Company Quick10K Filing
Quick10K
Southwest Georgia Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$20.38 3 $52
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-29 Shareholder Vote, Other Events, Exhibits
8-K 2019-03-31 Earnings, Exhibits
8-K 2019-01-02 Officers, Exhibits
8-K 2018-12-31 Earnings, Exhibits
8-K 2018-12-26 Officers
8-K 2018-11-28 Other Events, Exhibits
8-K 2018-09-30 Earnings, Exhibits
8-K 2018-08-29 Other Events, Exhibits
8-K 2018-06-30 Earnings, Exhibits
8-K 2018-06-30 Earnings, Exhibits
8-K 2018-05-23 Shareholder Vote, Other Events, Exhibits
8-K 2018-03-31 Earnings, Exhibits
8-K 2018-02-28 Other Events, Exhibits
8-K 2018-01-03 Officers, Exhibits
8-K 2017-12-31 Earnings, Exhibits
STZ Constellation Brands 38,630
PEB Pebblebrook Hotel Trust 4,150
SSYS Stratasys 1,290
UFCS United Fire Group 1,170
SYNA Synaptics 1,090
PRIM Primoris Services 1,050
PRFT Perficient 1,010
MCFT MCBC Holdings 485
OOMA Ooma 285
CURR Cure Pharmaceutical Holding 0
SGB 2019-03-31
Note 1
Note 2
Note 3
Note 4
Item 2. Management's Discussion and Analysis of Financial
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. - Other Information
Item 6.Exhibits
EX-31.1 exhibit311q119.htm
EX-31.2 exhibit312q119.htm
EX-32.1 exhibit321q119.htm
EX-32.2 exhibit322q119.htm

Southwest Georgia Financial Earnings 2019-03-31

SGB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tenq0319.htm FORM 10Q

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D. C. 20549

 

FORM 10-Q

(Mark One)

[ X ]       Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  For the quarterly period ended March 31, 2019
   
[     ]       Transition report pursuant to Section 13 or 15(d) of the Exchange Act.
  For the transition period from                     to                    

 

Commission file number 1-12053

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION

(Exact Name Of Small Business Issuer as specified in its Charter)

 

Georgia   58-1392259
(State Or Other Jurisdiction Of   (I.R.S. Employer
Incorporation Or Organization)   Identification No.)

 

201 FIRST STREET, S.E., MOULTRIE, GEORGIA 31768

Address Of Principal Executive Offices

 

(229) 985-1120 _

Registrant's Telephone Number, Including Area Code

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X ] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such fi les).Yes [ X ] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [   ] Non-accelerated filer [X]
Accelerated filer [   ] 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 Exchange Act).

Yes [ ] No [ X ]

 

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.

 

Class   Outstanding At May 4, 2019
Common Stock, $1 Par Value   2,545,776

 

 
 

SOUTHWEST GEORGIA FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2019

 

TABLE OF CONTENTS

      PAGE #
PART I - FINANCIAL INFORMATION
       
  ITEM 1. FINANCIAL STATEMENTS  
           
  The following financial statements are provided for Southwest Georgia  
  Financial Corporation as required by this Item 1.  
         
    a.                 Consolidated balance sheets – March 31, 2019 (unaudited) and  
      December 31, 2018 (audited). 2
           
    b.                Consolidated statements of income (unaudited) – for the three months  
      ended March 31, 2019 and 2018. 3
           
    c.                 Consolidated statements of comprehensive income (unaudited) - for the  
      three months ended March 31, 2019 and 2018. 4
           
    d. Consolidated statements of changes in shareholders’ equity (unaudited) -  
      for the three months ended March 31, 2019 and 2018. 5
           
    d.                Consolidated statements of cash flows (unaudited) for the three months  
      ended March 31, 2019 and 2018. 6
           
    e.                 Notes to Consolidated Financial Statements 7
           
  ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS 36
           
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  
    MARKET RISK 44
       
  ITEM 4.   CONTROLS AND PROCEDURES                      45
           
PART II - OTHER INFORMATION  
           
  ITEM 6.    EXHIBITS   46
           
  SIGNATURE   46

-1

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2019 and December 31, 2018
   (Unaudited)  (Audited)
   March 31,  December 31,
   2019  2018
ASSETS          
Cash and due from banks  $11,348,240   $14,050,682 
Interest-bearing deposits in other banks   37,666,935    21,448,110 
            Cash and cash equivalents   49,015,175    35,498,792 
           
Certificates of deposit in other banks   2,732,000    2,732,000 
Investment securities available for sale, at fair value   62,962,079    58,313,577 
Investment securities held to maturity (fair value          
  approximates $35,674,367 and $37,010,327)   35,184,883    36,827,073 
Federal Home Loan Bank stock, at cost   1,019,900    1,820,300 
            Total investment securities   99,166,862    96,960,950 
           
Loans   377,711,765    376,767,688 
Less: Unearned income   (17,390)   (17,451)
          Allowance for loan losses   (3,366,927)   (3,428,869)
            Loans, net   374,327,448    373,321,368 
           
Premises and equipment, net   14,443,696    14,573,974 
Foreclosed assets   127,605    127,605 
Intangible assets   0    3,907 
Bank owned life insurance   6,812,589    6,779,242 
Other assets   4,445,793    4,835,329 
           
            Total assets  $551,071,168   $534,833,167 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities:          
  Deposits:          
      Interest bearing business checking  $33,419,254   $28,070,871 
      NOW accounts   40,651,250    35,816,115 
      Money Market   163,903,769    158,730,044 
      Savings   33,580,463    31,848,588 
      Certificates of deposit $250,000 and over   16,831,531    16,264,681 
      Other time accounts   85,564,731    81,214,376 
            Total interest-bearing deposits   373,950,998    351,944,675 
      Noninterest-bearing deposits   114,667,559    103,694,910 
            Total deposits   488,618,557    455,639,585 
           
  Short-term borrowed funds   4,100,000    10,457,143 
  Long-term debt   9,600,000    21,171,429 
  Other liabilities   3,492,686    3,946,066 
            Total liabilities   505,811,243    491,214,223 
           
Stockholders' equity:          
  Common stock - $1 par value, 5,000,000 shares          
    authorized, 2,545,776 shares issued   2,545,776    2,545,776 
  Capital surplus   18,418,995    18,418,995 
  Retained earnings   25,764,780    24,841,569 
  Accumulated other comprehensive loss   (1,469,626)   (2,187,396)
            Total stockholders' equity   45,259,925    43,618,944 
           
            Total liabilities and stockholders' equity  $551,071,168   $534,833,167 

 

-2

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
   For the Three Months
   Ended March 31,
   (Unaudited)  (Unaudited)
   2019  2018
Interest income:          
    Interest and fees on loans  $5,121,187   $4,293,240 
    Interest on taxable securities available for sale   334,433    288,646 
    Interest on taxable securities held to maturity   54,058    28,147 
    Interest on tax exempt securities   237,772    291,004 
    Dividends   26,857    31,947 
    Interest on deposits in other banks   170,893    117,828 
    Interest on certificates of deposit in other banks   16,846    11,565 
            Total interest income   5,962,046    5,062,377 
           
