Company Quick10K Filing
Southwest Georgia Financial
Price21.45 EPS2
Shares3 P/E11
MCap55 P/FCF11
Net Debt-24 EBIT11
TEV31 TEV/EBIT3
TTM 2019-09-30, in MM, except price, ratios
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SGB 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10 - K Summary
EX-99.2 BYLAWS tenk19ex992bylaws.htm
EX-10.12 ex1012restrstockagreement.htm
EX-21 ex21subsidiariesofregistrant.htm
EX-31.1 tenk19ex311.htm
EX-31.2 tenk19ex312.htm
EX-32.1 tenk19ex321.htm
EX-32.2 tenk19ex322.htm

Southwest Georgia Financial Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

10-K 1 tenk19.htm FORM 10-K

U.S. Securities and Exchange Commission

Washington, D. C. 20549

 

Form 10-K

 

[ X ]Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2019

 

[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____ to _____ .

 

Commission file number 001-12053

 

Southwest Georgia Financial Corporation

(Exact Name of Corporation as specified in its charter)

Georgia   58-1392259
(State Or Other Jurisdiction Of   (I.R.S. Employer
Incorporation Or Organization)   Identification No.)
     
201 First Street, S.E.    
Moultrie, Georgia   31768
(Address of Principal Executive Offices)   (Zip Code)

 

(Corporation’s telephone number, including area code) (229) 985-1120

 

Securities registered pursuant to Section 12(b) of this Act:

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock, $1.00 par value per share   SGB   NYSE American

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically 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 and post such files). Yes [X] No [ ]

 

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

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [X] Smaller reporting company [X] Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X ]

 

Aggregate market value of voting and non-voting stock held by nonaffiliates of the registrant as of June 30, 2019: $41,776,791 based on 2,003,683 shares at the price of $20.85 per share.

 

As of March 26, 2020, [2,547,424] shares of the $1.00 par value common stock of Southwest Georgia Financial Corporation were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Pursuant to Instruction G of Form 10-K, Part III of this Annual Report on Form 10-K incorporates information by reference from the Registrant’s definitive proxy statement or amendment hereto to be filed within 120 days after the close of the fiscal year covered by this annual report.

-1
 

TABLE OF CONTENTS

 

 

PART I     PAGE
  Item 1. Business 3
  Item 1A. Risk Factors 26
  Item 1B. Unresolved Staff Comments 39
  Item 2. Properties 39
  Item 3. Legal Proceedings 40
  Item 4. Mine Safety Disclosures 40
         
PART II      
  Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 40
  Item 6. Selected Financial Data 42
  Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
  Item 7A. Quantitative and Qualitative Disclosures About Market Risk 52
  Item 8. Financial Statements and Supplementary Data 53
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 108
  Item 9A. Controls and Procedures 108
  Item 9B. Other Information 110
         
PART III      
  Item 10. Directors, Executive Officers and Corporate Governance 110
  Item 11. Executive Compensation 110
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 110
  Item 13. Certain Relationships and Related Transactions, and Director Independence 110
  Item 14. Principal Accountant Fees and Services 110
         
PART IV      
  Item 15. Exhibits and Financial Statement Schedules 111
  Item 16. Form 10-K Summary 113
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PART I

 

ITEM 1. BUSINESS

 

Southwest Georgia Financial Corporation (the “Corporation”) is a Georgia bank holding company organized in 1980, which, in 1981, acquired 100% of the outstanding shares of Southwest Georgia Bank (the “Bank”). The Bank commenced operations as Moultrie National Bank in 1928. The Bank is a state-chartered bank insured by the Federal Deposit Insurance Corporation (the “FDIC”).

 

The Corporation’s primary business is providing banking services through the Bank to individuals and businesses principally in the following counties: Colquitt, Baker, Worth, Lowndes, and Tift as well as the surrounding counties of southwest Georgia. Empire Financial Services, Inc. (“Empire”), a provider of commercial mortgage banking services has been wholly owned by the Bank since 2001. In December 2017, the Bank dissolved Empire. The executive office of the Corporation is located at 25 Second Avenue, S. W., Moultrie, Georgia 31768, and its telephone number is (229) 985-1120.

 

All references herein to the Corporation include Southwest Georgia Financial Corporation and the Bank unless the context indicates a different meaning.

 

Recent Developments

 

On December 18, 2019, the Corporation entered into an Agreement and Plan of Merger (the “merger agreement”) with The First Bancshares, Inc., a Mississippi corporation (“First Bancshares”), whereby the Corporation will be merged with and into the First Bancshares. Pursuant to and simultaneously with entering into the merger agreement, the Bank, and First Bancshares’s wholly owned subsidiary bank, The First, A National Banking Association (“The First”), entered into a Plan of Bank Merger whereby the Bank will be merged with and into The First immediately following the merger of the Corporation with and into First Bancshares (the “merger”) with a purchase price, on the announcement date, of approximately $88.0 million.

 

The merger agreement has been unanimously approved by the boards of directors of the Corporation and First Bancshares and by a majority of shareholders of the Corporation on March 27, 2020. The merger was further approved by the Office of the Comptroller of the Currency on March 18, 2020 and the transaction is expected to close in the second quarter of 2020.

 

The foregoing description of the merger and merger agreement is qualified in its entirety by reference to the merger agreement, which incorporated by reference into this Annual Report on Form 10-K. The merger agreement should not be read alone, but should instead be read in conjunction with the other information regarding the Corporation, First Bancshares, their respective affiliates and their respective businesses, the merger agreement and the merger contained in, or incorporated by reference into, the Registration Statement on Form S-4, filed by First Bancshares with the and reasonable and supportable forecasts. For Securities and Exchange Commission (the “SEC”) that includes a proxy statement of the Corporation and prospectus of First Bancshares, as well as in the Annual Reports on Forms 10-K, the Quarterly Reports on Forms 10-Q and other filings that each of the Corporation and First Bancshares has made with the SEC.

 

Please refer to Item 1A, “Risk Factors” for a discussion of certain risks related to the proposed merger.

 

Discussions in this Annual Report on Form 10-K that refer to the Corporation’s business, operations and risks in the future refer to the Corporation as a stand-alone entity up to the closing of the proposed merger or if the merger does not close, and that these considerations will be different with respect to the combined company after the closing of the merger.

 

General

 

The Corporation is a registered bank holding company. The Bank is community-oriented and offers customary banking services such as consumer and commercial checking accounts, NOW accounts, savings accounts, certificates of deposit, lines of credit, VISA® business accounts, and money transfers. The Bank finances commercial and consumer transactions, makes secured and unsecured loans, and provides a variety of other banking services. The Bank has a Wealth Strategies division that performs corporate, pension, and personal trust services and acts as trustee, executor, and administrator for estates and as administrator or trustee of various types of employee benefit plans for corporations and other organizations. Also, the Wealth Strategies division has a securities sales department which offers full-service brokerage services through a third party service provider. The Bank’s Southwest Georgia Insurance Services Division offers property and casualty insurance, life, health, and disability insurance. 

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Markets

 

The Corporation conducts banking activities in five counties in southwest and south central Georgia. Population characteristics in these counties range from rural to more metropolitan. In our most recent market, Tift County, we opened a full service banking center in August 2018. The total population of Tift County is 40,571. Our largest market is Lowndes County with a total population of 116,321 and the highest growth rate in our markets at 11.21% from 2008 to 2018. Due primarily to the location of a state university and a large air force base in Lowndes County, this market has a median age estimated at 30.2, younger than an average median age of 38.8 in the other four counties that the Bank primarily serves. These counties, Colquitt, Baker, Worth, and Tift, have an average total population of 27,389 and an average decline in population of (5.8)% from 2008 to 2018. Per capita income is approximately $22,000 in the Bank’s markets. Agriculture plays a major economic role in the Bank’s markets. Colquitt, Baker, Worth, Lowndes, and Tift Counties produce a large portion of our state’s crops, including cotton, peanuts, and a variety of vegetables.

 

Deposits

 

The Bank offers a full range of depository accounts and services to both consumers and businesses. At December 31, 2019, the Corporation’s deposit base, totaling $473,434,163, consisted of $113,882,249 in noninterest-bearing demand deposits (24.1% of total deposits), $233,333,973 in interest-bearing demand deposits including money market accounts (49.3% of total deposits), $33,554,780 in savings deposits (7.1% of total deposits), $67,580,453 in time deposits in amounts less than $250,000 (14.2% of total deposits), and $25,082,708 in time deposits of $250,000 or more (5.3% of total deposits).

 

Loans

 

The Bank makes both secured and unsecured loans to individuals, corporations, and other businesses. Both consumer and commercial lending operations include various types of credit for the Bank’s customers. Secured loans include first and second real estate mortgage loans. The Bank also makes direct installment loans to consumers on both a secured and unsecured basis. At December 31, 2019, consumer installment, real estate (including construction and mortgage loans), and commercial (including financial and agricultural) loans represented approximately 1.2%, 76.8% and 22.0%, respectively, of the Bank’s total loan portfolio.

 

Lending Policy

 

The current lending policy of the Bank is to offer consumer and commercial credit services to individuals and businesses that meet the Bank’s credit standards. The Bank provides each lending officer with written guidelines for lending activities. Lending authority is delegated by the Board of Directors of the Bank to loan officers, each of whom is limited in the amount of secured and unsecured loans which can be made to a single borrower or related group of borrowers.

 

The Loan Committee of the Bank’s Board of Directors is responsible for approving and monitoring the loan policy and providing guidance and counsel to all lending personnel. The committee approves all individual loan or relationship requests that exceed $800,000. The Loan Committee is composed of the Chief Executive Officer and President, and other executive officers of the Bank, as well as certain Bank directors.

 

Loan Review and Nonperforming Assets

 

The Bank regularly requires a review of its loan portfolio to determine deficiencies and corrective action to be taken. An independent loan review is conducted by an outside third party firm on a semiannual basis with their findings being reported annually to the Board’s Loan Committee and the Audit Committee. Also, the Bank’s external auditors as well as an outside third party firm conduct independent loan review adequacy tests and their findings are reviewed annually by the Audit Committee and the Board of Directors.

 

Certain loans are monitored more often by the Credit Administration Department and the Loan Committee. These loans include nonaccruing loans, loans more than 90 days past due, and other loans, regardless of size, that may be considered high risk-based on factors defined within the Bank’s loan review policy.

 

-4

 

Asset/Liability Management

 

The Asset/Liability Management Committee (“ALCO”) is established by the Bank’s Board of Directors and is charged with establishing policies to manage the assets and liabilities of the Bank. Its task is to manage asset growth, net interest margin, liquidity, and capital in order to maximize income and reduce interest rate risk. To meet these objectives while maintaining prudent management of risks, the ALCO manages the Bank’s overall acquisition and allocation of funds. At its quarterly meetings, the ALCO reviews and discusses the asset and liability funds budget and income and expense budget in relation to the actual composition and flow of funds; the ratio of the amount of rate sensitive assets to the amount of rate sensitive liabilities; the ratio of loan loss reserve to outstanding loans; and other variables, such as expected loan demand, investment opportunities, core deposit growth within specified categories, regulatory changes, monetary policy adjustments, and the overall state of the local, state, and national economy. The Board of Directors reviews ALCO data quarterly.

 

Investment Policy

 

The Bank’s investment portfolio policy is to maximize income consistent with liquidity, asset quality, and regulatory constraints. The policy is reviewed periodically by the Board of Directors. Individual transactions, portfolio composition, and performance are reviewed and approved monthly by the Board of Directors.

 

Employees

 

The Bank had 111 full-time employees and one part-time employee at December 31, 2019. The Bank is not a party to any collective bargaining agreement, and the Bank believes that its employee relations are good.

 

Competition

 

The banking business is highly competitive. The Bank competes with other depository institutions and other financial service organizations, including brokers, finance companies, financial technology companies, mutual funds, savings and loan associations, credit unions and certain governmental agencies. Many of these competitors have substantially greater resources than we do and offer services that we do not currently provide. Such competitors may also have greater lending limits than the Bank. In addition, nonbank competitors are generally not subject to the extensive regulations applicable to us. Price (the interest charged on loans and paid on deposits) remains a means of competition within the services industry. Use and advances in technology, such as internet and mobile banking, electronic payment processing channels, and cybersecurity are expected to have a significant impact on the competitive landscape of the financial services industry. The Bank also competes on the basis of service and convenience in providing financial services. The Bank ranks third out of twenty-one banks in a six county region (Colquitt, Baker, Worth, Lowndes, Brooks, and Tift) in deposit market share.

 

Monetary Policies

 

The results of operations of the Bank are affected by credit policies of monetary authorities, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The instruments of monetary policy employed by the Federal Reserve include open market operations in U. S. government agency securities, changes in the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank.

 

Payment of Dividends

 

The Corporation is a legal entity separate and distinct from the Bank. Most of the revenue of the Corporation results from dividends paid to it by the Bank. There are statutory and regulatory requirements applicable to the payment of dividends by the Bank, as well as by the Corporation to its shareholders.

 

Under the regulations of the Georgia Department of Banking and Finance (“DBF”), a state bank with positive retained earnings may declare dividends without DBF approval if it meets all the following requirements:

 

-5

 

 

  (a)   total classified assets as of the most recent examination of the bank do not exceed 80% of
      equity capital (as defined by regulation);
  (b)   the aggregate amount of dividends declared or anticipated to be declared in the calendar year
      does not exceed 50% of the net profits after taxes but before dividends for the previous
      calendar year; and
  (c)   the ratio of equity capital to adjusted assets is not less than 6%.

 

The payment of dividends by the Corporation and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FDIC has issued a policy statement providing that insured banks should generally only pay dividends out of current operating earnings. In addition to the formal statutes and regulations, regulatory authorities consider the adequacy of each of the Bank’s total capital in relation to its assets, deposits and other such items. Capital adequacy considerations could further limit the availability of dividends to the Bank. At December 31, 2019, net assets available from the Bank to pay dividends without prior approval from regulatory authorities totaled $2,750,464. For 2019, the Corporation’s cash dividend payout to shareholders was $1,221,766.

 

Supervision and Regulation

 

The following is a brief summary of the supervision and regulation of the Corporation and the Bank as financial institutions and is not intended to be a complete discussion of all NYSE American LLC, state or federal rules, statutes and regulations affecting their operations, or that apply generally to business corporations or companies listed on NYSE American LLC. Changes in the rules, statutes and regulations applicable to the Corporation and the Bank can affect the operating environment in substantial and unpredictable ways.

 

General. The Corporation is a registered bank holding company subject to regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Corporation is required to file annual and quarterly financial information with the Federal Reserve and is subject to periodic examination by the Federal Reserve.

