and the recorded balance of the related loans.
Allowance for loss on impaired loans
Recorded balance of impaired loans
2018
$ 518,230
$ 4,356,381
Year Ended December 31,
2017
$ 331,779
$ 4,895,730
2016
$ 549,429
$ 3,560,901
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
4. PREMISES AND EQUIPMENT
The amounts reported as bank premises and equipment at December 31, 2018 and 2017, are as follows:
Land
Buildings
Furniture and equipment
Construction in process
Less accumulated depreciation
Total
2018
2017
15,411,518
10,767,592
4,892
30,026,148
(15,452,174)
$ 3,842,146 $ 3,846,146
12,821,154
9,442,378
1,074,744
27,184,422
(14,934,904)
$ 14,573,974 $ 12,249,518
Depreciation of premises and equipment was $1,036,986, $881,000, and $923,578 in 2018, 2017, and 2016,
respectively. The Corporation depreciates its long-lived assets on various methods over their estimated
productive lives, as more fully described in Note 1, Summary of Significant Accounting Policies.
5. INTANGIBLE ASSETS
The following table lists the Corporation’s account relationship intangible assets at December 31, 2018 and
2017. These assets will fully amortize in March 2019.
Amortizing intangible assets
Account relationships
2018
2017
$ 3,907
$ 19,532
Total intangible assets
$ 3,907
$ 19,532
The intangible assets’ carrying amount, accumulated amortization and amortization expense for December 31,
2018, and the succeeding fiscal year are as follows:
2018
2019
Amortizing intangible assets
Account relationships
Gross carrying amount
Accumulated amortization
Net carrying amount
$ 125,000 $ 125,000
125,000
121,093
$ 3,907 $ 0
Amortization expense
$ 15,625 $ 3,907
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
6. DEPOSITS
At December 31, 2018, the scheduled maturities of certificates of deposit are as follows:
2019
2020
2021
2022
2023 and thereafter
Total
Amount
$74,553,918
19,062,966
1,970,720
1,823,345
68,108
$97,479,057
The amount of overdraft deposits reclassified as loans were $70,003 and $63,887 for the years ended December
31, 2018 and 2017, respectively. At December 31, 2018, there were 47 certificates of deposit totaling
$16,264,681 that were at or above the FDIC insurance limit of $250,000.
7. SHORT-TERM BORROWED FUNDS
Federal funds purchased generally mature within one to four days. On December 31, 2018, the Corporation did
not have any federal funds purchased. The Corporation had approximately $120,000,000 in unused federal
funds and FHLB accommodations at December 31, 2018. The Corporation maintains a line of credit with the
Federal Reserve Bank’s Discount Window. The maximum amount that can be borrowed is dependent upon the
amount of unpledged securities held by the Corporation as the amount of borrowings must be fully secured.
Other short-term borrowed funds consist of FHLB advances of $10,457,143 with interest at 1.92% as of
December 31, 2018, and $17,971,429 with interest at 1.73% as of December 31, 2017. $4.457 million of short-
term borrowings are short-term portions of long-term principal reducing Federal Home Loan Bank advances.
Information concerning federal funds purchased and FHLB short-term advances are summarized as follows:
Average balance during the year
Average interest rate during the year
Maximum month-end balance during the year
$17,305,184
2.29%
$20,971,429
$12,238,066
1.83%
$22,114,286
2018
2017
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
8. LONG-TERM DEBT
Long-term debt at December 31, 2018 and 2017, consisted of the following:
Advance from FHLB with 1.25% fixed rate of interest with annual installment
payments maturing September 30, 2020.
Advance from FHLB with 1.94% fixed rate of interest with annual installment
payments maturing December 16, 2022.
Advance from FHLB with 1.42% fixed rate of interest with annual installment
payments maturing August 30, 2023.
Advance from FHLB with a 1.53% fixed rate of interest maturing January 10,
2019.
Advance from FHLB with a 1.60% fixed rate of interest maturing July 10, 2019.
Advance from FHLB with a 1.80% fixed rate of interest maturing July 10, 2020.
Advance from FHLB with a 1.93% fixed rate of interest with annual installment
payments maturing September 28, 2022.
2018
2017
$ 1,600,000
$ 3,200,000
2,571,429
3,428,571
0
4,285,715
0
0
2,000,000
1,500,000
1,500,000
2,000,000
6,000,000
8,000,000
Advance from FHLB with a 2.34% fixed rate of interest with annual installment
payments maturing December 5, 2024.
0
5,142,857
Advance from FHLB with a 3.018% fixed rate of interest maturing Sept. 17, 2021.
3,000,000
0
Advance from FHLB with a 3.192% fixed rate of interest maturing Sept. 20, 2023.
Advance from FHLB with a 3.400% fixed rate of interest maturing Sept. 20, 2025.
Total long-term debt
3,000,000
3,000,000
$ 21,171,429
0
0
$ 29,057,143
The advances from FHLB are collateralized by the pledging of a combination of 1-4 family residential
mortgages and multifamily loans. At December 31, 2018, 1-4 family residential mortgage loans and
multifamily loans with a lendable collateral value of $61,443,772 were pledged to secure these advances. At
December 31, 2017, 1-4 family residential mortgage loans and multifamily loans with a lendable collateral value
of $58,684,267 were pledged to secure these advances. The amount of FHLB Stock held is based on
membership and level of FHLB advances. At year end 2018 and 2017, the amount of stock held that is based on
membership was $439,600 and $403,000, respectively, and the amount of stock held that is based on the level of
FHLB advances was $1,380,700 and $2,035,200, respectively. At December 31, 2018, the Corporation had
approximately $96,800,000 of unused lines of credit with the FHLB.
The following are maturities of long-term debt for the next five years. At December 31, 2018, there was no
floating rate long-term debt.
Due in:
2019
2020
2021
2022
2023
Later years
Total long-term debt
Fixed Rate Amount
$ 0
6,457,143
5,857,143
2,857,143
3,000,000
3,000,000
$21,171,429
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
9. EMPLOYEE BENEFITS AND RETIREMENT PLANS
Pension Plan
The Corporation has a noncontributory defined benefit pension plan which covers most employees who have
attained the age of 21 years and completed one year of continuous service. The Corporation is providing for the
cost of this plan as benefits are accrued based upon actuarial determinations employing the aggregate funding
method.
The table of actuarially computed benefit obligations and net assets and the related changes of the Plan at
December 31, 2018, 2017, and 2016, is presented below.
Change in Benefit Obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Amendments
Settlement
Benefits paid
Other – net
Benefit obligation at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Funded status
Unrecognized net actuarial (gain)/loss
Unrecognized prior service cost
Pension liability included in other liabilities
2018
2017
2016
$12,745,058
0
657,845
0
(100,395)
(1,097,859)
(412,047)
$11,792,602
$10,672,811
(254,803)
460,000
(1,198,254)
$ 9,679,754
2018
$(2,112,848)
0
0
$(2,112,848)
$13,149,559
0
712,228
0
(129,172)
(1,116,643)
129,086
$12,745,058
$10,574,145
864,481
480,000
(1,245,815)
$10,672,811
2017
$(2,072,247)
0
0
$(2,072,247)
$13,885,378
0
764,323
0
(841,941)
(1,131,148)
472,947
$13,149,559
$11,420,270
576,964
550,000
(1,973,089)
$10,574,145
2016
$(2,575,414)
0
0
$(2,575,414)
Accumulated benefit obligation
$11,792,602
$12,745,058
$13,149,559
Amount recognized in consolidated
balance sheet consist of the following:
Accrued Pension
Deferred tax assets
Accumulated other comprehensive income
Total
Components of Pension Cost
Service cost
Interest cost on benefit obligation
Expected return on plan assets
Other - net
Net periodic pension cost
Partial recognition of loss due to settlement
Total
2018
$2,112,848
$ 443,698
1,669,150
$2,112,848
2018
$ 0
657,845
(721,735)
482,679
418,789
0
$ 418,789
78
2017
$2,072,247
$ 435,172
1,637,075
$2,072,247
2017
$ 0
712,228
(716,622)
587,821
583,427
0
$ 583,427
2016
$2,575,414
$ 875,641
1,699,773
$2,575,414
2016
$ 0
764,323
(775,423)
657,260
646,160
426,599
$ 1,072,759
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Other changes in plan assets and benefit obligations recognized in comprehensive income:
Net loss (gain)
Prior service costs
Total recognized in other comprehensive income (loss)
Net periodic pension cost
Partial recognition of loss due to settlement
Total recognized in net periodic pension cost and other
2018
$ 40,601
0
40,601
418,789
0
2017
$ (503,167)
0
(503,167)
583,427
0
2016
$ 110,306
0
110,306
646,160
426,599
comprehensive income
$ 459,390
$ (80,260)
$ 1,183,065
After adopting ASC Topic 960, Employer’s Accounting for Defined Benefit Pension Plan and Other
Postretirement Plans, and freezing its pension retirement plan, the Corporation increased the accrued liability by
$40,601 in 2018 and decreased $503,167 in 2017. Also, changes were made to other comprehensive income
(loss) of ($32,075) for 2018 and $62,698 for 2017 on a pre-tax basis. During 2018, the fair value of the plan
assets decreased $993,057.