Interest expense:          
    Interest on deposits   1,050,306    372,473 
    Interest on federal funds purchased   6    6 
    Interest on other short-term borrowings   35,986    115,668 
    Interest on long-term debt   109,422    125,833 
            Total interest expense   1,195,720    613,980 
            Net interest income   4,766,326    4,448,397 
Provision for loan losses   115,908    215,500 
            Net interest income after provision for loan losses   4,650,418    4,232,897 
           
Noninterest income:          
    Service charges on deposit accounts   238,149    224,589 
    Income from trust services   56,606    58,833 
    Income from retail brokerage services   106,748    88,395 
    Income from insurance services   436,649    388,239 
    Income from mortgage banking services   0    620 
    Net gain (loss) on sale or disposition of assets   898    (7,155)
    Net gain on extinguishment of debt   143,031    0 
    Other income   254,966    240,883 
            Total noninterest income   1,237,047    994,404 
           
Noninterest expense:          
    Salaries and employee benefits   2,496,204    2,341,119 
    Occupancy expense   314,509    289,426 
    Equipment expense   308,020    190,269 
    Data processing expense   403,553    353,790 
    Amortization of intangible assets   3,907    3,906 
    Other operating expenses   889,398    817,068 
            Total noninterest expenses   4,415,591    3,995,578 
            Income before income taxes   1,471,874    1,231,723 
Provision for (benefit from) income taxes   243,168    (643)
            Net income  $1,228,706   $1,232,366 
           
Earnings per share of common stock:          
    Net income, basic  $0.48   $0.48 
    Net income, diluted  $0.48   $0.48 
    Dividends paid per share  $0.12   $0.11 
Weighted average shares outstanding   2,545,776    2,544,922 
Diluted average shares outstanding   2,545,776    2,544,922 

-3

 

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   For the Three Months
   Ended March 31,
   (Unaudited)  (Unaudited)
   2019  2018
       
Net income  $1,228,706   $1,232,366 
Other comprehensive income (loss), net of tax:          
Unrealized holding gain (loss) on  investment securities available for sale   908,569    (973,869)
Less: Tax effect   190,799    (204,513)
Total other comprehensive income (loss), net of tax   717,770    (769,356)
            Total comprehensive income  $1,946,476   $463,010 

 

-4

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

for the three months ended March 31, 2019 and March 31, 2018

   Common
Stock
  Additional
Paid-In
Capital
  Retained
Earnings
  Accumulated Other Comprehensive Loss  Treasury Stock  Total Shareholders’ Equity
Balance at Dec. 31, 2017  $4,293,835   $31,701,533   $33,020,030   $(1,629,619)  $(26,242,793)  $41,142,986 
Net Income   —      —      1,232,366    —      —      1,232,366 
Comprehensive income (loss):                              
Changes in net gain on
securities available for sale
   —      —      —      (769,356)   —      (769,356)
Cash dividend declared
$.11 per share
   —      —      (280,035)   —      —      (280,035)
Retirement of treasury stock   (1,748,059)   (12,994,133)   (11,500,601)   —      26,242,793    —   
Balance at Mar. 31, 2018  $2,545,776   $18,707,400   $22,471,760   $(2,398,975)  $0   $41,325,961 
Balance at Dec. 31, 2018  $2,545,776   $18,418,995   $24,841,569   $(2,187,396)  $0   $43,618,944 
Net Income   —      —      1,228,706    —      —      1,228,706 
Comprehensive income (loss):                              
Changes in net gain on
securities available for sale
   —      —      —      717,770    —      717,770 
Cash dividend declared
$.12 per share
   —      —      (305,495)   —      —      (305,495)
Balance at Mar. 31, 2019  $2,545,776   $18,418,995   $25,764,780   $(1,469,626)  $0   $45,259,925 

-5

 

SOUTHWEST GEORGIA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
    
   For the Three Months
   Ended March 31,
   (Unaudited)  (Unaudited)
Cash flows from operating activities:   2019    2018 
    Net income  $1,228,706   $1,232,366 
    Adjustments to reconcile net income to          
        net cash provided by operating activities:          
        Provision for loan losses   115,908    215,500 
        Depreciation   303,750    237,452 
        Net amortization of investment securities   63,560    90,812 
        Income on cash surrender value of bank owned life insurance   (33,347)   (41,556)
        Amortization of intangibles   3,907    3,906 
        (Gain) loss on sale/writedown of foreclosed assets   (898)   7,521 
        Net gain on extinguishment of debt   (143,031)   0 
    Change in:          
        Other assets   183,666    267,377 
        Other liabilities   (453,128)   (565,517)
                Net cash provided by operating activities   1,269,093    1,447,861 
           
Cash flows from investing activities:          
    Proceeds from calls, paydowns and maturities of securities HTM   1,628,603    649,921 
    Proceeds from calls, paydowns and maturities of securities AFS   175,813    125,115 
    Proceeds from Federal Home Loan Bank stock repurchase   840,900    0 
    Purchase of securities available for sale   (3,965,719)   (3,011,243)
    Purchase of Federal Home Loan Bank Stock   (40,500)   (36,600)
    Net change in loans   (1,121,988)   (5,477,008)
    Purchase of premises and equipment   (178,472)   (966,591)
    Proceeds from sales of fixed assets and foreclosed assets   20,717    954,791 
                Net cash used by investing activities   (2,640,646)   (7,761,615)
           
Cash flows from financing activities:          
    Net change in deposits   32,978,972    21,442,815 
    Payment of short-term portion of long-term debt   (7,283,601)   0 
    Payment for early retirement of long-term debt   (11,501,940)   0 
    Proceeds from issuance of short-term debt   1,000,000    0 
    Cash dividends paid   (305,495)   (280,035)
                Net cash provided by financing activities   14,887,936    21,162,780 
           
Increase in cash and cash equivalents   13,516,383    14,849,026 
Cash and cash equivalents - beginning of period   35,498,792    34,138,421 
Cash and cash equivalents - end of period  $49,015,175   $48,987,447 
           
NONCASH ITEMS:          
    Increase in foreclosed properties and decrease in loans  $0   $376,050 
    Unrealized gain (loss) on securities available for sale  $908,569   $(973,869)
    Net reclass between short and long-term debt  $0   $1,500,000 
    Retirement of treasury stock  $0   $26,242,793 
    Receivable from sale of guaranteed foreclosed asset  $0   $172,616 

 

-6

 

  

SOUTHWEST GEORGIA FINANCIAL CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________

 

 

Basis of Presentation

 

Southwest Georgia Financial Corporation (the “Corporation”), a bank-holding company organized under the laws of Georgia, provides deposit, lending, and other financial services to businesses and individuals primarily in the Southwest region of Georgia. The Corporation and its subsidiaries are subject to regulation by certain federal and state agencies.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and changes in financial position in conformity with generally accepted accounting principles. The interim financial statements furnished reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The interim consolidated financial statements should be read in conjunction with the Corporation’s 2018 Annual Report on Form 10K.

 

-7

 

 

NOTE 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.

 

-8

 

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 no uninsured deposits at March 31, 2019.

 

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 5 – 31 years  
Building and improvements 10 – 40 years  
Machinery and equipment 5 – 10 years  
Computer equipment 3 – 5 years  
Office furniture and fixtures 5 – 10 years  

 

All of the Corporation’s leases are operating leases and are not capitalized as assets for financial reporting purposes. Maintenance and repairs are charged to expense and betterments are capitalized.