 

The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before (1) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) it or any of its non-bank subsidiaries may acquire all or substantially all of the assets of a bank; and (3) it may merge or consolidate with any other bank holding company. In addition, a bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of any company engaged in non-banking activities. This prohibition does not apply to activities listed in the BHC Act or found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation or order to be closely related to banking are:

 

  ·         making, acquiring or servicing loans and certain types of leases;
  ·         performing certain data processing services;
  ·         acting as fiduciary or investment or financial advisor;
  ·         providing brokerage services;
  ·         underwriting bank eligible securities;
  ·         underwriting debt and equity securities on a limited basis through separately capitalized
      subsidiaries; and
  ·         making investments in corporations or projects designed primarily to promote community
      welfare.

   

-6

 

Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closely related or incidental to banking (as discussed above), the Gramm-Leach-Bliley Act (the “GLB Act”) relaxed the previous limitations and permitted bank holding companies to engage in a broader range of financial activities. Specifically, bank holding companies may elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Among the activities that are deemed “financial in nature” include:

 

  ·         lending, exchanging, transferring, investing for others or safeguarding money or securities;
  ·         insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or
      death, or providing and issuing annuities, and acting as principal, agent, or broker with respect
      thereto;
  ·         providing financial, investment, or economic advisory services, including advising an
      investment company;
  ·         issuing or selling instruments representing interests in pools of assets permissible for a bank to
      hold directly; and
  ·         underwriting, dealing in or making a market in securities.

 

Under this legislation, the Federal Reserve serves as the primary “umbrella” regulator of financial holding companies with supervisory authority over each parent company and limited authority over its subsidiaries. The primary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted by the subsidiary. For example, broker-dealer subsidiaries will be regulated largely by securities regulators and insurance subsidiaries will be regulated largely by insurance authorities.

 

The Corporation has no current plans to register as a financial holding company.

The Corporation must also register with the DBF and file periodic information with the DBF. As part of such registration, the DBF requires information with respect to the financial condition, operations, management and intercompany relationships of the Corporation and the Bank and related matters. The DBF may also require such other information as is necessary to keep itself informed concerning compliance with Georgia law and the regulations and orders issued thereunder by the DBF have been complied with, and the DBF may examine the Corporation and the Bank.

 

The Corporation is an “affiliate” of the Bank under the Federal Reserve Act of 1913 (the “Federal Reserve Act”), which imposes certain restrictions on (1) loans by the Bank to the Corporation, (2) investments in the stock or securities of the Corporation by the Bank, (3) the Bank taking the stock or securities of an “affiliate” as collateral for loans by the Bank to a borrower, and (4) the purchase of assets from the Corporation by the Bank. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.

 

The Bank is regularly examined by the FDIC. As a state banking association organized under Georgia law, the Bank is subject to the supervision of and the regular examination of the DBF. Both the FDIC and the DBF must grant prior approval of any merger, consolidation or other corporation reorganization involving the Bank.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted in 2010, and resulted in sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. In 2017, both the House of Representatives and the Senate introduced legislation that would repeal or modify provisions of the Dodd-Frank Act and significantly impact financial services regulation. In May 2018, certain provisions of these bills were signed into law as part of the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”) and repealed or modified significant portions of the Dodd-Frank Act. Specifically, the Economic Growth Act delayed implementation of rules related to the Home Mortgage Disclosure Act, reformed and simplified certain Volcker Rule requirements, and raised the threshold for applying enhanced prudential standards to bank holding companies with total consolidated assets equal to or greater than $50 billion to those with total consolidated assets equal to or greater than $250 billion.  

 

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While federal legislation, including the Economic Growth Act, has scaled back portions of the Dodd-Frank Act, uncertainty about the timing and scope of such changes, as well as the cost of complying with a new regulatory regime and future reform, remains. Specific portions of Dodd-Frank and the Economic Growth Act applicable to the Corporation or the Bank are discussed in detail below.

 

Capital Adequacy. Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

 

The Federal Reserve and the FDIC have implemented substantially identical risk-based rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk. “Total capital” is composed of Tier 1 capital and Tier 2 capital. “Tier 1 capital” includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, less goodwill, most intangible assets and certain other assets. “Tier 2 capital” includes, among other things, perpetual preferred stock and related surplus not meeting the Tier 1 capital definition, qualifying mandatorily convertible debt securities, qualifying subordinated debt and allowances for possible loan and lease losses, subject to limitations.

 

The Federal Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holding companies. The Federal Reserve will require a bank holding company to maintain a leverage ratio well above minimum levels if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve. The FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve will also require banks to maintain capital well above minimum levels.

 

In July 2013, the Federal Reserve published the Basel III Capital Rules establishing a new comprehensive capital framework applicable to all depository institutions, bank holding companies with total consolidated assets of a certain threshold, and all savings and loan holding companies except for those that are substantially engaged in insurance underwriting or commercial activities (collectively, “banking organizations”). The rules implement the December 2010 framework proposed by the Basel Committee on Banking Supervision (the “Basel Committee”), known as “Basel III”, for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act.

 

The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the prior U.S. risk-based capital rules. The Basel III Capital Rules:

 

 
  • defined the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios;
  • addressed risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replaced the prior risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords;
  • introduced a new capital measure called “common equity Tier 1” (“CET1”);
  • specified that Tier 1 capital consists of CET1 and “additional Tier 1 capital” instruments meeting specified requirements; and
  • implemented the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules.

 

The Basel III Capital Rules became effective for the Bank on January 1, 2015, subject to a phase-in period ending January 1, 2019, but are not applicable to bank holding companies, like the Corporation, with less than $1 billion in total consolidated assets that meet certain criteria.

-8

 

 

The Basel III Capital Rules require the Bank to maintain;

 

  a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio effectively resulting in a minimum CET1 ratio of 7.0%);
  a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6%, plus the 2.5% capital conservation buffer (which is added to the 6% Tier 1 capital ratio effectively resulting in a minimum Tier 1 capital ratio of 8.5%);
  a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8%, plus the 2.5% capital conservation buffer (which is added to the 8% Total capital ratio effectively resulting in a minimum Total capital ratio of 10.5%); and
  a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.

 

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under prior capital standards, the effects of certain accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, certain banking organizations, including the Bank, may make a one-time permanent election to continue to exclude these items. The Bank made this election in the first quarter of 2015 in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Bank’s available-for-sale securities portfolio.

 

The “capital conservation buffer” is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

As of December 31, 2019, the Bank met all capital adequacy requirements under the Basel III Capital Rules.

 

In addition, Section 38 of the Federal Deposit Insurance Act implemented the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “1991 Act”). The prompt corrective action provisions set forth five regulatory zones in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank’s financial condition declines. The FDIC is required to resolve a bank when its ratio of tangible equity to total assets reaches 2%. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.

 

The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, as revised by the Basel III Capital Rules effective January 1, 2015, which place financial institutions in the following five categories based upon capitalization ratios: (1) a “well-capitalized” institution has a Total risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least 8%, a CET1 risk-based ratio of 6.5% and a leverage ratio of at least 5%; (2) an “adequately capitalized” institution has a Total risk-based capital ratio of at least 8%, a Tier 1 risk-based ratio of at least 6%, a CET1 risk-based ratio of 4.5% and a leverage ratio of at least 4%; (3) an “undercapitalized” institution has a Total risk-based capital ratio of under 8%, a Tier 1 risk-based ratio of under 6%, a CET1 risk-based ratio of under 4.5% or a leverage ratio of under 4%; (4) a “significantly undercapitalized” institution has a Total risk-based capital ratio of under 6%, a Tier 1 risk-based ratio of under 4%, a CET1 risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a “critically undercapitalized” institution has a ratio of tangible equity to total assets of 2% or less. Institutions in any of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions. The FDIC regulations also allow it to “downgrade” an institution to a lower capital category based on supervisory factors other than capital. 

 

-9

 

As of December 31, 2019, the Bank was “well-capitalized” under current regulations. See “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Dividends” of this Annual Report on Form 10-K for further information.

 

In November 2017, the federal banking agencies adopted a final rule to extend the regulatory capital treatment applicable during 2017 under the capital rules for certain items, including regulatory capital deductions, risk weights, and certain minority interest limitations. The relief provided under the final rule applies to banking organizations that are not subject to the capital rules’ advanced approaches, such as the Corporation. Specifically, the final rule extends the current regulatory capital treatment of mortgage servicing assets, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, significant investments in the capital of unconsolidated financial institutions in the form of common stock, and common equity tier 1 minority interest, tier 1 minority interest, and total capital minority interest exceeding the capital rules’ minority interest limitations.

 

In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred to as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of risk-weighted assets (“RWA”), which will be accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; constraining the use of internally modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust capital floor. Leadership of the federal banking agencies who are tasked with implementing Basel IV supported the revisions. Although it is uncertain at this time, we anticipate some, if not all, of the Basel IV accord may be incorporated into the capital requirements framework applicable to the Corporation.

 

The Economic Growth Act mandated the federal banking regulators, through notice and comment rulemaking, to develop an “off-ramp” exempting certain banking organizations with less than $10.0 billion in consolidated assets and a low-risk profile from generally applicable leverage capital and risk-based capital requirements if such banking organization maintained a leverage ratio (calculated by dividing Tier 1 capital by average total consolidated assets) to be set by the federal banking regulators (the “Community Bank Leverage Ratio”). The Economic Growth Act requires the federal banking regulators set the Community Bank Leverage Ratio between 8% and 10%. On September 17, 2019, the federal banking regulators adopted a final rule to implementing Section 201 of the Economic Growth Act, which sets the Community Bank Leverage Ratio at 9% and allows these banking organizations to opt into the Community Bank Leverage Ratio framework beginning in the first quarter of 2020. Generally, community banking organizations that opt in and maintain a Community Bank Leverage ratio of 9% are considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and further, these institutions are considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the 1991 Act. The final rule also provides for a two quarter grace period, with certain exception if an electing banking organization ceases to satisfy any of the qualifying criteria to either meet the qualifying criteria or to comply with the generally applicable capital rule. The Corporation has not yet elected to maintain the Community Bank Leverage.

 

Consumer Protection Laws. The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (“CFPB”), and giving it the power to promulgate and enforce federal consumer protection laws. Depository institutions are subject to the CFPB’s rule writing authority, and existing federal bank regulatory agencies retain examination and enforcement authority for such institutions. The CFPB and the Corporation’s existing federal regulator, the FDIC, are focused on the following:

 

  risks to consumers and compliance with the federal consumer financial laws;
  the markets in which firms operate and risks to consumers posed by activities in those markets;
  depository institutions that offer a wide variety of consumer financial products and services;
  depository institutions with a more specialized focus; and
  non-depository companies that offer one or more consumer financial products or services.

  

-10

 

The CFPB and FDIC have authority to prevent unfair, deceptive or abusive practices in connection with offering consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits states’ attorneys general to enforce compliance with both state and federal laws and regulations.

 

Volcker Rule. The Dodd-Frank Act amended the BHC Act to require the federal bank regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory provision is commonly called the “Volcker Rule”.  The Volcker Rule and the final rules adopted by the Federal Reserve thereunder, do not have a material effect on the Corporation and the Bank, as we do not engage in businesses prohibited by the Volcker Rule. In the future, the Corporation may incur costs to adopt additional policies and systems to ensure compliance with the Volcker Rule.

 

Commercial Real Estate. The federal bank regulatory agencies, including the FDIC, restrict concentrations in commercial real estate lending and have noted that recent increases in banks’ commercial real estate concentrations have created safety and soundness concerns in the event of a significant economic downturn. The regulatory guidance mandates certain minimal risk management practices and categorizes banks with defined levels of such concentrations as banks requiring elevated examiner scrutiny. Although management believes that the Corporation’s credit processes and procedures meet the risk management standards dictated by this guidance, regulatory outcomes could effectively limit increases in the real estate concentrations in the Bank’s loan portfolio and require additional credit administration and management costs associated with those portfolios.

 

Source of Strength Doctrine. Federal Reserve regulations and policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this policy, the Corporation is expected to commit resources to support the Bank.

 

Loans. Inter-agency guidelines adopted by federal bank regulatory agencies mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital.

 

Transactions with Affiliates. Under federal law, all transactions between and among a state nonmember bank and its affiliates, which include holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. Generally, these requirements limit these transactions to a percentage of the bank’s capital and require all of them to be on terms at least as favorable to the bank as transactions with non-affiliates. In addition, a bank may not lend to any affiliate engaged in non-banking activities not permissible for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The FDIC is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a bank. The regulations also set forth various reporting requirements relating to transactions with affiliates.

 

Financial Privacy. In accordance with the GLB Act, federal banking regulatory agencies adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

 

Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of governmental policy on financial institutions in recent years has been aimed at combating terrorist financing. This has generally been accomplished by amending existing anti-money laundering laws and regulations. The United States Department of the Treasury has issued a number of implementing regulations which apply various requirements of the USA Patriot Act of 2001 to the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

 

-11

 

Incentive Compensation. The federal banking agencies have issued guidance on incentive compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an institution, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the institution’s board of directors.

 

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions like the Corporation that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the financial institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution’s safety and soundness and the institution is not taking prompt and effective measures to correct the deficiencies.

 

The scope and content of banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect our ability to hire, retain and motivate our key employees.

 

Cybersecurity. Cyber-attacks against banks and other financial institutions that resulted in unauthorized access to confidential customer information have prompted the federal bank regulatory agencies to issue extensive guidance on cybersecurity. These agencies are likely to continue to devote resources to this part of their safety and soundness examination for the foreseeable future.

 

Fair Value. The Corporation’s impaired loans and foreclosed assets may be measured and carried at “fair value”, the determination of which requires management to make assumptions, estimates and judgments.  When a loan is considered impaired, a specific valuation allowance is allocated or a partial charge-off is taken, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  In addition, foreclosed assets are carried at the lower of cost or “fair value”, less cost to sell, following foreclosure.  “Fair value” is defined by U.S. GAAP “as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.”  GAAP further defines an “orderly transaction” as “a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets; it is not a forced transaction (for example, a forced liquidation or distress sale).”  Although management believes its processes for determining the value of these assets use appropriate factors and allow the Corporation to arrive at a fair value, the processes require management judgment and assumptions and the value of such assets at the time they are revalued or divested may be significantly different from management’s determination of fair value.  Because of this increased subjectivity in fair value determinations, there is greater than usual grounds for differences in opinions, which may result in increased disagreements between management and the Bank’s regulators, disagreements which could impair the relationship between the Bank and its regulators.

 

Future Legislation. Various legislation affecting financial institutions and the financial industry is, from time to time, introduced in Congress. Such legislation may change banking statutes and the operating environment of the Corporation and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of the Corporation or any of its subsidiaries. With the current economic environment, the nature and extent of future legislative and regulatory changes affecting financial institutions is not known at this time.