At December 31, 2018, the plan assets included cash and cash equivalents, certificates of deposits with banks,
U.S. government agency securities, corporate notes, and equity securities.
Assumptions used to determine the benefit obligation as of December 31, 2018 and 2017 respectively were:
Weighted-Average Assumptions as of December 31
Discount rate
Rate of compensation increase
2018
2017
5.70%
5.70%
N/A
N/A
For the years ended December 31, 2018, 2017, and 2016, the assumptions used to determine net periodic
pension costs are as follows:
Discount rate
Expected return on plan assets
Rate of compensation increase
2018
2017
2016
5.70%
7.00%
N/A
5.70%
7.00%
N/A
5.75%
7.00%
N/A
The expected rate of return represents the average rate of return to be earned on plan assets over the period the
benefits included in the benefit obligation are to be paid. In determining the expected rate of return, the
Corporation considers long-term compound annualized returns of historical market data as well as actual returns
on the Corporation’s plan assets, and applies adjustments that reflect more recent capital market experience.
The Corporation’s pension plan investment objective is both security and long-term stability, with moderate
growth. The investment strategies and policies employed provide for investments, other than “fixed-dollar”
investments, to prevent erosion by inflation. Sufficient funds are held in a liquid nature (money market, short-
term securities) to allow for the payment of plan benefits and expenses, without subjecting the funds to loss
upon liquidation. In an effort to provide a higher return with lower risk, the fund assets are allocated between
stocks, fixed income securities, and cash equivalents. All plan investments and transactions are in compliance
with ERISA and any other law applicable to employee benefit plans. The targeted investment portfolio is
allocated up to 45% in equities, 50% to 90% in fixed-income investments, and up to 20% in cash equivalent
investments.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
All the Corporation’s equity investments are in mutual funds with a Morningstar rating of 3 or higher, have at
least $300 million in investments, and have been in existence 5 years or more. Fixed income securities include
issues of the U.S. government and its agencies and corporate notes. Any corporate note purchased has a rating
(by Standard & Poor’s or Moody’s) of “A” or better. The average maturity of the fixed income portion of the
portfolio does not exceed 10 years.
Pension Asset Allocation and Fair Value Measurement as of December 31
2018
2017
Fair Value
Level 1
%
Fair Value
Level 1
%
Investment at fair value as determined by
quoted market price:
Equity
Fixed income
Total
$ 3,482,765 $ 3,482,765
1,096,033
1,096,033
$ 4,578,798 $ 4,578,798
36%
11%
47%
$ 4,302,437 $ 4,302,437
1,351,048
1,351,048
$ 5,653,485 $ 5,653,485
40%
13%
53%
Investment at estimated fair value:
Certificates of deposit
Cash and cash equivalent
Total
Total
$ 4,521,110 $ 4,521,110
579,846
$ 5,100,956 $ 5,100,956
579,846
47%
6%
53%
$ 4,283,144 $ 4,283,144
736,182
$ 5,019,326 $ 5,019,326
736,182
40%
7%
47%
$ 9,679,754 $ 9,679,754 100%
$10,672,811 $10,672,811 100%
All of the pension plan’s investments were reported as Level 1 assets and received Level 1 fair value
measurement.
ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels: Level 1
inputs consist of unadjusted quoted prices in active markets for identical assets and have the highest priority, and
Level 3 inputs have the lowest priority. These levels are:
Level 1 - The fair values of mutual funds, preferred stock, corporate notes, and U.S. government agency
securities were based on quoted market prices. Money market funds and certificates of deposit were
reported at fair value.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that were not active, and model-based valuation techniques
for which all significant assumptions were observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption
not observable in the market. These unobservable assumptions reflect estimates of assumptions that
market participants would use in pricing the asset or liability. Valuation techniques include use of option
pricing models, discounted cash flow models and similar techniques.
Estimated Contributions
The Corporation expects to contribute $400,000 to its pension plan in 2019.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service and decrements as appropriate, are
expected to be paid for fiscal years beginning:
2019
2020
2021
2022
2023
Years 2024 – 2028
1,159,000
1,127,000
1,097,000
1,113,000
1,075,000
4,744,000
The estimated amortization amount for 2019 is a net loss of $580,843, no prior service cost or credit, and no net
transition asset or obligation.
Southwest Georgia Bank 401(K) Plan
In place of the Corporation’s frozen defined benefit pension retirement plan, the Corporation offers its
employees a 401(K) Plan. This 401(K) plan is a qualified defined contribution plan as provided for under
Section 401(K) of the Internal Revenue Code. This plan is a “safe–harbor” plan meaning that the Corporation
will match contributions dollar for dollar for the first four percent of salary participants defer into the plan. The
plan does allow for discretionary match in excess of the four percent and that the participants are allowed to
defer the maximum amount of salary. The Corporation matched the employee participants for the first four
percent of salary contributing to the plan $219,006, $204,565, and $186,253 for the years ended December 31,
2018, 2017, and 2016, respectively.
Employee Stock Ownership Plan
The Corporation has a nondiscriminatory Employee Stock Ownership Plan and Trust (the “ESOP”)
administered by a trustee. The plan was established to purchase and hold Southwest Georgia Financial
Corporation stock for all eligible employees. Contributions to the plan are made solely by the Corporation and
are at the discretion of the Board of Directors. The annual amount of the contribution is determined by taking
into consideration the financial conditions, profitability, and fiscal requirements of the Corporation. There were
contributions of $475,000, $425,000, and $400,000 for the years ended December 31, 2018, 2017, and 2016,
respectively. Contributions to eligible participants are based on percentage of annual compensation. As of
December 31, 2018, the ESOP holds 252,248 shares of the Corporation’s outstanding common stock. There
were 223,203 released shares allocated to the participants. The 29,045 unreleased shares are pledged as
collateral for a $640,000 debt incurred from repurchasing participants’ shares. Dividends paid by the
Corporation on ESOP shares are allocated to the participants based on shares held. ESOP shares are included in
the Corporation’s outstanding shares and earnings per share computation.
Directors Deferred Compensation Plan
The Corporation has a voluntary deferred compensation plan for the Board of Directors administered by an
insurance company (the “Directors’ Deferred Compensation Plan”). The plan stipulates that if a director
participates in the Plan for four years, the Corporation will pay the director future monthly income for ten years
beginning at normal retirement age, and the Corporation will make specified monthly payments to the director’s
beneficiaries in the event of his or her death prior to the completion of such payments. The plan is funded by
life insurance policies with the Corporation as the named beneficiary. This plan is closed to new director
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
enrollment and participation.
