UNITED STATES
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, 2011
Commission File Number 001-34981
Fidelity Southern Corporation
(Exact name of registrant as specified in its charter)
Georgia | 58-1416811 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
3490 Piedmont Road, Suite 1550 Atlanta, Georgia |
30305 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (404) 240-1504
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without stated par value
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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 is not contained herein and will not be contained, to the best of registrants 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, or a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | 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
The aggregate market value of the common equity held by non-affiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and directors are affiliates of the registrant) as of June 30, 2011 (based on the average bid and ask price of the Common Stock as quoted on the NASDAQ National Market System on June 30, 2011), was $62,193,598.
At March 9, 2012, there were 13,751,908 shares of Common Stock outstanding, without stated par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for the 2012 Annual Meeting of Shareholders are incorporated by reference into Part III.
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PART I
Item 1. | Business |
General
Fidelity Southern Corporation (FSC or Fidelity) is a bank holding company headquartered in Atlanta, Georgia. We conduct operations primarily though Fidelity Bank, a state chartered wholly-owned subsidiary bank (the Bank). The Bank was organized as a national banking corporation in 1973 and converted to a Georgia chartered state bank in 2003. LionMark Insurance Company (LIC) is a wholly-owned subsidiary of FSC and is an insurance agency offering consumer credit related insurance products. FSC also owns five subsidiaries established to issue trust preferred securities. The Company, we or our, as used herein, includes FSC and its subsidiaries, unless the context otherwise requires.
At December 31, 2011, we had total assets of $2.235 billion, total loans of $1.757 billion, total deposits of $1.872 billion, and shareholders equity of $167.3 million. In addition, in October 2011 we acquired Decatur First Bank, with approximately $79.4 million in loans and $169.9 million in deposits, in an FDIC-assisted acquisition. For more general information about our business and recent material transactions, see Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operation.
Forward-Looking Statements
This report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current expectations relating to present or future trends or factors generally affecting the banking industry and specifically affecting our operations, markets and services. Without limiting the foregoing, the words believes, expects, anticipates, estimates, projects, intends, and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon assumptions we believe are reasonable and may relate to, among other things, the difficult economic conditions and the economys impact on operating results, credit quality, liquidity, capital, the adequacy of the allowance for loan losses, changes in interest rates, and litigation results. These forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those projected for many reasons, including without limitation, changing events and trends that have influenced our assumptions.
These trends and events include (1) risks associated with our loan portfolio, including difficulties in maintaining quality loan growth, greater loan losses than historic levels, the risk of an insufficient allowance for loan losses, and expenses associated with managing nonperforming assets, unique risks associated with our construction and land development loans, our ability to maintain and service relationships with automobile dealers and indirect automobile loan purchasers, and our ability to profitably manage changes in our indirect automobile lending operations; (2) risks associated with adverse economic conditions, including risk of continued stagnation in real estate values in the Atlanta, Georgia, metropolitan area and in eastern and northern Florida markets, conditions in the financial markets and economic conditions generally and the impact of efforts to address difficult market and economic conditions; a stagnant economy and its impact on operations and credit quality, the impact of a recession on our consumer loan portfolio and its potential impact on our commercial portfolio, changes in the interest rate environment and their impact on our net interest margin, and inflation; (3) risks associated with government regulation and programs, including risks arising from the terms of the U.S. Treasury Departments (the Treasurys) equity investment in us, and the resulting limitations on executive compensation imposed through our participation in the TARP Capital Purchase Program, uncertainty with respect to future governmental economic and regulatory measures, including the ability of the Treasury to unilaterally amend any provision of the purchase agreement we entered into as part of the TARP Capital Purchase Program, new regulatory requirements imposed by the Bureau of Consumer Financial Protection, new regulatory requirements for residential mortgage loan services, the winding down of governmental emergency measures intended to stabilize the financial system, and numerous legislative proposals to further regulate the financial services industry, the impact of and adverse changes in the governmental regulatory requirements affecting us, and changes in political, legislative and economic conditions; (4) the ability to maintain adequate liquidity and sources of liquidity; (5) our ability to maintain sufficient capital and to raise additional capital; (6) the accuracy and completeness of information from customers and our counterparties; (7) the effectiveness of our controls and procedures; (8) our ability to attract and retain skilled people; (9) greater competitive pressures among financial institutions in our market; (10) failure to achieve the revenue increases expected to result from our investments in our growth strategies, including our branch additions and in our transaction deposit and lending businesses; (11) the volatility and limited trading of our common stock; (12) the impact of dilution on our common stock; (13) risks related to FDIC-assisted transactions; compliance with certain requirements under our FDIC loss share agreements; changes in national and local economic conditions resulting in higher charge-offs not covered by the FDIC loss share agreement; and (14) risks associated with technological changes and the possibility of Cyberfraud.
This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included herein and are not intended to represent a complete list of all risks and uncertainties in our business. Investors are encouraged to read the risks discussed under Item 1A.Risk Factors.
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Market Area, Products and Services
The Bank provides an array of financial products and services for business and retail customers primarily through 26 branches in Fulton, Dekalb, Cobb, Clayton, Gwinnett, Rockdale, Coweta, Henry, Morgan, Greene, and Barrow Counties in Georgia, a branch in Jacksonville, Duval County, Florida, and on the Internet at www.lionbank.com. The Banks customers are primarily individuals and small and medium sized businesses located in Georgia. Mortgage and construction loans are also provided through a branch in Jacksonville, Florida. Mortgage loans, automobile loans, and Small Business Administration (SBA) loans are provided through employees located throughout the South.
The Bank is primarily engaged in attracting deposits from individuals and businesses and using these deposits and borrowed funds to originate commercial and industrial loans, commercial loans secured by real estate, SBA loans, construction and residential real estate loans, direct and indirect automobile loans, residential mortgage and home equity loans, and secured and unsecured installment loans. The Bank offers business and personal credit card loans through a third party agency relationship. Internet banking, including on-line bill pay, and Internet cash management services are available to individuals and businesses, respectively. Additionally, the Bank offers businesses remote deposit services, which allow participating companies to scan and electronically send deposits to the Bank for improved security and funds availability. The Bank also provides international trade services. Trust services and merchant services activities are provided through agreements with third parties. Investment services are provided through an agreement with an independent broker-dealer.
We have generally grown our assets, deposits, and business internally by building on our lending products, expanding our deposit products and delivery capabilities, opening new branches, and hiring experienced bankers with existing customer relationships in our market. We do not purchase loan participations from any other financial institution. We have participated in a FDIC-assisted transaction and will continue to review the opportunities.
Deposits
The Bank offers a full range of depository accounts and services to both individuals and businesses. As of December 31, 2011, deposits totaled $1.872 billion, consisting of:
December 31, 2011 | December 31, 2010 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Noninterest-bearing demand deposits |
$ | 270 | 14.4 | % | $ | 186 | 11.5 | % | ||||||||
Interest-bearing demand deposits and money market accounts |
527 | 28.2 | 428 | 26.5 | ||||||||||||
Savings deposits |
389 | 20.8 | 398 | 24.7 | ||||||||||||
Time deposits |
667 | 35.6 | 539 | 33.5 | ||||||||||||
Brokered time deposits |
19 | 1.0 | 62 | 3.8 | ||||||||||||
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Total |
$ | 1,872 | 100.0 | % | $ | 1,613 | 100.0 | % | ||||||||
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During 2011, the Bank continued a marketing program to increase the number and volume of our personal and business demand deposit accounts with the goals of building relationships with existing customers, adding new customers, increasing transaction accounts, and helping manage our cost of funds. Deposits also increased due to the FDIC-assisted acquisition of Decatur First Bank. We believe the marketing program has been a contributing factor to the growth in the Banks core deposits in 2011. Based on the success of this program, the Bank intends to continue this marketing program during 2012.
Lending
The Banks primary lending activities include commercial loans to small and medium sized businesses, SBA sponsored loans, consumer loans (primarily indirect automobile loans), construction loans, and residential real estate loans. Commercial lending consists of the extension of credit for business purposes, primarily in the Atlanta metropolitan area. SBA loans, originated in the Atlanta metropolitan area and throughout the South, are primarily made through the Banks SBA loan production offices located in Georgia, Tennessee, Florida, North Carolina and Texas. Indirect loans are originated in Georgia, Florida, North Carolina, South Carolina, Alabama, Mississippi, Virginia and Tennessee. The Bank offers direct installment loans to consumers on both a secured and unsecured basis. Secured construction loans to homebuilders and developers and residential mortgages are primarily made in the Atlanta, Georgia, and Jacksonville, Florida, metropolitan areas.
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As of December 31, 2011, the Bank had total loans outstanding, including loans held-for-sale, consisting of:
Total Loans | Held-for-Sale | Loans | ||||||||||
(In thousands) | ||||||||||||
Commercial |
$ | 549,340 | $ | 12,942 | $ | 562,282 | ||||||
Construction |
97,710 | | 97,710 | |||||||||
Consumer |
857,175 | 30,000 | 887,175 | |||||||||
Mortgage |
119,646 | 90,907 | 210,553 | |||||||||
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Total |
$ | 1,623,871 | $ | 133,849 | $ | 1,757,720 | ||||||
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Certain of the following discussions are in part based on the Bank defined loan portfolios and may not conform to the above classifications.
Commercial and Industrial Lending
The Bank originates commercial and industrial loans, which include certain SBA loans comprised of partially guaranteed loans and other credit enhanced loans that are generally secured by business property such as inventory, equipment and accounts receivable. All commercial loans are evaluated for the adequacy of repayment sources at the time of approval and are regularly reviewed for any deterioration in the ability of the borrower to repay the loan. In most instances, collateral is required to provide an additional source of repayment in the event of default by the borrower. The amount and type of the collateral vary from loan to loan depending on the purpose of the loan, the financial strength of the borrower, and the amount and terms of the loan. In general, the Bank additionally requires personal guarantees on these loans.
Commercial Real Estate Lending
The Bank engages in commercial real estate lending through direct originations. The Bank does not purchase loan participations from other banks, although in 2011 the Bank did purchase approximately $12 million of commercial real estate loans from the FDIC through a failed bank acquisition. The Banks primary focus is on originating owner-occupied loans to finance real estate out of which an individual or company will operate their business. Non-owner occupied real estate loans for investment purposes are made on a selective basis and only where the borrowers or guarantors add substantial support to their credit. Loans where the sole source of repayment is derived from the project, or where the absence of the projects success would call into question the ability of the borrower to service the debt, are avoided. The Banks commercial real estate loans are made to individuals and to small and medium sized businesses to provide loan diversification, to generate assets that are sensitive to fluctuations in interest rates, and to generate deposit and other relationships. Commercial real estate loans are generally prime-based floating-rate loans or shorter-term (one to five year) fixed-rate loans. Approximately 57% of our commercial real estate loans are owner occupied real estate loans. The remaining non-owner occupied loans were made to established commercial customers for purposes other than retail development.
The Banks portfolio of SBA loans and SBA loans held-for-sale are primarily commercial real estate related, with a portion of each loan guaranteed by the SBA or with other credit enhancements provided by the government.
Indirect Automobile Lending
The Bank purchases, on a nonrecourse basis, consumer installment contracts secured by new and used vehicles purchased by consumers from franchised motor vehicle dealers and selected independent dealers located throughout the Southeast. A portion of the indirect automobile loans the Bank originates is generally sold with servicing retained. During 2011, the Bank produced approximately $644 million of indirect automobile loans, while profitably selling $140 million to third parties with servicing retained. At December 31, 2011, we were servicing $206 million in loans we had sold, primarily to other financial institutions.
Consumer Lending
The Banks consumer lending activity primarily consists of indirect automobile lending. The Bank also makes direct consumer loans (including direct automobile loans), residential mortgage and home equity loans, and secured and unsecured personal loans.
Real Estate Construction Lending
The Bank originates real estate construction loans that consist primarily of one-to-four family residential construction loans made to builders. Loan disbursements are closely monitored by management to ensure that funds are being used strictly for the purposes agreed upon in the loan covenants. The Bank employs both internal staff and external inspectors to ensure that requests for loan disbursements are substantiated by regular inspections and reviews. Construction and development loans are similar to all residential loans in that borrowers are underwritten according to their adequacy of repayment sources at the time of approval. Unlike conventional residential lending, however, signs of deterioration in a construction loan or development loan customers ability to repay the loan are measured throughout the life of the loan and not only at origination or when the loan becomes past due. In most instances, loan amounts are limited to 80% of the appraised value upon completion of the construction project. The Bank originates real estate construction loans throughout Atlanta, Georgia, and Jacksonville, Florida.
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Real Estate Mortgage Lending
The Banks residential mortgage loan business focuses on one-to-four family properties. We offer Federal Housing Authority (FHA), Veterans Administration (VA), and conventional and non-conforming residential mortgage loans. The Bank operates our retail residential mortgage banking business from multiple locations in the Atlanta metropolitan area, Jacksonville, Florida, Colorado Springs, Colorado, Savannah, Georgia and Loudon, Virginia. We also operate a wholesale lending division purchasing loans from qualified brokers and correspondents in the Southeast and Mid-Atlantic regions. The Bank is an approved originator and servicer for the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA), and is an approved originator for loans insured by the Department of Housing and Urban Development (HUD).
The balances of mortgage loans held-for-sale fluctuate due to economic conditions, interest rates, the level of real estate activity, the amount of mortgage loans retained by the Bank, and seasonal factors. During 2011, we originated and sold to third parties approximately $1.3 billion in mortgage loans. As seller, the Company makes certain standard representations and warranties with respect to the loans being transferred. To date, the Companys repurchases of mortgage loans previously sold have been de minimus.
At December 31, 2011, we employed 174 employees including 89 loan originators. The Bank primarily sells originated residential mortgage loans and brokered loans to investors, retaining servicing on a significant amount of the sales. Management expects mortgage banking division activity for 2012 to be comparable to 2011.
Credit Card Services
The Bank offers business and personal credit cards through a third party agency relationship.
Brokerage Services
The Bank offers a full array of brokerage products through an agreement with an independent full service broker-dealer.
International Trade Services
The Bank provides services to individuals and business clients to meet their international business requirements. Letters of credit, foreign currency drafts, foreign and documentary collections, export finance, and international wire transfers represent some of the services provided.