 

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Available Information

 

The Corporation’s website where you can find more information is located at www.sgb.bank. We make available free of charge, through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other reports filed or furnished pursuant to Section 13(a) or 15(d) under the Securities Exchange Act of 1934 (the “Exchange Act”). These reports are available as soon as reasonably practicable after those materials are electronically filed with the SEC.

 

Our SEC filings are publicly available at the SEC’s website located at www.sec.gov. You may also read and copy any document we file with the SEC at its Public Reference Facilities at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information about the Public Reference Room operations by calling the SEC at 1-800-SEC-0330. Information provided on our website is not part of this report, and is not incorporated herein by reference unless otherwise specifically referenced as such in this report.

 

Executive Officers of the Corporation and the Bank

 

Executive officers are elected by the Board of Directors annually in May and hold office until the following May at the pleasure of the Board of Directors. The principal executive officers of the Corporation and the Bank and their ages, positions, and terms of office as of March 26, 2020, are as follows:

 

Name (Age) Principal Position

Executive

Officer Since

       
DeWitt Drew President and Chief Executive Officer of the 1999
  (63) Corporation and Bank  
       

Donna S. Lott

(44)

Executive Vice President and Chief Administrative Officer of the Corporation and Bank and Cashier of the Bank 2008
       
Danny E. Singley Executive Vice President and Chief Credit Officer of 2002
  (65) the Bank  
     
Jeffrey (Jud) Moritz Executive Vice President of the Bank and Valdosta 2011
  (43) Region President  
       
Ross K. Dekle Executive Vice President of the Bank and Moultrie 2011
  (38) Region President  
       
Gregory P. Costin Senior Vice President of the Bank 2012
  (44)    
       
Pamela J. Yeager Senior Vice President of the Bank 2015
  (51)    
       
Chad J. Carpenter Senior Vice President of the Bank and Tifton 2015
  (45) Region President  
       
Leslie W. Green Senior Vice President of the Bank 2018
  (45)    
T. Garrett Westbrook Vice President and Controller 2020
  (44)    

 

None of the above officers are related and there are no arrangements or understandings between them and any other person pursuant to which any of them was elected as an officer, other than arrangements or understandings with directors or officers of the Corporation or Bank acting solely in their capacities as such. 

 

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The following is a brief description of the business experience of the principal executive officers of the Corporation and the Bank. Except as otherwise indicated, each principal executive officer has been engaged in their present or last employment, in the same or similar position, for more than five years.

 

Mr. Drew is a director of the Corporation and the Bank and was named President and Chief Executive Officer in May 2002. Previously, he served as President and Chief Operating Officer beginning in 2001 and Executive Vice President in 1999 of the Corporation and the Bank.

 

Ms. Lott became Chief Administrative Officer in 2018 and Executive Vice President of the Corporation and the Bank in 2017. She is also Cashier of the Bank. Previously, she served as Senior Vice President of the Bank since 2014. Prior to that, she served as Vice President of the Bank since 2008 and Assistant Vice President of the Bank since 2007.

 

Mr. Singley became Executive Vice President and Chief Credit Officer of the Bank in 2014. Previously, he was appointed President Moultrie Region and Senior Vice President of the Bank in 2011 and served as Senior Vice President of the Bank since 2008. Prior to that, he had been Vice President of the Bank since 2002.

 

Mr. Moritz became Executive Vice President of the Bank in 2018. Previously, he was appointed as Senior Vice President of the Bank and Valdosta Region President in 2011. Prior to that, he was employed by Park Avenue Bank in Valdosta, Georgia, for five years and Regions Bank for five years.

 

Mr. Dekle became Executive Vice President of the Bank in 2018. Previously, he was appointed Senior Vice President of the Bank and Moultrie Region President in 2014. Prior to that, he served as Vice President of the Bank since 2011 and, prior to that, Assistant Vice President of the Bank since 2007.

 

Mr. Costin became Senior Vice President of the Bank in 2015. Previously, he served as Vice President of the Bank since 2012 and, prior to that, Assistant Vice President of the Bank since 2011.

 

Ms. Yeager became Senior Vice President of the Bank in 2015. Previously, she was employed for 11 years with Commercial Banking Company in Valdosta, Georgia. Prior to that, she was employed for 18 years with First State Bank and Trust in Valdosta, Georgia.

 

Mr. Carpenter became Senior Vice President of the Bank and Tifton Region President in 2015. Previously, he was employed by BB&T in Tifton, Georgia, for 15 years where he most recently held the position of Area President for the communities of Tifton, Valdosta and Douglas.

 

Ms. Green became Senior Vice President of the Bank in 2018. Previously, she served as Vice President of the Bank since 2017. Prior to that, she was employed for 4 years with Thomas County Federal Savings and Loan in Thomasville, Georgia.

 

Mr. Westbrook became Vice President and Controller of the Corporation and the Bank in, 2020. Previously, he served as staff accountant of the Corporation and the Bank since 2018. He previously served as a tax manager for a local CPA firm.

 

Table 1 - Distribution of Assets, Liabilities, and Shareholders’ Equity; Interest Rates and Interest Differentials

 

The following tables set forth, for the fiscal years ended December 31, 2019, 2018, and 2017, the daily average balances outstanding for the major categories of earning assets and interest-bearing liabilities and the average interest rate earned or paid thereon. Except for percentages, all data is in thousands of dollars.  

 

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  Year Ended December 31, 2019

  Average Balance  Interest  Rate
ASSETS   (Dollars in thousands)           
Cash and due from banks  $12,428   $0    —  %
Earning assets:               
     Interest-bearing deposits with banks   22,734    497    2.19%
     Loans, net (a) (b) (c)   383,822    21,861    5.70%
     Certificates of deposit in other banks   2,859    71    2.48%
     Taxable investment securities
           held to maturity and available for sale
   67,480    1,684    2.50%

Nontaxable investment securities

held to maturity (c)

   25,970    882    3.40%

Nontaxable investment securities

available for sale (c)

   6,339    223    3.52%
     Other investment securities   1,579    104    6.59%
                    Total earning assets   510,783   $25,322    4.96%
Premises and equipment   14,292           
Other assets   11,593           
Total assets  $549,095           
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Noninterest-bearing demand deposits  $114,983   $0    —  %
Interest-bearing liabilities:               
     Interest bearing business checking   31,258    138    0.44%
     NOW accounts   13,464    56    0.42%
     Money market deposit accounts   177,154    1,555    0.88%
     Savings deposits   33,276    118    0.35%
     Time deposits   101,806    1,981    1.95%
     Federal funds purchased   1    0    0.00%
     Other borrowings   26,797    605    2.32%
                    Total interest-bearing liabilities   383,756    4,453    1.16%
Other liabilities   3,332           
                    Total liabilities   502,071           
Common stock   2,545           
Surplus   18,420           
Retained earnings   26,059           
                    Total shareholders’ equity   47,024           
Total liabilities and shareholders’ equity  $549,095           
Net interest income and margin      $20,869   4.09%

 

(a) Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are included.

(b) Interest income includes loan fees of approximately $1,138 thousand.

(c) Reflects taxable equivalent adjustments using a tax rate of 21%. 

  

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  Year Ended December 31, 2018

  Average Balance  Interest   Rate
ASSETS   (Dollars in thousands)           
Cash and due from banks  $9,944   $0    —  %
Earning assets:               
     Interest-bearing deposits with banks   25,951    485    1.87%
     Loans, net (a) (b) (c)   346,761    18,782    5.42%
     Certificates of deposit in other banks   2,019    48    2.38%
     Taxable investment securities
           held to maturity and available for sale
   54,088    1,363    2.52%

Nontaxable investment securities

held to maturity (c)

   36,364    1,204    3.31%

Nontaxable investment securities

available for sale (c)

   7,375    236    3.20%
     Other investment securities   2,356    144    6.11%
                    Total earning assets   474,914   $22,262    4.69%
Premises and equipment   13,763           
Other assets   11,874           
Total assets  $510,495           
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Noninterest-bearing demand deposits  $112,768   $0    —  %
Interest-bearing liabilities:               
     Interest bearing business checking   21,334    85    0.40%
     NOW accounts   18,807    70    0.37%
     Money market deposit accounts   147,395    1,030    0.70%
     Savings deposits   32,082    124    0.39%
     Time deposits   87,539    1,075    1.23%
     Federal funds purchased   42    1    2.38%
     Other borrowings   44,654    937    2.10%
                    Total interest-bearing liabilities   351,853    3,322    0.94%
Other liabilities   3,795           
                    Total liabilities   468,416           
Common stock   2,823           
Surplus   11,075           
Retained earnings   32,322           
Less treasury stock   (4,141)          
                    Total shareholders’ equity   42,079           
Total liabilities and shareholders’ equity  $510,495           
Net interest income and margin     $18,940   3.99 %

 

(a) Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are included.

(b) Interest income includes loan fees of approximately $1,062 thousand.

(c) Reflects taxable equivalent adjustments using a tax rate of 21%.

 

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   Year Ended December 31, 2017
  

Average

Balance

  Interest  Rate
ASSETS   (Dollars in thousands)           
Cash and due from banks  $8,701   $—      —  %
                
Earning assets:               
     Interest-bearing deposits with banks   18,104    195    1.08%
     Loans, net (a) (b) (c)   314,559    16,345    5.20%
     Certificates of deposit in other banks   1,477    35    2.37%
Taxable investment securities
           held to maturity and available for sale
   53,036    1,285    2.42%
Nontaxable investment securities
           held to maturity (c)
   45,286    1,713    3.78%

Nontaxable investment securities

 available for sale (c)

   7,260    287    3.95%
     Other investment securities   2,150    103    4.79%
                    Total earning assets   441,872   $19,963    4.52%
Premises and equipment   11,835           
Other assets   11,035           
Total assets  $473,433           
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Noninterest-bearing demand deposits  $130,252   $—      —  %
                
Interest-bearing liabilities:               
     NOW accounts   20,606    40    0.19%
     Money market deposit accounts   129,313    381    0.29%
     Savings deposits   30,448    82    0.27%
     Time deposits   79,832    652    0.82%
     Federal funds purchased   80    1    1.25%
     Other borrowings   38,293    747    1.95%
                    Total interest-bearing liabilities   298,572    1,903    0.64%
Other liabilities   4,157           
                    Total liabilities   432,981           
                
Common stock   4,294           
Surplus   31,702           
Retained earnings   30,587           
Less treasury stock   (26,121)          
                    Total shareholders’ equity   40,462           
Total liabilities and shareholders’ equity  $473,443           
Net interest income and margin       $18,060    4.09%

  

(a) Average loans are shown net of unearned income and the allowance for loan losses. Nonperforming loans are included.

(b) Interest income includes loan fees of approximately $965 thousand.

(c) Reflects taxable equivalent adjustments using a tax rate of 34%.

 

Table 2 – Rate/Volume Analysis

 

The following table sets forth, for the indicated years ended December 31, a summary of the changes in interest paid resulting from changes in volume and changes in rate. The change due to volume is calculated by multiplying the change in volume by the prior year’s rate. The change due to rate is calculated by multiplying the change in rate by the prior year’s volume. The change attributable to both volume and rate is calculated by multiplying the change in volume by the change in rate.

 

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           Due To
Changes In (a)
   2019  2018 

Increase

(Decrease)

  Volume  Rate
  (Dollars in thousands)
Interest earned on:                         
     Interest-bearing deposits with banks  $497   $485   $12   $(33)  $45 
     Loans, net (b)   21,861    18,782    3,079    2,077    1,002 
     Certificates of deposit in other banks   71    48    23    21    2 
     Taxable investment securities
        held to maturity and available for sale
   1,684    1,363    321    334    (13)

Nontaxable investment securities

held to maturity (b)

   882    1,204    (322)   (354)   32 

Nontaxable investment securities

available for sale (b)

   223    236    (13)   (43)   30 
     Other investment securities   104    144    (40)   (52)   12 
               Total interest income   25,322    22,262    3,060    1,950    1,110 
Interest paid on:                         
     Interest bearing business checking   138    85    53    43    10 
     NOW accounts   56    70    (14)   (23)   9 
     Money market deposit accounts   1,555    1,030    525    231    294 
     Savings deposits   118    124    (6)   6    (12)
     Time deposits   1,981    1,075    906    197    709 
     Federal funds purchased   0    1    (1)   (1)   0 
     Other borrowings   605    937    (332)   (445)   112 
               Total interest expense   4,453    3,322    1,131    8    1,122 
Net interest earnings  $20,869   $18,940   $1,929   $1,942   $(12)

 

(a) Volume and rate components are in proportion to the relationship of the absolute dollar amounts of the change in each.

(b) Reflects taxable equivalent adjustments using a tax rate of 21% for 2019 and 2018 in adjusting interest on nontaxable loans and securities to a fully taxable basis.

 

               

Due To

Changes In (a)

    2018   2017  

Increase

(Decrease)

  Volume   Rate
    (Dollars in thousands)
Interest earned on:                                        
     Interest-bearing deposits with banks   $ 485     $ 195     $ 290     $ 108     $ 182  
     Loans, net (b)     18,782       16,345       2,437       1,723       714  
     Certificates of deposit in other banks     48       35       13       13       0  
     Taxable investment securities
        held to maturity and available for sale
    1,363       1,285       78       26       52  

        Nontaxable investment securities

  held to maturity (b)

    1,204       1,713       (509 )     (311 )     (198 )

     Nontaxable investment securities

available for sale (b)

    236       287       (51 )     5       (56 )
    Other investment securities     144       103       41       11       30  
               Total interest income     22,262       19,963       2,299       1,575       724  
                                         
Interest paid on:                                        
     Interest bearing business checking     85       0       85       67       18  
     NOW accounts     70       40       30       (3 )     33  
     Money market deposit accounts     1,030       381       649       60       589  
     Savings deposits     124       82       42       4       38  
     Time deposits     1,075       652       423       68       355  
     Federal funds purchased     1       1       0       0       0  
     Other borrowings     937       747       190       130       60  
               Total interest expense     3,322       1,903       1,419       326       1,093  
                                         
Net interest earnings   $ 18,940     $ 18,060     $ 880     $ 1,249     $ (369 )

 

(a) Volume and rate components are in proportion to the relationship of the absolute dollar amounts of the change in each.

(b) Reflects taxable equivalent adjustments using a tax rate of 21% for 2018 and 34% for 2017 in adjusting interest on nontaxable loans and securities to a fully taxable basis.

