2 0 1 2 A N N U A L R E P O R T SOUTHWEST GEORGIA FINANCIAL CORPORATION The agricultural industry plays a vital role in the economic health of our region. COMPANY PROFILE & STRATEGY Offering comprehensive financial services to consumer, business and government customers, Southwest Georgia Financial Corporation (NYSE MKT) is a state-chartered bank holding company. Its subsidiary, Southwest Georgia Bank, has served the community of Moultrie, Georgia in Baldwin Colquitt County since 1928. Over the years, Southwest County Georgia Financial Corporation has continued to grow and advance, while constantly maintaining a strong leadership role in the communities we serve. The Corporation has $347 million in assets. We operate six banking offices in a five county area with additional automated teller machines for the convenience of our customers. The Corporation offers investment Baker County planning and management, trust management, mortgage banking and commercial and individual insurance products and services. Through Empire Financial Colquitt Worth County Thomas County Services, Inc., our mortgage banking services subsidiary County Lowndes County in Milledgeville,GA, we service over $126 million in non-recourse commercial mortgages and provide commercial mortgage banking services. OUR STRATEGY Southwest Georgia Financial Corporation’s strategy for OUR MISSION STATEMENT growth is to diversify our business base in order to broaden our revenue sources; to strengthen our sales and marketing To grow the value of and enhance the long-term return efforts in order to deliver quality service to our customers; on each stockholder’s investment by providing high to maintain our strong market share through commitment quality customer service through a staff of highly-trained, to our communities; and to expand our current geographic motivated, dedicated and well-managed employees, and footprint. by continuing a record of outstanding financial performance. PERFORMANCE HIGHLIGHTS For The Year 2012 2011 2010 2009 2008 (in thousands, except per share data) Interest income $ 13,734 $ 13,104 $ 13,017 $ 13,597 $ 15,070 Interest expense 1,898 2,195 2,889 3,672 5,470 Non-interest income 5,525 5,159 5,387 5,364 1,672 Non-interest expense 14,596 13,336 12,474 12,432 13,386 Net income (loss) 1,939 1,461 1,856 1,813 (1,279) Earnings (loss) per share – diluted $ 0.76 $ 0.57 $ 0.73 $ 0.71 $ (0.50) Weighted average shares outstanding – diluted 2,548 2,548 2,548 2,548 2,552 Dividends paid per share $ 0.16 $ 0.10 $ 0.10 $ 0.07 $ 0.56 At Year End Total assets $ 347,181 $ 305,650 $ 296,404 $ 291,008 $267,297 Loans, less unearned income 204,137 181,302 157,733 160,230 149,070 Deposits 291,762 248,911 239,531 235,431 214,541 Shareholders’ equity 29,875 28,551 26,775 25,530 23,316 Book value per share 11.73 11.21 10.51 10.02 9.15 Tangible book value per share $ 11.60 $ 10.99 $ 10.26 $ 9.69 $ 8.74 Common shares outstanding 2,548 2,548 2,548 2,548 2,548 Selected Average Balances Average total assets $ 325,759 $ 307,449 $ 300,746 $ 278,162 $275,427 Average loans 193,532 173,341 160,356 153,149 134,602 Average deposits 269,480 249,012 242,667 226,585 221,318 Average shareholders’ equity $ 29,287 $ 27,857 $ 26,926 $ 24,229 $ 25,367 Asset Quality Non-performing assets to total assets 0.53 % 1.18 % 1.19 % 1.88 % 1.10 % Non-performing assets $ 1,849 $ 3,621 $ 3,542 $ 5,484 $ 2,942 Net loan charge-offs $ 700 $ 638 $ 378 $ 379 $ 849 Net loan charge-offs to average loans 0.36 % 0.37 % 0.24 % 0.25 % 0.63 % Reserve for loan losses to loans 1.39 % 1.71 % 1.75 % 1.58 % 1.59 % Performance Ratios Return on average total assets 0.60 % 0.48 % 0.62 % 0.65 % (0.46) % Return on average shareholders’ equity 6.62 % 5.25 % 6.89 % 7.48 % (5.04) % Average shareholders’ equity to average total assets 8.99 % 9.06 % 8.95 % 8.71 % 9.21 % Efficiency ratio 81.15 % 80.63 % 77.91 % 78.53 % 113.15 % Net interest margin 4.22 % 4.11 % 3.90 % 4.14 % 4.04 % Dividend payout ratio 21.02 % 17.44 % 13.73 % 9.84 % NA* % *Dividend payout ratio can not be calculated due to net loss. SOUTHWEST GEORGIA FINANCIAL CORPORATION2012 Annual Report 1 LETTER TO OUR SHAREHOLDERS Dear Fellow Shareholders: As we entered 2012, the slow recovering economy challenged our region and the ever present regulatory burdens continued to suppress our industry. Our strengths, a robust and diverse agricultural economy in the mchaarlkleentsg ews ea nsedr vaec,h aileovne gp wosiitthiv oe urre seuxlptsa ninsi o2n0 1in2. VFaoldr othstea ,y eGaer,o wrgei ag, ehnaevrea teenda nbeletd i nucso tmo eo voef r$co1m.9e m thilelisoen, or 269.5 $0.76 per diluted share, up from $1.5 million, or $0.57 per diluted share, in 2011. As a result, we were able t6o0 rpeeturcrenn at didnictrieoansael ocvaepri t2a0l 1to1 .s h areholders, paying cash dividends of $0.16 per common share during 2012, a 242.7 249.0 GROWTH Iton bMe avricthal 2t0o1 t2h,e wloen ogp teenremd souucrc esessc oonf do ufur lCl-soemrvpicaen yb.a Wnkei ncgu rcreennttelyr ihna vVea l2d1o stteaa,m w hmicehm cboenrst iwnuitehs 221.3 226.6 significant experience in the growing Valdosta market. During the year, we increased our loan portfolio by $23 million, or nearly 13 percent. This growth played a significant role in improving our net interest margin to 4.22 percent. In 08 09 10 11 12 0 addition, we increased deposits by 17 percent, led by a 21 percent increase in non-interest bearing deposits. These