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| LION > SEC Filings for LION > Form 10-K on 17-Mar-2009 | All Recent SEC Filings |
17-Mar-2009
Annual Report
• The provision for loan losses for 2008 was $36.6 million compared to $8.5 million in 2007. Net charge-offs for 2008 were 1.36% of average loans outstanding compared to .45% for 2007. The allowance for loan losses was 2.43% of outstanding loans and provided a coverage ratio of 29.2 % of nonperforming loans.
• The net interest margin declined 20 basis points in 2008 to 2.84% from 3.04% in 2007, resulting from a 94 basis point decrease in the cost of funds which lagged the 100 basis point decrease in the yield on earning assets. While both the cost of funds and the yield on earning assets were negatively affected by the decrease in market interest rates, the yield on earning assets was also negatively affected by the increase in nonperforming loans which decreases loan interest income.
• Total assets increased $76.6 million or 4.5% to $1.763 billion at the end of 2008 compared to $1.686 billion at year end 2007. This increase was primarily due to the 206.3% increase in cash and cash equivalents as a result of proceeds from the issuance of preferred stock, higher investment securities, and higher Other Real Estate, partially offset by an increase in the allowance for loan losses.
The Bank's franchise spans eight Counties in the metropolitan Atlanta
market and has one branch office in Jacksonville, Florida. Our lending
activities and the total of our nonperforming assets are significantly
influenced by the local economic environments in Atlanta and Jacksonville. Our
net interest margin is affected by prevailing interest rates, nonperforming
assets and competition among financial institutions for loans and deposits.
Atlanta's and Jacksonville's economies continue to be negatively impacted by the
weak real estate market. Management expects the economy to continue to
deteriorate through 2009 pressuring earnings for the year. On the other hand,
market turmoil and disruptions will provide opportunities to attract new
customer relationships, and talented and experienced bankers. We plan to pursue
these opportunities on a selective basis.
Our overall focus is on building shareholder value. Our mission is "to
continue growth, improve earnings and increase shareholder value; to treat
customers, employees, community and shareholders according to the Golden Rule;
and to operate within a culture of strong internal controls." The strong focus
in 2009 will be on credit quality, expense controls, conservation of capital and
modest quality loan growth.
Critical Accounting Policies
Our accounting and reporting policies are in accordance with U.S. generally
accepted accounting principles and conform to general practices within the
financial services industry. Our financial position and results of operations
are affected by management's application of accounting policies, including
estimates, assumptions, and judgments made to arrive at the carrying value of
assets and liabilities and amounts reported for revenues, expenses, and related
disclosures. Different assumptions in the application of these policies, or
conditions significantly different from certain assumptions, could result in
material changes in our consolidated financial position or consolidated results
of operations. Our accounting policies are fundamental to understanding our
consolidated financial position and consolidated results of operations. Our
significant accounting policies are discussed in detail in Note 1 in the "Notes
to Consolidated Financial Statements." Significant accounting policies have been
periodically discussed and reviewed with and approved by the Audit Committee of
the Board of Directors and the Board of Directors.
The following is a summary of our more critical significant accounting
policies that are highly dependent on estimates, assumptions, and judgments.
Allowance for Loan Losses
The allowance for loan losses is established and maintained through
provisions charged to operations. Such provisions are based on management's
evaluation of the loan portfolio, including loan portfolio concentrations,
current economic conditions, the economic outlook, past loan loss experience,
adequacy of underlying collateral, and such other factors which, in management's
judgment, deserve consideration in
estimating loan losses. Loans are charged off when, in the opinion of
management, such loans are deemed to be uncollectible. Subsequent recoveries are
added to the allowance.
A formal review of the allowance for loan losses is prepared at least
monthly to assess the probable credit risk inherent in the loan portfolio,
including concentrations, and to determine the adequacy of the allowance for
loan losses. For purposes of the monthly management review, the loan portfolio
is separated by loan type and each loan type is treated as a homogeneous pool.
In accordance with the Interagency Policy Statement on the Allowance for Loan
and Lease Losses, the level of allowance required for each loan type is
determined based upon historical charge-off experience and current economic
trends. In addition to the homogenous pools of loans, every commercial,
commercial real estate, SBA, and construction loan is assigned a risk rating
using established credit policy guidelines. All nonperforming commercial,
commercial real estate, SBA, and construction loans and loans deemed to have
greater than normal risk characteristics are reviewed monthly by Credit Review
to determine the level of additional allowance for loan losses, if any, required
to be specifically assigned to these loans.