Investment Securities
At December 31, 2011, we owned investment securities totaling $278 million. Managements conservative investment philosophy attempts to limit risk in the portfolio, which results in less yield through less risky investments than would otherwise be available if we were more aggressive in our investment philosophy. Investment securities include debt securities issued by agencies of the U.S. Government, mortgage backed securities issued by U.S. Government agencies, bank qualified municipal bonds, and FHLB stock.
Significant Operating Policies
Lending Policy
The Board of Directors of the Bank has delegated lending authority to our management, which in turn delegates lending authority to our loan officers, each of whom is limited as to the amount of secured and unsecured loans he or she can make to a single borrower or related group of borrowers. As our lending relationships are important to our success, the Board of Directors of our Bank has established loan approval committees and written guidelines for lending activities. In particular, the Officers Credit Committee reviews lending relationships with aggregate relationship exposure exceeding $250,000. In addition, the Officers Credit Committee approves all credit for commercial loan relationships up to $5 million and for residential construction loan relationships up to $5 million. The Loan and Discount Committee must approve all credit for commercial loan relationships exceeding $5 million and all residential construction loan relationships exceeding $5 million. The Banks policy on calculating total exposure to an entity or individual, or related group of entities or individuals is more encompassing than that required under law and calls for the combining of all debt to all related entities regardless of the presence of independent sources of repayment or other conditions that might otherwise allow a portion of debt to be excluded.
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The Banks written guidelines for lending activities require, among other things, that:
| secured loans be made to persons and companies who maintain depository relationships with the Bank and who are well-established and have adequate net worth, collateral, and cash flow to support the loan; |
| unsecured loans be made to persons who maintain depository relationships with the Bank and have significant financial strength; |
| real estate loans be secured by real property located primarily in Georgia or primarily in the South for SBA loans; |
| working capital loans be repaid out of conversion of assets or earnings of the commercial borrower and that such loans generally be secured by the assets of the commercial borrower; and |
| loan renewal requests be reviewed in the same manner as an application for a new loan. |
Residential construction loans are made through the use of officer guidance lines, which are approved, when appropriate, by the Banks Officers Credit Committee or the Loan and Discount Committee. These guidance lines are approved for established builders and developers with track records and adequate financial strength to support the credit being requested. Loans may be granted for speculative starts or for pre-sold residential property to specific purchasers.
All mortgage loans are originated to FNMA, FHLMC, GNMA, and other similar investor standards and guidelines.
Loan Review and Nonperforming Assets
The Banks Credit Review Department reviews the Banks loan portfolios to identify potential deficiencies and recommends appropriate corrective actions. The Credit Review Department reviews more than 30% of the commercial and construction loan portfolios and reviews 10% of the consumer loans originated annually. In 2011, we reviewed more than 80% of the construction and commercial portfolios. The results of the reviews are presented to the Banks Loan and Discount Committee on a monthly basis.
The Bank maintains an allowance for loan losses, which is established and maintained through provisions charged to operations. Such provisions are based on managements 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 factors which, in managements judgment, deserve consideration in estimating losses.
Management also models the valuation of collateral dependent real estate loans and Other Real Estate (ORE) based on the latest appraised value, trends of similar property values within the Banks market and the Banks own observations and experience with similar properties. At least quarterly, valuations are decreased to take into account the aging of the appraisals. Loans are charged off when, in the opinion of management, such loans are deemed to be uncollectible. Subsequent recoveries are added to the allowance.
Asset/Liability Management
The Companys Asset/Liability Committee (ALCO) manages on an overall basis the mix of and terms related to the Companys assets and liabilities. ALCO attempts to manage asset growth, liquidity, and capital in order to reduce interest rate risk and maximize income. ALCO directs our overall acquisition and allocation of funds and reviews and sets rates on deposits, loans, and fees.
Investment Portfolio Policy
The Companys investment portfolio policy is designed to maximize income consistent with liquidity, risk tolerance, collateral needs, asset quality, regulatory constraints, and asset/liability objectives. The policy is reviewed at least annually by the Boards of Directors of FSC and the Bank. The Boards of Directors are provided information on a regular basis concerning significant purchases and sales of investment securities, including resulting gains or losses. They are also provided information related to average maturity, Federal taxable equivalent yield, and appreciation or depreciation by investment categories. The Board of Directors is responsible for the establishment, approval, implementation, and annual review of interest rate risk management strategies, comprehensive policies, procedures, and limits. Senior management is responsible for ensuring that board-approved strategies, policies, and procedures are appropriately executed through a robust interest rate risk measurement process and systems to assess exposures.
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Supervision and Regulation
The following is a brief summary of FSCs and the Banks supervision and regulation as financial institutions and is not intended to be a complete discussion of all NASDAQ Stock Market, state or federal rules, statutes and regulations affecting their operations, or that apply generally to business corporations or NASDAQ listed companies. Changes in the rules, statutes and regulations applicable to FSC and the Bank can affect the operating environment in substantial and unpredictable ways.
General
We are a registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve) under the Bank Holding Company Act of 1956, as amended (the Act). We are required to file annual and quarterly financial information with the Federal Reserve and are subject to periodic examination by the Federal Reserve.
The Act requires every bank holding company to obtain the Federal Reserves 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 interest in pools of assets permissible for a bank to hold directly; and |
| underwriting, dealing in or making a market in securities. |
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. Fidelity has no current plans to register as a financial holding company.
Fidelity must also register with the Georgia Department of Banking and Finance (GDBF) and file periodic information with the GDBF. As part of such registration, the GDBF requires information with respect to the financial condition, operations, management and intercompany relationships of Fidelity and the Bank and related matters. The GDBF 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 there under by the GDBF have been complied with, and the GDBF may examine Fidelity and the Bank. The Florida Office of Financial Regulation (FOFR) does not examine or directly regulate out-of-state holding companies for banks with a branch located in the State of Florida.
Fidelity is an affiliate of the Bank under the Federal Reserve Act, which imposes certain restrictions on (1) loans by the Bank to Fidelity, (2) investments in the stock or securities of Fidelity by the Bank, (3) the Banks 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 Fidelity 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.
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The Bank is regularly examined by the Federal Deposit Insurance Corporation (the FDIC). As a state banking association organized under Georgia law, the Bank is subject to the supervision of, and is regularly examined by, the GDBF. The Banks Florida branch is subject to examination by the FOFR. Both the FDIC and GDBF must grant prior approval of any merger, consolidation or other corporation reorganization involving the Bank.
TARP Capital Purchase Program
On October 14, 2008, the Treasury announced the Troubled Asset Relief Program (TARP) Capital Purchase Program (the Program). The Program was instituted by the Treasury pursuant to the Emergency Economic Stabilization Act of 2008 (EESA), to provide up to $700 billion to the Treasury to, among other things, take equity positions in financial institutions. The Program is intended to encourage U.S. Financial institutions to build capital and thereby increase the flow of financing to businesses and consumers.
On December 19, 2008, as part of the Program, Fidelity entered into a Letter Agreement (Letter Agreement) and a Securities Purchase Agreement Standard Terms with the Treasury, pursuant to which Fidelity agreed to issue and sell, and the Treasury agreed to purchase (1) 48,200 shares (the Preferred Shares) of Fidelitys Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share, and (2) a ten-year warrant (the Warrant) to purchase up to 2,266,458 shares of the Companys common stock at an exercise price of $3.19 per share, for an aggregate purchase price of $48.2 million in cash.
In connection with Fidelitys participation with the Program, Fidelity adopted the Treasurys standards for executive compensation and corporate governance set forth in section 111 of EESA and any guidance or regulations adopted thereunder for the period during which the Treasury holds equity issued under the Program. To ensure compliance with these standards, within the time frame prescribed by the Program, Fidelity has entered into agreements with its senior executive officers who would be subject to the standards. The executive officers have agreed to, among other things, (1) clawback provisions relating to the repayment by the executive officers of incentive compensation based on materially inaccurate financial statement or performance metrics and (2) limitations on certain post-termination parachute payments. In addition, the Letter Agreement provides that the Treasury may unilaterally amend any provision of the Letter Agreement to the extent required to comply with any changes in applicable federal law.
On January 26, 2012, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released its latest Quarterly Report to Congress. SIGTARP has recommended that Treasury develop a clear TARP exit path for community banks, including criteria pertaining to restructurings, exchanges, and sales of its TARP investments. Additionally, Treasury should assess whether it should renegotiate the terms of the Program contracts for those community banks that will not be able to exit TARP prior to the dividend rate increase in order to help preserve the value of taxpayers investments.
The Treasury has engaged a consultant to provide capital markets disposition services for its remaining Program investments, including:
| Analyzing, reviewing and documenting financial, business, regulatory, and market information related to potential transactions of Program investments; |
| Advising and monitoring restructuring strategies prior to the disposition of Program investments; |
| Reporting on the potential performance of certain Program investments and their disposition given a range of market scenarios and transaction structures; |
| Analyzing and proposing disposition alternatives and structures, including the use of additional underwriters, brokers, or other capital markets advisors for the best means and structure to dispose of such assets; and |
| Maintaining a compliance program designed to detect and prevent violations of Federal securities laws, and identifying documenting and enforcing controls to mitigate conflicts of interest. |
American Recovery and Reinvestment Act of 2009
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was enacted, and the Treasury implemented interim final rules under ARRA on June 15, 2009 (the ARRA Regulations). The ARRA, commonly known as the economic stimulus or economic recovery package, includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including Fidelity, until the institution has repaid the Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the Treasurys consultation with the recipients appropriate regulatory agency. The executive compensation standards set forth in the ARRA and ARRA Regulations include (but are not limited to) (i) prohibitions on bonuses, retention awards and other incentive compensation to certain executive officers and other highly compensated employees, other than restricted stock grants which do not fully vest during the TARP period up to one-third of an employees total annual compensation, (ii) prohibitions on golden parachute (e.g., severance) payments for departure from a company, (iii) an expanded clawback of bonuses, retention awards, and incentive compensation if payment is based on materially inaccurate statements of earnings, revenues, gains or other criteria, (iv) prohibitions on compensation plans that encourage manipulation of reported earnings, (v) retroactive review of bonuses, retention awards and other compensation previously provided by TARP recipients if found by the Treasury to be inconsistent with the purposes of TARP or otherwise contrary to public interest, (vi) required establishment of a company-wide policy regarding excessive or luxury expenditures, and (vii) inclusion in a participants proxy statements for annual shareholder meetings of a nonbinding say on pay shareholder vote on the compensation of executives.
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Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law on July 21, 2010. The Dodd-Frank Act affects financial institutions in numerous ways, including the creation of a new Financial Stability Oversight Council responsible for monitoring and managing systemic risk, granting additional authority to the Federal Reserve to regulate certain types of non-bank financial companies, granting new authority to the FDIC as liquidator and receiver, abolishing the Office of Thrift Supervision, changing the manner in which insurance deposit assessments are made, requiring the regulators to modify capital standards, establishing a new Bureau of Consumer Financial Protection to regulate compliance with consumer laws and regulations, capping interchange fees which banks charge merchants for debit card transactions, and imposing new requirements on mortgage lenders. There are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based. It is anticipated that these new regulations will increase Fidelitys compliance costs over time, and could have unforeseen consequences as the new legislation is implemented over time.
Temporary Liquidity Guarantee Program
On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (TLG Program). The TLG Program was announced by the FDIC on October 14, 2008, preceded by the determination of systemic risk by the Treasury, as an initiative to counter the system-wide crisis in the nations financial sector. Under the original TLG Program the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions and (ii) provide full FDIC deposit insurance coverage for noninterest-bearing transaction deposit accounts, Negotiable Order of Withdrawal (NOW) accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC-insured institutions through June 30, 2010. On June 22, 2010, the program was extended through December 31, 2010, and the maximum interest rate for guaranteed NOW accounts was lowered from .50% to .25%. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000.
On November 9, 2010, the FDIC issued a final rule to implement Section 343 of the Dodd-Frank Act that provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts at all FDIC-insured depository institutions. The separate coverage for noninterest-bearing transaction accounts became effective on December 31, 2010, and terminates on December 31, 2012. Fidelity elected to participate in both guarantee programs. From the inception of the TLG Program through December 31, 2011, Fidelity did not issue any senior unsecured debt. The termination of the guarantee is not expected to have a material impact on the Company.
FDIC Insurance Assessments
The FDIC maintains the deposit insurance fund (DIF) by assessing depository institutions an insurance premium. The amount each institution is assessed is based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the DIF. The Dodd-Frank Act permanently raised the FDIC insurance coverage limit per depositor to $250,000. In 2009, the FDIC increased the amount assessed from financial institutions by increasing its risk-based deposit insurance assessment scale. The assessment scale for 2010 ranged from seven basis points of assessable deposits for the strongest institutions to 77.5 basis points for the weakest. In 2009, the FDIC approved a rule that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. An insured institutions risk-based deposit insurance assessments will continue to be calculated on a quarterly basis, but will be paid from the amount the institution prepaid until the later of the date that amount is exhausted or June 30, 2013, at which point any remaining funds would be returned to the insured institution. On February 7, 2011, the FDIC approved a final rule implementing changes to the deposit insurance assessment system mandated by the Dodd-Frank Act. The base on which deposit insurance assessments are charged was revised from one based on domestic deposits to one based on assets. The assessment rate schedule was also revised to 5 to 35 basis points annually, and fully adjusted rates will range from 2.5 to 45 basis points annually. The overall impact of these changes has resulted in a reduction in the Banks FDIC insurance premiums.
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Payment of Dividends
FSC is a legal entity separate and distinct from the Bank. Most of the revenue we receive results from dividends paid to us by the Bank. There are statutory and regulatory requirements applicable to the payment of dividends by the Bank, as well as by us to our shareholders.
Under the regulations of the GDBF, dividends may not be declared out of the retained earnings of a state bank without first obtaining the written permission of the GDBF, unless such bank meets all the following requirements:
(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 Fidelity and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FDIC has issued a policy statement providing that insured banks should generally only pay dividends out of current operating earnings. In addition to the formal statutes and regulations, regulatory authorities consider the adequacy of the Banks 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.
For 2011, the Bank did not pay a cash dividend to FSC, while FSC did pay a $0.01 cash dividend during the third and fourth quarters to its common stockholders. In addition, in 2011, FSC declared a quarterly stock dividend of one share for every 200 shares owned in the first, second and third quarters. In January 2012, FSC declared a stock dividend of one new share for every 60 shares owned. The Board of Directors for both the Bank and FSC will review on a quarterly basis whether to declare and pay dividends for the remainder of 2012, with the declared and paid dividend consistent with current regulatory limitations, earnings, capital requirements, and forecasts of future earnings.