 

-18

 

Table 3 - Investment Portfolio

 

The carrying values of investment securities for the indicated years are presented below:

 

  Year Ended December 31,
   2019  2018  2017
  (Dollars in thousands)
Securities held to maturity:               
State and municipal  $20,443   $30,583   $41,447 
Residential mortgage-backed   5,044    6,244    3,144 
     Total securities held to maturity  $25,487   $36,827   $44,591 
Securities available for sale:               
U.S. government treasuries  $4,027   $955   $968 
U.S. government agencies   38,498    45,207    43,860 
State and municipal   4,534    7,378    7,574 
Residential mortgage-backed   20,766    4,774    1,862 
Corporate notes   0    0    0 
     Total securities available for sale  $67,825   $58,314   $54,264 

 

At December 31, 2019, the total investment portfolio decreased to $93,312,824, down $1,827,826, compared with $95,140,650 at December 31, 2018. The decrease in the portfolio resulted in various maturities and calls totaling $13,062,059, sales of $9,358,503, and residential mortgage-backed securities principal paydowns of $3,735,287. The sales were U.S. government agency and state and local municipal securities categorized as available for sale. These transactions resulted in a net gain of $174,283. Partially offsetting these maturities, calls, and sales were purchases of $23,291,052 of U.S. government agency securities, residential mortgage-backed securities, and municipal securities.

 

The following table shows the contractual maturities of debt securities at December 31, 2019, and the weighted average yields (for nontaxable obligations on a fully taxable basis assuming a 21% tax rate) of such securities. Mortgage-backed securities amortize in accordance with the terms of the underlying mortgages, including prepayments as a result of refinancing and other early payoffs.

   

    MATURITY
   

Within

One Year

 

After One

But Within

Five Years

 

After Five

But Within

Ten Years

 

After

Ten Years

    Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield
    (Dollars in thousands)
Debt Securities:                                                                
U.S. government treasuries   $ 0       0 %   $ 3,016       2.49 %   $ 1,011       2.25 %   $ 0       0 %
U.S. government agencies     2,007       2.28 %     26,857       2.62 %     9,634       2.57 %     0       0 %
State and municipal     2,516       2.37 %     10,047       2.78 %     10,064       2.56 %     2,350       2.53 %
Residential mortgage-backed     2       4.00 %     893       2.94 %     1,677       2.94 %     23,239       2.74 %
                                                                 
     Total   $ 4,525       2.33 %   $ 40,813       2.68 %   $ 22,386       2.58 %   $ 25,589       3.21 %

 

The calculation of weighted average yields is based on the carrying value and effective yields of each security weighted for the scheduled maturity of each security. At December 31, 2019 and 2018, securities carried at approximately $62,931,401 and $59,182,556, respectively, were pledged to secure public and trust deposits as required by law. At December 31, 2019, approximately $25,000,827 was over pledged and could be released if necessary for liquidity needs. At December 31, 2019 and 2018, no securities were pledged to secure our Federal Home Loan Bank advances.

 

-19

 

Table 4 - Loan Portfolio

 

The following table sets forth the amount of loans outstanding for the indicated years according to type of loan:

  

  Year Ended December 31,
   2019  2018  2017  2016  2015
  (Dollars in thousands)

Commercial, financial and

agricultural

  $87,441   $88,403   $73,146   $70,999   $58,173 
Real estate:                         
  Construction loans   28,826    24,891    22,287    25,999    19,831 
  Commercial mortgage loans   143,022    123,477    106,458    91,733    85,777 
  Residential loans   102,240    103,348    99,160    83,271    67,969 
  Agricultural loans   31,459    31,562    25,374    16,580    15,620 
Consumer & other   5,094    5,086    3,767    3,961    3,435 
       Total loans   398,082    376,767    330,192    292,543    250,805 
Less:                         
Unearned interest and discount   17    17    18    19    19 
Allowance for loan losses   3,604    3,429    3,044    3,124    3,032 
       Net loans  $394,461   $373,321   $327,130   $289,400   $247,754 

 

The following table shows maturities of the commercial, financial, agricultural, and construction loan portfolio at December 31, 2019.

 

  Commercial, Financial, Agricultural, and Construction
  (Dollars in thousands)
Distribution of loans which are due:     
     In one year or less  $36,921 
     After one year but within five years   54,478 
     After five years   24,869 
          Total  $116,268 

 

The following table shows, for such loans due after one year, the amounts which have predetermined interest rates and the amounts which have floating or adjustable interest rates at December 31, 2019.

  

   

 

 

Loans With

 

 

     
    Predetermined   Loans With    
    Rates   Floating Rates   Total
    (Dollars in thousands)
Commercial, financial, agricultural and construction $ 74,690 $ 4,657 $ 79,347

  

The following table presents information concerning outstanding balances of nonaccrual, past-due, and restructured loans as well as foreclosed assets for the indicated years. Respectively, they are defined as: (a) loans accounted for on a nonaccrual basis (“nonaccruals”); (b) loans which are contractually past due 90 days or more as to interest or principal payments and still accruing (“past-dues”); and (c) loans past due 30 days or more for which the terms have been modified to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (“troubled debt restructured”). The Corporation’s nonaccrual policy is located in Note 3 of the Corporation’s Notes to Consolidated Financial Statements.

   

-20

 

        Accruing Loans        
    Nonaccrual
Loans
  90 Days
Past-Due
  Troubled Debt Restructured   Total   Foreclosed
Assets
    (Dollars in thousands)
                     
  December 31, 2019     $ 241     $ 0     $ 3     $ 244     $ 274
  December 31, 2018     $ 1,205     $ 0     $ 7     $ 1,212     $ 128
  December 31, 2017     $ 1,675     $ 0     $ 4     $ 1,679     $ 759
  December 31, 2016     $ 246     $ 0     $ 914     $ 1,160     $ 127
  December 31, 2015     $ 1,546     $ 1     $ 2,290     $ 3,837     $ 82
  December 31, 2014     $ 786     $ 0     $ 215     $ 1,001     $ 274

   

In 2019, nonaccrual loans decreased due to settlement, payment, restructuring, or charge-offs. Items in foreclosed assets includes four commercial real estate properties totaling $273,873.

 

The Bank performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. All loans risk rated Watch, Other Assets Especially Mentioned (“OAEM”), Substandard or Doubtful are listed on the Bank’s “watchlist.” Management monitors these loans closely and reviews their performance on a regular basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as being Loss are fully charged off. In addition, the Bank maintains a listing of “classified loans”, of which some loans may be potential problem loans, consisting of Substandard and Doubtful loans which totaled $4,012,161 at December 31, 2019. Potential problem loans are loans other than nonaccruals, past-dues and troubled debt restructured loans which management has doubt as to the borrower’s ability to comply with the present loan repayment terms.

 

Management closely monitors the watchlist for signs of deterioration to mitigate the growth in nonaccrual loans. At December 31, 2019, watchlist loans, inclusive of the “classified loans”, totaled $12,212,483, of which $10,017,332 are not considered impaired.

 

As of the most recent reported period, state separately as to foreign and domestic loans included in Nonaccrual Loans, 90 Days Past Due Loans and Trouble Debt Restructured the following information: (i) the gross interest income that would have been recorded in the period that ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, and (ii) the amount of interest income on those loans that was included in net income for the period.

 

Summary of Loan Loss Experience

 

The following table is a summary of average loans outstanding during the reported periods, changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category, and additions to the allowance which have been charged to operating expenses.  

 

-21

 

 

  Year Ended December 31,
   2019  2018  2017  2016  2015
(Dollars in thousands)               
Average loans outstanding  $387,315   $349,938   $317,724   $281,006   $235,939 

Amount of allowance for loan

losses at beginning of period

  $3,429   $3,044   $3,124   $3,032   $3,114 

Amount of loans charged off

during period:

                         

Commercial, financial and

agricultural

   179    548    113    103    264 
   Real estate:                         
       Construction   56    1    0    0    0 
       Commercial   275    43    169    0    0 
       Residential   227    7    60    4    33 
       Agricultural   0    0    94    0    0 
    Consumer & other   14    7    12    9    22 
        Total loans charged off   751    606    448    116    319 
Amount of recoveries during period:                         

Commercial, financial and

agricultural

   20    12    64    28    42 
   Real estate:                         
       Construction   0    0    0    0    0 
       Commercial   3    1    0    0    0 
       Residential   40    0    0    17    22 
       Agricultural   0    147    0    0    0 
    Consumer & other   6    2    4    3    32 
        Total loans recovered   69    162    68    48    96 
Net loans charged off during period   682    444    380    68    223 

Additions to allowance for loan

losses charged to operating

expense during period

   857    829    300    160    141 

Amount of allowance for loan losses

at end of period

  $3,604   $3,429   $3,044   $3,124   $3,032 

Ratio of net charge-offs during

period to average loans

outstanding for the period

   .18%   .13%   .12%   .02%   .09%

 

 

The allowance is based upon management’s analysis of the portfolio under current economic conditions. This analysis includes a study of loss experience, a review of delinquencies, and an estimate of the possibility of loss in view of the risk characteristics of the portfolio. Based on the above factors, management considers the current allowance to be adequate.

 

Allocation of Allowance for Loan Losses

 

Management has allocated the allowance for loan losses within the categories of loans set forth in the table below based on historical experience of net charge-offs. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. The amount of the allowance applicable to each category and the percentage of loans in each category to total loans are presented below.   

 

-22

 

  December 31, 2019  December 31, 2018  December 31, 2017
Category  Allocation 

% of Total

Loans

  Allocation 

% of Total

Loans

  Allocation 

% of Total

Loans

(Dollars in thousands)                  

Commercial, financial

and agricultural

  $501    22.0%  $402    23.5%  $324    22.2%
Real estate:                              
     Construction   1,035    7.2%   1,043    6.6%   1,043    6.8%
     Commercial   1,359    35.9%   1,210    32.8%   1,057    32.2%
     Residential   420    25.7%   459    27.4%   416    30.0%
     Agricultural   77    7.9%   109    8.4%   12    7.7%
Consumer & other   212    1.3%   206    1.3%   192    1.1%
          Total  $3,604    100.0%  $3,429    100.0%  $3,044    100.0%

  

December 31, 2016  December 31, 2015         
Category  Allocation 

% of Total

Loans

  Allocation 

% of Total

Loans

Commercial, financial

and agricultural

  $191    24.3%  $145    23.2%
Real estate:                    
     Construction   1,043    8.9%   1,043    7.9%
     Commercial   1,192    31.3%   1,192    34.2%
     Residential   420    28.5%   382    27.1%
     Agricultural   87    5.7%   86    6.2%
Consumer & other   191    1.3%   184    1.4%
          Total  $3,124    100.0%  $3,032    100.0%

 

The calculation is based upon total loans including unearned interest and discount. Management believes that the portfolio is diversified and, to a large extent, secured without undue concentrations in any specific risk area. Control of loan quality is regularly monitored by management, the loan committee, and is reviewed by the Bank’s Board of Directors which meets monthly. Independent external review of the loan portfolio is provided by examinations conducted by regulatory authorities. The amount of additions to the allowance for loan losses charged to operating expense for the periods indicated were based upon many factors, including actual charge-offs and evaluations of current economic conditions in the market area. Management believes the allowance for loan losses is adequate to cover any potential loan losses.

 

Table 5 - Deposits

 

The average amounts of deposits for the last three years are presented below.

 

Year Ended December 31,         
   2019  2018         2017
(Dollars in thousands)         
Noninterest-bearing demand deposits  $114,983   $112,767   $130,252 
Interest bearing business checking   31,258    21,335    0 
NOW accounts   13,464    18,807    20,606 
Money market deposit accounts   177,154    147,395    129,313 
Savings   33,276    32,082    30,448 
Time deposits   101,806    87,539    79,832 
        Total interest-bearing deposits   356,958    307,158    260,199 
        Total average deposits  $471,941   $419,925   $390,451 

 

-23

 

 The maturity of certificates of deposit of $100,000 or more as of December 31, 2019, are presented below.

 

(Dollars in thousands)   
3 months or less  $11,107 
Over 3 months through 6 months   8,894 
Over 6 months through 12 months   14,327 
Over 12 months   18,908 
       Total outstanding certificates of deposit of $100,000 or more  $53,236 

 

Table 6 - Return on Equity and Assets

 

Certain financial ratios are presented below.

 

Year Ended December 31,         
   2019  2018  2017
Return on average assets   0.96%   0.91%   0.80%
Return on average equity   11.25%   11.04%   9.41%

Dividend payout

(dividends paid divided by net income)

   23.09%   25.74%   29.44%
Average equity to average assets   8.57%   8.24%   8.55%

 

Table 7 – Short-Term Borrowings

 

Short-term borrowed funds consist of FHLB advances of $5,814,286 with a weighted average interest rate of 1.78% as of December 31, 2019, and $10,457,143 with a weighted average interest rate of 1.92% as of December 31, 2018. $2.214 million of short-term borrowings are short-term portions of long-term principal reducing Federal Home Loan Bank advances.

 

Information concerning federal funds purchased and FHLB short-term advances are summarized as follows:

 

   2019  2018
Average balance during the year  $6,545,280   $17,305,184 
Average interest rate during the year   1.89%   2.29%
Maximum month-end balance during the year  $12,802,381   $20,971,429 

 

Forward-Looking Statements

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of the Corporation and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.

 

The Corporation cautions that there are various risks, uncertainties and other factors that could cause actual results and experience 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 risks, uncertainties and other factors include, but are not limited to, risks related to:

 

-24

 

 

·         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, including the discontinuation of London Interbank Offered Rate (“LIBOR”) as an interest rate benchmark;

·         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;

·         weather, natural disasters, and other catastrophic events;

·         risks associated with the timing of the completion of the merger;

·         the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement, including a termination of the merger agreement under circumstances that could require the Corporation to pay a termination fee to First Bancshares;

·         the inability to complete the merger contemplated by the merger agreement due to the failure to satisfy conditions necessary to close the merger;

·         management time and effort may be diverted to the resolution of merger-related issues;

·         the risk that the businesses of the Corporation and First Bancshares will not be integrated successfully, or such integration may be more difficult, time-consuming or costly than expected;

·         First Bancshares’ ability to achieve the synergies and value creation contemplated by the proposed merger with the Corporation;

 

-25

 

·         the expected growth opportunities or costs savings from the merger may not be fully realized or may take longer to realize than expected;

·         revenues following the transaction may be lower than expected as a result of losses of customers or other reasons;

·         potential deposit attrition, higher than expected costs, customer loss and business disruption associated with First Bancshares’ integration of the Corporation, including, without limitation, potential difficulties in maintaining relationships with key personnel;

·         the outcome of any legal proceedings that may be instituted against the Corporation or First Bancshares or their respective boards of directors;

·         general economic conditions, either globally, nationally, in the States of Georgia or Mississippi, or in the specific markets in which the Corporation or First Bancshares operate;

·         limitations placed on the ability of the Corporation and First Bancshares to operate their respective businesses by the merger agreement;

·        the effect of the announcement of the merger on the Corporation and First Bancshares’ business relationships, employees, customers, suppliers, vendors, other partners, standing with regulators, operating results and businesses generally;

·         customer acceptance of the combined company’s products and services;

·         the amount of any costs, fees, expenses, impairments and charges related to the merger;

·         fluctuations in the market price of First Bancshares common stock and the related effect on the market value of the merger consideration that the Corporation shareholders will receive upon completion of the merger;

·         legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which the Corporation and First Bancshares are engaged, including potential changes resulting from currently proposed legislation;

·         liquidity risk affecting the Corporation or First Bancshares ability to meet their respective obligations when they become due;

·         pandemics, terrorist activities and other risks that results in loss of consumer confidence and economic disruptions; and

·         other factors discussed in the Corporation’s other filings with the SEC.