 

Long-lived assets are evaluated regularly for other-than-temporary impairment. If circumstances suggest that their value may be impaired and the write-down would be material, an assessment of recoverability is performed prior to any write-down of the asset. Impairment on intangibles is evaluated at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount should be assessed. Impairment, if any, is recognized through a valuation allowance with a corresponding charge recorded in the income statement.

 

-9

 

 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.

 

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.

 

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 Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based upon changes in economic conditions. Also, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

 

Foreclosed Assets

 

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 March 31, 2019. Foreclosed assets totaled $127,605 at March 31, 2019 and December 31, 2018.

 

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. All intangibles were fully amortized as of March 31, 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 March 31, 2019, and December 31, 2018, the policies had a value of $6,812,589 and $6,779,242, respectively, and were 15.1% and 15.5%, respectively, of shareholders’ equity. These values are within regulatory guidelines.

 

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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.

 

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 expensed were $75,750 and $50,901 for the three month periods ended March 31, 2019 and 2018, respectively.

 

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Recent Market and 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.

 

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.

 

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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.

 

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 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 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. 2017-08, 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 had no material impact on the Corporation’s consolidated financial statements.

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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.

 

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.

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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 had no material impact on the Corporation’s consolidated financial statements.

 

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.

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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.

 

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 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. 

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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.

 

NOTE 2

 

Fair Value Measurements

 

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.

 

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

Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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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.

 

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. 

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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.

 

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 March 31, 2019, and December 31, 2018.

 

March 31, 2019  Level 1  Level 2  Level 3  Total
Investment securities available for sale:                    
  U.S. government treasury securities   $3,965,670   $0   $0   $3,965,670 
  U.S. government agency securities    0    46,884,851    0    46,884,851 
  State and municipal securities    0    7,478,656    0    7,478,656 
  Residential mortgage-backed securities   0    4,632,902    0    4,632,902 
     Total  $3,965,670   $58,996,409   $0   $62,962,079 

 

 

December 31, 2018  Level 1  Level 2  Level 3  Total
Investment securities available for sale:                    
  U.S. government treasury securities   $954,570   $0   $0   $954,570 
  U.S. government agency securities    0    45,207,005    0    45,207,005 
  State and municipal securities    0    7,377,935    0    7,377,935 
  Residential mortgage-backed securities   0    4,774,067    0    4,774,067 
     Total  $954,570   $57,359,007   $0   $58,313,577 

-20

 

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 March 31, 2019, and December 31, 2018.

 

March 31, 2019  Level 1  Level 2  Level 3  Total
Foreclosed assets  $0   $0   $127,605   $127,605 
Impaired loans   0    0    3,504,692    3,504,692 
     Total assets at fair value  $0   $0   $3,632,297   $3,632,297 

 

December 31, 2018  Level 1  Level 2  Level 3  Total
Foreclosed assets  $0   $0   $127,605   $127,605 
Impaired loans   0    0    3,838,151    3,838,151 
     Total assets at fair value  $0   $0   $3,965,756   $3,965,756 

 

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.

 

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 March 31, 2019, and December 31, 2018:

 

      Estimated Fair Value
March 31, 2019 

Carrying

Amount

  Level 1  Level 2  Level 3  Total
   (Dollars in thousands)
Assets:                         
  Cash and cash equivalents  $49,015   $49,015   $0   $0   $49,015 
  Certificates of deposit in other banks   2,732    2,732    0    0    2,732 
  Investment securities available for sale   62,962    3,966    58,996    0    62,962 
  Investment securities held to maturity   35,185    0    35,674    0    35,674 
  Federal Home Loan Bank stock   1,020    0    1,020    0    1,020 
  Loans, net   374,327    0    360,840    3,505    364,345 
  Bank owned life insurance   6,813    0    6,813    0    6,813 
Liabilities:                         
  Deposits   488,619    0    457,973    0    457,973 
  Federal Home Loan Bank advances   13,700    0    13,747    0    13,747 

-21

 

 

      Estimated Fair Value
December 31, 2018 

Carrying

Amount

  Level 1  Level 2  Level 3  Total
   (Dollars in thousands)
Assets:                         
  Cash and cash equivalents  $35,499   $35,499   $0   $0   $35,499 
  Certificates of deposit in other banks   2,732    2,732    0    0    2,732 
  Investment securities available for sale   58,314    955    57,359    0    58,314 
  Investment securities held to maturity   36,827    0    37,010    0    37,010 
  Federal Home Loan Bank stock   1,820    0    1,820    0    1,820 
  Loans, net   373,321    0    362,373    3,838    366,211 
  Bank owned life insurance   6,779    0    6,779    0    6,779 
Liabilities:                         
  Deposits   455,640    0    456,245    0    456,245 
  Federal Home Loan Bank advances   31,629    0    31,591    0    31,591 
                          

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.

 

NOTE 3

 

Investment Securities

 

Debt securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities as shown in the consolidated balance sheets and their estimated fair values at March 31, 2019, and December 31, 2018, were as follows:

 

Securities Available For Sale:

 

March 31, 2019 

Amortized

Cost

 

Unrealized

Gains

 

Unrealized

Losses

 

Estimated

Fair Value

             
U.S. government treasury securities  $3,963,014   $9,560   $6,904   $3,965,670 
U.S. government agency securities   46,786,921    563,946    466,017    46,884,850 
State and municipal securities   7,371,821    123,149    16,313    7,478,657 
Residential mortgage-backed securities   4,587,762    48,726    3,586    4,632,902 
                     
       Total debt securities AFS  $62,709,518   $745,381   $492,820   $62,962,079 

 

-22

 

 

December 31, 2018 

Amortized

Cost

 

Unrealized

Gains

 

Unrealized

Losses

 

Estimated

Fair Value

             
U.S. government treasury securities  $982,044   $0   $27,474   $954,570 
U.S. government agency securities   45,823,595    264,567    881,157    45,207,005 
State and municipal securities   7,394,278    30,579    46,922    7,377,935 
Residential mortgage-backed securities   4,769,668    21,579    17,180    4,774,067 
                     
       Total debt securities AFS  $58,969,585   $316,725   $972,733   $58,313,577 

 

Securities Held to Maturity:

 

March 31, 2019 

Amortized

Cost

 

Unrealized

Gains

 

Unrealized

Losses

 

Estimated

Fair Value

             
State and municipal securities  $29,216,837   $391,743   $26,272   $29,582,308 
Residential mortgage-backed securities   5,968,046    124,896    883    6,092,059 
                     
       Total securities HTM  $35,184,883   $516,639   $27,155   $35,674,367 

 

December 31, 2018 

Amortized

Cost

 

Unrealized

Gains

 

Unrealized

Losses

 

Estimated

Fair Value

             
State and municipal securities  $30,582,785   $208,480   $67,434   $30,723,831 
Residential mortgage-backed securities   6,244,288    49,490    7,282    6,286,496 
                     
       Total securities HTM  $36,827,073   $257,970   $74,716   $37,010,327 

 

The amortized cost and estimated fair value of securities at March 31, 2019, and 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.