Capital Adequacy
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 (as defined) to risk-weighted assets of eight percent (8%); and (2) a minimum Tier 1 Capital (as defined) to risk-weighted assets of four percent (4%). In addition, the Federal Reserve and the FDIC have established a minimum three percent (3%) leverage ratio of Tier 1 Capital to quarterly average total assets for the most highly-rated banks and bank holding companies. Tier 1 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 four percent (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 and the Federal Reserve consider interest rate risk in the overall determination of a banks capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for the risk.
Section 38 of the Federal Deposit Insurance Act implemented the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the 1991 Act). The 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 1 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 1 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 1 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 1 risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a critically undercapitalized institution has a leverage ratio 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. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a banks capital leverage ratio reaches 2%. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.
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To continue to conduct its business as currently conducted, FSC and the Bank will need to maintain capital well above the minimum levels. As of December 31, 2011, and 2010, the most recent notifications from the FDIC categorized the Bank as well capitalized under current regulations.
In 2004, the Basel Committee published a new capital accord (Basel II) to replace Basel I. Basel II provides two approaches for setting capital standards for credit riskan internal ratings-based approach tailored to individual institutions circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. Basel II also sets capital requirements for operational risk and refines the existing capital requirements for market risk exposures.
The Dodd-Frank Act requires the Federal Reserve Board, the OCC and the FDIC to adopt regulations imposing a continuing floor of the Basel I-based capital requirements in cases where the Basel II-based capital requirements and any changes in capital regulations resulting from Basel III (see below) otherwise would permit lower requirements.
In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as Basel III. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.
The Basel III final capital framework, among other things, (i) introduces as a new capital measure Common Equity Tier I (CET1), (ii) specifies that Tier 1 capital consists of CET1 and Additional Tier 1capital instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.
When fully phased-in on January 1, 2019, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).
Basel III also provides for a countercyclical capital buffer, generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The implementation of the Basel III final framework will commence January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios:
| 3.5% CET1 to risk-weighted assets. |
| 4.5% Tier 1 capital to risk-weighted assets. |
| 8.0% Total capital to risk-weighted assets. |
The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014, and will be phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625% and be phased-in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
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The U.S. banking agencies have indicated informally that they expect to adopt Basel III implementing regulations in mid-2012. Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is considering further amendments to Basel III, including the imposition of additional capital surcharges on globally systemically important financial institutions. In addition to Basel III, Dodd-Frank requires or permits the Federal banking agencies to adopt regulations affecting banking institutions capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the regulations ultimately applicable to the Bank may be substantially different from the Basel III final framework as published in December 2011. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Banks net income and return on equity.
Internal Control Reporting
The 1991 Act also imposes substantial auditing and reporting requirements and increases the role of independent accountants and outside directors of banks.
Commercial Real Estate
In December 2006, the federal banking agencies, including the FDIC, issued a final guidance on concentrations in commercial real estate lending (the Guidance), noting that increases in banks commercial real estate concentrations could create safety and soundness concerns in the event of a significant economic downturn. The Guidance mandates certain minimal risk management practices and categorizes banks with defined levels of such concentrations as banks that may warrant elevated examiner scrutiny. The regulatory guideline defines a bank as having a concentration in commercial real estate if its portfolio of land, construction (both commercial and residential) and Acquisition and Development loans exceeds 100% of the Banks total risk based capital. The Banks ratio decreased from 59% at December 31, 2010, to 56% at December 31, 2011. The regulatory guideline for all real estate loans, except owner-occupied property as a percentage of capital is a maximum of 300%. The Banks ratio decreased from 138% at December 31, 2010, to 136% at December 31, 2011. The Guidance does not formally prohibit a bank from exceeding either of these two thresholds. Rather, it defines the circumstances under which a bank will be declared to have a commercial real estate concentration. Further, the Guidance requires any such banks with commercial real estate concentrations to have heightened and sophisticated risk management systems in place to adequately manage the increased levels of risk. While management believes that our credit processes, procedures and systems meet the risk management standards dictated by the Guidance, regulatory authorities could effectively limit increases in the real estate concentrations in the Banks loan portfolios or require additional credit administration and management costs associated therewith, or both.
Loans
Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital. The Bank adopted the federal guidelines in 2001.
Transactions with Affiliates
Under federal law, all transactions between and among a state nonmember bank and its affiliates, which include holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. Generally, these requirements limit these transactions to a percentage of the banks capital and require all of them to be on terms at least as favorable to the bank as transactions with non-affiliates. In addition, a bank may not lend to any affiliate engaged in non-banking activities not permissible for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The FDIC is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a bank. The regulations also set forth various reporting requirements relating to transactions with affiliates.
Financial Privacy
In accordance with the GLB Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
Anti-Money Laundering Initiatives and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating terrorist financing. This has generally been accomplished by amending existing anti-money laundering laws and regulations. The USA Patriot Act of 2001 (the USA Patriot Act) has imposed significant new compliance and due diligence obligations, creating new crimes and penalties. The Treasury issued a number of implementing regulations that apply to various requirements of the USA Patriot Act to us and the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
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Future Legislation
Various legislation affecting financial institutions and the financial industry is from time to time introduced in Congress. Such legislation may change banking statutes and the operating environment of Fidelity and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of Fidelity or any of its subsidiaries. With the recent enactments of the Dodd-Frank Act, the nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time.
Competition
The banking business is highly competitive. The Bank competes for traditional bank business with numerous other commercial banks and thrift institutions in Fulton, DeKalb, Cobb, Clayton, Gwinnett, Rockdale, Coweta, Henry, Morgan, Greene, and Barrow Counties, Georgia, the Banks primary market area other than for residential construction and development loans, SBA loans, residential mortgages, and indirect automobile loans. The Bank also competes for loans with insurance companies, regulated small loan companies, credit unions, and certain governmental agencies. The Bank competes with independent brokerage and investment companies, as well as state and national banks and their affiliates and other financial companies. Many of the companies with whom the Bank competes have greater financial resources.
The indirect automobile financing and mortgage banking industries are also highly competitive. In the indirect automobile financing industry, the Bank competes with specialty consumer finance companies, including automobile manufacturers captive finance companies, in addition to other financial institutions. The residential mortgage banking business competes with independent mortgage banking companies, state and national banks and their subsidiaries, as well as thrift institutions and insurance companies.
Employees and Executive Officers
As of December 31, 2011, we had 626 full-time equivalent employees. We are not a party to any collective bargaining agreement. We believe that our employee relations are good. We afford our employees a variety of competitive benefit programs including a retirement plan and group health, life and other insurance programs. We also support training and educational programs designed to ensure that employees have the types and levels of skills needed to perform at their best in their current positions and to help them prepare for positions of increased responsibility.
Executive Officers of the Registrant
The Companys executive officers, their ages, their positions with the Company at December 31, 2011, and the period during which they have served as executive officers, are as follows:
Name |
Age |
Since |
Position | |||
James B. Miller, Jr. |
71 | 1979 | Principal Executive Officer, Chairman of the Board and Chief Executive Officer of Fidelity since 1979; President of Fidelity from 1979 to April 2006; Chairman of Fidelity Bank since 1998; President of Fidelity Bank from 1977 to 1997, and from December 2003 through September 2004; and Chief Executive Officer of Fidelity Bank from 1977 to 1997 and from December 2003 until present. A director of Fidelity Bank since 1976. Chairman of LionMark Insurance Company, a wholly-owned subsidiary, since November 2004. | |||
H. Palmer Proctor, Jr. |
44 | 1996 | President of Fidelity since April 2006; Senior Vice President of Fidelity from January 2006 through April 2006; Vice President of Fidelity from April 1996 through January 2006; Director and President of Fidelity Bank since October 2004 and Senior Vice President of Fidelity Bank from October 2000 through September 2004. Director and Secretary/Treasurer of LionMark Insurance Company, a wholly-owned subsidiary, since November 2004. |
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Stephen H. Brolly |
48 | 2008 | Principal Financial and Accounting Officer of Fidelity and Chief Financial Officer of Fidelity and Fidelity Bank since August 2008; Treasurer of Fidelity and Fidelity Bank from May 2006 through August 2008. Chief Financial Officer of LionMark Insurance Company, a wholly-owned subsidiary, since August 2008. | |||
David Buchanan |
54 | 1995 | Vice President of Fidelity since 1999; Executive Vice President of Fidelity Bank since October 2004; and Senior Vice President of Fidelity Bank from 1995 through September 2004. President of LionMark Insurance Company, a wholly-owned subsidiary, since November 2004. |
Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (the SEC) under the Securities Exchange Act. The public may read and copy any materials that we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet web site that contains reports, proxy and information statements, and other information regarding issuers, including Fidelity, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.
We also make available free of charge on or through our Internet web sites (http://www.fidelitysouthern.com) or (http://www.lionbank.com), our Annual Report to Shareholders, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our current reports on Form 8-K and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Item 1A. | Risk Factors |
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may adversely impact our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.
Risks Related to our Business
A significant portion of the Banks loan portfolio is secured by real estate loans in the Atlanta, Georgia, metropolitan area and in eastern and northern Florida markets, and a continued downturn in real estate market values in those areas may adversely affect our business.
Currently, our lending and other businesses are concentrated in the Atlanta, Georgia, metropolitan area and eastern and northern Florida. As of December 31, 2011, commercial real estate, real estate mortgage, and construction loans, accounted for 44.4% of our total loan portfolio. Therefore, conditions in these markets will strongly affect the level of our nonperforming loans and our results of operations and financial condition. Real estate values and the demand for commercial and residential mortgages and construction loans are affected by, among other things, changes in general and local economic conditions, changes in governmental regulation, monetary and fiscal policies, interest rates and weather. Continued declines in our real estate markets could adversely affect the demand for new real estate loans, and the value and liquidity of the collateral securing our existing loans. Adverse changes in our markets could also reduce our growth rate, impair our ability to collect loans, and generally affect our financial condition and results of operations.
Construction and land development loans are subject to unique risks that could adversely affect earnings.
Our construction and land development loan portfolio was $130.0 million at December 31, 2011, comprising 7.4% of total loans. Construction and land development loans are often riskier than home equity loans or residential mortgage loans to individuals. During general economic slowdowns, like the one we are currently experiencing, these loans represent higher risk due to slower sales and reduced cash flow that could impact the borrowers ability to repay on a timely basis. In addition, regulations and regulatory policies affecting banks and financial services companies undergo continuous change and we cannot predict when changes will occur or the ultimate effect of any changes. Since the latter part of 2006, there has been continued regulatory focus on construction, development and commercial real estate lending. Changes in the federal policies applicable to construction, development or commercial real estate loans make us subject to substantial limitations with respect to making such loans, increase the costs of making such loans, and require us to have a greater amount of capital to support this kind of lending, all of which could have a material adverse effect on our profitability or financial condition.
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The Allowance for loan losses may be insufficient.
The Bank maintains an allowance for loan losses, which is established and maintained through provisions charged to operations. Such provisions are based on managements 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 managements 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.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review the Banks allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the estimated charge-offs utilized in determining the sufficiency of the allowance for loan losses, we will need additional provisions to increase the allowance. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, regulatory capital, and may have a material adverse effect on our financial condition and results of operations. See Allowance for Loan Losses in Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to our process for determining the appropriate level of the allowance for loan losses.
The Bank may be unable to maintain and service relationships with automobile dealers and the Bank is subject to their willingness and ability to provide high quality indirect automobile loans.
The Banks indirect automobile lending operation depends in large part upon the ability to maintain and service relationships with automobile dealers, the strength of new and used automobile sales, the loan rate and other incentives offered by other purchasers of indirect automobile loans or by the automobile manufacturers and their captive finance companies, and the continuing ability of the consumer to qualify for and make payments on high quality automobile loans. There can be no assurance the Bank will be successful in maintaining such dealer relationships or increasing the number of dealers with which the Bank does business, or that the existing dealer base will continue to generate a volume of finance contracts comparable to the volume historically generated by such dealers, which could have a material adverse effect on our financial condition and results of operations.
Our profitability depends significantly on economic conditions in the Atlanta metropolitan area.
Our success depends primarily on the general economic conditions of the Atlanta metropolitan area and the specific local markets in which we operate. Unlike larger national or regional banks that are more geographically diversified, the Bank provides banking and financial services to customers primarily in the Atlanta metropolitan areas including Fulton, Dekalb, Cobb, Clayton, Gwinnett, Rockdale, Coweta, Henry, Morgan, Greene, and Barrow Counties. The local economic conditions in these areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by a significant economic slowdown, recession, inflation, acts of terrorism, outbreak of hostilities, or other international or domestic occurrences, unemployment, changes in securities markets, or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our financial condition and results of operations.
The earnings of financial services companies are significantly affected by general business and economic conditions.
Our operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include recession, short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which we operate, all of which are beyond our control. A deterioration in economic conditions could result in an increase in loan delinquencies and nonperforming assets, decreases in loan collateral values and a decrease in demand for our products and services, among other things, any of which could have a material adverse impact on our financial condition and results of operations.
Legislative and regulatory actions taken now or in the future may have a significant adverse effect on our operations.
Recent events in the financial services industry and, more generally, in the financial markets and the economy, have led to various proposals for changes in the regulation of the financial services industry. The Dodd-Frank Act made a number of material changes in banking regulations. The full impact of these changes remains to be seen. However, Fidelity anticipates that its compliance costs will increase as a result of the various new regulations required under the Dodd-Frank Act. Changes arising from implementation of Dodd-Frank and any other new legislation may impact the profitability of our business activities, require we raise additional capital or change certain of our business practices, require us to divest certain business lines, materially affect our business model or affect retention of key personnel, and could expose us to additional costs, including increased compliance costs. These changes may also require us to invest significant management attention and resources to make any necessary changes, and could therefore also adversely affect our business and operations.
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Further increases in FDIC premiums could have a material adverse effect on our future earnings.
The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at an adequate level. In light of current economic conditions, the FDIC has increased its assessment rates and imposed special assessments. The FDIC may further increase these rates and impose additional special assessments in the future, which could have a material adverse effect on future earnings.
There are substantial regulatory limitations on changes of control of bank holding companies.
With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be acting in concert from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock.
Future dividend payments and common stock repurchases are restricted by the terms of the Treasurys equity investment in us.
Under the terms of the Program, as long as the Preferred Shares are outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including our common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions.
The limitations on executive compensation imposed through our participation in the Capital Purchase Program may restrict our ability to attract, retain and motivate key employees, which could adversely affect our operations.