results further contributed to improvement in net interest margin Average Deposits ($ millions) and increased our deposit market share along the way. While we are pleased with the extraordinary deposit growth, we believe that a portion of it resulted from a continued flight to safety and mNoayn innotet rbeset pinercmomanee wnta.s $5.5 million, up 7.1 percent over 2011, led by a 13.5 percent improvement in 193.5 mortgage banking income. While servicing revenue from commercial mortgage banking continues to decline, obryi gminoadteiorant ef eiensc frreoamses b iont hre ctaoiml bmroekrceiraalg aen adn dre tianislu mraonrcteg argeev ebnaunek. iTngh eh ahveea liinncgr eoafs tehdo. sWe be uasrien aelssso l iennecso ius raanged 173.3 indicator of the overall health of the markets in which we are located and of the economy in general. 160.4 A CHALLENGING ENVIRONMENT 153.1 The sustained low interest rate environment is trying and, if it does not relent, may eventually have an adverse impact on earnings. We continue to maintain a conservative balance sheet, and a more normal 134.6 interest rate environment will provide increased opportunity for expansion of our net interest margin. Earnings continue to be negatively impacted by additional contributions to the Company’s frozen pension plan. We are committed to making sufficient contributions to keep the plan adequately funded. Only higher 08 09 10 11 12 interest rates can alleviate the abnormally higher funding requirements of the pension plan and the gradual Average Loans T decrease in our net interest margin. ($ millions) POISED FOR THE FUTURE Wsolhidil en ewto irnkc oremmea ginros wtoth b ien d 2o0n1e2, ,o duur ea smseot sqtluya tliot yi nincrdeiacsaetdo rlso aanres aatn rde l naotinveinlyt enreosrtm bae la lreinveg l sd. eWpoes ietxsp, ecroimenbciended % 4.22% bwainthk iinmgp rreogvieodn sc.r Wedeit hcaovsets s. tIrtu icst uarlseod eonucro buaralagninceg sthheaet to iunr ad mepaonsnite gr rtoow mthi nwimasi zeev etnhley ilslp ereffaedc tasm oof nragp oidulry three 4.14 4.11% rising interest rates, while providing the opportunity for earnings growth in a more normal, slightly higher, % rate environment. 4.04 Wgroew b ealti eav em ooudre rinatvee sptamcee.n Tt ihne pineovepsltem aenndt innefcraesstsrauryct tuor ee xinp agnrdow hiansg b ceoemn mexupnenitsiievse w, bilul ta lilso cwr iutisc atlo tcoo onutirnue to 3.90% Company’s long-term health. Our success could not have been achieved without your commitment to our Company. On behalf of our Board and our employees, thank you for your continued support and confidence. 08 09 10 11 12 Sincerely, D Net Interest Margin Dewitt Drew President and Chief Executive Officer MARCH 29, 2013 2 2012 Annual Report SOUTHWEST GEORGIA FINANCIAL CORPORATION 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, 2012 [ ] 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 1-12053 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: Common Stock $1 Par Value NYSE MKT (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated file,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X ] 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, 2012: $19,516,820 based on 1,951,682 shares at the price of $10.00 per share. As of March 22, 2013, 2,547,837 shares of the $1.00 par value common stock of Southwest Georgia Financial Corporation were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive Proxy Statement for the 2013 annual meeting of shareholders, to be filed with the Commission are incorporated by reference into Part III. TABLE OF CONTENTS 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 Stockholder 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 Stockholder 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 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. Currently, it is a FDIC insured, state-chartered bank. The Corporation’s primary business is providing banking services through the Bank to individuals and businesses principally in Colquitt County, Baker County, Thomas County, Worth County, Lowndes County, and the surrounding counties of southwest Georgia. The Bank also operates Empire Financial Services, Inc. (“Empire”), a commercial mortgage banking firm located in Baldwin County. The Corporation’s executive office is located at 201 First Street, S. E., Moultrie, Georgia 31768, and its telephone number is (229) 985-1120. All references herein to the Corporation include Southwest Georgia Financial Corporation, the Bank, and Empire, unless the context indicates a different meaning. General The Corporation is a registered bank holding company. All of the Corporation’s activities are currently conducted by the Bank and Empire. The Bank is community-oriented and offers such customary banking services 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 trust and brokerage 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 trust and brokerage area has a securities sales department which offers full-service brokerage services through a third party service provider. The Bank operates Southwest Georgia Insurance Services Division, an insurance agency that offers property and casualty insurance, life, health, and disability insurance. Empire, a subsidiary of the Bank, offers commercial mortgage banking services. Markets The Corporation conducts banking activities in five counties in southwest and south central Georgia. The latest statistics were recorded in 2010. Population characteristics in these counties range from rural to more metropolitan. Our most recent and largest market is Lowndes County with a total population of 109,233 and the highest growth rate in our markets at 18.6% from 2000 to 2010. 