 

March 31, 2019      
Available for Sale: 

Amortized

Cost

 

Estimated

Fair Value

       
Amounts maturing in:          
  One year or less  $3,140,872   $3,125,810 
  After one through five years   34,952,755    35,257,684 
  After five through ten years   19,183,448    19,097,610 
  After ten years   5,432,443    5,480,975 
           
     Total debt securities AFS  $62,709,518   $62,962,079 
           
Held to Maturity:   

Amortized

Cost

    

Estimated

Fair Value

 
           
Amounts maturing in:          
  One year or less  $6,480,829   $6,489,447 
  After one through five years   11,885,478    12,001,454 
  After five through ten years   11,125,453    11,354,541 
  After ten years   5,693,123    5,828,925 
           
     Total securities HTM  $35,184,883   $35,674,367 

-23

 

December 31, 2018      
Available for Sale: 

Amortized

Cost

 

Estimated

Fair Value

       
Amounts maturing in:          
  One year or less  $2,147,059   $2,124,645 
  After one through five years   29,691,474    29,674,236 
  After five through ten years   21,585,776    20,968,318 
  After ten years   5,545,276    5,546,378 
          
     Total debt securities AFS  $58,969,585   $58,313,577 
           
Held to Maturity:   

Amortized

Cost

    

Estimated

Fair Value

 
           
Amounts maturing in:          
  One year or less  $6,483,464   $6,497,910 
  After one through five years   12,885,021    12,961,209 
  After five through ten years   11,035,146    11,097,382 
  After ten years   6,423,442    6,453,826 
           
     Total securities HTM  $36,827,073   $37,010,327 

 

The following tables summarize the activity of security sales by intention and year for the three months ended March 31, 2019, and 2018.

 

Securities Available For Sale:                                               

 

   March 31, 2019  March 31, 2018
       
Proceeds of sales  $0   $0 
           
Gross gains  $0   $0 
Gross losses   0    0 
       Net gains (losses) on sales of  available for sale securities  $0   $0 

 

Securities Held to Maturity:

 

   March 31, 2019  March 31, 2018
       
Amortized cost of securities sold  $0   $0 
Proceeds from sales   0    0 
           
       Net gains on sales of  held to maturity securities  $0   $0 

 

-24

 

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:

 

March 31, 2019  Less Than Twelve Months  Twelve Months or More
   Gross Unrealized Losses 

 

Fair

Value

  Gross Unrealized Losses 

 

Fair

Value

Securities Available for Sale                    
Temporarily impaired debt securities:                    
U.S. government treasury securities  $0   $0   $6,904   $975,660 
U.S. government agency securities   0    0    466,017    22,346,327 
State and municipal securities   0    0    16,313    1,831,683 
Residential mortgage-backed securities   0    0    3,586    122,791 
Total debt securities available for sale  $0   $0   $492,820   $25,276,461 
                     
Securities Held to Maturity                    
Temporarily impaired debt securities:                    
State and municipal securities  $0   $0   $26,272   $2,515,563 
Residential mortgage-backed securities   0    0    883    304,019 
Total securities held to maturity  $0   $0   $27,155   $2,819,582 

 

December 31, 2018  Less Than Twelve Months  Twelve Months or More
   Gross Unrealized Losses 

 

Fair

Value

  Gross Unrealized Losses 

 

Fair

Value

Securities Available for Sale                    
Temporarily impaired debt securities:                    
U.S. government treasury securities  $0   $0   $27,474   $954,570 
U.S. government agency securities   33,077    6,073,337    848,080    20,015,052 
State and municipal securities   3,209    306,792    43,713    1,813,173 
Residential mortgage-backed securities   14,199    3,032,237    2,981    129,410 
Total debt securities available for sale  $50,485   $9,412,366   $922,248   $22,912,205 
                     
Securities Held to Maturity                    
Temporarily impaired debt securities:                    
State and municipal securities  $20,209   $7,359,536   $47,225   $2,782,627 
Residential mortgage-backed securities   5,671    879,487    1,611    89,464 
Total securities held to maturity  $25,880   $8,239,023   $48,836   $2,872,091 

 

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 March 31, 2019, thirty-four debt securities with unrealized losses have depreciated 1.8% from the Corporation’s amortized cost basis. 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.

-25

 

NOTE 4

 

Loans and Allowance for Loan Losses

 

The composition of the Corporation’s loan portfolio and the percentage of loans in each category to total loans at March 31, 2019 and December 31, 2018, were as follows:

             
   March 31, 2019  December 31, 2018
             
Commercial, financial and agricultural loans  $88,999,975    23.6%  $88,403,215    23.5%
Real estate:                    
Construction loans   26,092,085    6.9%   24,890,536    6.6%
Commercial mortgage loans   121,855,453    32.3%   123,477,369    32.8%
Residential loans   103,995,725    27.5%   103,347,898    27.4%
Agricultural loans   31,505,959    8.3%   31,561,686    8.4%
Consumer & other loans   5,262,568    1.4%   5,086,984    1.3%
                     
         Loans outstanding   377,711,765    100.0%   376,767,688    100.0%
                     
Unearned interest and discount   (17,390)        (17,451)     
Allowance for loan losses   (3,366,927)        (3,428,869)     
       Net loans  $374,327,448        $373,321,368      

 

The Corporation’s only significant concentration of credit at March 31, 2019, occurred in real estate loans which totaled $283,449,222 compared with $283,277,489 at December 31, 2018. However, this amount was not concentrated in any specific segment within the market or geographic area.

 

At March 31, 2019, the lendable collateral value of the 1 – 4 family and multifamily mortgage loans that were pledged to FHLB to secure outstanding advances was $66,722,482. FHLB has a blanket lien on the 1 – 4 family and multifamily portfolios, which totaled $115,773,588.

 

The following table shows maturities as well as interest sensitivity of the commercial, financial, agricultural, and construction loan portfolio at March 31, 2019.

  

Commercial,

Financial,

Agricultural and

Construction

    
Distribution of loans which are due:     
     In one year or less  $35,327,184 
     After one year but within five years   54,757,452 
     After five years   25,007,424 
      
          Total  $115,092,060 

-26

 

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 March 31, 2019.

 

    Loans With        
    Predetermined   Loans With    
    Rates   Floating Rates   Total
             
Commercial, financial,            
agricultural and construction   $ 76,439,177   $ 3,325,699   $ 79,764,876

 

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 $905,068 and $1,204,861 at March 31, 2019, and December 31, 2018, respectively. There were no past due loans over ninety days and still accruing at March 31, 2019, or December 31, 2018. 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 $9,896 for March 31, 2019, and $64,015 for December 31, 2018.

 

The following tables present an age analysis of past due loans still accruing interest and nonaccrual loans segregated by class of loans.