Directors and Executive Officers Stock Purchase Plan
The Corporation has adopted a stock purchase plan for the executive officers and directors of Southwest Georgia
Financial Corporation. Under the plan, participants may elect to contribute up to $900 monthly of salary or
directors’ fees and receive corporate common stock with an aggregate value of two times their contribution.
The expense incurred during 2018, 2017, and 2016 on the part of the Corporation totaled $248,800, $265,900,
and $290,573, respectively.
Dividend Reinvestment and Share Purchase Plan
The Corporation maintains a dividend reinvestment and share purchase plan. The purpose of the plan is to
provide shareholders of record of the Corporation’s common stock, who elect to participate in the plan, with a
simple and convenient method of investing cash dividends and voluntary cash contributions in shares of the
common stock without payment of any brokerage commissions or other charges. Eligible participants may
purchase common stock through automatic reinvestment of common stock dividends on all or partial shares and
make additional voluntary cash payments of not less than $5 nor more than $5,000 per month.
The participant’s price of common stock purchased with dividends or voluntary cash payments will be the
average price of all shares purchased in the open market, or if issued from unissued shares or treasury stock the
price will be the average of the high and low sales prices of the stock on the NYSE American LLC on the
dividend payable date or other purchase date. During the years ended December 31, 2018, 2017, and 2016,
shares issued through the plan were 5,726, 5,286, and 6,955, respectively, at an average price of $22.63, $21.18,
and $15.92, per share, respectively. These numbers of shares and average price per share are not adjusted by
stock dividends.
Equity Incentive Award
The Corporation has a 2013 Omnibus Incentive Plan (the “Incentive Plan”) that was approved by our
shareholders at the Corporation’s 2014 Annual Meeting. The Incentive Plan was established to attract, retain
and motivate the Corporation’s employees, consultants, advisors and directors, to promote the success of our
business by linking their personal interests to those of our shareholders and to encourage stock ownership on the
part of management. Under the Incentive Plan, the Corporation may issue a maximum aggregate amount of
125,000 shares of common stock pursuant to (i) stock options, which includes incentive stock options and non-
qualified stock options, (ii) stock appreciation rights, (iii) restricted stock awards, (iv) restricted stock units, (v)
incentive awards, (vi) other stock-based awards and (vii) dividend equivalents. The Corporation may also grant
cash-based awards under the Incentive Plan. During 2018, the Corporation granted 13,316 shares of restricted
stock awards of which none are vested. The Corporation granted 4,271 shares of restricted stock awards during
2017 of which 854 are vested.
The following table summarizes the movements in the Corporation’s outstanding restricted stock awards:
Non-vested balance, December 31, 2016
Granted
Vested
Non-vested balance, December 31, 2017
Number
of Shares
0
4,271
0
4,271
Amount
$ 0
88,153
0
$ 88,153
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Granted
Vested
Non-vested balance, December 31, 2018
13,316
(854)
16,733
306,032
(17,627)
$ 376,558
Awards are being amortized to expense over the five-year vesting period.
10. INCOME TAXES
Components of income tax expense for 2018, 2017, and 2016 are as follows:
Current expense
Deferred taxes (benefit)
Total income taxes
2018
$ 28,779
639,637
$ 668,416
2017
$ 1,101,902
517,998
$ 1,619,900
2016
$ 1,163,230
(10,754)
$ 1,152,476
The reasons for the difference between the federal income taxes in the consolidated statements of income and
the amount and percentage computed by the applying the combine statutory federal and state income tax rate to
income taxes are as follows:
Taxes at statutory income tax rate
Reductions in taxes resulting
from exempt income
Other timing differences
Total income taxes
2018
2017
2016
Amount
$ 1,116,262
%
21.0
Amount
$ 1,845,313
%
34.0
Amount
$ 1,763,394
(272,486)
(175,360)
$ 668,416
(5.1)
(3.3)
12.6
(524,347)
298,934
$ 1,619,900
(9.7)
5.5
29.8
(547,556)
(63,362)
$ 1,152,476
%
34.0
(10.6)
(1.2)
22.2
The sources of timing differences for tax reporting purposes and the related deferred taxes recognized in 2018,
2017, and 2016 are summarized as follows:
Nonqualified retirement plan
Intangible asset amortization
Deferred gain on covered transaction
Nonaccrual loan interest
Recognition of AMT tax credit carryforward
Foreclosed assets expenses
Bad debt expense in excess of tax
Realized impairment gain on equity securities
Accretion of discounted bonds
Gain on disposition of discounted bonds
Book and tax depreciation difference
Other timing differences
Total deferred taxes
2018
$ 0
0
5,004
8,369
332,776
41,530
(80,902)
0
16,805
(4,188)
357,266
(37,023)
$ 639,637
2017
$ 0
172,816
9,352
(6,896)
0
(42,075)
423,203
0
14,772
(28,215)
(24,959)
0
$ 517,998
2016
$ 0
0
498
32,157
0
(3,413)
(31,405)
0
33,187
(23,059)
(18,719)
0
$ (10,754)
ASC 740, Income Taxes, requires organizations to recognize the effect of a change in tax rates at the date of
enactment by adjusting its deferred tax liabilities and assets to the new tax rate. With the Jobs and Tax Cut Act
of 2017 being signed into law in December 2017, our deferred taxes were revalued resulting in additional
income tax expense of $419,359 at December 31, 2017, leaving $98,639 as the actual current period timing
difference.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Deferred tax assets:
Nonaccrual loan interest
Deferred gain on covered transaction
Alternative minimum tax
Foreclosed assets expenses
Intangible asset amortization
Bad debt expense in excess of tax
Realized loss on other-than-temporarily impaired equity securities
Deferred directors compensation
Capital loss carryforward
Pension plan
Unrealized losses on securities available for sale
Total deferred tax assets
Deferred tax liabilities:
Accretion on bonds and gain on discounted bonds
Book and tax depreciation difference
Unrealized gains on securities available for sale
Total deferred tax liabilities
December 31
2018
2017
$ 474
9,300
0
10,163
125,883
720,063
214,353
133,057
32,878
443,698
137,761
1,827,630
68,307
575,899
0
644,206
$ 8,843
14,304
332,776
51,693
125,883
639,161
214,353
104,561
32,878
435,172
0
1,959,624
55,690
218,634
1,982
276,306
Net deferred tax assets
$ 1,183,424
$ 1,683,318
11. RELATED PARTY TRANSACTIONS
The ESOP held 252,248 shares of the Corporation’s stock as of December 31, 2018, of which 29,045 shares
have been pledged to secure the ESOP’s debt to the Corporation. In the normal course of business, the Bank has
made loans at prevailing interest rates and terms to directors and executive officers of the Corporation and its
subsidiaries, and to their affiliates. The aggregate indebtedness to the Bank of these related parties
approximated $1,567,000 and $1,079,000 at December 31, 2018 and 2017, respectively. During 2018,
approximately $811,000 of such loans were made, and repayments totaled approximately $323,000. None of
these above mentioned loans were restructured, nor were any related party loans charged off during 2018 or
2017. Also, during 2018 and 2017, directors and executive officers had approximately $2,015,000 and
$2,072,000, respectively, in deposits with the Bank.
12. COMMITMENTS, CONTINGENT LIABILITIES, AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
In the normal course of business, various claims and lawsuits may arise against the Corporation. Management,
after reviewing with counsel all actions and proceedings, considers that the aggregate liability or loss, if any,
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.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Commitments to extend credit are contractual obligations to lend to a customer as long as all established
contractual conditions are satisfied. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee by a customer.
Standby letters of credit and financial guarantees are conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party. Standby letters of credit and financial guarantees are
generally terminated through the performance of a specified condition or through the lapse of time.
