SOUTHWEST GEORGIA FINANCIAL CORP. Overview
The Corporation is a full-service community bank holding company headquartered inMoultrie, Georgia . The community ofMoultrie 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 incorporatesColquitt County , where we are headquartered, as well asBaker ,Worth ,Lowndes , andTift Counties, each contiguous withColquitt County , and the surrounding counties of southwestGeorgia . We have six full service banking facilities each with a deposit automation teller machine, and nineIn-Lobby teller machines throughout the six branches. -42- 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 inValdosta, Georgia , with two full-service banking centers, and added a commercial banking center inAugust 2014 . Continuing to expand our geographic footprint, a loan production office was opened in the neighboring community ofTifton, Georgia , inJanuary 2016 . The loan production office was closed upon completion of a new full-service banking center inTifton, Georgia , that was opened inAugust 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
-43-
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 requiringus 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, theFederal Reserve has responded with a series of monetary policy adjustments inMarch 2020 including reductions to the targeted federal funds rate totaling 1.50 percent, an increase in its daily repurchase agreement offerings, announced purchases ofU.S. Treasury securities andU.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 ofDecember 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. -44- Results of Operations Performance Summary
For the year endedDecember 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 endedDecember 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 theTifton andValdosta 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. -45- 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
*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 fromEmpire 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. -46-
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 12.9Unearned 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%.
-48-
Allowance and Provision for Possible Loan Losses
The allowance for loan losses represents our estimate of the amount required for probable loan losses in the Corporation's loan portfolio. Loans, or portions thereof, which are considered to be uncollectible are charged against this allowance and any subsequent recoveries are credited to the allowance. There can be no assurance that the Corporation will not sustain losses in future periods which could be substantial in relation to the size of the allowance for loan losses atDecember 31, 2019 . We have a loan review program in place which provides for the regular examination and evaluation of the risk elements within the loan portfolio. The adequacy of the allowance for loan losses is regularly evaluated based on the review of all significant loans with particular emphasis on non-accruing, past due, and other potentially impaired loans that have been identified as possible problems. The allowance for loan losses was$3.604 million , or 0.9% of total loans outstanding, as ofDecember 31, 2019 . This level represented an$175 thousand increase from the corresponding 2018 year-end amount, which was also 0.9% of total loans outstanding. The provision for loan losses was$857 thousand in 2019 compared with provision for loan losses of$830 thousand in 2018. See Part I, Item 1, "Table 4 - Loan Portfolio" for details of the changes in the allowance for loan losses.Investment Securities The investment portfolio serves several important functions for the Corporation. Investments in securities are used as a source of income for excess liquidity that is not needed for loan demand and to satisfy pledging requirements in the most profitable way possible. The investment portfolio is a source of liquidity when loan demand exceeds funding availability, and is a vehicle for adjusting balance sheet sensitivity to cushion against adverse rate movements. Our investment policy attempts to provide adequate liquidity by maintaining a portfolio with significant cash flow for reinvestment. The Corporation's investment securities represent 17.8% of our total assets. The portfolio includes 41.3% ofU.S. government agency securities, 26.8% state, county and municipal securities, 27.7% ofU.S. government sponsored pass-thru residential mortgage-backed securities, and 4.3% ofU.S. government treasury securities.
The following table summarizes the contractual maturity of investment securities
at their carrying values as of
Securities Securities
Amounts Maturing In: Available for Sale Held to Maturity Total
(Dollars in thousands)
One year or less $ 2,009 $ 2,516 $ 4,525
After one through five years 31,325 9,488 40,813
After five through ten years 13,522 8,864 22,386
After ten years 20,970 4,619 25,589
Total investment securities $ 67,826 $ 25,487 $ 93,313
At December 31, 2019 , the total investment portfolio decreased $1.8 million ,
down to $93.3 million , compared with $95.1 million at December 31, 2018 . The
decrease was mainly due to calls and maturities of $14.6 million of municipal
securities and U.S. government agency securities as well as residential
mortgage-backed securities principal paydowns of $2.2 million . Additionally, we
sold $9.4 million of available for sale U.S. government agency securities, while
net amortization of bond premiums/discounts was $341 thousand . Partially
offsetting these increases were purchases of $22.4 million of U.S. government
agency securities, municipal securities, and residential mortgage-backed
securities, net unrealized gains on available for sale securities of $2.1
million , and realized net gains on available for sale securities of $174
thousand .