 

   Age Analysis of Past Due Loans
As of March 31, 2019
   30-89 Days Past Due   90 Days or Greater  Total Past Due Loans  Nonaccrual Loans  Current Loans  Total Loans
                   
Commercial, financial and
agricultural loans
  $556,388   $0   $556,388   $0   $88,443,587   $88,999,975 
Real estate:                              
Construction loans   536,090    0    536,090    0    25,555,995    26,092,085 
Commercial mortgage loans   204,250    0    204,250    839,854    120,811,349    121,855,453 
Residential loans   1,638,063    0    1,638,063    65,214    102,292,448    103,995,725 
Agricultural loans   193,800    0    193,800    0    31,312,159    31,505,959 
Consumer & other loans   31,862    0    31,862    0    5,230,706    5,262,568 
                               
         Total loans  $3,160,453   $0   $3,160,453   $905,068   $373,646,244   $377,711,765 

-27

 

   Age Analysis of Past Due Loans
As of December 31, 2018
   30-89 Days Past Due 

90 Days

or Greater

  Total Past Due Loans  Nonaccrual Loans  Current Loans  Total Loans
                   
Commercial, financial and
agricultural loans
  $247,397   $0   $247,397   $36,157   $88,119,661   $88,403,215 
Real estate:                              
Construction loans   0    0    0    0    24,890,536    24,890,536 
Commercial mortgage loans   0    0    0    1,022,550    122,454,819    123,477,369 
Residential loans   1,560,913    0    1,560,913    146,154    101,640,831    103,347,898 
Agricultural loans   321,319    0    321,319    0    31,240,367    31,561,686 
Consumer & other loans   36,654    0    36,654    0    5,050,330    5,086,984 
                               
         Total loans  $2,166,283   $0   $2,166,283   $1,204,861   $373,396,544   $376,767,688 

 

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 March 31, 2019, and December 31, 2018, impaired loans amounted to $4,332,409 and $4,356,381, respectively. A reserve amount of $827,717 and $518,230 was recorded in the allowance for loan losses for these impaired loans as of March 31, 2019, and December 31, 2018, respectively.

 

The following tables present impaired loans, segregated by class of loans as of March 31, 2019, and December 31, 2018:

 

   Unpaid  Recorded Investment     Year-to-date
Average
  Interest
Income Received
March 31, 2019  Principal Balance  With No Allowance  With Allowance  Total  Related Allowance  Recorded Investment  During Impairment
                      
Commercial, financial and
agricultural loans
  $1,420,052   $78,507   $1,254,891   $1,333,398   $562,925   $461,763   $8,225 
Real estate:                                   
Construction loans   393,898    273,098    0    273,098    0    273,098    5,253 
Commercial mortgage loans   1,661,727    346,979    954,250    1,301,229    38,678    1,097,539    9,701 
Residential loans   1,432,181    327,454    1,083,815    1,411,269    225,215    1,318,080    28,979 
Agricultural loans   0    0    0    0    0    0    0 
Consumer & other loans   13,415    0    13,415    13,415    899    13,415    346 
                                    
         Total loans  $4,921,273   $1,026,038   $3,306,371   $4,332,409   $827,717   $3,163,895   $52,504 

 

-28

 

   Unpaid  Recorded Investment     Year-to-date
Average
  Interest
Income Received
December 31, 2018  Principal Balance  With No Allowance  With Allowance  Total  Related Allowance  Recorded Investment  During Impairment
                      
Commercial, financial and
agricultural loans
  $184,899   $87,525   $568,816   $656,341   $276,392   $370,038   $52,411 
Real estate:                                   
Construction loans   402,234    281,434    0    281,434    0    281,434    25,364 
Commercial mortgage loans   1,787,305    1,277,611    333,892    1,611,503    51,854    1,544,299    45,403 
Residential loans   1,801,002    1,027,647    752,443    1,780,090    188,368    1,594,390    127,806 
Agricultural loans   12,526    12,526    0    12,526    0    12,526    5,530 
Consumer & other loans   0    0    14,487    14,487    1,616    14,487    820 
                                    
         Total loans  $4,187,966   $2,686,743   $1,669,638   $4,356,381   $518,230   $3,817,174   $257,334 

  

At March 31, 2018, the year-to-date average recorded investment of impaired loans was $3,803,413 and the interest income received during impairment was $59,744.

 

At March 31, 2019, and December 31, 2018, included in impaired loans were $4,275 and $7,458, respectively, of troubled debt restructurings.

 

Troubled Debt Restructurings (TDR)

 

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.

 

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.

 

-29

 

The following tables present the amount of troubled debt restructuring by loan class, classified separately as accrual and nonaccrual at March 31, 2019, and December 31, 2018, as well as those currently paying under restructured terms and those that have defaulted under restructured terms as of March 31, 2019, and December 31, 2018. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 or more days past due.

   March 31, 2019
         Under restructured terms
  

 

Accruing

  Non-accruing 

 

#

 

 

Current

 

 

#

 

 

Default

Commercial, financial, and
agricultural loans
  $4,275   $0    1   $4,275    0   $0 
Real estate:                              
   Construction loans   0    0    0    0    0    0 
   Commercial mortgage loans   0    0    0    0    0    0 
   Residential loans   0    0    0    0    0    0 
   Agricultural loans   0    0    0    0    0    0 
Consumer & other loans   0    0    0    0    0    0 
Total TDR’s  $4,275   $0    1   $4,275    0   $0 

 

   December 31, 2018
         Under restructured terms
  

 

Accruing

  Non-accruing 

 

#

 

 

Current

 

 

#

 

 

Default

Commercial, financial, and
agricultural loans
  $5,570   $0    1   $5,570    0   $0 
Real estate:                              
   Construction loans   0    0    0    0    0    0 
   Commercial mortgage loans   0    0    0    0    0    0 
   Residential loans   1,888    0    1    1,888    0    0 
   Agricultural loans   0    0    0    0    0    0 
Consumer & other loans   0    0    0    0    0    0 
Total TDR’s  $7,458   $0    2   $7,458    0   $0 

 

The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and non-accrual at March 31, 2019, and December 31, 2018.

 

   March 31, 2019  December 31, 2018
   Accruing  Nonaccruing  Accruing  Nonaccruing
   #  Balance  #  Balance  #  Balance  #  Balance
Type of concession:                        
Payment modification   0   $0    0   $0    0   $0    0   $0 
Rate reduction   0    0    0    0    0    0    0    0 
Rate reduction, payment modification   1    4,275    0    0    1    1,888    0    0 
Forbearance of interest   0    0    0    0    1    5,570    0    0 
Total   1   $4,275    0   $0    2   $7,458    0   $0 

 

As of March 31, 2019, and December 31, 2018, the Corporation had a balance of $4,275 and $7,458, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans at March 31, 2019, and December 31, 2018. The Corporation had $4,275 in the allowance for loan losses allocated to such troubled debt restructurings at March 31, 2019, and no balance allocated at December 31, 2018. The Corporation had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of March 31, 2019.

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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.

 

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.

-31

 

Grade 7 – Doubtful – Loans graded 7 have such a 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 March 31, 2018, all Grade 8 loans have been charged-off.