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 29.9, younger than an average median age of 38.9 in the other four counties that the bank primarily serves. These counties, Colquitt, Worth, Thomas, and Baker, have an average total population of 28,837 and an average growth rate of (1.0)% from 2000 to 2010. Per capita income in Lowndes County was $20,040, slightly higher than an average of $18,822 for the rest of the bank’s markets. Agriculture plays a major economic role in the bank’s markets. Colquitt, Worth, Thomas, Lowndes, and Baker Counties produce a large portion of our state’s crops, including cotton, peanuts, and a variety of vegetables. Empire provides mortgage banking primarily for commercial properties throughout the southeastern United States. Deposits The Bank offers a full range of depository accounts and services to both consumers and businesses. At December 31, 2012, the Corporation’s deposit base, totaling $291,762,060, consisted of $68,071,346 in noninterest-bearing demand deposits (23.3% of total deposits), $106,014,298 in interest-bearing demand deposits including money market accounts (36.3% of total deposits), $25,988,297 in savings deposits (8.9% of total deposits), $55,097,669 in time deposits in amounts less than $100,000 (18.9% of total deposits), and $36,590,450 in time deposits of $100,000 or more (12.6% 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, 2012, consumer installment, real estate (including construction and mortgage loans), and commercial (including financial and agricultural) loans represented approximately 2.0%, 78.2% and 19.8%, 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. This committee also approves all extensions of credit over $300,000. The Loan 3 Committee is composed of the Chief Executive Officer and President, and other executive officers of the Bank, as well as certain Bank directors. Servicing and Origination Fees on Loans The Corporation through its subsidiary, Empire, recognizes as income in the current period all loan origination and brokerage fees collected on loans closed for investing participants. Loan servicing fees are based on a percentage of loan interest paid by the borrower and are recognized over the term of the loan as loan payments are received. Empire does not directly fund any mortgages and acts as a service-oriented broker for participating mortgage lenders. Fees charged for continuing servicing fees are comparable with market rates. In 2012, Bank revenue received from mortgage banking services was $1,675,936 compared with $1,477,166 in 2011. All of this income was from Empire except for $354,375 in 2012 and $239,625 in 2011, which was mortgage banking income from the Bank. Loan Review and Nonperforming Assets The Bank regularly reviews its loan portfolio to determine deficiencies and corrective action to be taken. Loan reviews are prepared by the Bank’s loan review officer and presented periodically 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 included annually as part of the overall report to the Audit Committee and to the Board of Directors. Certain loans are monitored more often by the loan review officer and the Loan Committee. These loans include non-accruing loans, loans more than 90 days past due, and other loans, regardless of size, that may be considered high risk based on factors defined within the Bank’s loan review policy. Asset/Liability Management The Asset/Liability Management Committee (“ALCO”) is 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 directs the Bank’s overall acquisition and allocation of funds. At its monthly meetings, the ALCO reviews and discusses the monthly 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 Bank’s Loan Committee oversees the ALCO. Investment Policy The Bank’s investment portfolio policy is to maximize income consistent with liquidity, asset quality, and regulatory constraints. The policy is reviewed periodically by the Board of Directors. Individual transactions, portfolio composition, and performance are reviewed and approved monthly by the Board of Directors. Employees The Bank had 120 full-time employees and five part-time employees at December 31, 2012. 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 and Empire compete with other depository institutions and other financial service organizations, including brokers, finance companies, savings and loan associations, credit unions and certain governmental agencies. The Bank ranks fourth out of twenty-seven banks in a six county region (Baker, Brooks, Colquitt, Lowndes, Thomas, and Worth) 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 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 stockholders. Under the regulations of the Georgia Department of Banking and Finance (“DBF”), dividends may not be declared out of the retained earnings of a state bank without first obtaining the written permission of the DBF, unless such bank meets all the following requirements: 4 (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 Federal Deposit Insurance Corporation (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, 2012, net assets available from the Bank to pay dividends without prior approval from regulatory authorities totaled $1,000,186. For 2012, the Corporation’s cash dividend payout to stockholders was $407,655. Supervision and Regulation General. 