Capitalized Servicing Assets and Liabilities
The majority of our indirect automobile loan pools and certain SBA loans
are sold with servicing retained. When the contractually specific servicing fees
on loans sold servicing retained exceed the estimated costs to service those
loans, a capitalized servicing asset is recognized. When the estimated costs to
service loans exceed the contractually specific servicing fees on loans sold
servicing retained, a capitalized servicing liability is recognized. Servicing
assets and servicing liabilities are amortized over the expected lives of the
serviced loans utilizing the interest method. Management makes certain estimates
and assumptions related to costs to service varying types of loans and pools of
loans, the projected lives of loans and pools of loans sold servicing retained,
and discount factors used in calculating the present values of servicing fees
projected to be received.
No less frequently than quarterly, management reviews the status of all
loans and pools of loans sold with related capitalized servicing assets to
determine if there is any impairment to those assets due to such factors as
earlier than estimated repayments or significant prepayments. Any impairment
identified in these assets will result in reductions in their carrying values
and a corresponding increase in operating expenses.
Loan Related Revenue Recognition
Loans are reported at principal amounts outstanding net of deferred fees
and costs. Interest income and ancillary fees from loans are a primary source of
revenue. Interest income is recognized in a manner that results in a level yield
on principal amounts outstanding. Rate related loan fee income, loan
origination, and commitment fees, and certain direct origination costs are
deferred and amortized as an adjustment of the yield over the contractual lives
of the related loans, taking into consideration assumed prepayments. The accrual
of interest is discontinued when, in management's judgment, it is determined
that the collectibility of interest or principal is doubtful.
For commercial, SBA, construction, and real estate loans, the accrual of
interest is discontinued and the loan categorized as nonaccrual when, in
management's opinion, due to deterioration in the financial position or
operations of the borrower, the full repayment of principal and interest is not
expected, or principal or interest has been in default for a period of 90 days
or more, unless the obligation is both well secured and in the process of
collection. Commercial, SBA, construction, and real estate secured loans may be
returned to accrual status when management expects to collect all principal and
interest and the loan has been brought current. Interest received on well
collateralized nonaccrual loans is recognized on the cash basis. If the
commercial, SBA, construction or real estate secured loan is not well
collateralized, payments are applied to reduce principal.
Consumer loans are placed on nonaccrual upon becoming 90 days past due or
sooner if, in the opinion of management, the full repayment of principal and
interest is not expected. On consumer loans, any payment received on a loan on
which the accrual of interest has been suspended is applied to reduce principal.
When a loan is placed on nonaccrual, interest accrued during the current
accounting period is reversed and interest accrued in prior periods, if
significant, is charged off and adjustments to principal are made if the
collateral related to the loan is deficient.
Income Taxes
We file a consolidated Federal income tax return, as well as tax returns in
several states. Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are recovered or settled. Deferred tax assets are reviewed annually
to assess the probability of realization of benefits in future periods or
whether valuation allowances are appropriate. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The calculation of the
income tax provision is complex and requires the use of judgments and estimates
in its determination.
Results of Operations
2008 Compared to 2007
Net Income
Our net loss for the year ended December 31, 2008, was $12.2 million or
$1.30 basic and fully diluted loss per share. Net income for the year ended
December 31, 2007, was $6.6 million or $.70 basic and fully diluted earnings per
share. The $18.9 million decrease in net income in 2008 compared to 2007 was
primarily due to a $28.1 million increase in the provision for loan losses as a
result of increased charge-offs and nonperforming assets.
Net interest income decreased during 2008 compared to 2007 as the average
balance of interest-earning assets increased $95.4 million, resulting in an
increase in interest income, more than offset by a 20 basis point decline in the
net interest margin. Noninterest income decreased by $275,000 or 1.5% to
$17.6 million in 2008 compared to 2007, primarily due to a decrease in revenues
from SBA lending activities of $1.2 million, and a decrease in other income of
$375,000, offset in part by a $1.3 million gain from the mandatory redemption of
29,267 shares of Visa, Inc. upon Visa's initial public offering. Noninterest
expense increased $1.6 million or 3.5% in 2008 compared to 2007 primarily due to
increases in ORE expenses of $3.2 million and FDIC insurance expense of $818,000
compared to 2007 partially offset by reductions in Visa litigation accruals of
$1.0 million, fraud losses, placement fees, and various other expenses.