The foregoing list of factors is not exclusive, and readers are cautioned not to place undue reliance on any forward-looking statements. The Corporation undertakes no obligation to update or revise any forward-looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in the Corporation’s current and subsequent filings with the SEC.

 

ITEM 1A. RISK FACTORS

 

An investment in the Corporation’s common stock and the Corporation’s financial results are subject to a number of risks. Investors should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K and the documents incorporated by reference. Additional risks and uncertainties, including those generally affecting the industry in which the Corporation operates and risks that management currently deems immaterial, may arise or become material in the future and affect the Corporation’s business.

Risks Related to the Corporation

As a bank holding company, adverse conditions in the general business or economic environment could have a material adverse effect on the Corporation’s financial condition and results of operation.

 

Weaknesses or adverse changes in business and economic conditions generally or specifically in the markets in which the Corporation operates could adversely impact our business, including causing one or more of the following negative developments:

  

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  ·         a decrease in the demand for loans and other products and services offered by the Corporation;
  ·         a decrease in the value of the Corporation’s loans secured by consumer or commercial real estate;
  ·         an impairment of the Corporation’s assets, such as its intangible assets, goodwill, or deferred tax
  assets; or
  ·         an increase in the number of customers or other counterparties who default on their loans or other
  obligations to the Corporation, which could result in a higher level of nonperforming assets, net
  charge-offs and provision for loan losses.

 

One or more negative developments resulting from adverse conditions in the general business or economic environment, some of which are described above, could have a material adverse effect on the Corporation’s financial condition and results of operations.

 

The Corporation’s ability to raise capital could be limited, affect its liquidity, and could be dilutive to existing shareholders.

 

The Corporation’s ability to raise capital will depend on conditions in the capital markets, which are outside of our control, and on the Corporation’s financial performance. Accordingly, there is no guarantee that the Corporation will be able to borrow funds or successfully raise additional capital at all or on terms that are favorable or otherwise not dilutive to existing shareholders.

 

Capital resources and liquidity are essential to the Corporation’s businesses and it relies on external sources to finance a significant portion of its operations.

 

Liquidity is essential to the Corporation’s businesses. We depend on access to a variety of sources of funding to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, and to accommodate the transaction and cash management needs of our customers. Sources of funding available to us, and upon which we rely as regular components of our liquidity and funding management strategy, include traditional and brokered deposits, inter-bank borrowings, Federal Funds purchased, repurchase agreements and Federal Home Loan Bank advances. We may also raise funds from time to time in the form of either short-or long-term borrowings or equity issuances. The Corporation’s capital resources and liquidity could be negatively impacted by disruptions in its ability to access these sources of funding. The cost of brokered and other out-of-market deposits and potential future regulatory limits on the interest rate we pay for brokered deposits could make them unattractive sources of funding. Further, factors that we cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, could impair our ability to access sources of funds. Other financial institutions may be unwilling to extend credit to banks because of concerns about the banking industry and the economy generally and there may not be a viable market for raising short or long-term debt or equity capital. In addition, our ability to raise funding could be impaired if lenders develop a negative perception of our long-term or short-term financial prospects. Such negative perceptions could be developed if the Corporation is downgraded or put on (or remains on) negative watch by the rating agencies, suffers a decline in the level of its business activity or regulatory authorities take significant action against it, among other reasons.

 

Among other things, if we fail to remain “well-capitalized” for bank regulatory purposes, because we do not qualify under the minimum capital standards or the FDIC otherwise downgrades our capital category, it could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common stock, and our ability to make acquisitions, and we would not be able to accept brokered deposits without prior FDIC approval. To be “well-capitalized”, a bank must generally maintain a common equity Tier 1 capital ratio of 6.5%, Tier 1 leverage capital ratio of 5%, Tier 1 risk-based capital ratio of 8% and total risk-based capital ratio of 10%. In addition, our regulators may require us to maintain higher capital levels. Our failure to remain “well-capitalized” or to maintain any higher capital requirements imposed on us could negatively affect our business, results of operations and financial condition.

 

If the Corporation is unable to raise funding using the methods described above, it would likely need to finance or liquidate unencumbered assets to meet maturing liabilities. The Corporation may be unable to sell some of its assets, or it may have to sell assets at a discount from market value, either of which could adversely affect its results of operations and financial condition.

 

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In addition, the Corporation is a legal entity separate and distinct from the Bank and depends on subsidiary service fees and dividends from the Bank to fund its payment of dividends to its shareholders and of interest and principal on its outstanding debt. The Bank is also subject to other laws that authorize regulatory authorities to prohibit or reduce the flow of funds from the Bank to the Corporation. Any inability of the Corporation to pay its obligations, or need to defer the payment of any such obligations, could have a material adverse effect on our business, operations, financial condition, and the value of our common stock.

 

The Corporation’s construction and land development loans are subject to unique risks that could adversely affect earnings.

 

The Corporation’s construction and land development loan portfolio was $28.8 million at December 31, 2019, comprising 7.2% of total loans. Construction and land development loans are often riskier than home equity loans or residential mortgage loans to individuals. In the event of a general economic slowdown, they would represent higher risk due to slower sales and reduced cash flow that could impact the borrowers’ ability to repay on a timely basis. As a result, these loans could represent higher risk due to slower sales and reduced cash flow that affect the borrowers’ ability to repay on a timely basis which could result in a sharp increase in our total net charge-offs and require us to significantly increase our allowance for loan losses, any of which could have a material adverse effect on our financial condition or results of operations.

 

Recent performance may not be indicative of future performance.

 

Various factors, such as economic conditions, regulatory and legislative considerations, competition and the ability to find and retain talented people, may impede the Corporation’s ability to remain profitable.

 

Deterioration in asset quality could have an adverse impact on the Corporation.

 

A significant source of risk for the Corporation arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of diverse real and personal property that may be affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, environmental contamination and other external events. In addition, decreases in real estate property values due to the nature of the Bank’s loan portfolio, over 75% of which is secured by real estate, could affect the ability of customers to repay their loans. The Bank’s loan policies and procedures may not prevent unexpected losses that could have a material adverse effect on the Corporation’s business, financial condition, results of operations, or liquidity.

 

Changes in prevailing interest rates may negatively affect the results of operations of the Corporation and the value of its assets.

 

The Corporation’s earnings depend largely on the relationship between the yield on earning assets, primarily loans and investments, and the cost of funds, primarily deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities and the level of nonperforming assets. Fluctuations in interest rates affect the demand of customers for the Corporation’s products and services. In addition, interest-bearing liabilities may re-price or mature more slowly or more rapidly or on a different basis than interest-earning assets. Significant fluctuations in interest rates could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity. On March 3, 2020 the Federal Reserve lowered the target range for the federal funds rate to a range from 1.00 to 1.25 percent citing evolving risks to economic activity from the coronavirus (“COVID-19”) (discussed elsewhere in these Risk Factors and in Part II, Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments”), and on March 15, 2020, the Federal Reserve further lowered the target range for the federal funds rate to a range from 0 to 0.25 percent citing related concerns about the disruption to economic activity and stress in the energy sector. A prolonged period of very low interest rates could reduce our net interest income and have a material adverse impact on our results of operations or financial condition.

 

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In addition, the discontinuance of LIBOR as a reference rate, and the uncertainty related to such potential changes, may adversely affect the value of reference rate-linked debt securities that we hold or issue, which could further impact our interest rate spread and impact our financial condition or results of operations.

 

Changes in the level of interest rates may also negatively affect the value of the Corporation’s assets and its ability to realize book value from the sale of those assets, all of which ultimately affect earnings.

 

The phase-out or the replacement of LIBOR with a different reference rate or modification of the method used to calculate LIBOR could adversely affect our financial condition and results of operations.

 

LIBOR is an interest rate benchmark used as a reference rate for a wide range of our financial instruments. In July 2017, the UK’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop compelling banks to submit LIBOR rates after 2021. It is unclear whether or not LIBOR will cease to exist at that time (and if so, what reference rate will replace it) or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The Alternative Reference Rates Committee (the “ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in contracts that are currently indexed to United States dollar LIBOR. The ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to financial and other derivative contracts exposed to LIBOR. Uncertainty exists as to the transition process and broad acceptance of SOFR as the primary alternative to LIBOR. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform.

 

These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past and could have adverse effects on our business, financial condition and results of operations. In particular, the disappearance of LIBOR and transition to a new method or benchmark could:

·       adversely affect the interest rates paid or received on, and the revenue and expenses associated with, and the value of the Corporation’s floating rate obligations, loans and other financial instruments tied to LIBOR, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;

·       prompt inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with an alternative benchmark rate;

·       result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language, or the absence of such language, in LIBOR-based securities and loans;

·       result in customer uncertainty and disputes around how variable rates should be calculated in light of the foregoing, thereby damaging our reputation and resulting in a loss of customers and additional costs to us; and

·       require the transition to or development of appropriate systems and analytics to effectively transition the Corporation’s risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark, such as SOFR.

 

The manner and impact of this transition, and the effect on the Corporation’s funding costs, loan, and investment and trading securities portfolios, asset liability management and business is uncertain.

 

The Corporation’s reported financial results depend on the accounting and reporting policies of the Corporation, the application of which requires significant assumptions, estimates and judgments.

 

The Corporation’s accounting and reporting policies are fundamental to the methods by which we record and report our financial condition and results of operations. The Corporation’s management must make significant assumptions and estimates and exercise significant judgment in selecting and applying many of these accounting and reporting policies so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report the Corporation’s financial condition and results. In some cases, management must select a policy from two or more alternatives, any of which may be reasonable under the circumstances, which may result in the Corporation reporting materially different results than would have been reported under a different alternative. 

 

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If the Corporation’s allowance for loan losses is not sufficient to cover actual loan losses, earnings would decrease.

 

The Bank’s loan customers may not repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to assure repayment. The Bank may experience significant loan losses which would have a material adverse effect on the Corporation’s operating results. Management makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. The Corporation maintains an allowance for loan losses in an attempt to cover any loan losses inherent in the portfolio. In determining the size of the allowance, management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and nonaccruals, national and local economic conditions and other pertinent information. As a result of these considerations, the Corporation has from time to time increased its allowance for loan losses. For the year ended December 31, 2019, the Corporation recorded an allowance for possible loan losses of $3.60 million, compared with $3.43 million for the year ended December 31, 2018. If these assumptions are incorrect, the allowance may not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

 

The Corporation may be subject to losses due to fraudulent and negligent conduct of the Bank’s loan customers, third party service providers and employees.

 

When the Bank makes loans to individuals or entities, they rely upon information supplied by borrowers and other third parties, including information contained in the applicant’s loan application, property appraisal reports, title information and the borrower’s net worth, liquidity and cash flow information.  While they attempt to verify information provided through available sources, they cannot be certain all such information is correct or complete.  The Bank’s reliance on incorrect or incomplete information could have a material adverse effect on the Corporation’s profitability or financial condition.

 

We rely on third parties to provide key components of our business infrastructure.

 

Third parties provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third party vendor could also hurt our operations if those difficulties interfere with the vendor's ability to serve us. Furthermore, our vendors could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.

 

Technology difficulties or failures or cyber security breaches of our network security could have a material adverse effect on the Corporation.

 

The Corporation depends upon data processing, software, and communication and information exchange on a variety of computing platforms and networks. The computer platforms and network infrastructure we use could be vulnerable to unforeseen hardware and cyber security issues. The Corporation cannot be certain that all of its systems are entirely free from vulnerability to cyber-attack or other technological difficulties or failures. The Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and the Corporation could subject us to additional regulatory scrutiny, damage our reputation, result in a loss of customers and expose us to claims from customers.

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Any of these results could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity. Although we have security measures designed to mitigate the possibility of break-ins, breaches and other disruptive problems, including firewalls and penetration testing, there can be no assurance that such security measures will be effective in preventing such problems.

 

The Corporation’s business is subject to the success of the local economies and real estate markets in which it operates and susceptible to an economic downturn.

 

The Corporation’s banking operations are located in southwest Georgia. Because of the geographic concentration of its operations, the Corporation’s success depends largely upon economic conditions in this area, which include volatility in the agricultural market, influx and outflow of major employers in the area, and minimal population growth throughout the region. Deterioration in economic conditions in the communities in which the Corporation operates could adversely affect the quality of the Corporation’s loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity. The Corporation is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of more diverse economies.

 

Moreover, if economic conditions were to worsen nationally, regionally or locally, then we could see a sharp increase in our total net charge-offs and also be required to significantly increase our allowance for credit losses. Furthermore, the demand for loans and our other products and services could decline. An increase in our non-performing assets and related increases in our provision for loan losses, coupled with a potential decrease in the demand for loans and our other products and services, could negatively affect our business and could have a material adverse effect on our capital, financial condition, results of operations and future growth. Our customers may also be adversely impacted by changes in regulatory, trade (including tariffs) and tax policies and laws, or a global health crisis or pandemic, all of which could reduce demand for loans and adversely impact our borrowers’ ability to repay our loans. In addition, international economic uncertainty could also impact the U.S. financial markets by potentially suppressing stock prices, including ours, and adding to overall market volatility, which could adversely affect our business. The effects of any economic downturn could continue for many years after the downturn is considered to have ended.

 

The Corporation may face risks with respect to its ability to execute its business strategy.

 

The financial performance and profitability of the Corporation will depend on its ability to execute its strategic plan and manage its future growth. Moreover, the Corporation’s future performance is subject to a number of factors beyond its control, including pending and future federal and state banking legislation, regulatory changes, unforeseen litigation outcomes, inflation, lending and deposit rate changes, interest rate fluctuations, increased competition and economic conditions. Accordingly, these issues could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity. On March 3, 2020 the Federal Reserve lowered the target range for the federal funds rate to a range from 1.00 to 1.25 percent citing evolving risks to economic activity from the COVID-19 (discussed elsewhere in these Risk Factors and in Part II, Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments”), and on March 15, 2020, the Federal Reserve further lowered the target range for the federal funds rate to a range from 0 to 0.25 percent citing related concerns about the disruption to economic activity and stress in the energy sector. A prolonged period of very low interest rates could reduce our net interest income and have a material adverse impact on our results of operations or financial condition.

 

The Corporation depends on its key personnel, and the loss of any of them could adversely affect the Corporation.