The Corporation’s exposure to credit loss in the event of nonperformance by the other party to commitments to
extend credit and standby letters of credit is represented by the contractual or notional amounts of these
instruments. As these off-balance sheet financial instruments have essentially the same credit risk involved in
extending loans, the Corporation generally uses the same credit and collateral policies in making these
commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the
commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, the
contractual or notional amounts do not represent future cash requirements.
The contractual or notional amounts of financial instruments having credit risk in excess of that reported in the
Consolidated Balance Sheets are as follows:
Dec. 31, 2018
Dec. 31, 2017
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit
Standby letters of credit and financial guarantees
$ 39,418,110
$ 4,342,849
$ 24,706,357
$ 3,134,849
The Corporation has no lease obligations that require capitalization. The rental agreement for the loan production
office in Tifton, Georgia ended July 31, 2018. The Corporation’s remaining lease is an operating lease for postage
services, which expires December 2020.
The following table shows scheduled future cash payments under this obligation as of December 31, 2018.
Total
Less
than 1
Year
Operating leases
$10,296
$5,148
1-3
Years
$5,148
4-5
Years
$ 0
After 5
Years
$ 0
Payments Due by Period
Rental expenses were $9,100, $15,600, and $15,600 for the years ended December 31, 2018, 2017, and 2016,
respectively.
13. FAIR VALUE MEASUREMENTS AND DISCLOSURES
The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities
and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring
basis. From time to time, the Corporation may be required to record at fair value other assets on a nonrecurring
basis, such as impaired loans and foreclosed real estate. Additionally, the Corporation is required to disclose,
but not record, the fair value of other financial instruments.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Fair Value Hierarchy:
Under ASC Topic 820, the Corporation groups assets and liabilities at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair
value. These levels are:
Level 1
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2
Level 3
Valuation is based upon quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and model-
based valuation techniques for which all significant assumptions are observable in the
market.
Valuation is generated from model-based techniques that use at least one significant
assumption not observable in the market. These unobservable assumptions reflect
estimates of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing models, discounted cash
flow models and similar techniques.
Following is a description of valuation methodologies used for assets and liabilities which are either recorded or
disclosed at fair value.
Cash and Cash Equivalents:
For disclosure purposes for cash and due from banks, interest bearing deposits in other banks and federal
funds sold, the carrying amount is a reasonable estimate of fair value.
Certificates of Deposit in Other Banks:
For disclosure purposes for certificates of deposit in other banks, the carrying amount is a reasonable estimate of
fair value.
Investment Securities Available for Sale:
Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement
is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the present value of future cash
flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss
assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock
Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market
funds. Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and
state, county and municipal bonds. Other securities classified as available for sale are reported at fair value
utilizing Level 2 inputs. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Investment Securities Held to Maturity:
Investment securities held to maturity are not recorded at fair value on a recurring basis. For disclosure
purposes, fair value measurement is based upon quoted prices, if available.
Federal Home Loan Bank Stock:
For disclosure purposes, the carrying value of other investments approximate fair value.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Loans:
The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is
considered impaired and a specific allocation is established within the allowance for loan losses. Loans for
which it is probable that payment of interest and principal will not be made in accordance with the contractual
terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired,
management measures impairment in accordance with ASC Topic 310, Accounting by Creditors for Impairment
of a Loan. The fair value of impaired loans is estimated using one of three methods, including collateral value,
market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance
represent loans for which the fair value of the expected repayments or collateral exceed the recorded
investments in such loans. In accordance with ASC Topic 820, impaired loans where an allowance is
established based on the fair value of collateral require classification in the fair value hierarchy. When the fair
value of the collateral is based on an observable market price or a current appraised value, the Corporation
records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there is no
observable market price, the Corporation records the impaired loan as nonrecurring Level 3.
For disclosure purposes, the fair value of fixed rate loans which are not considered impaired, is estimated by
discounting the future cash flows using the current rates at which similar loans would be made to borrowers with
similar credit ratings. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair
value for disclosure purposes.
Foreclosed Assets:
Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate.
Subsequently, other real estate assets are carried at the lower of carrying value or fair value. Fair value is based
upon independent market prices, appraised values of the collateral or management’s estimation of the value of
the collateral. When the fair value of the collateral is based on an observable market price or a current appraised
value, the Corporation records the other real estate as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Corporation records the other real estate asset as nonrecurring Level
3.
Bank Owned Life Insurance:
For disclosure purposes, for cash surrender value of life insurance, the carrying value is a reasonable
estimate of fair value.
Deposits:
For disclosure purposes, the fair value of demand deposits, savings accounts, NOW accounts and money market
deposits is the amount payable on demand at the reporting date, while the fair value of fixed maturity certificates
of deposit is estimated by discounting the future cash flows using current rates at which comparable certificates
would be issued.
FHLB Advances:
For disclosure purposes, the fair value of the FHLB fixed rate borrowing is estimated using discounted cash
flows, based on the current incremental borrowing rates for similar types of borrowing arrangements.
Commitments to Extend Credit and Standby Letters of Credit:
Because commitments to extend credit and standby letters of credit are made using variable rates and have short
maturities, the carrying value and the fair value are immaterial for disclosure.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Assets Recorded at Fair Value on a Recurring Basis:
The table below presents the recorded amount of assets measured at fair value on a recurring basis as of
December 31, 2018 and 2017.
December 31, 2018
Investment securities available for sale:
U.S. government treasury securities
U.S. government agency securities
State and municipal securities
Residential mortgage-backed securities
Total
December 31, 2017
Investment securities available for sale:
U.S. government treasury securities
U.S. government agency securities
State and municipal securities
Residential mortgage-backed securities
Total
Level 1
Level 2
Level 3
Total
$ 954,570
0
0
0
$ 954,570
$ 0
45,207,005
7,377,935
4,774,067
$ 57,359,007
$ 0
0
0
0
$ 0
$ 954,570
45,207,005
7,377,935
4,774,067
$ 58,313,577
Level 1
Level 2
Level 3
Total
$ 967,770
0
0
0
$ 967,770
$ 0
43,860,090
7,573,689
1,861,712
$ 53,295,491
$ 0
0
0
0
$ 0
$ 967,770
43,860,090
7,573,689
1,861,712
$ 54,263,261
Assets Recorded at Fair Value on a Nonrecurring Basis:
The Corporation may be required, from time to time, to measure certain assets at fair value on a nonrecurring
basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were
recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring
basis are included in the table below as of December 31, 2018 and 2017.
December 31, 2018
Foreclosed assets
Impaired loans
Total assets at fair value
December 31, 2017
Foreclosed assets
Impaired loans
Total assets at fair value
Level 1
$ 0
0
$ 0
Level 1
$ 0
0
$ 0
Level 2
$ 0
0
$ 0
Level 2
$ 0
0
$ 0
Level 3
$ 127,605
3,838,151
$ 3,965,756
Level 3
$ 758,878
4,563,951
$ 5,322,829
Total
$ 127,605
3,838,151
$ 3,965,756
Total
$ 758,878
4,563,951
$ 5,322,829
Foreclosed properties that are included above as measured at fair value on a nonrecurring basis are those
properties that resulted from a loan that had been foreclosed and charged down or have been written down
subsequent to foreclosure. Foreclosed properties are generally recorded at the appraised value less estimated
selling costs in the range of 15 – 20%. Loans that are reported above as being measured at fair value on a
nonrecurring basis are generally impaired loans that have been either partially charged off or have specific
reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to
a range of 80 – 85% of appraised value which considers the estimated costs to sell. Specific reserves are
established for impaired loans based on appraised value of collateral or discounted cash flows.