As part of our participation in the Program, we agreed to be bound by certain executive compensation restrictions, including limitations on severance payments and the clawback of any bonus and incentive compensation that were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria. Subsequent to the issuance of the preferred shares, the ARRA was enacted, which provides more stringent limitations on severance pay and the payment of bonuses. To the extent that any of these compensation restrictions do not permit us to provide a comprehensive compensation package to our key employees that is competitive in our market area, we may have difficulty in attracting, retaining and motivating our key employees, which could have an adverse effect on our results of operations.
The terms governing the issuance of the preferred shares to the Treasury may be changed, the effect of which may have an adverse effect on our operations.
The terms of the Letter Agreement which we entered into with the Treasury provides that the Treasury may unilaterally amend any provision of the Letter Agreement to the extent required to comply with any changes in applicable federal law that may occur in the future. We have no assurances that changes in the terms of the transaction will not occur in the future. Such changes may place restrictions on our business or results of operations, which may adversely affect the market price of our common stock.
Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our operations.
Liquidity is essential to our businesses. Our liquidity could be substantially affected in a negative fashion by an inability to raise funding in the debt capital markets or the equity capital markets or an inability to access the secured lending markets. Factors that we cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, could impair our ability to raise funding. In addition, our ability to raise funding could be impaired if lenders develop a negative perception of our financial prospects. Such negative perceptions could be developed if we suffer a decline in the level of our business activity or regulatory authorities take significant action against us, among other reasons. If we are unable to raise funding using the methods described above, we would likely need to finance or liquidate unencumbered assets to meet maturing liabilities. We may be unable to sell some of our assets, or we may have to sell assets at a discount from market value, either of which could adversely affect our results of operations and financial condition.
17
Fluctuations in interest rates could reduce our profitability and affect the value of our assets.
Like other financial institutions, our earnings and cash flows are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa. In addition, the individual market interest rates underlying our loan and deposit products (e.g., prime versus competitive market deposit rates) may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, our earnings may be negatively affected. Also, the volume of nonperforming assets will negatively impact average yields if and as it increases. In addition, loan volume and quality and deposit volume and mix can be affected by market interest rates. Changes in levels of market interest rates, including the current rate environment, could materially adversely affect our net interest spread, asset quality, origination volume and overall profitability. Income could also be adversely affected if the interest rates paid on deposits and other borrowings increase quicker than the interest rates received on loans and other investments during periods of rising interest rates.
We principally manage interest rate risk by managing our volume and the mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition, and results of operations could be materially harmed.
Changes in the level of interest rates also may negatively affect our ability to originate construction, commercial and residential real estate loans, the value of our assets, and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.
We operate in a highly competitive industry and market area.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have more financial resources. Such competitors primarily include national, regional, and community banks within the markets in which we operate. Additionally, various out-of-state banks continue to enter the market area in which we currently operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services, as well as better pricing for those products and services. A weakening in our competitive position, could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
We are subject to extensive governmental regulation.
We are subject to extensive supervision and regulation by Federal and state governmental agencies, including the FRB, the GDBF and the FDIC. Current and future legislation, regulations, and government policy could adversely affect the Company and the financial institution industry as a whole, including the cost of doing business. Although the impact of such legislation, regulations, and policies cannot be predicted, future changes may alter the structure of, and competitive relationships among, financial institutions and the cost of doing business, which could have a material adverse effect on our financial condition and results of operations.
Our growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by Federal regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate our capital resources will satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our growth. If we raise capital through the issuance of additional shares of our common stock or other securities, it would dilute the ownership interest of our current shareholders and may dilute the per share book value of our common stock. New investors may also have rights, preferences and privileges senior to our current shareholders, which may adversely impact our current shareholders.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure that we will have the ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth or acquisitions could be materially impaired, which could have a material adverse effect on our financial condition and results of operations.
18
The building of market share through our branching strategy could cause our expenses to increase faster than revenues.
We intend to continue to build market share in the greater Atlanta metropolitan area through our branching strategy. While we have no commitments to branch during 2011, there are branch locations under consideration and others may become available. There are considerable costs involved in opening branches and new branches generally require a period of time to generate sufficient revenues to offset their costs, especially in areas in which we do not have an established presence.
Accordingly, any new branch can be expected to negatively impact our earnings for some period of time until the branch reaches certain economies of scale. Our expenses could be further increased if we encounter delays in the opening of new branches. Finally, we have no assurance that new branches will be successful, even after they have been established.
Potential acquisitions may disrupt our business and dilute shareholder value.
From time to time, we may evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions. There is no assurance that any acquisitions will occur in the future. However, if we do acquire other banks, businesses, or branches, such acquisitions would involve various risks, including the following:
| potential exposure to unknown or contingent liabilities of the target company; |
| exposure to potential asset quality issues of the target company; |
| difficulty and expense of integrating the operations and personnel of the target company; |
| potential disruption to our business; |
| potential diversion of managements time and attention; |
| the possible loss of key employees and customers of the target company; |
| difficulty in estimating the value of the target company; and |
| potential changes in banking or tax laws or regulations that may affect the target company. |
If we were to pay for acquisitions with shares of our common stock, some dilution of our tangible book value and net income per common share may occur since acquisitions may involve the payment of a premium over book and market values. Furthermore, failure to realize the expected benefits of an acquisition, such as anticipated revenue increases, cost savings, or increased geographic or product presence, could have a material adverse effect on our financial condition and results of operations.
We are subject to risks related to FDIC-assisted transactions.
The ultimate success of our past FDIC-assisted transaction, and any FDIC-assisted transactions in which we may participate in the future, will depend on a number of factors, including our ability:
| to fully integrate the branches acquired into the Banks operations; |
| to limit the outflow of deposits held by our new customers in the acquired branches and to retain and manage interest-earning assets acquired in FDIC-assisted transactions; |
| to generate new interest-earning assets in the geographic areas previously served by the acquired banks; |
| to effectively compete in new markets in which we did not previously have a presence; |
| to control the incremental noninterest expense from the acquired branches in a manner that enables us to maintain a favorable overall efficiency ratio; |
| to retain and attract the appropriate personnel to staff the acquired branches; |
| to earn acceptable levels of interest and noninterest income, including fee income, from the acquired branches; and |
| to reasonably estimate cash flows for acquired loans to mitigate exposure greater than estimated losses at the time of acquisition. |
As with any acquisition involving a financial institution, including FDIC-assisted transactions, there may be higher than average levels of service disruptions that would cause inconveniences to our new customers or potentially increase the effectiveness of competing financial institutions in attracting our customers. Integration efforts will also likely divert managements attention and resources. We may be unable to integrate acquired branches successfully, and the integration process could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the FDIC-assisted transactions. We may also encounter unexpected difficulties or costs during the integration that could adversely affect our earnings and financial condition. Additionally, we may be unable to achieve results in the future similar to those achieved by our existing banking business, to compete effectively in the market areas previously served by the acquired branches or to manage effectively any growth resulting from FDIC-assisted transactions.
19
Our ability to continue to receive the benefits of our loss share arrangements with the FDIC is conditioned upon our compliance with certain requirements under the agreements.
We are the beneficiary of a loss share agreement with the FDIC that calls for the FDIC to fund a portion of our losses on a majority of the assets we acquired in connection with our recent FDIC-assisted transaction. To recover a portion of our losses and retain the loss share protection, we must comply with certain requirements imposed by the agreement. The requirements of the agreement relate primarily to our administration of the assets covered by the agreement, as well as our obtaining the consent of the FDIC to engage in certain corporate transactions that may be deemed under the agreements to constitute a transfer of the loss share benefits. When the consent of the FDIC is required under the loss share agreement, the FDIC may withhold its consent or may condition its consent on terms that we do not find acceptable. If the FDIC does not grant its consent to a transaction we would like to pursue, or conditions its consent on terms that we do not find acceptable, we may be unable to engage in a corporate transaction that might otherwise benefit our shareholders or we may elect to pursue such a transaction without obtaining the FDICs consent, which could result in termination of our loss share agreement with the FDIC.
Changes in national and local economic conditions could lead to higher loan charge-offs in connection with the acquired bank and the loss sharing agreement with the FDIC may not cover all of those charge-offs.
In connection with the acquisition of the acquired bank, we acquired a portfolio of loans. Although we have marked down the loan portfolio we have acquired, the non-impaired loans we acquired may become impaired or may further deteriorate in value, resulting in additional charge-offs to the loan portfolio. The fluctuations in national, regional and local economic conditions, including those related to local residential, commercial real estate and construction markets, may increase the level of charge-offs that we make to our loan portfolio and consequently reduce our capital. The fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition even if other favorable events occur.
Our loss sharing arrangements with the FDIC will not cover all of our losses on loans we acquired.
Although we have entered into a loss share agreement with the FDIC that provides that the FDIC will bear a significant portion of losses related to specified loan portfolios that we acquired, we are not protected for all losses resulting from charge-offs with respect to those specified loan portfolios. Additionally, the loss sharing agreements have limited terms. Therefore, the FDIC will not reimburse us for any charge-off or related losses that we experience after the term of the loss share agreement, and any such charge-offs would negatively impact our net income. Moreover, the loss share provisions in the loss share agreement may be administered improperly, or the FDIC may interpret those provisions in a way different that we do. In any of those events, our losses could increase.
Our controls and procedures may fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, and financial condition.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities that we engage in can be intense and we may not be able to hire people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
20
We are subject to claims and litigation.
From time to time, customers and others make claims and take legal action pertaining to the Companys performance of our responsibilities. Whether customer claims and legal action related to the Companys performance of our responsibilities are founded or unfounded, or if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and our products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Risks Related to our Common Stock
Our stock price can be volatile.
Stock price volatility may make it more difficult for shareholders to resell common stock when they want and at prices they find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
| news reports relating to trends, concerns and other issues in the financial services industry; |
| actual or anticipated variations in quarterly results of operations; |
| recommendations by securities analysts; |
| operating and stock price performance of other companies that investors deem comparable to us; |
| perceptions in the marketplace regarding the Company and/or our competitors; |
| significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or our competitors; |
| changes in government laws and regulation; and |
| geopolitical conditions such as acts or threats of terrorism or military conflicts. |
General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease, regardless of operating results.
Our common stock trading volume is less than that of other larger financial services companies.
Although our common stock is listed for trading on the NASDAQ Global Select Market, the trading volume in our common stock is less than that of larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.
The exercise of the Warrant by the Treasury would dilute existing shareholders ownership interest and may make it more difficult for us to take certain actions that may be in the best interest of shareholders.
In addition to the issuance of the Preferred Shares, we also granted to the Treasury the Warrant to purchase 2,266,458 shares of common stock at a price of $3.19 per share. If the Treasury exercises the entire Warrant, it would result in a significant dilution to the ownership interest of our existing shareholders and dilute the earnings per share value of our common stock. Further, if the Treasury exercises the entire Warrant, it will become the second largest shareholder of Fidelity. The Treasury has agreed that it will not exercise voting power with regard to the shares that it acquires by exercising the Warrant. However, Treasurys abstention from voting may make it more difficult for us to obtain shareholder approval for those matters that require a majority of total shares outstanding, such as a business combination involving Fidelity.
Provisions in our Bylaws and our Tax Benefits Preservation Plan may make it more difficult for another party to obtain control.
In November, 2010, the Board of Directors of the Company adopted an amendment to the bylaws of the Company electing for the provisions of Article 11A of the Georgia Business Corporation Code (the Business Combination Statute) to apply to the Company and also adopted a Tax Benefits Preservation Plan. The bylaw amendment and Tax Benefits Preservation Plan could make it more difficult for a third party to acquire control of us or could have the effect of discouraging a third party from attempting to acquire control of us. These provisions could make it more difficult for a third party to acquire us even if an acquisition might be at a price attractive to some of our shareholders.
21
Our information systems may experience a security breach, computer virus or disruption of service.
We provide our customers the ability to bank online. The secure transmission of confidential information over the Internet is a critical element of online banking. While we use qualified third party vendors to test and audit our network, our network could become vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems. The Bank may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us or the Bank to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Banks systems and could adversely affect its reputation and its ability to generate deposits. Any failures, interruptions or security breaches could result in damage to our reputation, a loss of customer business, increased regulatory scrutiny, or possible exposure to financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
Item 1B. | Unresolved Staff Comments |
None
Item 2. | Properties |
Our principal executive offices consist of 19,175 square feet of leased space in Atlanta, Georgia. Our support operations are principally conducted from 65,897 square feet of leased space located at 3 Corporate Square, Atlanta, Georgia. The Bank has 27 branch offices located in Fulton, Dekalb, Cobb, Clayton, Gwinnett, Rockdale, Coweta, Henry, Morgan, Greene, Barrow Counties, Georgia, and Duval County, Florida, of which 22 are owned and 5 are leased. The Company leases mortgage origination offices in Atlanta, Georgia, Alpharetta, Georgia, Duluth, Georgia, Greensboro, Georgia, Athens, Georgia, Gainesville, Georgia, Sandy Springs, Georgia, Sterling, Virginia, and Colorado Springs, Colorado. The Company leases a SBA loan production office in Covington, Georgia, and an off-site storage space in Atlanta, Georgia.
Item 3. | Legal Proceedings |
We are a party to claims and lawsuits arising in the course of normal business activities. Although the ultimate outcome of all claims and lawsuits outstanding as of December 31, 2011, cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on our results of operations or financial condition.
Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Fidelitys common stock trades on the NASDAQ Global Select Market under the symbol LION. The following table sets forth the high and low closing sale prices (adjusted for stock dividends) for the common stock for the calendar quarters indicated, as published by the NASDAQ stock market.
Market PriceCommon Stock
2011(1) | 2010(1) | |||||||||||||||
High | Low | High | Low | |||||||||||||
Fourth Quarter |
$ | 6.84 | $ | 5.66 | $ | 7.10 | $ | 5.94 | ||||||||
Third Quarter |
7.14 | 5.95 | 7.24 | 5.84 | ||||||||||||
Second Quarter |
8.31 | 6.15 | 8.91 | 5.52 | ||||||||||||
First Quarter |
8.66 | 6.70 | 5.76 | 3.17 |
(1) | Adjusted for stock dividends |
As of March 3, 2011, there were approximately 600 shareholders of record. In addition, shares of approximately 1,750 beneficial owners of Fidelitys common stock were held by brokers, dealers, and their nominees.