 

The Corporation’s success depends to a significant extent on the management skills of its existing executive officers and directors, many of whom have held officer and director positions with the Corporation for many years. The loss or unavailability of any of its key personnel, including DeWitt Drew, President and Chief Executive Officer; Donna S. Lott, Executive Vice President and Chief Administrative Officer; and Danny E. Singley, Executive Vice President & Chief Credit Officer, could have a material adverse effect on the Corporation’s business, financial condition, and results of operations or liquidity.

 

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Competition from financial institutions and other financial service providers may adversely affect the Corporation.

 

The banking business is highly competitive, and the Corporation experiences competition in its markets from other depository institutions and other financial service organizations, including brokers, finance companies, financial technology companies, mutual funds, savings and loan associations, credit unions and certain governmental agencies. The Corporation competes with these other financial institutions in attracting deposits and in making loans. Many of its competitors are well-established, larger financial institutions that are able to operate profitably with a narrower net interest margin and have a more diverse revenue base. The Corporation may face a competitive disadvantage as a result of its smaller size, lack of geographic diversification and inability to spread costs across broader markets. There can be no assurance that the Corporation will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.

 

In addition, technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits, which could have a material impact on our financial condition and results of operations.

 

The Corporation may not have the resources to effectively implement new technology, or we may experience operational challenges when implementing new technology.

 

The financial services industry is changing rapidly, and to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. In addition to better serving our customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, at least in part, upon our ability to respond to future technological changes and the ability to address the needs of our customers. We address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our products and service offerings. We may experience operational challenges as we implement these new technology enhancements or products, which could result in our not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner. In addition, complications during a conversion of our core technology platform or implementation or upgrade of any software could negatively impact the experiences or satisfaction of our customers, which could cause those customers to terminate their relationship with us or reduce the amount of business that they do with us, either of which could adversely affect our business, financial condition or results of operations.

 

Many of our larger competitors have substantially greater resources to invest in technological improvements. Third parties upon which we rely for our technology needs may not be able to cost-effectively develop systems that will enable us to keep pace with such developments. As a result, our competitors may be able to offer additional or superior products compared to those that we will be able to provide, which would put us at a competitive disadvantage. We may lose customers seeking new technology-driven products and services to the extent we are unable to provide such products and services. The inability to keep pace with technological change could adversely affect our business, financial condition and results of operations.

 

The short-term and long-term impact of the changing regulatory capital requirements is uncertain.

 

The Basel III Capital Rules established a common equity Tier 1 minimum capital requirement of 4.5%, a higher minimum Tier 1 capital to risk-weighted assets requirement of 6% and Total capital to risk-weighted assets of 8%. In addition, to be considered “well-capitalized”, the rules include a common equity Tier 1 capital requirement of 6.5% or greater and a higher Tier 1 capital to risk-weighted assets requirement of 8% or greater. Moreover, the rules limit a banking organization’s capital distributions and certain discretionary bonus payments if such banking organization does not hold a “capital conservation buffer” consisting of a 2.5% of common equity Tier 1 capital in addition to the 4.5% minimum common equity Tier 1 requirement and the other amounts necessary to meet the minimum risk-based capital requirements.

 

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The application of the more stringent capital requirements described above could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in additional regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in us modifying our business strategy and could restrict dividends.

 

We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

 

The federal Bank Secrecy Act, USA Patriot Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal bank regulatory agencies, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. Federal bank regulatory agencies and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, which would negatively impact our business, financial condition and results of operations.

 

We could be subject to changes in tax laws, regulations and interpretations or challenges to our income tax provision.

 

We compute our income tax provision based on enacted tax rates in the jurisdictions in which we operate. Any change in enacted tax laws, rules or regulatory or judicial interpretations, any adverse outcome in connection with tax audits in any jurisdiction or any change in the pronouncements relating to accounting for income taxes could adversely affect our effective tax rate, tax payments and results of operations. In addition, changes in enacted tax laws, such as adoption of a lower income tax rate in any of the jurisdictions in which we operate, could impact our ability to obtain the future tax benefits represented by our deferred tax assets.

 

Changes in monetary policy, laws and regulations or failures to comply with such laws and regulations could adversely affect the Corporation.

 

Federal monetary policy, particularly as implemented through the Federal Reserve, significantly affects credit conditions for the Corporation, and any unfavorable change in these conditions could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity. Further, the Corporation and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the Corporation conducts its banking business, undertakes new investments and activities and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit holders of the Corporation’s securities. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity. See Part I, Item 1, “Supervision and Regulation.”

 

In 2017, both chambers of Congress proposed comprehensive financial regulatory reform bills that would amend the Dodd-Frank Act and that could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In May 2018, certain provisions of these bills were signed into law as part of the Economic Growth Act and repealed or modified significant portions of the Dodd-Frank Act. Specifically, the Economic Growth Act delayed implementation of rules related to the Home Mortgage Disclosure Act, reformed and simplified certain Volcker Rule requirements, and raised the threshold for applying enhanced prudential standards to bank holding companies with total consolidated assets equal to or greater than $50 billion to those with total consolidated assets equal to or greater than $250 billion.

 

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While recent federal legislation, including the Economic Growth Act, has scaled back portions of the Dodd-Frank Act, uncertainty about the timing and scope of such changes, as well as the cost of complying with a new regulatory regime, remains and enactment of any other regulatory relief is uncertain and none of which may lead to a meaningful reduction of our regulatory burden and attendant costs. See Part I, Item 1, “Supervision and Regulation.”

 

Federal and state regulators have the ability to impose or request that we consent to substantial sanctions, restrictions and requirements on the Bank if they determine, upon examination or otherwise, violations of laws, rules or regulations with which we or the Bank must comply, or weaknesses or failures with respect to general standards of safety and soundness. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, cease and desist or consent orders, civil money penalties and termination of deposit insurance and bank closures. Enforcement actions may be taken regardless of the capital level of the institution. In particular, institutions that are not sufficiently capitalized in accordance with regulatory standards may also face capital directives or prompt corrective action. Enforcement actions may require certain corrective steps (including staff additions or changes), impose limits on activities (such as lending, deposit taking, acquisitions or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised, any of which could adversely affect our financial condition and results of operations. Enforcement actions, including the imposition of monetary penalties, may have a material impact on our financial condition or results of operations, and damage to our reputation, and loss of our holding company status. In addition, compliance with any such action could distract management’s attention from our operations, cause us to incur significant expenses, restrict us from engaging in potentially profitable activities, and limit our ability to raise capital. Closure of the Bank would result in a total loss of shareholder investment.

 

The outbreak of the recent COVID-19, or an outbreak of another highly infectious or contagious disease, could adversely affect our business, financial condition and results of operations.

 

Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of a highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in the U.S. economy, which could in turn disrupt the business, activities, and operations of our customers, as well as our business and operations. Moreover, since the beginning of January 2020, the COVID-19 outbreak has caused significant disruption in the financial markets both globally and in the United States. The spread of COVID-19, or an outbreak of another highly infectious or contagious disease, including the time such outbreak takes to wane and the time it takes our markets to return to normal, may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a spread of COVID-19 or an outbreak of an infectious disease in our market area. Although we maintain contingency plans for pandemic outbreaks, a spread of COVID-19, or an outbreak of another contagious disease could also negatively impact the availability of key personnel necessary to conduct our business activities. Such a spread or outbreak also negatively impact the business and operations of third-party service providers who perform critical services for us. The spread of COVID-19, or another highly infectious or contagious disease, or the failure to contain such spread could have a material adverse effect to our business, financial condition, and results of operations.

 

On March 11, 2020, the World Health Organization announced that infections of COVID-19 had become pandemic, and on March 13, the U.S. President announced a national emergency relating to the disease. There is a possibility of widespread infection in the United States and abroad, with the potential for catastrophic impact. National, state and local authorities have recommended social distancing and imposed or are considering quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures, while intended to protect human life, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts, including proposed government payments to affected citizens and industries, is uncertain. Some economists are predicting the United States will soon enter a recession. Any of the foregoing factors, or other cascading effects of the pandemic that are not currently foreseeable, could materially affect our business, including our customers’ willingness to conduct banking transactions, their ability to pay on existing obligations and the availability of liquidity, which would negatively affect our financial condition and results of operations. The duration of any such impacts cannot be predicted.

 

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Risks Related to the Merger

Because of the fixed exchange ratio and the fluctuation of the market price of First Bancshares common stock, our shareholders will not know the market value of the merger consideration until they will receive at the effective time of the merger.

Pursuant to the merger agreement, each share of the Corporation’s common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive 1.00 share of First Bancshares common stock.

 

The market value of the merger consideration may vary from the market value on the date we announced the merger until the date merger is completed and thereafter due to fluctuations in the market price of First Bancshares common stock. Any fluctuation in the market price of First Bancshares common stock will change the value of the shares of First Bancshares common stock that our shareholders may receive. Stock price changes may result from a variety of factors that are beyond our control, including but not limited to general market and economic conditions, changes in their respective businesses, operations and prospects and regulatory considerations.

 

Failure to complete the merger could negatively affect the value of our shares and the future business and financial results of the Corporation.

If the merger is not completed, the ongoing business of the Corporation could be adversely affected and we will be subject to a variety of risks associated with the failure to complete the merger, including the following:

·we may be required, under certain circumstances, to pay to First Bancshares a termination fee equal to $3,750,000;
·we have incurred substantial costs in connection with the proposed merger, such as legal, accounting, financial advisor, printing and mailing fees;
·the loss of key employees and customers;
·the disruption of operations and business;
·deposit attrition, customer loss and revenue loss;
·unexpected problems with costs, operations, personnel, technology and credit;
·diversion of management focus and resources from operational matters and other strategic opportunities while working to implement the merger; and
·reputational harm due to the adverse perception of any failure to successfully complete the merger.

If the merger is not completed, these risks could materially affect the business, financial results and the value of the Corporation’s common stock.

 

The Corporation will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with us to seek to change existing business relationships with us. Retention of certain employees may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with us or the combined entity. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, our business or the business assumed by First Bancshares following the merger could be harmed. In addition, we have agreed to certain contractual restrictions on the operation of our business prior to closing which could materially affect the business, financial results and the value of the Corporation’s common stock.

 

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The merger agreement limits our ability to pursue an alternative acquisition proposal and requires us to pay a termination fee of $3,750,000 under limited circumstances relating to alternative acquisition proposals.

Under the merger agreement, we have agreed not to initiate, solicit, induce or knowingly encourage, or take any action to facilitate any alternative business combination transaction or, subject to certain exceptions, participate in discussions or negotiations regarding, or furnish any non-public information relating to, any alternative business combination transaction. The merger agreement also provides that we will pay First Bancshares a termination fee in the amount of $3,750,000 in the event that the merger agreement is terminated for certain reasons. These provisions could discourage a potential competing acquirer that might have an interest in acquiring the Corporation from considering or making a competing acquisition proposal, even if the potential competing acquirer was prepared to pay consideration with a higher per share cash value than the market value proposed to be received or realized in the merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances under the merger agreement.

 

The merger agreement contains provisions granting both the Corporation and First Bancshares the right to terminate the merger agreement in certain circumstances.

The merger agreement contains certain termination rights, including the right, subject to certain exceptions, of either party to terminate the merger agreement if the merger is not completed on or prior to June 30, 2020 (subject to automatic extension to August 31, 2020 if the only outstanding condition to closing is the receipt of regulatory approvals), and the right of the Corporation to terminate the merger agreement, subject to certain conditions, to accept a business combination transaction deemed to be superior to the merger by our board of directors. Additionally, we may terminate the agreement if (i) the average closing price of First Bancshares common stock over the 10 trading days preceding the date that is five days prior to the closing date is less than $26.86, and (ii) the decline in the price of First Bancshares common stock (as measured by the average closing price divided by $33.58) is more than 20% greater than the decline in the KBW Regional Banking Index (KRX) (as measured by dividing the average closing price of the KBW Regional Banking Index over the 10 trading days preceding the date that is five days prior to the closing date by $108.51); provided, however, that First Bancshares has the option, but not the obligation, to adjust the per share cash consideration or the per share stock consideration to prevent the termination of merger agreement.

 

If the merger is not completed, the ongoing business of the Corporation could be adversely affected and the Corporation will be subject to several risks, including the risks described elsewhere in this “Risk Factors” section.

 

The merger is subject to a number of conditions which, if not satisfied or waived in a timely manner, would delay the merger or adversely impact the companies’ ability to complete the transactions.

The completion of the merger is subject to certain conditions (some of which having been completed as of the date of this Annual Report on Form 10-K), including (1) approval of the merger agreement by the holders of at least a majority of the outstanding shares of the Corporation’s common stock entitled to vote at the special meeting of shareholders of the Corporation held March 27, 2020; (2) the receipt of all required regulatory approvals for the merger, without the imposition of any material on-going conditions or restrictions, and the expiration of all regulatory waiting periods; (3) the absence of any legal restraint (such as an injunction or restraining order) that would prevent the consummation of the merger; (4) the effectiveness of the registration statement filed by First Bancshares; (5) each party’s receipt of a tax opinion from its respective outside legal counsel, dated the closing date of the merger, confirming the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code; (6) the Plan of Bank Merger in the form attached as Exhibit B to the merger agreement being executed and delivered; (7) the absence of the occurrence of a material adverse effect on SGB or First Bancshares; (8) the Corporation obtaining an actuarial analysis demonstrating that (i) the Corporation’s approximate total liability in respect of its pension plan on a termination basis will not materially exceed $13.8 million and (ii) the difference between such liability and the market value of the assets of the pension plan will not be expected to materially exceed $3.85 million, and (9) other customary closing conditions set forth in the merger agreement.  

 

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While it is currently anticipated that the merger will be completed during the second quarter of 2020, there can be no assurance that such conditions will be satisfied in a timely manner or at all, or that an effect, event, development or change will not transpire that could delay or prevent these conditions from being satisfied. Accordingly, there can be no guarantee with respect to the timing of the closing of the merger, whether the merger will be completed at all and when the Corporation shareholders will receive the merger consideration, if at all.

 

The merger may be completed even if the Corporation or First Bancshares experiences adverse changes in its business.