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The carrying amount and estimated fair values of the Corporation’s assets and liabilities which are required to
be either disclosed or recorded at fair value at December 31, 2018 and 2017, are as follows:
December 31, 2018
Assets:
Cash and cash equivalents
Certificates of deposit in other banks
Investment securities available for sale
Investment securities held to maturity
Federal Home Loan Bank stock
Loans, net
Bank owned life insurance
Liabilities:
Deposits
Federal Home Loan Bank advances
December 31, 2017
Assets:
Cash and cash equivalents
Certificates of deposit in other banks
Investment securities available for sale
Investment securities held to maturity
Federal Home Loan Bank stock
Loans, net
Bank owned life insurance
Liabilities:
Deposits
Federal Home Loan Bank advances
Carrying
Amount
$ 35,499
2,732
58,314
36,827
1,820
373,321
6,779
455,640
31,629
Carrying
Amount
$ 34,138
1,985
54,364
44,591
2,438
327,130
6,553
Estimated Fair Value
Level 1
Level 2
(Dollars in thousands)
Level 3
Total
$ 35,499
2,732
955
0
0
0
0
0
0
$ 0
0
57,359
37,010
1,820
362,373
6,779
456,245
31,591
$ 0
0
0
0
0
3,838
0
0
0
Estimated Fair Value
$ 35,499
2,732
58,314
37,010
1,820
366,211
6,779
456,245
31,591
Level 1
Level 2
(Dollars in thousands)
Level 3
Total
$ 34,138
1,985
968
0
0
0
0
$ 0
0
53,396
45,148
2,438
320,684
6,553
397,331
46,658
$ 0
0
0
0
0
4,564
0
0
0
$ 34,138
1,985
54,364
45,148
2,438
325,248
6,553
397,331
46,658
397,006
47,029
0
0
Limitations:
Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial statement element. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments
without attempting to estimate the value of anticipated future business and the fair value of assets and
liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In
addition, the tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the estimates.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
14. SUPPLEMENTAL FINANCIAL DATA
Components of other income and other operating expense in excess of one percent of gross revenue for the
respective periods are as follows:
Income:
Bank card interchange fees
Expense:
Other professional fees
Advertising & public relations
Director & board committee fees
FDIC insurance assessment
Administrative expense – employee benefit
Telephone expense
Years Ended December 31
2018
2017
2016
$576,359
$600,619
$506,506
$287,273
$264,269
$241,523
$233,878
$209,399
$284,586
$317,147
$192,016
$278,821
$247,963
$207,620
$180,559
$202,267
$173,595
$328,919
$201,605
$231,311
$155,393
15. SHAREHOLDERS’ EQUITY / REGULATORY MATTERS
Dividends paid by the Bank subsidiary are the primary source of funds available to the parent company for
payment of dividends to its shareholders and other needs. Banking regulations limit the amount of dividends
that may be paid without prior approval of the Bank’s regulatory agency. At December 31, 2018, approximately
$2,375,242 of the Bank’s net assets were available for payment of dividends without prior approval from the
regulatory authorities.
The Federal Reserve Board requires that banks maintain reserves based on their average deposits in the form of
vault cash and average deposit balances at the Federal Reserve Banks. For the year ended December 31, 2018,
the Bank had a total reserve requirement of $5,504,000.
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by such agencies that, if undertaken, could have a direct
material effect on the Corporation’s and Bank’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank
to maintain minimum amounts and ratios (set forth in the following table) of Total, Common Equity Tier I, and
Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average
assets (as defined). As of December 31, 2018 and 2017, the Corporation met all capital adequacy requirements.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2018, the most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain minimum Total risk-based, Common Equity Tier I
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following tables. Under the Basel III
rules, the Bank must hold a capital conservation buffer above the minimum regulatory risk-based capital ratios.
The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital
conservation buffer for 2018 is 1.875%. There are no conditions or events since the notification that
management believes have changed the Bank’s category. The Corporation’s and the Bank’s actual capital
amounts and ratios as of December 31, 2018 and 2017, are also presented in the table.
As a result of regulatory limitations at December 31, 2018, approximately $39,122,012 of the parent company’s
investments in net assets of the subsidiary bank of $41,497,254, as shown in the accompanying condensed
balance sheets in Note 16, was restricted from transfer by the subsidiary bank to the parent company in the form
of cash dividends.
The Corporation’s and the Bank’s ratios under the above rules at December 31, 2018 and 2017, are set forth in
the following tables.
As of December 31, 2018
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Southwest Georgia
Financial Corporation
Common equity Tier 1 (to
risk- weighted assets)
Total capital (to risk-
weighted assets)
Tier I capital (to risk-
weighted assets)
Leverage (tier I capital
to average assets)
Southwest Georgia Bank
Common equity Tier 1 (to
risk- weighted assets)
Total capital (to risk-
weighted assets)
Tier I capital (to risk-
weighted assets)
Leverage (tier I capital
to average assets)
$45,802,434
11.97%
$17,217,892
> 4.50%
N/A*
$49,231,303
12.87%
$30,609,586
> 8.00%
N/A*
$45,802,434
11.97%
$22,957,189
> 6.00%
N/A*
$45,802,434
8.62%
$21,265,996
> 4.00%
N/A*
N/A*
N/A*
N/A*
N/A*
$43,680,743
11.44%
$17,180,290
> 4.50%
$24,815,974
> 6.50%
$47,109,612
12.34%
$30,542,738
> 8.00%
$38,178,422
> 10.00%
$43,680,743
11.44%
$22,907,053
> 6.00%
$30,542,738
> 8.00%
$43,680,743
8.24%
$21,206,909
> 4.00%
$26,508,636
> 5.00%
*N/A - As of December 31, 2017, the Corporation met the definition under the Basel III Capital Rules of a small bank holding
company and, therefore, was exempt from consolidated risk-based and leverage capital adequacy guidelines for bank holding companies.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
As of December 31, 2017
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Southwest Georgia
Financial Corporation
Common equity Tier 1 (to
risk- weighted assets)
Total capital (to risk-
weighted assets)
Tier I capital (to risk-
weighted assets)
Leverage (tier I capital
to average assets)
Southwest Georgia Bank
Common equity Tier 1 (to
risk- weighted assets)
Total capital (to risk-
weighted assets)
Tier I capital (to risk-
weighted assets)
Leverage (tier I capital
to average assets)
$42,756,979
12.74%
$15,098,672
> 4.50%
N/A*
$45,800,611
13.65%
$26,842,084
> 8.00%
N/A*
$42,756,979
12.74%
$20,131,563
> 6.00%
N/A*
$42,756,979
8.79%
$19,467,338
> 4.00%
N/A*
N/A*
N/A*
N/A*
N/A*
$40,247,187
12.02%
$15,069,727
> 4.50%
$21,767,383
> 6.50%
$43,290,819
12.93%
$26,790,625
> 8.00%
$33,488,282
> 10.00%
$40,247,187
12.02%
$20,092,969
> 6.00%
$26,790,625
> 8.00%
$40,247,187
8.29%
$19,418,765
> 4.00%
$24,273,457
> 5.00%
*N/A - As of December 31, 2017, the Corporation met the definition under the Basel III Capital Rules of a small bank holding
company and, therefore, was exempt from consolidated risk-based and leverage capital adequacy guidelines for bank holding companies.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
16. PARENT COMPANY FINANCIAL DATA
Southwest Georgia Financial Corporation’s condensed balance sheets as of December 31, 2018 and 2017, and