Net Interest Income/Margin
Taxable-equivalent net interest income was $46.9 million in 2008 compared
to $47.3 million in 2007, a decrease of $378,000 or .8%. Average
interest-earning assets in 2008 increased $95.4 million to $1.649 billion, a
6.1% increase when compared to 2007. Average interest-bearing liabilities
increased $104.0 million to $1.497 billion, a 7.5% increase. The net interest
rate margin decreased by 20 basis points to 2.84% in 2008 when compared to 2007.
Tax-equivalent interest income decreased $9.4 million or 8.3% to
$104.5 million during 2008 compared with 2007 as a result of a 100 basis point
decrease in the yield on interest-earning assets somewhat offset by the net
growth of $95.4 million or 6.1% in average interest-earning assets. The average
balance of loans outstanding in 2008 increased $77.6 million or 5.5% to $1.481
billion when compared to 2008. The yield on average loans outstanding decreased
105 basis points to 6.52% when compared to 2007, in large part due to decreasing
yields on the consumer loan portfolio, consisting primarily of indirect
automobile loans as well as significant increases in nonperforming loans. The
average balance of investment securities increased $9.2 million as principal
payments on mortgage backed securities were more than offset by investment
purchases during the year. Average Federal funds sold increased $7.1 million or
146.3% to $12.0 million and interest-bearing deposits increased $1.5 million or
131.9% to $2.6 million due to management's decision to maintain higher levels of
liquidity in light of the continuing credit and liquidity crisis.
Interest expense in 2008 decreased $9.0 million or 13.6% to $57.6 million
as a result of a $104.0 million or 7.5% growth in average interest-bearing
liability balances, more than offset by a 94 basis point decrease in the cost of
interest-bearing liabilities due to decreasing prevailing interest rates as the
Federal Reserve aggressively lowered interest rates during 2008. Average total
interest-bearing deposits increased $70.1 million or 5.6% to $1.317 billion
during 2008 compared to 2007, while average borrowings increased $33.9 million
or 23.1% to $180.8 million. The increase in average total interest-bearing
deposits was primarily due to an increase of $86.2 million in average time
deposits as customers sought higher yields as overall interest rates fell.
The cost of funds for subordinated debt decreased from 9.08% for 2007 to
7.83% in 2008 primarily as a result of the full year effect of the addition of
$20.0 million in trust preferred securities which have a five year fixed rate of
6.62% then convert to a floating rate at 140 basis points over three-month
LIBOR. In addition, Fidelity Southern Statutory Trust I and II have floating
rate indexes which decreased from 8.30% and 7.58%, respectively at December 31,
2007 to 4.57% and 3.76% at December 31, 2008.