22
Dividends
For 2011, the Company did declare a cash dividend of $0.01 in the third and fourth quarters. The Company declared a quarterly stock dividend of one share for every 200 shares owned in the first and second quarters of 2011. In January 2012, the Company declared one stock dividend for every 60 shares owned. Future dividends will require a quarterly review of current and projected earnings for the remainder of 2012 in relation to capital requirements prior to the determination of the dividend, and be subject to regulatory restrictions under applicable law.
The following schedule summarizes cash dividends declared and paid per share of common stock for the last three years:
Dividend | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
First Quarter |
$ | | $ | | $ | | ||||||
Second Quarter |
| | | |||||||||
Third Quarter |
0.01 | | | |||||||||
Fourth Quarter |
0.01 | | | |||||||||
|
|
|
|
|
|
|||||||
For the Year |
$ | 0.02 | $ | | $ | | ||||||
|
|
|
|
|
|
Pursuant to the terms of the Letter Agreement entered into with the Treasury under the Program, as long as the Preferred Shares are outstanding, dividend payments are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. This restriction will terminate on the date on which the Preferred Shares have been redeemed in whole or the Treasury has transferred all of the Preferred Shares to third parties.
See Note 13 to the consolidated financial statements in Item 8 for a further discussion of the restrictions on our ability to pay dividends.
Share Repurchases
Fidelity did not repurchase any securities during the fourth quarter of 2011.
Sale of Unregistered Securities
Fidelity has not sold any unregistered securities during the period.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents information as of December 31, 2011, with respect to shares of common stock of Fidelity that may be issued under equity compensation plans. The equity compensation plans of Fidelity consist of the stock options, restricted stock grants, and other awards as defined in the 2006 Equity Incentive Plan and the 401(k) tax qualified savings plan.
Plan Category |
Number of Securities to be Issued upon Exercise of Outstanding Options |
Weighted Average Exercise Price of Outstanding Options |
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A) |
|||||||||
Equity Compensation Plans Approved by Shareholders(1) |
370,905 | $ | 5.30 | 1,705,459 | ||||||||
Equity Compensation Plans Not Approved by Shareholders(2) |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total |
370,905 | $ | 5.30 | 1,705,459 | ||||||||
|
|
|
|
|
|
(1) | 2006 Equity Incentive Plan |
(2) | Excludes shares issued under the 401(k) Plan. |
23
Shareholder Return Performance Graph
The following graph compares the percentage change in the cumulative five-year shareholder return on Fidelitys Common Stock (traded on the NASDAQ National Market under the symbol LION) with the cumulative total return on the NASDAQ Composite Index, and the SNL NASDAQ Bank Index.
The graph assumes that the value invested in the Common Stock of Fidelity and in each of the two indices was $100 on December 31, 2006, and all dividends were reinvested.
Period Ending December 31, | ||||||||||||||||||||||||
Index |
2006 | 2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||||
Fidelity Southern Corporation |
$ | 100.00 | $ | 51.29 | $ | 20.44 | $ | 20.80 | $ | 41.14 | $ | 36.30 | ||||||||||||
NASDAQ Composite |
100.00 | 110.66 | 66.42 | 96.54 | 114.06 | 113.16 | ||||||||||||||||||
SNL NASDAQ Bank Index |
100.00 | 78.51 | 57.02 | 46.25 | 54.57 | 48.42 |
24
Item 6. | Selected Financial Data |
The following table contains selected consolidated financial data. This information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes included in this report.
Years Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(Dollars in thousands except per share data) | ||||||||||||||||||||
Interest income |
$ | 93,700 | $ | 95,284 | $ | 97,583 | $ | 104,054 | $ | 113,462 | ||||||||||
Interest expense |
22,849 | 30,563 | 46,009 | 57,636 | 66,682 | |||||||||||||||
Net interest income |
70,851 | 64,721 | 51,574 | 46,418 | 46,780 | |||||||||||||||
Provision for loan losses |
20,325 | 17,125 | 28,800 | 36,550 | 8,500 | |||||||||||||||
Noninterest income, including securities gains |
51,439 | 42,909 | 33,978 | 17,636 | 17,911 | |||||||||||||||
Securities gains, net |
1,078 | 2,291 | 5,308 | 1,306 | 2 | |||||||||||||||
Noninterest expense |
85,422 | 75,973 | 64,562 | 48,839 | 47,203 | |||||||||||||||
Net income (loss) |
11,398 | 10,133 | (3,855 | ) | (12,236 | ) | 6,634 | |||||||||||||
Dividends declaredcommon |
265 | | | 1,783 | 3,357 | |||||||||||||||
Per Share Data: |
||||||||||||||||||||
Net income (loss): |
||||||||||||||||||||
Basic earnings (loss)(1) |
$ | 0.66 | $ | 0.63 | $ | (0.69 | ) | $ | (1.22 | ) | $ | 0.66 | ||||||||
Diluted earnings (loss)(1) |
0.59 | 0.56 | (0.69 | ) | (1.22 | ) | 0.66 | |||||||||||||
Book value(1) |
9.06 | 8.59 | 8.05 | 8.97 | 9.85 | |||||||||||||||
Dividends declared |
0.01 | | | 0.19 | 0.36 | |||||||||||||||
Dividend payout ratio |
2.30 | % | | % | | % | | % | 50.61 | % | ||||||||||
Profitability Ratios: |
||||||||||||||||||||
Return on average assets |
0.55 | % | 0.54 | % | (0.21 | )% | (0.70 | )% | 0.41 | % | ||||||||||
Return on average shareholders equity |
7.43 | 7.50 | (2.91 | ) | (12.43 | ) | 6.84 | |||||||||||||
Net interest margin |
3.68 | 3.66 | 2.95 | 2.84 | 3.04 | |||||||||||||||
Asset Quality Ratios: |
||||||||||||||||||||
Net charge-offs to average loans |
1.38 | % | 1.44 | % | 2.44 | % | 1.36 | % | 0.45 | % | ||||||||||
Net charge-offs to average loans excluding FDIC-assisted transactions |
1.39 | 1.44 | 2.44 | 1.36 | .45 | |||||||||||||||
Allowance to period-end loans |
1.72 | 2.00 | 2.33 | 2.43 | 1.19 | |||||||||||||||
Allowance to period end loans excluding FDIC-assisted transactions |
1.81 | | | | | |||||||||||||||
Nonperforming assets to total loans, ORE and repos |
5.51 | 6.01 | 6.43 | 7.89 | 1.65 | |||||||||||||||
Nonperforming assets to total loans, ORE and repos excluding FDIC-assisted transactions |
4.87 | 6.01 | 6.43 | 7.89 | 1.65 | |||||||||||||||
Allowance to nonperforming loans, ORE and repos |
0.28x | 0.29x | 0.32x | 0.29x | 0.71x | |||||||||||||||
Allowance to nonperforming loans, ORE and repos excluding FDIC-assisted transactions |
0.34x | 0.29x | 0.32x | 0.29x | 0.71x | |||||||||||||||
Liquidity Ratios: |
||||||||||||||||||||
Total loans to total deposits |
93.92 | % | 100.00 | % | 91.64 | % | 100.01 | % | 103.30 | % | ||||||||||
Loans to total deposits |
86.77 | 86.99 | 83.18 | 96.14 | 98.77 | |||||||||||||||
Average total loans to average earning assets |
83.35 | 83.34 | 82.46 | 89.81 | 90.34 | |||||||||||||||
Capital Ratios: |
||||||||||||||||||||
Leverage |
9.83 | % | 9.36 | % | 9.03 | % | 10.04 | % | 7.93 | % | ||||||||||
Risk-based capital |
||||||||||||||||||||
Tier 1 |
11.85 | 10.87 | 11.25 | 11.10 | 8.43 | |||||||||||||||
Total |
13.70 | 13.28 | 13.98 | 13.67 | 11.54 | |||||||||||||||
Average equity to average assets |
7.43 | 7.19 | 7.13 | 5.66 | 5.93 | |||||||||||||||
Balance Sheet Data (At End of Period): |
||||||||||||||||||||
Assets |
$ | 2,234,795 | $ | 1,945,300 | $ | 1,851,520 | $ | 1,763,113 | $ | 1,686,484 | ||||||||||
Earning assets |
2,039,501 | 1,797,398 | 1,744,134 | 1,635,722 | 1,597,855 | |||||||||||||||
Total loans |
1,757,720 | 1,613,270 | 1,421,090 | 1,443,862 | 1,452,013 | |||||||||||||||
Total deposits |
1,871,516 | 1,613,248 | 1,550,725 | 1,443,682 | 1,405,625 | |||||||||||||||
Long-term debt |
120,027 | 142,527 | 117,527 | 115,027 | 92,527 | |||||||||||||||
Shareholders equity |
167,280 | 140,511 | 129,685 | 136,604 | 99,963 | |||||||||||||||
Daily Average: |
||||||||||||||||||||
Assets |
$ | 2,063,169 | $ | 1,879,657 | $ | 1,858,874 | $ | 1,738,494 | $ | 1,635,520 | ||||||||||
Earning assets |
1,933,771 | 1,776,563 | 1,759,893 | 1,649,022 | 1,553,602 | |||||||||||||||
Total loans |
1,611,825 | 1,480,618 | 1,451,240 | 1,481,066 | 1,403,461 | |||||||||||||||
Total deposits |
1,718,828 | 1,562,617 | 1,542,569 | 1,445,485 | 1,377,503 | |||||||||||||||
Long-term debt |
125,828 | 129,102 | 133,623 | 111,475 | 90,366 | |||||||||||||||
Shareholders equity |
153,312 | 135,132 | 132,613 | 98,461 | 97,059 |
(1) | Adjusted for stock dividends |
25
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
CONSOLIDATED FINANCIAL REVIEW
The following management discussion and analysis addresses important factors affecting the results of operations and financial condition of FSC and its subsidiaries for the periods indicated. The consolidated financial statements and accompanying notes should be read in conjunction with this review.
FDIC-Assisted Transactions
In October 2011, we acquired Decatur First Bank, with approximately $80 million in loans and $17- million in deposits, in a FDIC-assisted transaction, resulting in a gain of approximately $1.5 million. During the first quarter of 2012, we completed the integration of this purchase.
Overview
Our profitability, as with most financial institutions, is significantly dependent upon net interest income, which is the difference between interest received on interest-earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. During a period of economic slowdown the lack of interest income from nonperforming assets and an additional provision for loan losses can greatly reduce our profitability. Results of operations are also affected by noninterest income, such as service charges on deposit accounts and fees on other services, income from indirect automobile and SBA lending activities, mortgage banking, brokerage activities, and bank owned life insurance; as well as noninterest expenses such as salaries and employee benefits, occupancy, furniture and equipment, professional and other services, and other expenses, including income taxes.
Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect financial institutions. Poor performance of subprime loans initiated the credit crisis that began in the summer of 2007, followed by substantial declines in residential home sales and prices, the slowing of the national economy and by a serious lack of liquidity. By the end of 2007, the credit turmoil migrated to consumer lending, as demonstrated by the increase in credit card delinquencies and automobile repossessions in all regions of the U.S., including our southeast markets. In 2008, the financial crisis worsened and led to a crisis of confidence in the financial sector as a result of concerns about the capital base and viability of certain financial institutions and the Treasury had to step in with capital infusions for many financial institutions. During this period, interbank lending and commercial paper borrowing fell sharply, precipitating a credit freeze for both institutional and individual borrowers. Since the second half of 2009, liquidity in the secondary markets has steadily improved. The national unemployment rate, which increased as high as 10.1% in 2009, continued to decrease to 8.5% in December 2011. In 2011, the Federal Reserve kept short-term interest rates at historic lows in response to the continuing national economic downturn.
The recession had a major impact on the Atlanta and Florida economies, particularly in the residential construction and development markets. Many builders and building related businesses have suffered financially due to the decreasing home prices, lack of demand for houses and the oversupply of houses and residential lots. In 2010, we began to see some moderation in the real estate downturn as both delinquencies and foreclosures began to slow. In 2011, while nonperforming assets generally trended lower, the overall level remained elevated over historical levels. Net charge-offs increased 7.0% to $20.5 million during 2011 and our provision for loan losses increased 18.7% to $20.3 million. Our allowance for loan losses as a percentage of loans outstanding decreased to 1.72% at December 31, 2011, from 2.00% at the end of 2010. Excluding the loans acquired in the 2011 FDIC-assisted transaction of Decatur First Bank, the percentage of loans increased to 1.81%.
Since our inception in 1974, we have pursued managed profitable growth through providing quality financial services. During 2011, as the economic crisis began to recede, the Bank was able to organically grow its consumer installment, mortgage and commercial loan portfolios. The loan portfolio is well diversified among consumer, business, and real estate.
Net income for 2011 was $11.4 million compared to $10.1 million in 2010. Net income per basic and diluted share was $0.66 and $0.59, respectively for 2011 compared to a net income per basic and diluted share of $0.63 and $0.56, respectively, in 2010. The increase of $6.1 million or 9.5% in net interest income was a key factor impacting our improved financial condition and results of operations for 2011.
The Banks franchise spans eleven Counties in the metropolitan Atlanta market and 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. Atlantas and to a lesser extent Jacksonvilles economies continue to be negatively impacted by the weak real estate market. Management expects the economy to gradually continue to improve during 2012. The Bank continues to attract new customer relationships, and talented and experienced bankers.
26
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 2012 will be on credit quality, expense controls, and 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 managements 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 managements 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 managements 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 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
We sell indirect automobile loan pools, residential mortgages and SBA loans with servicing retained. When the contractually specific servicing fees on loans sold servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized. When the expected costs to a servicer for performing loan servicing are not expected to adequately compensate a servicer, 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 managements judgment, it is determined that the collectability of interest or principal is doubtful.
27
For commercial, SBA, construction, and real estate loans, the accrual of interest is discontinued and the loan categorized as nonaccrual when, in managements 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740-10-25, formerly known as SFAS No. 109, Accounting for Income Taxes. Under the liability method, 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. 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. Management has reviewed all evidence, both positive and negative, and concluded that a valuation allowance against the deferred tax asset is not needed at December 31, 2011. The calculation of the income tax provision is complex and requires the use of judgments and estimates in its determination.
Fair Value
The primary financial instruments that the Company carries at fair value include investment securities, interest rate lock commitments (IRLCs), derivative instruments, and residential mortgage loans held-for-sale. Classification in the fair value hierarchy of financial instruments is based on the criteria set forth in FASB ASC 820-10-35.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level measurements) and the lowest priority to unobservable inputs (level 3 measurements). A financial instruments level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Investment Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds terms and conditions, among other things. The investments in the Companys portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.