its related condensed statements of operations and cash flows for the years ended are as follows:
Condensed Balance Sheets
as of December 31, 2018 and 2017
(Dollars in thousands)
ASSETS
Cash
Investment in consolidated wholly-owned bank
subsidiary, at equity
Loans
Other assets
2018
2017
$ 776
41,497
640
708
$ 1,694
38,633
105
711
Total assets
$ 43,621
$ 41,143
LIABILITIES AND SHAREHOLDERS’ EQUITY
Total liabilities
$ 2
$ 0
Shareholders’ equity:
Common stock, $1 par value, 5,000,000 shares authorized,
2,545,776 shares and 4,293,835 shares issued for 2018 & 2017
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost, 0 for 2018
and 1,752,330 for 2017
Total shareholders’ equity
2,546
18,419
24,841
(2,187)
( 0)
43,619
4,294
31,701
33,020
(1,629)
(26,243)
41,143
Total liabilities and shareholders’ equity
$ 43,621
$ 41,143
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
16. PARENT COMPANY FINANCIAL DATA (continued)
Condensed Statements of Income and Expense
for the years ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
Income:
Dividend received from bank subsidiary
Interest income
Total income
Expenses:
Other
Income before income taxes and equity in
Undistributed income of bank subsidiary
Income tax benefit – allocated from
consolidated return
Income before equity in undistributed
income of subsidiary
2018
2017
2016
$ 1,200
45
$ 2,000
26
$ 0
23
1,245
2,026
23
189
172
178
1,056
1,854
( 155)
40
88
91
1,096
1,942
( 64)
Equity in undistributed income of subsidiary
3,551
1,865
4,098
Net income
4,647
3,807
4,034
Retained earnings – beginning of year
33,020
30,334
27,370
Adjustment to correct immaterial misstatement
of investment in bank subsidiary in prior periods
(129)
0
0
Cash dividend declared
( 1,196)
( 1,121)
( 1,070)
Retirement of treasury stock
( 11,501)
0
0
Retained earnings – end of year
$ 24,841
$ 33,020
$ 30,334
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
16. PARENT COMPANY FINANCIAL DATA (continued)
Condensed Statements of Cash Flows
for the years ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
Cash flow from operating activities:
Net income
Adjustments to reconcile net income to net
cash used by operating activities:
Equity in undistributed earnings of subsidiary
Changes in:
Other assets
Other liabilities
Net cash provided (used) for operating activities
Cash flow from investing activities:
Net change in loans
Net cash provided (used) for investing activities
Cash flow from financing activities:
Cash dividend paid to shareholders
Payment to repurchase common stock
Net cash used for financing activities
2018
2017
2016
$ 4,647
$ 3,807
$ 4,034
(3,551)
(1,865)
(4,098)
21
2
1,119
(25)
0
1,917
(16)
0
(80)
(535)
(535)
80
80
178
178
(1,196)
(306)
(1,502)
(1,121)
(122)
(1,243)
(1,070)
(7)
(1,077)
Increase (decrease) in cash
(918)
754
(979)
Cash – beginning of year
Cash – end of year
1,694
$ 776
940
$ 1,694
1,919
$ 940
17. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares outstanding during the year.
Net income
Net income available to common shareholders
Average number of common shares outstanding
Effect of dilutive restricted stock
Average number of common shares outstanding used to
calculate diluted earnings per common share
Earnings per share - basic
Earnings per share - diluted
95
2018
$ 4,647,119
$ 4,647,119
December 31,
2017
$ 3,807,492
$ 3,807,492
2016
$ 4,033,977
$ 4,033,977
2,545,565
0
2,547,421
1
2,547,778
0
2,545,565
2,547,422
2,547,778
$ 1.83
$ 1.83
$ 1.49
$ 1.49
$ 1.58
$ 1.58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
18. QUARTERLY DATA
SOUTHWEST GEORGIA FINANCIAL CORPORATION
QUARTERLY DATA
(UNAUDITED)
(Dollars in thousands)
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expenses
Income before income taxes
Provision for income taxes
Net income
Earnings per share of common stock:
Basic
Diluted
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expenses
Income before income taxes
Provision for income taxes
Net income
Earnings per share of common stock:
Basic
Diluted
Fourth
$ 5,900
1,116
4,784
226
4,558
1,175
4,357
1,376
253
$ 1,123
For the Year 2018
Third
$ 5,640
867
4,773
249
4,524
978
4,149
1,353
209
$ 1,144
Second
$ 5,292
725
4,567
140
4,427
1,060
4,132
1,355
207
$ 1,148
$ .44
$ .44
$ .45
$ .45
$ .45
$ .45
Fourth
$ 5,018
559
4,459
75
4,384
960
3,892
1,452
735
$ 717
$ .28
$ .28
For the Year 2017
Third
$ 4,859
472
4,387
75
4,312
969
4,068
1,213
261
$ 952
Second
$ 4,767
435
4,332
75
4,257
1,100
3,968
1,389
316
$ 1,073
$ .37
$ .37
$ .42
$ .42
First
$ 5,062
614
4,448
215
4,233
994
3,996
1,231
(1)
$ 1,232
$ .48
$ .48
First
$ 4,502
436
4,066
75
3,991
1,283
3,901
1,373
308
$ 1,065
$ .42
$ .42
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
19. SEGMENT REPORTING
The Corporation operations are divided into four reportable business segments: The Retail and Commercial
Banking Services, Insurance Services, Wealth Strategies Services, and Financial Management Services. These
operating segments have been identified primarily based on the Corporation’s organizational structure.
The Retail and Commercial Banking Services segment serves consumer and commercial customers by offering
a variety of loan and deposit products, and other traditional banking services.
The Insurance Services segment offers clients a full spectrum of commercial and personal lines insurance
products including life, health, property, and casualty insurance.
The Wealth Strategies Services segment provides personal trust administration, estate settlement, investment
management, employee retirement benefit services, and the Individual Retirement Account (IRA)
administration. Also, this segment offers full-service retail brokerage which includes the sale of retail
investment products including stocks, bonds, mutual funds, and annuities.
The Financial Management Services segment is responsible for the management of the investment securities
portfolio. It also is responsible for managing financial risks, including liquidity and interest rate risk.
The accounting policies of the segments are the same as those described in the summary of significant
accounting policies. The Corporation evaluates performance based on profit or loss from operations after
income taxes not including nonrecurring gains or losses.
The Corporation’s reportable segments are strategic business units that offer different products and services.
They are managed separately because each segment appeals to different markets and, accordingly, requires
different technology and marketing strategies.
The Corporation allocates capital and funds used or funds provided for each reportable business segment. Also,
each segment is credited or charged for the cost of funds provided or used. These credits and charges are
reflected as net intersegment interest income (expense) in the table below. The Corporation does allocate
income taxes to the segments. Other revenue represents noninterest income, exclusive of the net gain (loss) on
disposition of assets and expenses associated with administrative activities which are not allocated to the
segments. Those expenses include audit, compliance, investor relations, marketing, personnel, and other
executive or parent company expenditures.
The Corporation does not have operating segments other than those reported. Parent Company and the
Administrative Offices financial information is included in the “Other” category, and is deemed to represent an
overhead function rather than an operating segment. The Administrative Offices include audit, marketing,
information technology, personnel, and the executive office.
The Corporation does not have a single external customer from which it derives 10% or more of its revenue and
operates in one geographical area.