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 MKT (the “NYSE”), state or federal rules, statutes and regulations affecting their operations, or that apply generally to business corporations or NYSE listed companies. Changes in the rules, statutes and regulations applicable to the Corporation and the Bank can affect the operating environment in substantial and unpredictable ways. The Corporation is a registered bank holding company subject to regulation by the Board of Governors of Federal Reserve under the Bank Holding Corporation Act of 1956, as amended (the “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 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 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 or servicing loans and certain types of leases; * performing certain data processing services; * acting as fiduciary or investment or financial advisor; * providing brokerage services; * underwriting bank eligible securities; * underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and * making investments in corporations or projects designed primarily to promote community welfare. Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closely related or incidental to banking (as discussed above), the Gramm-Leach-Bliley Act (the “GLB Act”) relaxed the previous limitations and permitted bank holding companies to engage in a broader range of financial activities. Specifically, bank holding companies may elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Among the activities that are deemed “financial in nature” include: * lending, exchanging, transferring, investing for others or safeguarding money or securities; * insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto; * providing financial, investment, or economic advisory services, including advising an investment company; * issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and * underwriting, dealing in or making a market in securities. 5 A bank holding company may become a financial holding company under this statute only if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. A bank holding company that falls out of compliance with such requirement may be required to cease engaging in certain activities. Any bank holding company that does not elect to become a financial holding company remains subject to the bank holding company restrictions of the Act. Under this legislation, the Federal Reserve Board 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 as to whether the provisions of 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, 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’s 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 and the regular examination of the DBF. Both the FDIC and DBF must grant prior approval of any merger, consolidation or other corporation reorganization involving the Bank. 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. Banks and bank holding companies are required to have (1) a minimum level of Total capital to risk-weighted assets of 8%; and (2) a minimum Tier I capital to risk-weighted assets of 4%. In addition, the Federal Reserve and the FDIC have established a minimum 3% leverage ratio of Tier I capital to quarterly average total assets for the most highly-rated banks and bank holding companies. “Tier I capital” generally consists of common equity excluding unrecognized gains and losses on available for sale securities, plus minority interests in equity accounts of consolidated subsidiaries and certain perpetual preferred stock less certain intangibles. The Federal Reserve and the FDIC will require a bank holding company and a bank, respectively, to maintain a leverage ratio greater than 4% if either is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve. 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 FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve consider interest rate risk in the overall determination of a bank’s capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for the risk. The “prompt corrective action” provisions of the Federal Deposit Insurance Act 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. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s tangible equity to total assets is 2% or below. 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, 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 I risk-based ratio of at least 6% 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 I risk-based ratio of at least 4% and a leverage ratio of at least 4%; (3) an “undercapitalized” institution has a Total risk-based capital ratio of under 8%, a Tier I risk-based ratio of under 4% or a leverage ratio of under 4%; (4) a “significantly undercapitalized” institution has a Total risk-based capital ratio of under 6%, a Tier I risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a “critically undercapitalized” institution has tangible assets to total equity 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 establish procedures for “downgrading” an institution to a lower capital category based on supervisory factors other than capital. The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 Capital Accord of the Basel Committee on 6