The Company classifies IRLCs on residential mortgage loans, which are derivatives under SFAS No. 133 now codified in ASC 815-10-15, on a gross basis within other liabilities or other assets. The fair value of these commitments, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. These pull-through rates are based on both the Companys historical data and the current interest rate environment and reflect the Companys best estimate of the likelihood that a commitment will ultimately result in a closed loan. As a result of the adoption of SAB No. 109, the loan servicing value is also included in the fair value of IRLCs.
Derivative instruments are primarily transacted in the secondary mortgage and institutional dealer markets and priced with observable market assumptions at a mid-market valuation point, with appropriate valuation adjustments for liquidity and credit risk. For purposes of valuation adjustments to its derivative positions under FASB ASC 820-10-35, the Company has evaluated liquidity premiums that may be demanded by market participants, as well as the credit risk of its counterparties and its own credit.
The credit risk associated with the underlying cash flows of instruments carried at fair value was a consideration in estimating the fair value of certain financial instruments. Credit risk was considered in the valuation through a variety of inputs, as applicable, including, the actual default and loss severity of the collateral, and level of subordination. The assumptions used to estimate credit risk applied relevant information that a market participant would likely use in valuing an instrument.
28
The fair value of residential mortgage loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies these loans as Level 2.
SBA and indirect loans held-for-sale are measured at the lower of cost or fair value. Fair value is based on recent trades for similar loan pools as well as offering prices for similar assets provided by buyers in the secondary market. If the cost of a loan is determined to be less than the fair value of similar loans, the impairment is recorded by the establishment of a reserve to reduce the value of the loan.
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified as a Level 3 in the fair value hierarchy. Collateral may include real estate or business assets, including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. If significant, the value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company, otherwise, the equipments net book value on the business financial statements is the basis for the value of business equipment. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraised and reported values may be discounted based on managements historical knowledge, changes in market conditions from the time of the valuation, and managements expertise and knowledge of the client and clients business. Impaired loans are evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or managements estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Appraised and reported values may be discounted based on managements historical knowledge, changes in market conditions from the time of the valuation, and managements expertise and knowledge of the client and clients business.
Acquisition Accounting
Generally accepted accounting principles require the use of fair values in determining the carrying values of certain assets and liabilities acquired in a business combination, as well as for specific disclosures. We recorded assets purchased and liabilities assumed in our FDIC-assisted acquisition at their fair values. The fair value of a loan portfolio and foreclosed property acquired in a business combination requires greater levels of management estimates and judgment than the remainder of assets or assumed liabilities. The credit risks inherent and evidenced in the FDIC-assisted transaction resulted in substantially all loans purchased in the transaction with a credit discount. On the date of acquisition, when the loans have evidence of credit deterioration since their origination and we believe it is a probable that we will not collect all contractually required principal and interest payments, we refer to the difference between contractually required payments and the cash flows expected to be collected as the non-accretable discount. We must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges and adjusted accretable discount, which will have a positive effect on interest income.
Because we record loans acquired in connection with FDIC-assisted acquisitions at fair value, we record no allowance for loan losses related to the acquired covered loans on the acquisition date, given that the fair value of the loans acquired incorporates assumptions regarding credit risk. We record acquired loans at fair value in accordance with the fair value methodology, exclusive of the loss share agreements with the FDIC. These fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows. We continue to measure the loss share agreements on the same basis as the related covered loans. Because the acquired covered loans are subject to the accounting prescribed by FASB ASC Topic 310, subsequent changes to the basis of the loss share agreements also follow that model. Deterioration in the credit quality of the loans (recorded as an adjustment to the allowance for loan losses) would immediately increase the basis of the loss share agreements, with the offset recorded through the consolidated statements of operations. Increases in the credit quality or cash flows of loans (reflected as an adjustment to the discount and accreted into income over the remaining life of the loans) decrease the basis of the loss share agreements. That decrease is accreted into income over either the same period or the life of the loss share agreements, whichever is shorter. Loss assumptions used in the basis of the covered loans are consistent with the loss assumptions used to measure the FDIC receivable. Fair value accounting incorporates into the fair value of the FDIC receivable an element of the time value of money, which is accreted back into income over the life of the loss share agreements.
29
FDIC Receivable for Loss Share Agreements
The portion of our loan and other real estate assets are covered under a loss share agreement with the FDIC in which the FDIC has agreed to reimburse us for 80% of all losses incurred in connection with those assets. We estimated the amount that we will receive from the FDIC under the loss share agreements that will result from losses incurred as we dispose of covered loans and other real estate assets, and we recorded the estimate as a receivable from the FDIC. The FDIC receivable for loss share agreements is measured separately from the related covered assets because it is not contractually embedded in the assets and is not transferable if we sell the assets. We estimated the fair value of the FDIC receivable using the present value of cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages. We will review and update the fair value of the FDIC receivable prospectively as loss estimates related to covered loans and other real estate owned change. Subsequent decreases in the amount expected to be collected result in a provision for loan and lease losses, an increase in the allowance for loan and lease losses, and a proportional adjustment to the FDIC receivable for the estimated amount to be reimbursed. Subsequent increases in the amount expected to be collected result in the reversal of any previously-recorded provision for loan and lease losses and related allowance for loan and lease losses and adjustments to the FDIC receivable, or prospective adjustment to the accretable discount if no provision for loan and lease losses had been recorded. Based on our due diligence review of our acquisition, including estimates of the timing of cash flow receipts and the disposition of nonperforming assets, we were able to estimate the acquisition date fair value of the FDIC receivable. We discounted the receivable for the expected timing and receipt of these cash flows using a risk-free rate plus a premium for risk. The ultimate realization of the FDIC receivable depends on the performance of the underlying covered assets, the passage of time and claims paid by the FDIC. The amortization of the FDIC receivable is recorded into noninterest expense over the estimated life of the receivable.
Results of Operations
2011 Compared to 2010
Net Income
Our net income for the year ended December 31, 2011, was $11.4 million or $0.66 and $0.59 basic and fully diluted earnings per share, respectively. Net income for the year ended December 31, 2010, was $10.1 million or $0.63 and $0.56 basic and fully diluted earnings per share, respectively. The $1.3 million increase in net income in 2011 compared to 2010 was due primarily to a $7.7 million decrease in interest expense, as a result of our improved deposit mix and lower cost of deposits. Additionally, there was an $8.5 million increase in total noninterest income. These increases were somewhat offset by lower interest income as a result of the continued low interest rate environment and competitive pricing, higher noninterest expense led by salaries and benefits expense, and an increase in provision for loan losses. Details of the changes in the various components of net income are further discussed below.
Net Interest Income/Margin
Taxable-equivalent net interest income was $71.2 million in 2011 compared to $65.1 million in 2010, an increase of $6.2 million or 9.5%. Average interest-earning assets in 2011 increased $157.2 million to $1.934 billion, an 8.8% increase when compared to 2010. Average interest-bearing liabilities increased $103.1 million to $1.663 billion, a 6.6% increase. The net interest margin increased by two basis points to 3.68% in 2011 when compared to 2010. The components of net interest margin are described below.
Taxable-equivalent interest income increased $6.2 million or 9.5% to $71.2 million during 2011 compared with 2010 as the result of a 51 basis point decrease in the yield on interest-earning assets more than offset by the net growth of $157.2 million or 8.8% in average interest-earning assets. The average balance of loans outstanding in 2011 increased $131.2 million or 8.9% to $1.612 billion when compared to 2010. The yield on average loans outstanding decreased 52 basis points to 5.38% when compared to 2010, in large part due to decreasing yields on the consumer loan portfolio, consisting primarily of indirect automobile loans. The decrease in yield was due to changes in market interest rates. The average balance of investment securities increased $8.3 million due to FHLB and GNMA purchases and the FDIC-assisted purchase of Decatur First Bank. Average interest-bearing deposits increased $17.4 million to $92.2 million due to managements decision to maintain higher levels of liquidity throughout the majority of 2011.
Interest expense in 2011 decreased $7.7 million or 25.2% to $5.1 million as a result of a 59 basis point decrease in the cost of interest-bearing liabilities net of a $103.1 million or 6.6% increase in average interest-bearing liability balances due to managements efforts to lower cost of funds by decreasing rates paid on deposits and focus on lower cost core deposits. Average total interest-bearing deposits increased $106.0 million or 7.6% to $1.499 billion during 2011 compared to 2010, while average borrowings decreased $2.9 million or 1.7% to $163.9 million. The increase in average total interest-bearing deposits was primarily due to an increase of $94.6 million in demand deposits.
30
Average Balances, Interest and Yields
For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
Average Balance |
Income/ Expense |
Yield/ Rate |
Average Balance |
Income/ Expense |
Yield/ Rate |
Average Balance |
Income/ Expense |
Yield/ Rate |
||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||||||
Interest-Earning Assets: |
||||||||||||||||||||||||||||||||||||
Loans, net of unearned income |
||||||||||||||||||||||||||||||||||||
Taxable |
$ | 1,606,783 | $ | 86,497 | 5.38 | % | $ | 1,475,351 | $ | 87,104 | 5.90 | % | $ | 1,444,423 | $ | 86,643 | 6.00 | % | ||||||||||||||||||
Tax-exempt(1) |
5,042 | 308 | 6.14 | 5,267 | 324 | 6.17 | 6,817 | 395 | 5.93 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total loans |
1,611,825 | 86,805 | 5.38 | 1,480,618 | 87,428 | 5.90 | 1,451,240 | 87,038 | 6.00 | |||||||||||||||||||||||||||
Investment securities |
||||||||||||||||||||||||||||||||||||
Taxable |
215,719 | 6,227 | 2.89 | 208,834 | 7,302 | 3.50 | 227,731 | 9,901 | 4.35 | |||||||||||||||||||||||||||
Tax-exempt(2) |
13,103 | 829 | 6.33 | 11,706 | 730 | 6.23 | 14,760 | 898 | 6.09 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total Investment securities |
228,822 | 7,056 | 3.09 | 220,540 | 8,032 | 3.65 | 242,491 | 10,799 | 4.47 | |||||||||||||||||||||||||||
Interest-bearing deposits |
92,174 | 225 | 0.24 | 74,792 | 177 | 0.24 | 55,149 | 139 | 0.25 | |||||||||||||||||||||||||||
Federal funds sold |
950 | | 0.06 | 613 | 1 | 0.07 | 11,013 | 24 | 0.22 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total interest-earning assets |
1,933,771 | 94,086 | 4.87 | 1,776,563 | 95,638 | 5.38 | 1,759,893 | 98,000 | 5.57 | |||||||||||||||||||||||||||
Noninterest-Earning Assets: |
||||||||||||||||||||||||||||||||||||
Cash and due from banks |
23,769 | 12,213 | 25,900 | |||||||||||||||||||||||||||||||||
Allowance for loan losses |
(28,724 | ) | (28,085 | ) | (33,632 | ) | ||||||||||||||||||||||||||||||
Premises and equipment |
22,253 | 18,877 | 18,725 | |||||||||||||||||||||||||||||||||
Other real estate owned |
24,754 | 23,225 | 21,527 | |||||||||||||||||||||||||||||||||
Other assets |
87,346 | 76,864 | 66,461 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total assets |
$ | 2,063,169 | $ | 1,879,657 | $ | 1,858,874 | ||||||||||||||||||||||||||||||
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|
|
|
|
|||||||||||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||||||||||||||||||
Interest-Bearing Liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
$ | 439,243 | 2,334 | 0.53 | $ | 344,607 | 3,014 | 0.87 | $ | 236,819 | 2,794 | 1.18 | ||||||||||||||||||||||||
Savings deposits |
407,865 | 3,183 | 0.78 | 415,516 | 5,767 | 1.39 | 333,865 | 6,963 | 2.09 | |||||||||||||||||||||||||||
Time deposits |
652,343 | 10,792 | 1.65 | 633,374 | 14,664 | 2.32 | 829,229 | 28,864 | 3.48 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total interest-bearing deposits |
1,499,451 | 16,309 | 1.09 | 1,393,497 | 23,445 | 1.68 | 1,399,913 | 38,621 | 2.76 | |||||||||||||||||||||||||||
Federal funds purchased |
36 | | 1.06 | 740 | 7 | 0.94 | | | | |||||||||||||||||||||||||||
Securities sold under agreements to repurchase |
19,335 | 210 | 1.09 | 22,436 | 442 | 1.97 | 29,237 | 390 | 1.33 | |||||||||||||||||||||||||||
Other short-term borrowings |
18,680 | 475 | 2.54 | 14,493 | 572 | 3.94 | 6,407 | 227 | 3.54 | |||||||||||||||||||||||||||
Subordinated debt |
67,527 | 4,494 | 6.66 | 67,527 | 4,502 | 6.67 | 67,527 | 4,650 | 6.89 | |||||||||||||||||||||||||||
Long-term debt |
58,301 | 1,361 | 2.33 | 61,575 | 1,595 | 2.59 | 66,096 | 2,121 | 3.21 | |||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total interest-bearing liabilities |
1,663,330 | 22,849 | 1.37 | 1,560,268 | 30,563 | 1.96 | 1,569,180 | 46,009 | 2.93 | |||||||||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||||||||||||||||||
Noninterest-Bearing Liabilities and Shareholders Equity: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
219,377 | 169,120 | 142,656 | |||||||||||||||||||||||||||||||||
Other liabilities |
27,150 | 15,137 | 14,425 | |||||||||||||||||||||||||||||||||
Shareholders equity |
153,312 | 135,132 | 132,613 | |||||||||||||||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 2,063,169 | $ | 1,879,657 | $ | 1,858,874 | ||||||||||||||||||||||||||||||
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Net interest income/spread |
$ | 71,237 | 3.50 | $ | 65,075 | 3.42 | $ | 51,991 | 2.64 | |||||||||||||||||||||||||||
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Net interest rate margin |
3.68 | 3.66 | 2.95 |
(1) | Interest income includes the effects of taxable-equivalent adjustments for 2011 and 2010 of $107,000 and $112,000, respectively. |
(2) | Interest income includes the effects of taxable-equivalent adjustments for 2011 and 2010 of $279,000 and $242,000, respectively. |
31
Rate/Volume Analysis
2011 Compared to 2010 Variance Attributed to(1) |
2010 Compared to 2009 Variance Attributed to(1) |
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Volume | Rate | Net Change | Volume | Rate | Net Change | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Net Loans: |
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Taxable |
$ | 7,429 | $ | (8,037 | ) | $ | (608 | ) | $ | 1,851 | $ | (1,390 | ) | $ | 461 | |||||||||
Tax-exempt(2) |
(14 | ) | (1 | ) | (15 | ) | (88 | ) | 17 | (71 | ) | |||||||||||||
Investment Securities: |
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Taxable |
236 | (1,311 | ) | (1,075 | ) | (773 | ) | (1,826 | ) | (2,599 | ) | |||||||||||||
Tax exempt(2) |
88 | 11 | 99 | (190 | ) | 22 | (168 | ) | ||||||||||||||||
Federal funds sold |
| | | (13 | ) | (10 | ) | (23 | ) | |||||||||||||||
Interest-bearing deposits |
44 | 3 | 47 | 46 | (8 | ) | 38 | |||||||||||||||||
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Total interest-earning assets |
$ | 7,783 | $ | (9,335 | ) | $ | (1,552 | ) | $ | 833 | $ | (3,195 | ) | $ | (2,362 | ) | ||||||||
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Interest-Bearing Deposits: |
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Demand |
$ | 684 | $ | (1,364 | ) | $ | (680 | ) | $ | 1,062 | $ | (842 | ) | $ | 220 | |||||||||
Savings |
(104 | ) | (2,480 | ) | (2,584 | ) | 1,471 | (2,667 | ) | (1,196 | ) | |||||||||||||
Time |
431 | (4,303 | ) | (3,872 | ) | (5,874 | ) | (8,326 | ) | (14,200 | ) | |||||||||||||
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Total interest-bearing deposits |
1,011 | (8,147 | ) | (7,136 | ) | (3,341 | ) | (11,835 | ) | (15,176 | ) | |||||||||||||
Federal funds purchased |
(7 | ) | 1 | (6 | ) | 7 | | 7 | ||||||||||||||||
Securities sold under agreements to repurchase |
(55 | ) | (177 | ) | (232 | ) | (105 | ) | 157 | 52 | ||||||||||||||
Other short-term borrowings |
141 | (238 | ) | (97 | ) | 316 | 29 | 345 | ||||||||||||||||
Subordinated debt |
| (8 | ) | (8 | ) | | (148 | ) | (148 | ) | ||||||||||||||
Long-term debt |
(82 | ) | (153 | ) | (235 | ) | (138 | ) | (388 | ) | (526 | ) | ||||||||||||
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Total interest-bearing liabilities |
$ | 1,008 | $ | (8,722 | ) | $ | (7,714 | ) | $ | (3,261 | ) | $ | (12,185 | ) | $ | (15,446 | ) | |||||||
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(1) | The change in interest due to both rate and volume has been allocated to the components in proportion to the relationship of the dollar amounts of the change in each. |
(2) | Reflects fully taxable equivalent adjustments using a Federal tax rate of 35%. |
Provision for Loan Losses
Managements policy is to maintain the allowance for loan losses at a level sufficient to absorb probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries.