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Information about reportable business segments, and reconciliation of such information to the consolidated
financial statements for the years ended December 31, 2018, 2017, and 2016, are as follows:
Provision for Loan Losses
830
Segment Reporting
For the year ended December 31, 2018
Retail and
Commercial
Banking
Insurance
Services
Wealth
Strategies
Financial
Management
Inter-
segment
Elimination
Other
Totals
$ 16,334
$ -
$ -
$ 2,193
$ -
$ 45
$ 18,572
1,818
18,152
1,765
(20)
1,745
845
-
10,974
11,819
7,248
1,184
20
20
-
1,604
20
1,624
37
16
1,158
1,211
433
68
(7)
(7)
-
665
31
696
18
-
624
642
47
3
(1,831)
362
-
259
-
259
56
-
752
808
(187)
(210)
-
-
-
-
(31)
(31)
-
-
-
-
-
45
-
(86)
-
(86)
81
-
2,073
2,154
(31)
(2,195)
-
(377)
-
18,572
830
4,207
-
4,207
1,037
16
15,581
16,634
5,315
668
$ 6,064
$ 365
$ 44
$ 23
$ (31)
$ (1,818)
$ 4,647
$ 628,222
$ 1,971
$ 267
$ 132,033
$ (229,108)
$ 1,448
$ 534,833
Net Interest Income (expense)
external customers
Net intersegment interest
income (expense)
Net interest income
Noninterest Income (expense)
external customers
Intersegment noninterest
Income (expense)
Total Noninterest Income
Noninterest Expenses:
Depreciation
Amortization of intangibles
Other Noninterest expenses
Total Noninterest expenses
Pre-tax income
Provision for Income Taxes
Net Income
Assets
Expenditures of Fixed Assets
$ 3,321
$ 2
$ 8
$ 57
$ -
$ -
$ 3,388
Amounts included in the “Other” column are as follows:
Net interest Income:
Parent Company
Noninterest Income:
Executive office miscellaneous income
Noninterest Expenses:
Parent Company corporate expenses
Executive office expenses not allocated
to segments
Provision for Income taxes:
Parent Company income taxes (benefit)
Executive office income taxes not allocated
to segments
Net Income:
Segment assets:
Parent Company assets,
after intercompany elimination
Other
$ 45
(86)
188
1,966
(40)
(337)
$ (1,818)
$ 1,448
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Provision for Loan Losses
300
Segment Reporting
For the year ended December 31, 2017
Retail and
Commercial
Banking
Insurance
Services
Wealth
Strategies
Financial
Management
Inter-
segment
Elimination
Other
Totals
$ 15,119
$ -
$ -
$ 2,099
$ -
$ 26
$ 17,244
1,817
16,936
2,099
(16)
2,083
685
-
10,328
11,013
7,706
1,784
16
16
-
1,525
16
1,541
33
16
1,119
1,168
389
86
(6)
(6)
-
612
32
644
24
-
592
616
22
(2)
(1,827)
272
-
75
-
75
56
-
780
836
(489)
306
-
-
-
-
(32)
(32)
-
-
-
-
-
26
-
1
-
1
83
-
2,113
2,196
(32)
(2,169)
-
(554)
-
17,244
300
4,312
-
4,312
881
16
14,932
15,829
5,427
1,620
$ 5,922
$ 303
$ 24
$ (795)
$ (32)
$ (1,615)
$ 3,807
$ 567,723
$ 1,687
$ 177
$ 138,598
$ (219,840)
$ 727
$ 489,072
Net Interest Income (expense)
external customers
Net intersegment interest
income (expense)
Net interest income
Noninterest Income (expense)
external customers
Intersegment noninterest
Income (expense)
Total Noninterest Income
Noninterest Expenses:
Depreciation
Amortization of intangibles
Other Noninterest expenses
Total Noninterest expenses
Pre-tax income
Provision for Income Taxes
Net Income
Assets
Expenditures of Fixed Assets
$ 1,888
$ 48
$ 2
$ 17
$ -
$ -
$ 1,955
Amounts included in the “Other” column are as follows:
Net interest Income:
Parent Company
Noninterest Income:
Executive office miscellaneous income
Noninterest Expenses:
Parent Company corporate expenses
Executive office expenses not allocated
to segments
Provision for Income taxes:
Parent Company income taxes (benefit)
Executive office income taxes not allocated
to segments
Net Income:
Segment assets:
Parent Company assets,
after intercompany elimination
Other
$ 26
1
172
2,024
(88)
(466)
$ (1,615)
$ 727
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Provision for Loan Losses
160
Segment Reporting
For the year ended December 31, 2016
Retail and
Commercial
Banking
Insurance
Services
Wealth
Strategies
Financial
Management
Inter-
segment
Elimination
Other
Totals
$ 13,837
$ -
$ -
$ 1,940
$ -
$ 24
$ 15,801
1,671
15,508
2,316
(11)
2,305
738
-
9,260
9,998
7,655
1,794
11
11
-
1,477
11
1,488
30
16
1,184
1,230
269
61
(6)
(6)
-
584
32
616
23
-
585
608
2
(7)
(1,676)
264
-
80
-
80
57
-
737
794
(450)
(107)
-
-
-
-
(32)
(32)
-
-
-
-
-
24
-
2
-
2
76
-
2,208
2,284
(32)
(2,258)
-
(589)
-
15,801
160
4,459
-
4,459
924
16
13,974
14,914
5,186
1,152
$ 5,861
$ 208
$ 9
$ (343)
$ (32)
$ (1,669)
$ 4,034
$ 507,538
$ 1,414
$ 199
$ 148,099
$ (209,619)
$ 870
$ 448,501
Net Interest Income (expense)
external customers
Net intersegment interest
income (expense)
Net interest income
Noninterest Income (expense)
external customers
Intersegment noninterest
Income (expense)
Total Noninterest Income
Noninterest Expenses:
Depreciation
Amortization of intangibles
Other Noninterest expenses
Total Noninterest expenses
Pre-tax income
Provision for Income Taxes
Net Income
Assets
Expenditures of Fixed Assets
$ 1,409
$ 15
$ 11
$ 20
$ -
$ -
$ 1,455
Amounts included in the “Other” column are as follows:
Net interest Income:
Parent Company
Noninterest Income:
Executive office miscellaneous income
Noninterest Expenses:
Parent Company corporate expenses
Executive office expenses not allocated
to segments
Provision for Income taxes:
Parent Company income taxes (benefit)
Executive office income taxes not allocated
to segments
Net Income:
Segment assets:
Parent Company assets,
after intercompany elimination
Other
$ 24
2
178
2,106
(91)
(498)
$ (1,669)
$ 870
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
20. ADJUSTMENT TO RETAINED EARNINGS
During year-end processing for 2018, the Corporation discovered that its Directors’ Deferred Compensation
Plan accrual and the income related to the Cash Surrender Value of related policies to fund the plan had not been
calculated properly for a number of years. Once discovered, the proper calculations were made and confirmed.
The net effect on prior periods presented was determined to be immaterial and was therefore charged to 2018
Retained Earnings without restating prior periods. See the Consolidated Statements of Changes in Shareholders'
Equity for the treatment of the correction. After this adjustment, the 2018 Consolidated Balance Sheets reflect
the net present value of payments due under this plan and the 2018 Consolidated Statements of Income reflect
the correct current year expense associated with changes in the net present value of payments due under this
plan.
21. SUBSEQUENT EVENTS
The Corporation performed an evaluation of subsequent events through March 29, 2019, the date upon which
the Corporation’s financial statements were available for issue. The Corporation has not evaluated subsequent
events after this date.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Corporation did not change accountants nor have any disagreements with its accountants on any matters of
accounting practices or principles or financial statement disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Corporation’s management, including the Chief Executive Officer and Principal Financial Officer, supervised
and participated in an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures (as
defined in federal securities rules) as of December 31, 2018. Based on, and as of the date of, that evaluation, the
Corporation’s Chief Executive Officer and Principal Financial Officer have concluded that the Corporation’s
disclosure controls and procedures were effective in accumulating and communicating information to
management, including the Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely
decisions regarding required disclosures of that information under the SEC’s rules and forms and that the
Corporation’s disclosure controls and procedures are designed to ensure that the information required to be
disclosed in reports that are filed or submitted by the Corporation under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control over Financial Reporting
The Corporation’s management is responsible for establishing and maintaining adequate internal control over
financial reporting. Management’s assessment of the effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2018, is included in Item 8 of this Annual Report on Form 10-K under the
heading “Management’s Report on Internal Controls Over Financial Reporting.”
101
Changes in Internal Control Over Financial Reporting
No changes were made to the Corporation’s internal control over financial reporting during the last fiscal quarter
that materially affected or could reasonably likely to materially affect the Corporation’s internal controls over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the heading “Information About Nominees For Director” and “Section 16(a)
Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement to be used in connection with the
solicitation of proxies for the Corporation’s annual meeting of shareholders to be held on May 28, 2019, to be
filed with the SEC on or around April 18, 2019, is incorporated herein by reference. Certain other information
relating to the Executive Officers of the Corporation appears in Item 1 hereof under the heading “Executive
Officers of the Corporation and the Bank.”