We will continue to actively manage the size, components, and maturity structure
of the investment securities portfolio. Future investment strategies will
continue to be based on profit objectives, economic conditions, interest rate
risk objectives, and balance sheet liquidity demands.
-49-
Nonperforming Assets
Nonperforming assets are defined as nonaccrual loans, loans that are 90 days
past due and still accruing, other-than-temporarily impaired preferred stock,
and property acquired by foreclosure. The level of nonperforming assets
decreased $818 thousand at December 31, 2019 compared with December 31, 2018 .
Nonaccrual loans decreased $964 thousand compared with 2018, and foreclosed
assets increased $146 thousand compared with 2018. Nonperforming assets were
approximately $515 thousand , or 0.09% of total assets as of December 31, 2019 ,
compared with $1.3 million , or 0.25% of total assets at December 31, 2018 .Deposits and Other Interest-Bearing Liabilities
Our primary source of funds is deposits. The Corporation offers a variety of deposit accounts having a wide range of interest rates and terms. We rely primarily on competitive pricing policies and customer service to attract and retain these deposits. In 2019, average deposits increased from$419.9 million in 2018 to$471.9 million . This average deposit growth occurred primarily from increases in new premier money market deposits of$22.5 million , increases in noninterest-bearing accounts of$10.2 million , and increases in savings accounts of$1.7 million compared to 2018. These increases were offset by decreases in NOW accounts of$11.6 million and decreases in total time deposits of$4.8 million compared to 2018. As ofDecember 31, 2019 , the Corporation's balance of certificates of deposit of$250,000 or more increased$8.8 million to$25.1 million from$16.3 million at the end of 2018. We have used borrowings from theFederal Home Loan Bank to support our residential mortgage lending activities. During 2019, the Corporation borrowed$19 million in fixed rate credit advances,$20 million in daily rate credit, and$11 million in principal reducing credit advances. The Corporation repaid$19 million of the fixed-rate and$20 million of the daily rate advances. made annual installment payments of$6.2 million on five principal reducing credit advances from theFederal Home Loan Bank . The Corporation also and made additional payments of$12.7 million for the early retirement of two fixed rate credit advances and one principal reducing credit advance from theFederal Home Loan Bank and recognized a net gain of$143 thousand . During 2020, we expect to make annual installment payments totaling$3.8 million on principal reducing credit advances and payoff a$2 million fixed rate credit advance. Total long-term advances with theFederal Home Loan Bank were$22.7 million atDecember 31, 2019 . Details on theFederal Home Loan Bank advances are presented in Notes 7 and 8 of the Corporation's Consolidated Financial Statements. Liquidity Liquidity is managed to assume that the Bank can meet the cash flow requirements of customers who may be either depositors wanting to withdraw their funds or borrowers needing funds to meet their credit needs. Many factors affect the ability to accomplish liquidity objectives successfully. Those factors include the economic environment, our asset/liability mix and our overall reputation and credit standing in the marketplace. In the ordinary course of business, our cash flows are generated from deposits, interest and fee income, loan repayments and the maturity or sale of other earning assets. The Corporation is a separate entity from the Bank and provides for its own liquidity. The Corporation is responsible for the payment of dividends declared for shareholders, and interest and principal on its outstanding debt. Substantially, all of the Corporation's liquidity is obtained from dividends from the Bank. The Consolidated Statement of Cash Flows details the Corporation's cash flows from operating, investing, and financing activities. During 2019, operating and financing activities provided cash flows of$19.8 million , while investing activities used$17.7 million resulting in an increase in cash and cash equivalents balances of$2.1 million . -50- Liability liquidity represents our ability to renew or replace our short-term borrowings and deposits as they mature or are withdrawn. The Bank's deposit mix includes a significant amount of core deposits. Core deposits are defined as total deposits less time deposits of$250,000 or more. These funds are relatively stable because they are generally accounts of individual customers who are concerned not only with rates paid, but with the value of the services they receive, such as efficient operations performed by helpful personnel. Total core deposits were 94.7% of total deposits onDecember 31, 2019 and 96.4% of total deposits onDecember 31, 2018 . Asset liquidity is provided through ordinary business activity, such as cash received from interest and fee payments as well as from maturing loans and investments. Additional sources include marketable securities and short-term investments that are easily converted into cash without significant loss. The Bank had$4.5 million of investment securities maturing within one year or less onDecember 31, 2019 , which represented 4.8% of the investment debt securities portfolio. Also, the Bank has$2.5 million ofU.S. government agency securities callable at the option of the issuer within one year and approximately$6.4 million of expected annual cash flow in principal reductions from payments
of mortgage-backed securities. During 2019 and 2018, noU.S. government agency securities with call features were called. We are not aware of any other known trends, events, or uncertainties that will have or that are reasonably likely to have a material adverse effect on the Corporation's liquidity or operations. Contractual Obligations
The chart below shows the Corporation's contractual obligations and its
scheduled future cash payments under those obligations as of
The majority of the Corporation's outstanding contractual obligations are long-term debt. The remaining contractual are comprised of purchase obligations for data processing services. We have no capital lease obligations.