The provision for loan losses was $20.3 million in 2011, $17.1 million in 2010, and $28.8 million in 2009. Net charge-offs were $20.5 million in 2011, compared to $19.1 million in 2010, and $32.4 million in 2009. The increase in the provision in 2011, compared to 2010 was primarily due to growth in the loan portfolio and an increase in net charge-offs. In 2008, management increased provision for loan losses well in excess of charge-offs in response to the worsening economic climate and to continued deterioration in the Banks asset quality. Beginning in the second half of 2009, credit trends began to stabilize and we saw some improvement in certain credit quality metrics such as nonperforming assets. In 2010 and 2011, credit conditions in the consumer portfolio continued to show improvement with significant reductions in loans charged-off and delinquent loan percentages, while the net charge-offs from which our non-consumer loan portfolio increased. Average nonperforming assets were $90.4 million for the year ended December 31, 2011, compared to $87.4 million for the same period in 2010, an increase of $3.1 million or 3.5%.
The allowance for loan losses as a percentage of loans outstanding at the end of 2011, 2010, and 2009 was 1.72%, 2.00% and 2.33%, respectively. Excluding the loans acquired in the fourth quarter of 2011 through the FDIC-assisted purchase of Decatur First Bank, the allowance for loan losses as a percentage of loans was 1.81%. The allowance for loan losses as a percentage of loans decreased in 2011 in response to the stabilizing economy and the associated positive impact on consumer loans.
For additional information on asset quality, refer to the discussions regarding loans, credit quality, nonperforming assets, and the allowance for loan losses.
32
Analysis of the Allowance for Loan Losses
December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance at beginning of year |
$ | 28,082 | $ | 30,072 | $ | 33,691 | $ | 16,557 | $ | 14,213 | ||||||||||
Charge-offs: |
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Commercial, financial and agricultural |
2,090 | 1,264 | 1,045 | 319 | 200 | |||||||||||||||
Real estate-construction |
13,494 | 11,274 | 20,217 | 9,083 | 1,934 | |||||||||||||||
Real estate-mortgage |
804 | 656 | 416 | 332 | 82 | |||||||||||||||
Consumer installment |
5,638 | 7,086 | 11,622 | 10,841 | 5,301 | |||||||||||||||
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Total charge-offs |
22,026 | 20,280 | 33,300 | 20,575 | 7,517 | |||||||||||||||
Recoveries: |
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Commercial, financial and agricultural |
86 | 28 | 40 | 220 | 257 | |||||||||||||||
Real estate-construction |
596 | 361 | 77 | 43 | 190 | |||||||||||||||
Real estate-mortgage |
44 | 8 | 19 | 14 | 78 | |||||||||||||||
Consumer installment |
849 | 768 | 745 | 882 | 836 | |||||||||||||||
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Total recoveries |
1,575 | 1,165 | 881 | 1,159 | 1,361 | |||||||||||||||
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Net charge-offs |
20,451 | 19,115 | 32,419 | 19,416 | 6,156 | |||||||||||||||
Provision for loan losses |
20,325 | 17,125 | 28,800 | 36,550 | 8,500 | |||||||||||||||
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Balance at end of year |
$ | 27,956 | $ | 28,082 | $ | 30,072 | $ | 33,691 | $ | 16,557 | ||||||||||
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Allowance for loan losses as a percentage of loans |
1.72 | % | 2.00 | % | 2.33 | % | 2.43 | % | 1.19 | % | ||||||||||
Allowance for loan losses as a percentage of loans, excluding FDIC-assisted purchased loans |
1.81 | 2.00 | 2.33 | 2.43 | 1.19 | |||||||||||||||
Ratio of net charge-offs during period to average loans outstanding, net |
1.38 | 1.44 | 2.44 | 1.36 | 0.45 | |||||||||||||||
Ratio of net charge-offs during period to average loans outstanding excluding FDIC-assisted purchased loans |
1.39 | 1.44 | 2.44 | 1.36 | 0.45 |
Real estate construction loan net charge-offs were $12.9 million in 2011, compared to $10.9 million in 2010. These charge-offs were related to residential construction builders and were attributed to the continued slow housing construction and sales. Based on recent trends in the economy and a smaller balance of construction loans outstanding, management believes the real estate construction loan charge-offs will decrease in 2012, as compared to 2011. We will continue to closely monitor the activity and trends in the residential housing construction portfolio as well as the rest of the loan portfolio.
Consumer installment loan net charge-offs of $4.8 million decreased 24.2% over charge-offs of $6.3 million in 2010. The majority of consumer installment loan charge-offs were related to indirect automobile loan repossessions and liquidations. Indirect net charge-offs decreased 42.0% or $2.6 million to $3.6 million for the year ended December 31, 2011, compared to $6.2 million in 2010.
Noninterest Income
Noninterest income for 2011 was $51.4 million compared to $42.9 million in 2010, a 15.4% increase. This increase was primarily due to an increase in revenues from SBA lending, other operating income, and indirect lending somewhat offset by a decrease in securities gains, as described below.
Income from SBA lending activities which includes gains from the sale of SBA loans and ancillary fees on loans sold with servicing retained, totaled $8.5 million for 2011, compared to $2.4 million for 2010. The increase was due to higher sales and better margins in 2011 as a result of a more active secondary market. Loans sold increased from $24.5 million in 2010, to $93.9 million in 2011.
Other operating income increased $1.8 million to $3.3 million in 2011, compared to 2010 because of a gain on the FDIC-assisted acquisition of Decatur First Bank and higher gains on sale of ORE. The Bank recognized a gain on the acquisition of Decatur First Bank of $1.5 million in the fourth quarter of 2011.
Income from indirect lending activities increased $1.4 million to $5.9 million, for the year ended December 31, 2011, compared to 2010. The increase was primarily due to an increase in the gain on loans sold. Indirect lending loans sold totaled $140.2 million for the year ended December 31, 2011, compared to $63.3 million sold for the same period in 2010. Somewhat offsetting the increase in gain was a decrease in prepayment penalty and late charge income.
33
Securities gain income decreased $1.2 million to $1.1 million in 2011, compared to $2.3 million in 2010. The decrease is a result of the Bank selling fewer securities in 2011, compared to 2010. The Bank sold five securities totaling $31.7 million during 2011, compared to 16 securities totaling $98.0 million in 2010.
Noninterest Expense
Noninterest expense during 2011, increased $9.4 million or 12.4% to $85.4 million when compared to 2010, due primarily to increases in salaries and employee benefits related to growth in the mortgage division, increases in other operating expenses, and increases in professional and other services.
Salaries and benefits expense increased $5.0 million or 11.6% in 2011, compared to 2010. The increase was primarily due to the higher commissions and salaries associated with the mortgage division, and the hiring of new lenders in the SBA, Commercial, Private Banking and Indirect divisions of the Bank.
Other operating expenses were $12.0 million in 2011, and $3.0 million or 33.2% higher than 2010 as a result higher legal expenses related to ongoing legal actions, higher other losses related to the establishment of certain mortgage lending reserves, underwriting fee expense related to increased mortgage lending activity, higher other insurance expense related to certain expanded coverage limits, higher miscellaneous tax expense, and higher credit reports expense related to increased mortgage lending activity.
Professional and other services expense increased $900,000 to $5.7 million, for the year ended December 31, 2011, compared to 2010. The increase was primarily due to higher outside service expense related to increased mortgage activity and associated credit research, internet banking, indirect lending and deposit activity.
Somewhat offsetting these increases was a decrease in FDIC insurance expense of $953,000 to $2.6 million for the year ended December 31, 2011, compared to 2010 as a result of a reduction in the FDIC assessment rate and base.
Provision for Income Taxes
The provision for income taxes expense for 2011 and 2010 was $5.1 million and $4.4 million, respectively, with effective tax rates of 31.1% and 30.3%, respectively. Management has reviewed all evidence, both positive and negative, and concluded that a valuation allowance against the deferred tax asset is not needed at December 31, 2011.
2010 Compared to 2009
Net Income
Our net income for the year ended December 31, 2010, was $10.1 million or $0.63 and $0.56 for basic and fully diluted earnings per share, respectively. Net loss for the year ended December 31, 2009, was $3.9 million or $0.70 basic and fully diluted loss per share. The $14.0 million increase in net income in 2010 compared to 2009 was due primarily to a $15.4 million decrease in interest expense, as a result of our improved deposit mix and lower cost of deposits. Additionally, there was an $11.7 million decrease in the provision for loan losses as a result of the recent positive economic trends affecting our loan portfolio including improving asset quality and lower average nonperforming assets.
Net Interest Income/Margin
Taxable-equivalent net interest income was $65.1 million in 2010 compared to $52.0 million in 2009, an increase of $13.1 million or 25.2%. Average interest-earning assets in 2010 increased $16.7 million to $1.777 billion, a 0.9% increase when compared to 2009. Average interest-bearing liabilities decreased $8.9 million to $1.560 billion, a 0.6% decrease. The net interest margin increased by 71 basis points to 3.66% in 2010 when compared to 2009. The components of net interest margin are described below.
Taxable-equivalent interest income decreased $2.4 million or 2.4% to $95.6 million during 2010, compared with 2009 as a result of a 19 basis point decrease in the yield on interest-earning assets somewhat offset by the net growth of $16.7 million or 0.9% in average interest-earning assets. The average balance of loans outstanding in 2010, increased $29.4 million or 2.0% to $1.481 billion when compared to 2009. The yield on average loans outstanding decreased 10 basis points to 5.90% when compared to 2009, in large part due to decreasing yields on the consumer loan portfolio, consisting primarily of indirect automobile loans. The decrease in yield was due to changes in market interest rates. The average balance of investment securities decreased $22.0 million due to increased maturities and calls. Average interest-bearing deposits increased $19.6 million to $74.8 million and Federal funds sold decreased $10.4 million or 94.4% to $613,000.
Interest expense in 2010 decreased $15.4 million or 33.6% to $30.6 million as a result of a $8.9 million or 0.6% decrease in average interest-bearing liability balances and a 97 basis point decrease in the cost of interest-bearing liabilities due to managements efforts to lower cost of funds by decreasing rates paid on deposits and to replace higher cost certificates of deposit with lower cost core deposits. Average total interest-bearing deposits decreased $6.4 million or 0.5% to $1.393 billion during 2010, compared to 2009, while average borrowings decreased $2.5 million or 1.5% to $166.8 million. The decrease in average total interest-bearing deposits was primarily due to a decrease of $195.9 million in time deposits somewhat offset by an increase in demand accounts and savings deposits.
34
Provision for Loan Losses
The provision for loan losses was $17.1 million in 2010 and $28.8 million in 2009. Net charge-offs were $19.1 million in 2010, compared to $32.4 million in 2009. The decrease in the provision in 2010 compared to 2009 was primarily due to moderating asset quality, reductions in the level of average nonperforming assets, an increase in SBA loans of which a portion of each loan is guaranteed by the SBA, and a general increase in credit quality for newly originated loans. In 2010, credit conditions improved with significant reductions in loans charged-off and delinquent loan percentages. Average nonperforming assets were $87.4 million for the year ended December 31, 2010, compared to $113.1 million for the same period in 2009, a decrease of $25.7 million or 22.7%.
The allowance for loan losses as a percentage of loans outstanding at the end of 2010, and 2009 was 2.00% and 2.33%, respectively. The allowance for loan losses as a percentage of loans decreased 33 basis points in 2010 in response to the stabilizing economy and the associated positive impact on consumer loans.