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading “Executive Compensation” in the definitive Proxy Statement to be
used in connection with the solicitation of proxies for the Corporation’s annual meeting of shareholders to be held
on May 28, 2019, to be filed with the SEC on or around April 18, 2019, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
The information contained under the heading “Voting Securities and Principal Holders” in the definitive Proxy
Statement to be used in connection with the solicitation of proxies for the Corporation’s annual meeting of
shareholders to be held on May 28, 2019, to be filed with the SEC on or around April 18, 2019, and the information
contained in Item 5 hereof under the heading “Securities Authorized for Issuance Under Equity Compensation
Plans,” is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information contained under the heading “Certain Relationships and Related Party Transactions” in the
definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual
meeting of shareholders to be held on May 28, 2019, to be filed with the SEC on or around April 18, 2019, is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the heading “Information Concerning the Corporation’s Accountants” in the
definitive Proxy Statement to be used in connection with the solicitation of proxies for the Corporation’s annual
meeting of shareholders to be held on May 28, 2019, to be filed with the SEC on or around April 18, 2019, is
incorporated herein by reference.
102
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements
PART IV
The following consolidated financial statements and supplementary information for the fiscal years ended
December 31, 2018, 2017, and 2016 are included in Part II, Item 8 herein:
(i)
Report of Independent Auditors
(ii) Consolidated Balance Sheets – December 31, 2018 and 2017
(iii) Consolidated Statements of Income – Years ended December 31, 2018, 2017, and 2016
(iv) Consolidated Statements of Comprehensive Income – Years ended December 31, 2018, 2017, and
2016
(v) Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2018,
2017, and 2016
(vi) Consolidated Statements of Cash Flows – Years ended December 31, 2018, 2017, and 2016
(vii) Notes to Consolidated Financial Statements – December 31, 2018
(b)
Financial Statement Schedules
All applicable financial statement schedules required have been included in the Notes to the Consolidated
Financial Statements.
(c)
The exhibits filed as part of this registration statement are as follows:
Exhibits:
Exhibit Number Description Of Exhibit
3.1
3.2
10.1
10.2
10.3
Articles of Incorporation of Southwest Georgia Financial Corporation, as amended and
restated (included as Exhibit 3.1 to the Corporation’s Form 10-KSB for the year ended
December 31, 1996, previously filed with the SEC and incorporated herein by reference).
Bylaws of the Corporation, as amended.
Form of Directors’ Deferred Compensation Plan of the Corporation (included as Exhibit
10.3 to the Corporation’s Form S-18 dated January 23, 1990, previously filed with the SEC
and incorporated herein by reference).*
Directors and Executive Officers Stock Purchase Plan of the Corporation dated August 22,
2012 (included as Exhibit 4 to the Corporation’s Form S-8 dated October 11, 2012,
previously filed with the SEC and incorporated herein by reference).*
Amendment No. 1 to Directors and Executive Officers Stock Purchase Plan of the
Corporation dated March 23, 2016 (included as Exhibit 10.3 to the Corporation’s Form 10-
K for the year ended December 31, 2016, previously filed with the SEC and incorporated
herein by reference).*
103
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
14
21
23.1
31.1
31.2
32.1
Supplemental Retirement Plan of the Corporation dated December 21, 1994 and Trust under
the Corporation’s Supplemental Retirement Plan dated December 21, 1994 (included as
Exhibit 10.11 to the Corporation’s Form 10-KSB for the year ended December 31, 1994,
previously filed with the SEC and incorporated herein by reference).*
Amendment No. 1 to the Trust under the Corporation’s Supplemental Retirement Plan, as
amended (included as Exhibit 10.6b to the Corporation’s Form 10-K for the year ended
December 31, 1997, previously filed with the SEC and incorporated herein by reference).*
Dividend Reinvestment and Share Purchase Plan of the Corporation, as amended and
restated by Amendment No. 1 (included as Exhibit 99 to the Corporation’s Form S-3DPOS
dated September 30, 1998, previously filed with the SEC and incorporated herein by
reference).
Employment Agreement of DeWitt Drew (included as Exhibit 10.11 to the Corporation’s
Form S-4 dated January 6, 2004, previously filed with the SEC and incorporated herein by
reference).*
2013 Omnibus Incentive Plan of the Corporation (included as Appendix I to the
Corporation’s Proxy Statement dated April 17, 2014, previously filed with the SEC and
incorporated herein by reference).*
Employee Stock Ownership Plan and Trust of the Corporation, as amended and restated
effective as of January 1, 2014 (included as Exhibit 10.10 to the Corporation’s Form 10-K
for the year ended December 31, 2016, previously filed with the SEC and incorporated
herein by reference).*
Southwest Georgia Bank 401(k) Plan, as restated effective as of January 1, 2015 (included
as Exhibit 10.11 to the Corporation’s Form 10-K for the year ended December 31, 2016,
previously filed with the SEC and incorporated herein by reference).*
Pension Retirement Plan of the Corporation, as amended and restated effective as of January
1, 2015; amended effective as of December 1, 2016 (included as Exhibit 10.12 to the
Corporation’s Form 10-K for the year ended December 31, 2016, previously filed with the
SEC and incorporated herein by reference).*
Form of Restricted Stock Award Agreement (included as Exhibit 10.12 to the Corporation’s
Form 10-K for the year ended December 31, 2017, previously filed with the SEC and
incorporated herein by reference).*
Code of Ethical Conduct dated February 27, 2008 (included as Exhibit 14 to the
Corporation’s Form 8-K dated February 27, 2008, previously filed with the SEC and
incorporated herein by reference).
Subsidiaries of the Corporation
Consent of TJS Deemer Dana, LLP
Section 302 Certification of Periodic Financial Report by Chief Executive Officer.
Section 302 Certification of Periodic Financial Report by Principal Financial Officer.
Section 906 Certification of Periodic Financial Report by Chief Executive Officer.
104
32.2
Section 906 Certification of Periodic Financial Report by Principal Financial Officer.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2019
Date: March 29, 2019
Southwest Georgia Financial Corporation
(Corporation)
By:
/s/ DeWitt Drew
DEWITT DREW
President and Chief Executive Officer
/s/ Karen T. Boyd
KAREN T. BOYD
Senior Vice President and Treasurer
105
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Corporation and in the capacities and on the dates indicated.
/s/ Roy Reeves
ROY REEVES
Chairman
/s/ Cecil H. Barber
CECIL H. BARBER
Vice Chairman
/s/ Richard L. Moss
RICHARD L. MOSS
Director
/s/ John J. Cole, Jr.
JOHN J. COLE, JR.
Director
/s/ Johnny R. Slocumb
JOHNNY R. SLOCUMB
Director
/s/ M. Lane Wear
M. LANE WEAR
Director
/s/ Marcus R. Wells
MARCUS R. WELLS
Director
Date: March 29, 2019
Date: March 29, 2019
Date: March 29, 2019
Date: March 29, 2019
Date: March 29, 2019
Date: March 29, 2019
Date: March 29, 2019
106
Exhibit Index
Exhibit Number
Description of Exhibit
3.2
21
23.1
31.1
31.2
32.1
32.2
Bylaws of the Corporation, as amended.
Subsidiaries of the Corporation
Consent of TJS Deemer Dana, LLP
Section 302 Certification of Periodic Financial Report by Chief
Executive Officer.
Section 302 Certification of Periodic Financial Report by Principal
Financial Officer.
Section 906 Certification of Periodic Financial Report by Chief
Executive Officer.
Section 906 Certification of Periodic Financial Report by Principal
Financial Officer.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
107