 

In general, either the Corporation or First Bancshares may refuse to complete the merger if the other party suffers a material adverse effect on its business prior to the closing of the merger. However, certain types of changes or occurrences with respect to the Corporation or First Bancshares would not prevent the merger from going forward, even if the change or occurrence would have adverse effects on the Corporation or First Bancshares, including the following:

 

changes in laws and regulations affecting financial institutions and their holding companies generally, or interpretations thereof by courts or governmental entities, if such changes do not have a disproportionate impact on the affected company;

changes in GAAP or regulatory accounting requirements generally applicable to financial institutions and their holding companies, if such changes do not have a disproportionate impact on the affected company;

changes in global, national or regional political conditions including the outbreak of war or acts of terrorism, or in economic or market conditions affecting the financial services industry generally, if such changes do not have a disproportionate impact on the affected company;

changes or effects from the announcement of the merger agreement and the transactions contemplated thereby, and compliance by the parties with the merger agreement on the business, financial condition or results of operations of the parties;

any failure by the Corporation of First Bancshares to meet any internal or published industry analyst projections or forecasts or estimates of revenues or earnings for any period (but not including the underlying causes thereof);

changes in the trading price or trading volume of First Bancshares common stock (but not including the underlying causes thereof unless otherwise specifically excluded); however, the Corporation may terminate the merger agreement if (i) the average closing price of First Bancshares common stock during a specified period prior to closing is less than $26.86 and (ii) First Bancshares common stock underperforms the KBW Regional Banking Index by more than 20%, unless First Bancshares elects to make a compensating adjustment to the exchange ratio; and

the impact of the merger agreement and the transactions contemplated thereby on relationships with customers or employees, including the loss of personnel subsequent to the date of the merger agreement.

Litigation in transactions of this type are sometimes filed against the board of directors of either party that could prevent or delay the completion of the merger or result in the payment of damages following completion of the merger.

 

In connection with the merger, it is possible that the Corporation shareholders may file putative class action lawsuits against the boards of directors of the Corporation and/or First Bancshares. Among other remedies, these shareholders could seek to enjoin the merger. The outcome of any such litigation would be uncertain. If a dismissal is not granted or a settlement is not reached, such potential lawsuits could prevent or delay completion of the merger and result in substantial costs to the Corporation or First Bancshares. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is consummated may adversely affect the combined company’s business, financial condition, results of operations, cash flows and market price.   

 

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On February 28, 2020, the Corporation received a letter on behalf of an alleged shareholder alleging that the Corporation and its directors violated their fiduciary duties including by issuing allegedly misleading disclosures in connection with the merger (the “Demand”). While the Corporation believed that the disclosures set forth in the definitive proxy statement/prospectus, dated February 18, 2020 (the “Proxy Statement”), which was filed by the Corporation with the SEC on February 20, 2020 and mailed on or about February 21, 2020 to the Corporation’s shareholders of record as of the close of business on February 12, 2020, fully complied with applicable law, to resolve the alleged shareholder’s claims and moot the disclosure claims, to avoid nuisance, potential expense, and delay and to provide additional information to the Corporation’s shareholders, the Corporation determined to voluntarily supplement the Proxy Statement with the additional disclosures. In light of the supplemental disclosures, the Demand was withdrawn. For additional information, see the Corporation’s Current Report on Form 8-K filed with the SEC on March 18, 2020.

 

The combined company expects to incur substantial expenses related to the merger.

The combined company expects to incur substantial expenses in connection with completing the merger and integrating the business and operations of the Corporation and First Bancshares. Although First Bancshares and the Corporation have assumed that a certain level of transaction and integration expenses would be incurred, there are a number of factors beyond their control that could affect the total amount or the timing of their integration expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction and integration expenses associated with the merger could, particularly in the near term, exceed the savings that the combined company expects to achieve from the integration of the businesses following the completion of the merger.

 

Following the merger, the combined company may be unable to integrate the Corporation’s business with First Bancshares successfully and realize the anticipated synergies and other benefits of the merger or do so within the anticipated timeframe.

The merger involves the combination of two companies that currently operate as independent companies, as well as the companies’ subsidiaries. Although the combined company is expected to benefit from certain synergies, including cost savings, the combined company may encounter potential difficulties in the integration process, including:

 

the inability to successfully combine the Corporation’s business with First Bancshares in a manner that permits the combined company to achieve the cost savings anticipated to result from the merger, which would result in the anticipated benefits of the merger not being realized in the timeframe currently anticipated or at all;

the risk of not realizing all of the anticipated operational efficiencies or other anticipated strategic and financial benefits of the merger within the expected timeframe or at all;

potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and

performance shortfalls as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations.

For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s operations, any of which could adversely affect the ability of the combined company to maintain relationships with customers and employees or to achieve the anticipated benefits of the merger, or could otherwise adversely affect the business and financial results of the combined company. 

 

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While the merger is pending the Corporation and following the merger, the combined company, may be unable to retain key employees and customers.

 

Uncertainties about the effects of the merger may impair our ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter for the combined company, and could cause customers and others who work with us to seek to change their existing business relationships with us. Employee retention may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their roles with the combined company following the merger. Uncertainties about the effects of the merger could cause customers and others who work with us to seek to change their existing business relationships with us. It is not unusual for competitors to use mergers as an opportunity to target the merging parties’ customers and to hire certain of their employees.

 

The success of the combined company after the merger will depend in part upon its ability to retain key employees. Simultaneous with the execution of the merger agreement, First Bancshares entered into employment agreements with certain key employees of the Corporation, the effectiveness of which is conditioned upon the completion of the merger. However, key employees may depart either before or after the merger because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company following the merger. Accordingly, no assurance can be given that the Corporation or, following the merger, the combined company will be able to retain key employees.

 

The voting power of the Corporation shareholders will be diluted by the merger.

The merger will result in the Corporation shareholders having an ownership stake in the combined company that is smaller than their current stake in the Corporation.  Upon completion of the merger of the Corporation with First Bancshares, we estimate that the Corporation shareholders will own approximately 13.55% of the issued and outstanding shares of common stock of the combined company. Consequently, the Corporation shareholders, as a general matter, will have less influence over the management and policies of the combined company after the effective time of the merger than they currently exercise over the management and policies of the Corporation.

 

The market price of the combined company’s common stock may decline as a result of the merger.

 

The market price of the combined company’s common stock may decline as a result of the merger if the combined company does not achieve the perceived benefits of the merger or the effect of the merger on the combined company’s financial results is not consistent with the expectations of financial or industry analysts. In addition, upon completion of the merger, the Corporation and First Bancshares shareholders will own interests in a combined company operating an expanded business with a different mix of assets, risks and liabilities. Current shareholders of the Corporation and First Bancshares may not wish to continue to invest in the combined company, or for other reasons may wish to dispose of some or all of their shares of the combined company.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

There are no unresolved comments from the SEC staff regarding the Corporation’s periodic or current reports under the Exchange Act.

 

ITEM 2. PROPERTIES

 

The executive offices of the Corporation are located in the SGB Wealth Strategies office at 25 Second Avenue S.W. Moultrie, Georgia. The main banking office and operations center of the Bank are located in a 22,000 square foot facility at 201 First Street, S.E., Moultrie, Georgia. The Trust and Brokerage operations are located in the SGB Wealth Strategies office. The Bank’s Administrative Services office is located across the street from the main office at 205 Second Street, S.E., Moultrie, Georgia. This building is also used for training and meeting rooms, record storage, and a drive-thru teller facility.

  

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Name

 

Address

Square

Feet

     
Main Office 201 First Street, SE, Moultrie, GA  31768 22,000
Old Operations Center 11 Second Avenue, SW, Moultrie, GA  31768 5,000
SGB Wealth Strategies Office 25 Second Avenue, SW, Moultrie, GA  31768 9,400
Administrative Services 205 Second Street, SE, Moultrie, GA  31768 15,000
Southwest Georgia Ins. Services 501 South Main Street, Moultrie, GA  31768 5,600
Baker County Branch 168 Georgia Highway 91, Newton, GA  39870 4,400
Sylvester Branch 300 North Main Street, Sylvester, GA  31791 12,000
North Valdosta Branch 3500 North Valdosta Road, Valdosta, GA 31602 5,900
Valdosta Commercial Banking Center 3520 North Valdosta Road, Valdosta, GA 31602 10,700
Baytree Branch 1404 Baytree Road, Valdosta, GA 31602 3,000
Tifton Branch 205 East Eighth Street, Tifton, GA 31794 9,000

 

All of the buildings and land, which include parking and drive-thru teller facilities, are owned by the Bank.  Additionally, we have deployed nine In-Lobby teller machines throughout our footprint and replaced the traditional drive-up automated teller machines (ATM) with ATMs that will take deposits.

 

ITEM 3. LEGAL PROCEEDINGS

 

In the ordinary course of operations, the Corporation and the Bank are defendants in various legal proceedings. Additionally, in the ordinary course of business, the Corporation and the Bank are subject to regulatory examinations and investigations. In the opinion of management, there is no pending or threatened proceeding in which an adverse decision will result in a material adverse change in the consolidated financial condition or results of operations of the Corporation. No material proceedings terminated in the fourth quarter of 2019.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

The Corporation’s common stock trades on the NYSE American LLC under the symbol “SGB”. The closing price on December 31, 2019, was $35.00. As of December 31, 2019, there were 374 record holders of the Corporation’s common stock. Also, there were approximately 582 additional shareholders who held shares through trusts and brokerage firms.

 

Dividends

 

Cash dividends paid on the Corporation’s common stock were $0.48 per share in 2019 and $0.47 per share in 2018. Our dividend policy objective is to pay out a portion of earnings in dividends to our shareholders in a consistent manner over time. However, no assurance can be given that dividends will be declared in the future. The amount and frequency of dividends is determined by the Corporation’s Board of Directors after consideration of various factors, which include the Corporation’s financial condition and results of operations, investment opportunities available to the Corporation, capital requirements, tax considerations and general economic conditions. The primary source of funds available to the parent company is the payment of dividends by its subsidiary bank. Federal and State banking laws restrict the amount of dividends that can be paid without regulatory approval. See Part I, Item 1, “Business – Payment of Dividends.” The Corporation and its predecessors have paid cash dividends for the past ninety-two consecutive years.  

 

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Share Repurchases

 

The table below summarizes the number of shares of our common stock that were repurchased during the three months ended December 31, 2019 on behalf of the 2013 Omnibus Incentive Plan Restricted Stock Awards.

 

 

 

 

Month Ended

  Total Number of Shares Purchased  Average Price Paid per Share  Total Number of Share Purchased as Part of Publicly Announced Plans  Maximum Number of Shares That May Still Be Purchased under the Plan
 October 31, 2019    0    0    0    0 
 November 30, 2019    0    0    0    0 
 December 31, 2019    4,456    21.00    4,456    104,679 
 Total    4,456    21.00    4,456    104,679 

 

(1) The 2013 Omnibus Incentive Plan was announced on December 18, 2013 for a maximum aggregate amount of 125,000 shares of common stock. The plan will expire December 18, 2023.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table presents information as of December 31, 2019, with respect to shares of common stock of the Corporation that may be issued under the Directors and Executive Officers Stock Purchase Plan and the 2013 Omnibus Incentive Plan. During 2019, 4,456 shares of restricted stock were issued under the 2013 Omnibus Incentive Plan.

 

 

 

 

Plan Category

  Number of Securities to be Issued upon Exercise of Outstanding Options 

 

Weighted Average Exercise Price of Outstanding Options

 

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans

Equity compensation plans approved by shareholders(1)   0   $0    364,739 
Equity compensation plans not approved by shareholders(2)   0    0    0 
Total   0   $0    364,739 

 

(1) The Directors and Executive Officers Stock Purchase Plan and the 2013 Omnibus Incentive Plan.

(2) Excludes shares issued under the 401(k) Plan.

 

Sales of Unregistered Securities

 

The Corporation has not sold any unregistered securities in the past three years.

 

Performance Graph

 

The following graph compares the cumulative total shareholder return of the Corporation’s common stock with SNL’s Southeast Bank Index, SNL Bank $500M - $1B Index, the S&P 500 Index and the NASDAQ Composite Index. SNL’s Southeast Bank Index is a compilation of the total return to shareholders over the past five years of a group of 74 banks located in the southeastern states of Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia. The SNL Bank $500M - $1B Index is a compilation of the total return to shareholders over the past five years of a group of 36 banks in the United States with assets between $500 million and $1 billion. The comparison assumes $100 was invested January 1, 2014, and that all semi-annual and quarterly dividends were reinvested each period. The comparison takes into consideration changes in stock price, cash dividends, stock dividends, and stock splits since December 31, 2013.

 

The comparisons in the graph are disclosed pursuant to Item 201(e), Regulation S-K promulgated under the Exchange Act and are not intended to forecast or be indicative of possible future performance of the Corporation’s common stock.

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Period Ending                  
Index  12/31/14  12/31/15  12/31/16  12/31/17  12/31/18  12/31/19
Southwest Georgia Financial Corporation   100.00    114.01    146.77    180.03    155.40    275.28 
SNL Bank $500M - $1B Index   100.00    112.87    152.40    185.93    179.45    231.13 
SNL Southeast Bank Index   100.00    98.44    130.68    161.65    133.56    188.08 
S&P 500 Index   100.00    101.38    113.51    138.29    132.23    173.86 
NASDAQ Composite Index   100.00    106.96    116.45    150.96    146.67    200.49 

 

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

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

  

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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 2019, noninterest income, at 19.2% of the Corporation’s total revenue, increased mainly due higher income from insurance services, net gains on the sale of fixed assets, and net gains on the sale of securities when compared with 2018.

 

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

 

At the end of 2019, the Corporation’s nonperforming assets decreased to $515 thousand from $1.33 million at December 31, 2018, due to decreases of $964 thousand in nonaccrual loans and an increase of $146 thousand in foreclosed assets when compared to the end of 2018.   

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Recent Developments

 

Pending Merger

 

On December 18, 2019, the Corporation entered into the merger agreement with First Bancshares, whereby the Corporation will be merged with and into the First Bancshares. Pursuant to and simultaneously with entering into the merger agreement, the Bank, and First Bancshares’s wholly owned subsidiary bank, The First, entered into a Plan of Bank Merger whereby the Bank will be merged with and into The First immediately following the merger of the Corporation with and into First Bancshares. For additional information see Part I, Item 1, “Business – Recent Developments”.

  

COVID-19 Pandemic

 

In December 2019, a novel strain of coronavirus—COVID-19—was reported in Wuhan, China. The World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” In March 2020, infections of COVID-19 had become a pandemic with persons testing positive in all fifty states and the District of Columbia. On March 13, the U.S. President announced a national emergency relating to the pandemic. With the possibility of widespread infection in the United States and abroad, national, state and local authorities have recommended social distancing and imposed or are considering quarantine and isolation measures on large portions of the population, including mandatory business closures. On March 20, 2020, the Governor of the State of Georgia declared a state of emergency in response to the outbreak, however, as of the date of this Annual Report on Form 10-K, no order has been issued requiring us to close.

 

The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries and may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of the spread of COVID-19 in our primary market areas. In response to these developments, the Federal Reserve has responded with a series of monetary policy adjustments in March 2020 including reductions to the targeted federal funds rate totaling 1.50 percent, an increase in its daily repurchase agreement offerings, announced purchases of U.S. Treasury securities and U.S. Agency mortgage-backed securities, and the establishment of the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Money Market Mutual Fund Liquidity Facility. The economic effects of the COVID-19 pandemic are difficult to predict and may adversely impact our business, financial condition or results of operations. The extent of the impact of COVID-19 pandemic on our business, financial condition and results of operations will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot be predicted. See Part I, Item 1A under the heading “Risk Factors – Risks Related to the Corporation - The outbreak of the recent COVID-19, or an outbreak of another highly infectious or contagious disease, could adversely affect our business, financial condition and results of operations” for more information.