Payments Due by Period
(Dollars in thousands)
Less
than 1 1-3 3-5 After 5
Contractual Obligations Total Year Years Years Years
Long-term debt $ 22,679 $ 0 $ 7,214 $ 9,215 $ 6,250
Operating leases 5 5 0 0 0
Total contractual obligations
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk which arise in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements and are unconditionally cancelable. Since many of the commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. Financial instruments whose contract amounts represent credit risk: 2019
2018
(Dollars in thousands)
Commitments to extend credit$ 55,934
$ 39,418 Standby letters of credit$ 1,255 $ 4,343
The Corporation does not have any special purpose entities or off-balance sheet financing payment obligations.
-51-
Capital Resources and Dividends
Our average equity to average assets ratio was 8.76% in 2019 and 8.24% in 2018. AtDecember 31, 2019 , we were well in excess of all applicable minimum capital requirements under the guidelines with a common equity Tier 1 capital ratio of 12.35%, Tier I risk-based capital ratio of 12.35%, Total risk-based capital ratio of 13.27%, and a leverage ratio of 8.81%. To continue to conduct its business as currently conducted, the Corporation and the Bank will need to maintain capital well above the minimum levels.
The following table presents the risk-based capital and leverage ratios at
Corporation Bank
Minimum
Minimum Plus Capital
Risk-Based Capital Minimum Regulatory For Well- Conservation
Ratios 2019 2018 2019 2018 Guidelines Capitalized Buffer (1)
Common Equity Tier
1 12.35 % 11.97 % 12.15 % 11.44 % 4.50 % ? 6.50% ? 7.00%
Tier I capital 12.35 % 11.97 % 12.15 % 11.44 % 6.00 % ? 8.00% ? 8.50%
Total risk-based
capital 13.27 % 12.87 % 13.07 % 12.34 % 8.00 % ? 10.00% ? 10.50%
Leverage 8.81 % 8.62 % 8.59 % 8.24 % 4.00 % ? 5.00% ? 5.00%
(1)Not applicable to bank holding companies, like the Corporation, with less
than
Interest Rate Sensitivity The Corporation's most important element of asset/liability management is the monitoring of its sensitivity and exposure to interest rate movements which is the Corporation's primary market risk. We have no foreign currency exchange rate risk, commodity price risk, or any other material market risk. The Corporation has no trading investment portfolio, nor do we have any interest rate swaps
or other derivative instruments. Our primary source of earnings, net interest income, can fluctuate with significant interest rate movements. To lessen the impact of these movements, we seek to maximize net interest income while remaining within prudent ranges of risk by practicing sound interest rate sensitivity management. We attempt to accomplish this objective by structuring the balance sheet so that the differences in repricing opportunities between assets and liabilities are minimized. Interest rate sensitivity refers to the responsiveness of earning assets and interest-bearing liabilities to changes in market interest rates. The Corporation's interest rate risk management is carried out by the Asset/Liability Management Committee which operates under policies and guidelines established by the Bank's Board of Directors. The principal objective of asset/liability management is to manage the levels of interest-sensitive assets and liabilities to minimize net interest income fluctuations in times of fluctuating market interest rates. To effectively measure and manage interest rate risk, the Corporation uses computer simulations that determine the impact on net interest income of numerous interest rate scenarios, balance sheet trends and strategies. These simulations cover the following financial instruments: short-term financial instruments, investment securities, loans, deposits, and borrowings. These simulations incorporate assumptions about balance sheet dynamics, such as loan and deposit growth and pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Simulations are run under various interest rate scenarios to determine the impact on net income and capital. From these computer simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. The Corporation also maintains an investment portfolio which receives monthly cash flows from mortgage-backed securities principal payments, and staggered maturities and provides flexibility over time in managing exposure to changes in interest rates. Any imbalances in the repricing opportunities at any point in time constitute a financial institution's interest rate sensitivity.
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