Average Balances, Interest and Yields
For the Years Ended December 31,
2008 2007 2006
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
ASSETS
Interest-Earning
Assets:
Loans, net of
unearned
income(1)(2)
Taxable $ 1,472,573 $ 96,009 6.52 % $ 1,390,625 $ 105,222 7.57 % $ 1,239,437 $ 88,884 7.17 %
Tax-exempt(3) 8,493 581 6.97 12,837 1,052 8.20 10,949 871 7.95
Total loans 1,481,066 96,590 6.52 1,403,462 106,274 7.57 1,250,386 89,755 7.18
Investment
securities
Taxable 139,391 6,867 4.93 137,370 6,964 5.07 155,955 7,893 5.03
Tax-exempt (4) 13,975 833 5.96 6,782 390 5.75 - - -
Total Investment
securities 153,366 7,700 5.05 144,152 7,354 5.12 155,955 7,893 5.03
Interest-bearing
deposits 2,630 36 1.38 1,134 58 5.08 1,484 74 5.00
Federal funds sold 11,960 179 1.49 4,855 243 5.01 7,280 360 4.94
Total
interest-earning
assets 1,649,022 104,505 6.34 1,553,603 113,929 7.34 1,415,105 98,082 6.93
Noninterest-Earning
Assets:
Cash and due from
banks 22,239 23,383 22,411
Allowance for loan
losses (22,610 ) (14,644 ) (13,133 )
Premises and
equipment 19,537 18,875 15,516
Other real estate
owned 12,624 2,918 80
Other assets 57,682 51,385 43,405
Total assets $ 1,738,494 $ 1,635,520 $ 1,483,384
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LIABILITIES AND SHAREHOLDERS' EQUITY Interest-Bearing Liabilities: Demand deposits $ 271,429 6,226 2.29 $ 293,336 10,243 3.49 $ 234,871 6,561 2.79 Savings deposits 209,301 6,043 2.89 203,529 8,881 4.36 177,505 7,328 4.13 Time deposits 836,049 36,453 4.36 749,803 38,778 5.17 683,074 31,462 4.61 Total interest-bearing deposits 1,316,779 48,722 3.70 1,246,668 57,902 4.64 1,095,450 45,351 4.14 Federal funds purchased 9,001 265 2.94 10,310 548 5.31 12,171 637 5.23 Securities sold under agreements to repurchase 34,924 921 2.64 21,674 657 3.03 28,954 928 3.21 Other short-term borrowings 25,393 879 3.46 24,516 1,111 4.54 25,337 1,058 4.17 Subordinated debt 67,527 5,284 7.83 54,478 4,945 9.08 46,908 4,378 9.33 Long-term debt 43,948 1,565 3.56 35,888 1,519 4.23 47,203 1,923 4.07 Total interest-bearing liabilities 1,497,572 57,636 3.85 1,393,534 66,682 4.79 1,256,023 54,275 4.32 Noninterest-Bearing Liabilities and Shareholders' Equity: Demand deposits 128,706 130,835 127,978 Other liabilities 13,755 14,092 10,517 Shareholders' equity 98,461 97,059 88,866 Total liabilities and shareholders' equity $ 1,738,494 $ 1,635,520 $ 1,483,384 Net interest income/spread $ 46,869 2.49 $ 47,247 2.55 $ 43,807 2.61 Net interest rate margin 2.84 3.04 3.10 |
(1) Fee income relating to loans is included in interest income.
(2) Nonaccrual loans are included in average balances and income on such loans, if recognized, is recognized on a cash basis.
(3) Interest income includes the effects of taxable-equivalent adjustments of $192,000, $350,000, and $278,000, for 2008, 2007, and 2006, respectively, using a combined tax rate of 35%.
(4) Interest income includes the effects of taxable-equivalent adjustments of $259,000 and $147,000 for 2008 and 2007, respectively, using a combined tax rate of 35%.
Rate/Volume Analysis
2008 Compared to 2007 2007 Compared to 2006
Variance Attributed to(1) Variance Attributed to(1)
Volume Rate Net Change Volume Rate Net Change
(Dollars in thousands)
Net Loans:
Taxable $ 5,961 $ (15,174 ) $ (9,213 ) $ 11,241 $ 5,097 $ 16,338
Tax-exempt(2) (327 ) (145 ) (472 ) 153 28 181
Investment
Securities:
Taxable 102 (199 ) (97 ) (987 ) 58 (929 )
Tax exempt(2) 428 15 443 416 4 420
Federal funds sold 191 (255 ) (64 ) (122 ) 5 (117 )
Interest-bearing
deposits 40 (62 ) (22 ) (17 ) 1 (16 )
Total
interest-earning
assets $ 6,395 $ (15,820 ) $ (9,425 ) $ 10,684 $ 5,193 $ 15,877
Interest-Bearing
Deposits:
Demand $ (719 ) $ (3,299 ) $ (4,018 ) $ 1,832 $ 1,850 $ 3,682
Savings 245 (3,083 ) (2,838 ) 1,121 432 1,553
Time 4,158 (6,482 ) (2,324 ) 3,255 4,061 7,316
Total
interest-bearing
deposits 3,684 (12,864 ) (9,180 ) 6,208 6,343 12,551
Federal funds
purchased (63 ) (221 ) (284 ) (99 ) 10 (89 )
Securities sold under
agreements to
repurchase 359 (94 ) 265 (222 ) (49 ) (271 )
Other short-term
. . .
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