 

The following tables present internal loan grading by class of loans as of March 31, 2019, and December 31, 2018:

March 31, 2019 

 

Commercial, Financial, and Agricultural

  Construction Real Estate  Commercial Real Estate  Residential Real Estate  Agricultural Real Estate  Consumer and Other  Total
Rating:                     
Grade 1- Exceptional  $1,389,477   $0   $0   $22,656   $0   $199,257   $1,611,390 
Grade 2- Above Avg.   0    0    0    0    0    43,134    43,134 
Grade 3- Acceptable   23,896,901    2,140,022    28,634,023    26,258,915    17,060,292    1,815,446    99,805,599 
Grade 4- Fair   62,003,261    23,429,965    88,485,618    73,773,119    14,445,667    3,184,099    265,321,729 
Grade 5a- Watch   758,902    273,098    1,908,525    2,006,308    0    14,950    4,961,783 
Grade 5b- OAEM   244,637    0    0    0    0    0    244,637 
Grade 6- Substandard   702,441    249,000    2,400,340    712,620    0    4,397    4,068,798 
Grade 7- Doubtful   4,356    0    426,947    1,222,107    0    1,285    1,654,695 
       Total loans  $88,999,975   $26,092,085   $121,855,453   $103,995,725   $31,505,959   $5,262,568   $377,711,765 

 

December 31, 2018  Commercial, Financial, and Agricultural  Construction Real Estate  Commercial Real Estate  Residential Real Estate  Agricultural Real Estate  Consumer and Other  Total
Rating:                     
Grade 1- Exceptional  $1,237,602   $0   $0   $22,905   $0   $210,045   $1,470,552 
Grade 2- Above Avg.   0    0    0    0    0    43,711    43,711 
Grade 3- Acceptable   23,821,846    1,860,003    30,398,565    25,839,646    16,863,356    1,151,239    99,934,655 
Grade 4- Fair   58,753,931    22,749,099    88,122,957    73,114,310    14,698,330    3,657,108    261,095,735 
Grade 5a- Watch   473,616    0    2,411,710    722,441    0    6,206    3,613,973 
Grade 5b- OAEM   3,079,098    0    446,841    1,299,587    0    2,168    4,827,694 
Grade 6- Substandard   787,309    281,434    2,097,296    2,349,009    0    16,507    5,531,555 
Grade 7- Doubtful   249,813    0    0    0    0    0    249,813 
       Total loans  $88,403,215   $24,890,536   $123,477,369   $103,347,898   $31,561,686   $5,086,984   $376,767,688 

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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.

 

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the three-month period ended March 31, 2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. The annualized net charge-offs to average loans outstanding ratio was 0.19% for the three months ended March 31, 2019, compared with 0.13% at December 31, 2018.

-33

 

 

Three months ended March 31, 2019:

 

March 31, 2019  Commercial, Financial, and Agricultural  Construction Real Estate  Commercial Real Estate  Residential Real Estate  Agricultural Real Estate  Consumer and Other  Total
Allowance for loan losses:                     
Beginning balance, December 31, 2018  $402,251   $1,043,027   $1,210,302   $458,871   $108,878   $205,540   $3,428,869 
                                    
Charge-offs   0    0    184,696    0    0    0    184,696 
Recoveries   2,696    0    3,368    0    0    782    6,846 
Net charge-offs   (2,696)   0    181,328    0    0    (782)   177,850 
Provisions charged to operations   98,375    0    48,695    0    (31,998)   836    115,908 
Balance at end of period, March 31, 2019  $503,322   $1,043,027   $1,077,669   $458,871   $76,880   $207,158   $3,366,927 
                                    
Ending balance -                                   
Individually evaluated
for impairment
  $562,925   $0   $38,678   $225,215   $0   $899   $827,717 
Collectively evaluated for impairment   (59,603)   1,043,027    1,038,991    233,656    76,880    206,259    2,539,210 
Balance at end of period  $503,322   $1,043,027   $1,077,669   $458,871   $76,880   $207,158   $3,366,927 
                                    
Loans :                                   
Ending balance -                                   
Individually evaluated
for impairment
  $1,333,398   $273,098   $1,301,229   $1,411,269   $0   $13,415   $4,332,409 
Collectively evaluated for impairment   87,666,577    25,818,987    120,554,224    102,584,456    31,505,959    5,249,153    373,379,356 
Balance at end of period  $88,999,975   $26,092,085   $121,855,453   $103,995,725   $31,505,959   $5,262,568   $377,711,765 

 

At March 31, 2019, of the $4,381,133 loans that were individually evaluated for impairment, only $4,332,409 were deemed impaired.

-34

 

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the year ended December 31, 2018.

 

December 31, 2018  Commercial, Financial, and Agricultural  Construction Real Estate  Commercial Real Estate  Residential Real Estate  Agricultural Real Estate  Consumer and Other  Total
Allowance for loan losses:                     
Beginning balance, December 31, 2017  $324,260   $1,043,083   $1,056,595   $416,474   $11,560   $191,660   $3,043,632 
                                    
Charge-offs   548,460    783    43,349    6,909    0    6,844    606,345 
Recoveries   12,025    0    590    0    147,252    2,215    162,082 
Net charge-offs   536,435    783    42,759    6,909    (147,252)   4,629    444,263 
Provisions charged to operations   614,426    727    196,466    49,306    (49,934)   18,509    829,500 
Balance at end of period, December 31, 2018  $402,251   $1,043,027   $1,210,302   $458,871   $108,878   $205,540   $3,428,869 
                                    
Ending balance -                                   
Individually evaluated
for impairment
  $276,392   $0   $51,854   $188,368   $0   $1,616   $518,230 
Collectively evaluated for impairment   125,859    1,043,027    1,158,448    270,503    108,878    203,924    2,910,639 
Balance at end of period  $402,251   $1,043,027   $1,210,302   $458,871   $108,878   $205,540   $3,428,869 
                                    
Loans :                                   
Ending balance -                                   
Individually evaluated
for impairment
  $656,341   $281,434   $1,611,503   $1,929,214   $12,526   $14,487   $4,505,505 
Collectively evaluated for impairment   87,746,874    24,609,102    121,865,866    101,418,684    31,549,160    5,072,497    372,262,183 
Balance at end of period  $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.

-35

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

In addition to historical information, this Form 10-Q report contains forward-looking statements within the meaning of the federal securities laws. 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.

 

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.

-36

 

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.

 

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 the first quarter 2019, noninterest income, at 17.2% of the Corporation’s total revenue, increased as most sources of noninterest income improved when compared with the first quarter 2018.

-37

 

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.

 

The Corporation’s nonperforming assets were $1.03 million at the end of March 31, 2019, down from $1.33 million at December 31, 2018, due to a decrease of $300 thousand in nonaccrual loans and down $473 thousand when compared with the first quarter 2018 due to nonaccrual loans decreasing $601 thousand and foreclosed assets increasing $128 thousand.

 

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 March 31, 2019, is adequate; however, under adverse conditions or assumptions, future additions to the allowance may be necessary. There have been no significant changes in the methods or assumptions used in our accounting policies that would have resulted in material estimates and assumptions changes. Note 1 to the Consolidated Financial Statements provides a description of our significant accounting policies and contributes to the understanding of how our financial performance is reported.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

The liquidity and capital resources of the Corporation are monitored on a periodic basis by state and Federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Bank’s liquidity ratios at March 31, 2019, were considered satisfactory. At that date, the Bank’s short-term investments were adequate to cover any reasonably anticipated immediate need for funds. We are not aware of any known trends, events, or uncertainties that will have or that are reasonably likely to have a material adverse effect on the Corporation’s liquidity or operations. At March 31, 2019, the Corporation’s and the Bank’s risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. During the three months ended March 31, 2019, total capital increased $1.641 million to $45.3 million and increased $3.93 million from the same period last year. Also, the Corporation continues to maintain a healthy level of capital adequacy as measured by its equity-to-asset ratio of 8.21% as of March 31, 2019, and average equity-to-average asset ratio for the first quarter ending March 31, 2019, of 8.19%. The Corporation is not aware of any events or trends likely to result in a material change in capital resources other than the effects of normal operations on the retention of net earnings. Also, the Corporation’s management is not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have a material effect on the Corporation’s capital resources. 