 

Critical Accounting Policies

 

In the course of the Corporation’s normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial statements of the Corporation. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates have on the Corporation’s results of operations. We believe that the allowance for loan losses as of December 31, 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 Corporation’s Consolidated Financial Statements provides a description of our significant accounting policies and contributes to the understanding of how our financial performance is reported.

 

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Results of Operations

 

Performance Summary

 

For the year ended December 31, 2019, net income was $5.29 million, up $640 thousand from net income of $4.65 million for 2018. The increase in net income is primarily due to an increase in net interest income and noninterest income. Net interest income for 2019 increased $2.0 million to $20.58 million due primarily to a $3.08 million increase in interest income and fees on loans offset by a $1.13 million increase in interest expense compared with last year. Noninterest income for 2019 increased $610 thousand mainly due higher income from insurance services, net gains on the sale of fixed assets, and net gains on the sale of securities. These gains were partially offset by a $1.47 million increase in noninterest expense due mostly to higher employee, equipment, data processing, professional fees, and postemployment benefits. Provision for income taxes increased $478 thousand compared with last year, primarily due to a $1.92 million reversal of deductible timing differences in tax basis depreciation expense. Net income was $2.08 per diluted share for 2019 compared with a net income of $1.83 per diluted share for 2018.

 

For the year ended December 31, 2018, net income was $4.65 million, up $840 thousand from net income of $3.81 million for 2017. The increase in net income is primarily due to the lower income tax rates based on the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) resulting in a $951 thousand decrease to the provision for income taxes. Net interest income for 2018 increased $1.33 million to $18.57 million due primarily to a $2.46 million increase in interest income and fees on loans compared with last year. Growth in net interest income more than offset the $804 thousand increase in noninterest expense due mostly to higher employee, advertising, telephone, and depreciation expenses related to the Tifton and Valdosta expansions. Provision for loan losses increased $530 thousand when compared to 2017, which reflected our strong loan growth. Noninterest income also decreased $106 thousand mainly due to lower income from mortgage banking services. Net income was $1.83 per diluted share for 2018 compared with a net income of $1.49 per diluted share for 2017

 

We measure our performance on selected key ratios, which are provided in the following table:

 

   2019  2018  2017
Return on average total assets   0.96%   0.91%   0.80%
Return on average shareholders’ equity   11.01%   11.04%   9.41%
Average shareholders’ equity to average total assets   8.76%   8.24%   8.55%
Net interest margin (tax equivalent)   4.09%   3.99%   4.09%

 

Net Interest Income

 

Net interest income after provision for loan losses increased $1.98 thousand, or 11.2%, to $19.73 million for 2019 when compared with 2018. Total interest income increased $3.14 million, which more than offset an increase in total interest expense of $1.13 million. The Corporation recognized a $857 thousand provision for loan losses in 2019, a $27 thousand increase compared with $830 thousand in 2018. Interest income and fees on loans increased $3.08 million when compared with 2018 resulting from growth in average loans of $37.4 million. Also, interest income on investment securities increased by $34 thousand mainly due to an increase in average investment securities volume of $1.2 million compared with 2018. Interest on deposits in other banks also increased $12 thousand compared with the same period last year. Partially offsetting these increases in net interest income, interest paid on deposits increased $1.47 million to $3.85 million and interest paid on total borrowings decreased by $334 thousand when compared with the prior year. The average rate paid on average time deposits of $92.7 million increased 72 basis points when compared with 2018. These rate increases were primarily driven by rising rates in our markets.

  

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Net interest income after provision for loan losses increased $798 thousand, or 4.71%, to $17.74 million for 2018 when compared with 2017. Total interest income increased $2.75 million which more than offset an increase in total interest expense of $1.42 million. The Corporation recognized a $830 thousand provision for loan losses in 2018, a $530 thousand increase compared with $300 thousand in 2017. Interest income and fees on loans increased $2.46 million when compared with 2017 resulting from growth in average loans of $32.2 million. Also, interest income on investment securities decreased by $18 thousand mainly due to a decrease in average investment securities volume of $7.5 million compared with 2017. Interest on deposits in other banks also increased $290 thousand compared with the same period last year. Partially offsetting these increases in net interest income, interest paid on deposits increased $1.23 million to $2.38 million and interest paid on total borrowings increased by $190 thousand when compared with the prior year. The average rate paid on average time deposits of $87.5 million increased 41 basis points when compared with 2017. These rate increases were primarily driven by rising rates in our markets.

 

Net Interest Margin

 

Net interest margin, which is the net return on earning assets, is a key performance ratio for evaluating net interest income. It is computed by dividing net interest income by average total earning assets. Net interest margin increased 10 basis points to 4.09% for 2019 when compared with 2018. The increase in net interest margin was attributed primarily to a 10.7% increase in average loan volume coupled with a 28 basis point rate increase in our loan portfolio. This increase was partially offset by an 8.9% increase in average interest bearing liabilities volume coupled with a 22 basis point rate increase in interest bearing liabilities. Net interest margin was 3.99% for 2018, a 10 basis point decrease from 4.09% in 2017.

 

Noninterest Income

 

Noninterest income is an important contributor to net earnings. The following table summarizes the changes in noninterest income during the past three years:

 

   2019  2018  2017
(Dollars in thousands)                  
  Amount  % Change  Amount  %
Change
Amount  %
Change
Service charges on deposit accounts  $929    (8.5)%  $1,015    1.0%  $1,005    (7.5)%
Income from trust services   221    (6)   235    7.3    219    4.3 
Income from retail brokerage services   360    (9.8)   399    10.2    362    5.9 
Income from insurance services   1,741    8.5    1,604    5.3    1,523    3.0 
Income from mortgage banking services   0    (100)   2    (98.7)   155    (56.2)
Gain (loss) on the sale or disposition of assets   288    NM    (80)   NM    (9)   NM 
Gain (loss) on the sale of securities   174    NM    (165)   NM    187    10.7 
Gain on extinguishment of debt   143    NM    318    NM    0    NM 
Other income   961    9.3    879    1.0    870    11.3 
          Total noninterest income  $4,817    14.5%  $4,207    (2.5)%  $4,312    (3.3)%

 

*NM = not meaningful

 

For 2019, noninterest income was $4.82 million, up from $4.21 million in 2018. The increase was primarily attributed to increases in income from insurance services of $137 thousand, net gains on the disposition of assets of $368 thousand, net gains on the sale of investment securities of $339 thousand, and other income of $84 thousand when compared with 2018. These increases were offset by a $175 thousand decrease in gain on the extinguishment of debt when compared with 2018. Other decreases included income from service charges on deposit accounts, income from trust services, and income from retail brokerage services of $86 thousand, $14 thousand, respectively, when compared with 2018.

 

For 2018, noninterest income was $4.21 million, down from $4.31 million in 2017. The decrease was primarily attributed to a decline in income from mortgage banking services of $153 thousand compared with 2017. Commercial mortgage banking fees from Empire Financial Services, Inc. ceased as the entity was dissolved in late 2017. A loss on the disposition of assets of $80 thousand was recognized in 2018 compared with a loss of $9 thousand in 2017. A loss on the sale of securities of $165 thousand was recognized in 2018 compared with a gain of $187 thousand in 2017.

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These decreases were offset by increases in income from insurance services, income from retail brokerage services, income from trust services, service charges on deposit accounts, and other income of $80 thousand, $37 thousand, $16 thousand, $10 thousand, and $9 thousand, respectively, when compared with 2017. The Corporation also recognized a $318 thousand gain on the extinguishment of debt in 2018 compared with a $0 gain recognized in 2017.

 

Noninterest Expense

 

Noninterest expense includes all expenses of the Corporation other than interest expense, provision for loan losses and income tax expense. The following table summarizes the changes in the noninterest expenses for the past three years:

 

   2019  2018  2017
  (Dollars in thousands)
  Amount  % Change  Amount % Change  Amount  % Change
Salaries and employee benefits  $10,247    5.4%  $9,725    5.1%  $9,251    5.5%
Occupancy expense   1,260    5.4    1,195    6.3    1,124    (1.4)
Equipment expense   1,220    30.7    933    9.8    850    (1.3)
Data processing expense   1,649    14.1    1,445    (4.5)   1,513    10.6 
Amortization of intangible assets   4    (75)   16    0.0    16    0.0 
Other operating expenses   3,727    12.3    3,320    8.0    3,075    11.3 
          Total noninterest expense  $18,106    8.9%  $16,634    5.1%  $15,829    6.1%

 

Noninterest expense increased $1.47 million to $18.11 million in 2019 compared with 2018. Salaries and employee benefits increased $522 thousand, occupancy expense increased $65 thousand, equipment expense increased $287 thousand, and data processing expense increased $204 thousand compared with 2018 as a result of expansion in the Tifton and Valdosta markets coupled with greater incentive based income. Other operating expense increased $407 thousand compared with 2018 due primarily due to higher professional fees related to the upcoming merger with First Bancshares, postemployment benefits for employee separation agreements, and additional charitable contributions to the Hospital Authority of Colquitt County for community support.

 

For 2018, noninterest expense increased $804 thousand to $16.6 million compared with the same period in 2017. Salaries and employee benefits increased $474 thousand when compared with 2017 as a result of staffing expansion in the Tifton and Valdosta markets and greater incentive based income. Other operating expense increased $245 thousand compared with 2017 due primarily to higher telephone expense, advertising expense, and employee training expenses also related to expansion in the Tifton and Valdosta markets. Occupancy expense increased $71 thousand and equipment expense increased $83 thousand compared with 2017 primarily due to additional depreciation expense on the new bank building and equipment in Tifton. Data processing expense decreased $68 thousand compared with 2017 largely related to the front-end core processor migration expenses incurred in 2017.

 

The efficiency ratio, (noninterest expense divided by total noninterest income plus tax equivalent net interest income), a measure of productivity, decreased to 70.5% for 2019 when compared with 71.9% for 2018 and 70.8% for year ending 2017. The efficiency ratio decreased slightly during 2019 due to a full-year of increased operating expenses due to the expansion into the Tifton, Georgia market, increased interest expense due to increased rates on interest bearing deposit accounts, and the tax equivalent adjustment on tax-free loans and investment securities declined due to the reduction in tax-free investment securities holdings. The improvement in the efficiency ratio for 2018 resulted from increased operating expenses as we expanded to the Tifton, Georgia market, increased interest expense as we paid higher rates on interest bearing deposit accounts, and the tax equivalent adjustment on tax-free loans and investment securities declined due to the reduction in the corporate income tax rate from 34% to 21% when compared with 2017.

 

Income Tax Expense

 

The Corporation had an expense of $1.15 million for income taxes in 2019 compared with an expense of $668 thousand in 2018 and $1.62 million for the year ending December 31, 2017. These amounts resulted in an effective tax rate of 17.8%, 12.6%, and 29.8%, for 2019, 2018, and 2017, respectively. See Note 10 of the Corporation’s Notes to Consolidated Financial Statements for further details of tax expense. 

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Uses and Sources of Funds

 

The Corporation, primarily through the Bank, acts as a financial intermediary. As such, our financial condition should be considered in terms of how we manage our sources and uses of funds. Our primary sources of funds are deposits and borrowings. We invest our funds in assets, and our earning assets are our primary source of income.

 

Total average assets increased $38.1 million to $548.6 million in 2019 compared with 2018. The increase in total average assets is primarily attributable to an increase in average loans of $37.4 million. Average investment securities increased by $1.2 million to $101.4 million while interest-bearing deposits with other banks decreased by $3.2 million. The Corporation’s earning assets, which include loans, investment securities, certificates of deposit with other banks and interest-bearing deposits with banks, averaged $510.8 million in 2019, a 7.6% increase from $474.9 million in 2018. The average volume for total deposits increased $52.0 million mostly due to an increase in average money market accounts of $29.8 million resulting from the offering new premier money market accounts for individuals and businesses. In addition, interest-bearing business account deposits increased by $9.9 million and time deposit accounts increased by $14.3 million compared with the prior year. For 2019, average earning assets were comprised of 75.1% loans, 19.8% investment securities, and 5.0% deposit balances with banks. The ratio of average earning assets to average total assets increased slightly to 93.1% for 2019 compared with 93.0% for 2018.

 

Loans

 

Loans are one of the Corporation’s largest earning assets and uses of funds. Because of the importance of loans, most of the other assets and liabilities are managed to accommodate the needs of the loan portfolio. During 2019, average net loans represented 75% of average earning assets and 70% of average total assets.

 

The composition of the Corporation’s loan portfolio at December 31, 2019, 2018, and 2017 was as follows:

 

   2019 2018 2017
  (Dollars in thousands)
Category  Amount  % Change  Amount  % Change  Amount  % Change
Commercial, financial, and agricultural  $87,441    (1.1)%  $88,403    20.9%  $73,146    3.0%
Real estate:                              
    Construction   28,826    15.8    24,891    11.7    22,287    (14.3)
    Commercial   143,022    15.8    123,477    16.0    106,458    16.1 
    Residential   102,240    (1.1)   103,348    4.2    99,160    19.1 
    Agricultural   31,459    (0.3)   31,562    24.4    25,374    53.0 
Consumer & other   5,094    0.1    5,086    35.0    3,767    (4.9)
       Total loans  $398,082    5.7   $376,767    14.1   $330,192    12.9 
Unearned interest and discount   (17)   (0.6)   (17)   (5.6)   (18)   5.3 
Allowance for loan losses   (3,604)   5.1    (3,429)   12.6    (3,044)   2.6 
       Net loans  $394,461    5.7%  $373,321    14.1%  $327,130    13.0%

 

Total year-end balances of loans increased $21.3 million while average total loans increased $37.4 million in 2019 compared with 2018. Construction and commercial real estate loan categories as well as consumer and other loans experienced growth in 2019, while commercial, financial, agricultural loans as well as residential and agricultural real estate loans decreased slightly. The ratio of total loans to total deposits at year end increased to 84.1% in 2019 compared with 82.7% in 2018.

 

The loan portfolio mix at December 31, 2019 consisted of 7.2% loans secured by construction real estate, 35.9% loans secured by commercial real estate, 25.7% of loans secured by residential real estate, and 7.9% of loans secured by agricultural real estate. The loan portfolio also included other commercial, financial, and agricultural purposes of 22.0% and installment loans to individuals for consumer purposes of 1.3%.  

 

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Allowance and Provision for Possible Loan Losses

 

The allowance for loan losses represents our estimate of the amount required for probable loan losses in the Corp