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RESULTS OF OPERATIONS

 

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

 

Performance Summary

 

The Corporation's net income after taxes for the three-month period ending March 31, 2019, was $1.2 million, down $4 thousand from net income of $1.2 million for the first quarter of 2018. Net interest income grew over 7% to $4.8 million due primarily to a $45.3 million growth in average loans and increases in noninterest income and noninterest expense of $243 thousand and $420 thousand, respectively, and a decrease in provision for loan loss of $100 thousand.

 

On a per share basis, net income for the first quarter remained flat compared to the same quarter in 2018 at $0.48 per diluted share. The weighted average common diluted shares outstanding for the quarter were 2.546 million, up from 2.545 million first quarter last year. In the first quarter of 2018, the Corporation retired its treasury stock. The number of treasury shares retired was 1,748,059.

 

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

 

   1st Qtr  4th Qtr  3rd Qtr  2nd Qtr  1st Qtr
   2019  2018  2018  2018  2018
Return on average total assets   0.91%   0.85%   0.90%   0.91%   0.99%
Return on average total equity   11.06%   10.48%   10.74%   11.00%   11.89%
Average shareholders’ equity to
Average total assets
   8.19%   8.09%   8.36%   8.28%   8.33%
Net interest margin (tax equivalent)   3.82%   3.94%   4.08%   3.96%   4.05%

 

Comparison of Statements of Income for the Quarter

 

Total interest income increased $900 thousand to $6 million for the three months ended March 31, 2019, compared with the same period in 2018, reflecting an increase in interest income and fees on loans of $828 thousand. Interest on deposits and certificates of deposit in other banks increased $53 thousand and $5 thousand, respectively, when compared with the first quarter of 2018. Also, interest income and dividends from investment securities increased $13 thousand compared with the same period last year.

 

Total interest expense increased $582 thousand, or 95%, to $1.2 million in the first quarter of 2019 compared with the same period in 2018. Interest paid on deposits increased $678 thousand, or 182%, during the first quarter of 2019 due to a 46 basis point increase in rate paid on interest-bearing deposits as well as an $86.1 million increase in average interest-bearing deposit volume compared with the first quarter of 2018. Total interest on borrowings decreased $96 thousand compared with the same quarter in 2018 due to a $22.4 million lower average volume of Federal Home Loan Bank Advances. 

 

The primary source of revenue for the Corporation is net interest income, which is the difference between total interest income on earning assets and interest expense on interest-bearing sources of funds. Net interest income improved to $4.8 million for the first quarter of 2019 compared with $4.4 million in net interest income in the 2018 first quarter. Net interest income after provision for loan losses for the first quarter of 2019 was $4.7 million compared with $4.2 million for the same period in 2018 as the first quarter provision for loan losses was down $100 thousand to $116 thousand in 2019. The Corporation’s net interest margin was 3.82% for the first quarter of 2019, down 16 basis points from the same period last year. The lower net interest margin was primarily related to the 46 basis point increase in rates paid on interest bearing deposits mentioned previously.

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Noninterest income, at 17.2% of the Corporation’s total revenue for the quarter, was $1.2 million for the first quarter, up $243 thousand compared with the same period in 2018. The increase in noninterest income was primarily the result of a $143 thousand gain on the extinguishment of debt recognized. Also contributing to the increase was a $14 thousand increase in income from service charges on deposit accounts and a $48 thousand increase in income from insurance services. Income from retail brokerage services, other income, and net gain or loss on the sale or disposition of assets increased by $18 thousand, $14 thousand, and $8 thousand, respectively, compared with the first quarter last year. Partially offsetting these increases was a $2 thousand decrease in income from trust services compared with the first quarter last year.

 

Noninterest expense was $4.4 million for the first quarter of 2019, an increase of $420 thousand when compared with the first quarter of 2018. The largest component of noninterest expense, salaries and employee benefits, increased $155 thousand to $2.5 million for the first quarter of 2019 as hourly wages increased and management made a number strategic hires to support the Corporation.  Equipment, data processing, and other expenses increased $118 thousand, $50 thousand, and $72 thousand, respectively. The increase in equipment are due to an increase in depreciation expense and maintenance on new equipment purchased to support technological advances. Also contributing to the increase is occupancy expense which increased $25 thousand when compared to first quarter 2018.

 

Comparison of Financial Condition Statements

 

At March 31, 2019, total assets were $551.1 million, a $16.2 million increase from December 31, 2018. Interest-bearing deposits in other banks grew $16.2 million and total loans increased $1.0 million which was primarily funded by an increase in total deposits of $33 million at March 31, 2019, mostly in money market and noninterest-bearing deposit accounts.

 

Total loans increased $1.0 million to $377.7 million at March 31, 2019, compared with $376.8 million at December 31, 2018. The Corporation continues to be conservative in its lending practices in order to maintain a quality loan portfolio. Loans, a major use of funds, represented 68.5% of total assets at March 31, 2019.

 

Investment securities, interest-bearing deposits in other banks, and certificates of deposit in other banks represented 25.3% of total assets at March 31, 2019. Compared with December 31, 2018, interest-bearing deposits in other banks increased $16.2 million and investment securities increased $2.2 million while certificates of deposit in other banks remained flat. This resulted in an overall increase in investments of $18.4 million since December 31, 2018.

 

Deposits increased to $488.6 million at the end of the first quarter of 2019, up $33 million from the end of 2018. The increase was primarily in interest bearing business checking accounts of $5.3 million, money market deposit accounts of $5.2 million, and noninterest-bearing deposits of $11 million. NOW accounts, savings accounts and total certificates of deposit accounts also increased $4.8 million, $1.7 million, and $4.9 million, respectively, compared with December 31, 2018. At March 31, 2019, total deposits represented 88.7% of total assets.

 

Total debt decreased $17.9 million when compared with the year-end 2018. Short-term borrowed funds consist of Federal Home Loan Bank advances of $3.1 million and $1 million in borrowings from First National Bankers Bank as of March 31, 2019, compared with $10.5 million at December 31, 2018. $1.6 million of short-term borrowings are short-term portions of long-term principal reducing Federal Home Loan Bank advances. The Corporation will repay the Federal Home Loan Bank long-term advances as scheduled. The following table shows the major contractual obligations for the Corporation. 

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Long-term debt consists of the following:

   March 31,  December 31,  March 31,
   2019  2018  2018
          
Advance from FHLB with a 1.259% fixed rate of interest maturing September 30, 2020  (principal reducing hybrid advance with principal reductions of $1.6 million).  $1,600,000   $1,600,000   $3,200,000 
                
Advance from FHLB with a 1.9425% fixed rate of interest maturing December 16, 2022  (principal reducing hybrid advance with principal reductions of $857 thousand annually).   0    2,571,429    3,428,571 
                
Advance from FHLB with a 1.419% fixed rate of interest maturing August 30, 2023  (principal reducing hybrid advance with principal reductions of $857 thousand annually).   0    0    4,285,715 
                
Advance from FHLB with a 1.60% fixed rate of interest maturing July 10, 2019.   0    0    1,500,000 
                
Advance from FHLB with a 1.80% fixed rate of interest maturing July 10, 2020.   2,000,000    2,000,000    2,000,000 
                
Advance from FHLB with a 1.925% fixed rate of interest maturing September 28, 2022  (principal reducing hybrid advance with principal reductions of $2.0 million annually).   0    6,000,000    8,000,000 
                
Advance from FHLB with a 2.337% fixed rate of interest maturing December 5, 2024  (principal reducing hybrid advance with principal reductions of $857 thousand annually).   0    0    5,142,857 
                
 Advance from FHLB with a 3.018% fixed rate of interest maturing September 17, 2021.   0    3,000,000    0 
                
 Advance from FHLB with a 3.192% fixed rate of interest maturing September 20, 2023.   3,000,000    3,000,000    0 
                
 Advance from FHLB with a 3.4% fixed rate of interest maturing September 20, 2025.   3,000,000    3,000,000    0 
                
Total long-term debt  $9,600,000   $21,171,429   $27,557,143 

 

Due to an increase in liquidity, the Corporation elected to retire a portion of its long-term debt prior to maturity. During the three months ended March 31, 2019, $11,571,429 was retired early, and the Corporation recognized a net gain of $143,031 on the early retirement. There were no early retirements of long-term debt during the three months ended March 31, 2018.

 

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

 

Other factors used in determining the adequacy of the reserve are management’s judgment about factors affecting loan quality and their assumptions about the local and national economy. The allowance for loan losses was 0.89% of total loans outstanding at March 31, 2019, compared with 0.91% at December 31, 2018, and 0.95% at March 31, 2018. In the 2019 first quarter, net charge-offs were $178 thousand compared with net charge-offs of $89 thousand in the first quarter of 2018. Management considers the allowance for loan losses as of March 31, 2019, adequate to cover potential losses in the loan portfolio. For more information about loans, see Part I, Item 1, “Note 4 – Loans and Allowance for Loan Losses.”

 

Nonperforming assets were $1.0 million, or 0.19% of total assets, in the first quarter of 2019, down from $1.3 million, or 0.25% of total assets, at the end of 2018, and down from $1.5 million, or 0.30% of total assets in the same period last year. Nonaccrual loans were $905 thousand in the first quarter of 2019 mostly concentrated in two commercial customer relationships totaling $840 thousand.

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Off-Balance Sheet Arrangements

 

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

 

Financial instruments whose contract amounts

represent credit risk (dollars in thousands):

 

March 31,

2019

 

December 31,

2018

Commitments to extend credit  $37,544   $39,418 
Standby letters of credit and financial guarantees  $4,280   $4,343 

 

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

 

Capital Resources and Dividends

 

The Corporation considers a solid capital foundation as essential to continued strength and growth as well as return to our shareholders. Risk-based capital requirements and rules became effective January 1, 2015, with some conditions that phase in through January 2019. These requirements and rules increase the minimum capital ratios, add a new ratio (CET1), and designate a standardized approach for risk-weighting assets.

 

As of March 31, 2019, the Corporation met the definition under Basel III of a small bank holding company and, therefore, was exempt from the new consolidated risk-based and leverage capital adequacy guidelines for bank holding companies.

 

Total risk-based capital for the Corporation and the Bank are composed of CET1, additional Tier 1 capital, and Tier 2 capital. CET 1 capital includes common stock plus related surplus and retained earnings less intangible assets. Additional Tier 1 capital is currently the same as the CET1. Tier 2 capital consists of allowances for possible loan and lease losses, subject to limitations. The Tier 1 leverage ratio is based on average assets. Our total risk-based capital ratio now stands at 13.14%, which is 3.1 percent in excess of the regulatory standard for “well-capitalized”. See Footnote 1, Summary of Significant Accounting Policies, Recent Market and Regulatory Developments section, elsewhere in this report for further discussion on Basel III and capital requirements. The Corporation’s and the Bank’s risk-based capital ratios as of March 31, 2019, are shown in the following table.

 

Risk Based Capital Ratios
            Basel III Regulatory Guidelines
   Southwest         
   Georgia  Southwest     Required Minimum
   Financial  Georgia  For Well  Capital
Risk-Based Capital Ratios  Corporation(1)  Bank  Capitalized  Plus Buffer
Common Equity Tier 1 capital   12.26%   11.70%   6.50%   7.00%
Tier 1 capital   12.26%   11.70%   8.00%   8.50%
Total risk-based capital   13.14%   12.58%   10.00%   10.50%
Tier 1 leverage ratio   8.61%   8.24%   5.00%   4.00%
                     
                     

(1) Corporation meets the requirements of the exemption as a small bank holding company.

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In March 2019, the Corporation paid a quarterly cash dividend of $0.12 per common share. A cash dividend of $0.12 per common share was also paid in December, September, June 2018 and $0.11 cash dividend per common share was paid in March 2018. The Board of Directors will continue to assess conditions for future dividend payments.

 

Interest Rate Sensitivity

 

The Corporation’s most important element of asset/liability management is the monitoring of its sensitivity and exposure to interest rate movements which is the Corporation’s primary market risk. We have no foreign currency exchange rate 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

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ITEM 4. 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 the end of the period covered by this report. Based on, and as of the date of, that evaluation, the Corporation’s Chief Executive Officer and 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 March 31, 2019, was included in Item 8 of the form 10K , dated December 31, 2018, under the heading “Management’s Report on Internal Control Over Financial Reporting”.

 

The annual report form 10K, dated December 31, 2018, does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits the Corporation to provide only management’s report in the annual report.

 

Changes in Internal Control over Financial Reporting

 

No changes were made to the Corporation’s internal control over financial reporting during this quarter that materially affected or could reasonably likely to materially affect the Corporation’s internal controls over financial reporting.

 

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PART II. - OTHER INFORMATION

 ITEM 6.

EXHIBITS

 

  Exhibit 31.1 Section 302 Certification of Periodic Financial Report by
    Chief Executive Officer.
     
  Exhibit 31.2 Section 302 Certification of Periodic Financial Report by
    Principal Financial Officer.
     
  Exhibit 32.1 Section 906 Certification of Periodic Financial Report by
    Chief Executive Officer.
     
  Exhibit 32.2 Section 906 Certification of Periodic Financial Report by
    Principal Financial Officer.
     
  Exhibit 101 Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2019, is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at March 31, 2019, and December 31, 2018; (ii) Consolidated Statements of Income for the three months ended March 31, 2019, and 2018; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019, and 2018;  (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018; and (v) Notes to Consolidated Financial Statements.

 

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    SOUTHWEST GEORGIA FINANCIAL CORPORATION
    /s/Karen T. Boyd
     
  BY:    KAREN T. BOYD
    SENIOR VICE PRESIDENT AND TREASURER

 

Date: May 14, 2019

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