Noninterest Income
Noninterest income for 2010, was $42.9 million compared to $34.0 million in 2009, a 26.3% increase. This increase was primarily due to an increase in revenues from mortgage banking, SBA lending and other operating income, somewhat offset by a decrease in securities gains, as described below.
Income from mortgage banking activities increased $9.5 million to $24.5 million during 2010, compared to 2009. In 2009, management made the strategic decision to expand the mortgage banking operation by hiring 58 former employees of an Atlanta based mortgage company which had closed down operations. During 2010, we continued to hire employees for our mortgage operation. As a result of this expansion and favorable mortgage interest rates, the Bank originated approximately $1.245 billion in mortgage loans during 2010, compared to approximately $846 million in 2009, and $20 million in 2008. Origination fee income in 2010, was $4.9 million compared to $3.7 million in 2009. Gain on loans sold increased from $7.1 million in 2009, to $14.9 million in 2010. In addition, on January 1, 2009, the Bank elected under ASC 825-10-25 to value its loans held-for-sale at fair value. This valuation along with the mark to market on the derivatives associated with interest rate lock commitments and related hedges resulted in the recognition of a mark to market gain of $2.3 million during 2010 compared to $2.0 million in 2009.
Income from SBA lending activities which includes gains from the sale of SBA loans and ancillary fees on loans sold with servicing retained, totaled $2.4 million for 2010, compared to $1.1 million for 2009. The increase was due to higher sales and better margins in 2010 as a result of a more active secondary market. Loans sold increased from $16.7 million in 2009, to $24.5 million in 2010. The premium on loans sold increased 65% in 2010, compared to 2009.
Other operating income increased $782,000 to $1.5 million in 2010, compared to 2009 because of higher gains on sale of ORE and higher ORE lease income. Gains on sale of ORE increased because of more favorable gains on the sales of foreclosed properties. ORE lease income increased as the Bank was able to lease more properties held in other real estate.
Securities gain income decreased $3.0 million to $2.3 million in 2010, compared to $5.3 million in 2009. The decrease is a result of the Bank selling fewer securities in 2010 compared to 2009. The Bank sold 16 securities totaling $98 million during 2010, compared to 33 securities totaling $151 million in 2009.
Noninterest Expense
Noninterest expense during 2010, increased $11.4 million or 17.7% to $76.0 million when compared to 2009, due primarily to increases in salaries and employee benefits related to growth in the mortgage division, and increases in other operating expenses.
Salaries and benefits expense increased $9.3 million or 28.0% in 2010, compared to 2009. The increase was primarily due to the higher commissions and salaries associated with the expansion of the mortgage division during 2010 and the hiring of new lenders in the SBA, Commercial, Private Banking and Indirect divisions of the Bank.
Other operating expenses were $9.0 million in 2010, and $1.9 million or 26.8% higher than 2009 as a result higher underwriting fee expense related to increased mortgage lending activity, higher other insurance expense related to certain expanded coverage limits, higher other losses related to the establishment of certain mortgage lending reserves, higher advertising expenses, higher stationery and printing expenses, and higher credit reports expense related to increased mortgage lending activity.
35
Provision for Income Taxes
The provision for income taxes expense (benefit) for 2010 and 2009 was $4.4 million and $(4.0) million, respectively, with effective tax rates of 30.3% and 50.6%, respectively. The income tax benefit recorded in 2009 was primarily the result of a pretax loss as well as the recognition of state income tax credits earned during the year. Management has reviewed all evidence, both positive and negative, and concluded that a valuation allowance against the deferred tax asset is not needed at December 31, 2010.
Financial Condition
We manage our assets and liabilities to maximize long-term earnings opportunities while maintaining the integrity of our financial position and the quality of earnings. To accomplish this objective, management strives for efficient management of interest rate risk and liquidity needs. The primary objectives of interest-sensitivity management are to minimize the effect of interest rate changes on the net interest margin and to manage the exposure to risk while maintaining net interest income at acceptable levels. Liquidity is provided by our attempt to carefully structure our balance sheet and through unsecured and secured lines of credit with other financial institutions, the Federal Home Loan Bank of Atlanta (the FHLB), and the Federal Reserve Bank of Atlanta (the FRB).
The Asset/Liability Management Committee (ALCO) meets regularly to, among other things, review our interest rate sensitivity positions and our balance sheet mix, monitor our capital position and ratios, review our product offerings and pricing, including rates, fees and charges, monitor our funding needs and sources, and review cash flows to assess our current and projected liquidity.
Market Risk
Our primary market risk exposures are interest rate risk, credit risk and liquidity risk. We have little or no risk related to trading accounts, commodities, or foreign exchange.
Interest rate risk, which encompasses price risk, is the exposure of a banking organizations financial condition and earnings ability to withstand adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk can pose a significant threat to assets, earnings, and capital. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to our success.
ALCO, which includes senior management representatives, monitors and considers methods of managing the rate and sensitivity repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of changes in portfolio values and net interest income with changes in interest rates. The primary purposes of ALCO are to manage our interest rate risk consistent with earnings and liquidity, to effectively invest our capital, and to preserve the value created by our core business operations. Our exposure to interest rate risk compared to established tolerances is reviewed on at least a quarterly basis by our Board of Directors.
Evaluating a financial institutions exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organizations quantitative levels of exposure. When assessing the interest rate risk management process, we seek to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires us to assess the existing and potential future effects of changes in interest rates on our consolidated financial condition, including capital adequacy, earnings, liquidity, and, where appropriate, asset quality.
Interest rate sensitivity analysis, referred to as Equity at Risk, is used to measure our interest rate risk by computing estimated changes in earnings and in the net present value of our cash flows from assets, liabilities, and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net present value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 200, 300, and 400 basis point increases or decreases in market interest rates. In addition, management reviews the impact of various yield curve scenarios on earnings and cash flows.
We utilize a statistical research firm specializing in the banking industry to provide various quarterly analyses and special analyses, as requested, related to our current and projected financial performance, including rate shock analyses. Data sources for this and other analyses include quarterly FDIC Call Reports and the Federal Reserve Y-9C, management assumptions, statistical loan portfolio information, industry norms and financial markets data. For purposes of evaluating rate shock, rate change induced sensitivity tables are used in determining the timing and volume of repayment, prepayment, and early withdrawals.
36
Earnings and fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Assumptions have been made as to appropriate discount rates, prepayment speeds, expected cash flows, and other variables. Changes in assumptions significantly affect the estimates and, as such, the derived earnings and fair value may not be indicative of the negotiable value in an actual sale or comparable to that reported by other financial institutions. In addition, the fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business. The tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Our policy states that a negative change in net present value (equity at risk) as a result of an immediate and sustained 200 basis point increase or decrease in interest rates should not exceed the lesser of 2% of total assets or 15% of total regulatory capital. It also states that a similar increase or decrease in interest rates should not negatively impact net interest income or net income by more than 5% or 15%, respectively.
The following schedule reflects an analysis of our assumed market value risk and earnings risk inherent in our interest rate sensitive instruments related to immediate and sustained interest rate variances of 200 basis points, both above and below current levels (rate shock analysis). It also reflects the estimated effects on net interest income and net income over a one-year period and the estimated effects on net present value of our assets, liabilities, and off-balance sheet items as a result of an immediate and sustained increase or decrease of 200 basis points in market rates of interest as of December 31, 2011 and 2010:
Rate Shock Analysis
December 31, 2011 | December 31, 2010 | |||||||||||||||
Market Rates of Interest |
+200 Basis Points |
-200 Basis Points |
+200 Basis Points |
-200 Basis Points |
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(Dollars in thousands) | ||||||||||||||||
Change in net present value |
$ | (15,633 | ) | $ | 42,191 | $ | 4,791 | $ | 23,999 | |||||||
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Change as a percent of total assets |
(0.70 | )% | 1.89 | % | 0.25 | % | 1.24 | % | ||||||||
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Change as a percent of regulatory equity |
(6.74 | )% | 18.19 | % | 2.27 | % | 11.36 | % | ||||||||
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Percent change in net interest income |
1.54 | % | (12.47 | )% | 2.82 | % | (7.68 | )% | ||||||||
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Percent change in net income |
(1.60 | )% | (30.59 | )% | 10.52 | % | (28.59 | )% | ||||||||
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The rate shock analysis at December 31, 2011, indicated that the effects of an immediate and sustained increase of 200 basis points in market rates of interest would fall within policy parameters and approved tolerances for equity at risk, net interest income and net income. The effect of an immediate and sustained decrease of 200 basis points in market rates would fall outside of policy parameters for net interest income and net income. Short-term market rates have dropped to historically low levels so that an immediate and sustained decrease of 200 basis points is highly doubtful.
Rate shock analysis provides only a limited, point in time view of interest rate sensitivity. The gap analysis also does not reflect factors such as the magnitude (versus the timing) of future interest rate changes and asset prepayments. The actual impact of interest rate changes upon earnings and net present value may differ from that implied by any static rate shock or gap measurement. In addition, net interest income and net present value under various future interest rate scenarios are affected by multiple other factors not embodied in a static rate shock or gap analysis, including competition, changes in the shape of the Treasury yield curve, divergent movement among various interest rate indices, and the speed with which interest rates change.
Interest Rate Sensitivity
The major elements used to manage interest rate risk include the mix of fixed and variable rate assets and liabilities and the maturity and repricing patterns of these assets and liabilities. It is our policy not to invest in derivatives outside of our mortgage hedging process. We perform a quarterly review of assets and liabilities that reprice and the time bands within which the repricing occurs. Balances generally are reported in the time band that corresponds to the instruments next repricing date or contractual maturity, whichever occurs first. However, fixed rate indirect automobile loans, mortgage backed securities, and residential mortgage loans are primarily included based on scheduled payments with a prepayment factor incorporated. Through such analyses, we monitor and manage our interest sensitivity gap to minimize the negative effects of changing interest rates.
The interest rate sensitivity structure within our balance sheet at December 31, 2011, indicated a cumulative net interest sensitivity asset gap of 11.84% when projecting forward six months. When projecting out one year, there was a net interest sensitivity asset gap of 9.73%. This information represents a general indication of repricing characteristics over time; however, the sensitivity of certain deposit products may vary during extreme swings in the interest rate cycle (see Market Risk). Since all interest rates and yields do not adjust at the same velocity, the interest rate sensitivity gap is only a general indicator of the potential effects of interest rate changes on net interest income. Our policy states that the cumulative gap at six months and one year should generally not exceed 15% and 10%, respectively. Our cumulative gap at six months and one year both fall within this guideline.
37
The following table illustrates our interest rate sensitivity at December 31, 2011, as well as the cumulative position at December 31, 2011. All amounts are categorized by their actual maturity or repricing date with the exception of non-maturity deposit accounts. As a result of prior experience during periods of rate volatility and managements estimate of future rate sensitivities, we allocate the non-maturity deposit accounts noted below, based on the estimated duration of those deposits.
Interest Rate Sensitivity Analysis
Repricing Within | ||||||||||||||||||||||||||||||||||||
0-30 Days |
31-60 Days |
61-90 Days |
91-120 Days |
121-150 Days |
151-180 Days |
181-365 Days |
Over One Year |
Total | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Interest-Earning Assets: |
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Investment securities |
$ | 12,435 | $ | 3,481 | $ | 11,440 | $ | 20,188 | $ | 2,646 | $ | 2,684 | $ | 27,178 | $ | 197,824 | $ | 277,876 | ||||||||||||||||||
Loans |
400,424 | 52,586 | 53,722 | 41,713 | 47,038 | 42,210 | 256,094 | 730,084 | 1,623,871 | |||||||||||||||||||||||||||
Loans held-for-sale |
74,929 | 38,566 | 11,294 | 1,294 | 1,294 | 3,236 | 3,236 | | 133,849 | |||||||||||||||||||||||||||
Federal funds sold |
2,411 | | | | | | | | 2,411 | |||||||||||||||||||||||||||
Due from banks-interest-earning |
33,967 | | | | | | | | 33,967 | |||||||||||||||||||||||||||
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Total interest - earning assets |
524,166 | 94,633 | 76,456 | 63,195 | 50,978 | 48,130 | 286,508 | 927,908 | 2,071,974 | |||||||||||||||||||||||||||
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Cumulative RSA |
524,166 | 618,799 | 695,255 | 758,450 | 809,428 | 857,558 | 1,144,066 | |||||||||||||||||||||||||||||
Interest-Bearing Liabilities: |
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Demand deposit accounts |
13,479 | 13,479 | 13,479 | 4,493 | 4,493 | 4,493 | 26,959 | 188,713 | 269,588 | |||||||||||||||||||||||||||
Savings and NOW accounts |
32,437 | 32,437 | 32,437 | 10,812 | 10,812 | 10,812 | 64,874 | 194,623 | 389,244 | |||||||||||||||||||||||||||
Money market accounts |
26,348 | 26,348 | 26,348 | 8,783 | 8,783 | 8,783 | 52,696 | 368,873 | 526,962 | |||||||||||||||||||||||||||
Time deposits >$100,000 |
14,507 | 17,491 | 15,104 | 24,961 | 22,091 | 47,811 | 82,593 | 132,792 | 357,350 | |||||||||||||||||||||||||||
Time deposits <$100,000(Incl. BD) |
20,818 | 25,303 | 19,976 | 24,785 | 16,606 | 19,399 | 80,234 | 121,245 | 328,366 | |||||||||||||||||||||||||||
Long-term debt |
| | 25,774 | | | | | 94,253 | 120,027 | |||||||||||||||||||||||||||
Short-term borrowings |
20,080 | 2,525 | 2,104 | 1,619 | 1,245 | 889 | 23,056 | 1,562 | 53,080 | |||||||||||||||||||||||||||
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Total interest - bearing liabilities |
127,669 | 117,583 | 135,222 | 75,453 | 64,030 | 92,187 | 330,412 | $ | 1,102,061 | 2,044,617 | ||||||||||||||||||||||||||
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Cumulative RSL |
127,669 | 245,252 | 380,474 | 455,927 | 519,957 | 612,144 | 942,556 | |||||||||||||||||||||||||||||
Interest-sensitivity gap |
$ | 396,497 | $ | (22,950 | ) | $ | (58,766 | ) | $ | (12,258 | ) | $ | (13,052 | ) | $ | (44,057 | ) | $ | (43,904 | ) | $ | (174,153 | ) | $ | 27,357 | |||||||||||
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Cumulative |
$ | 396,497 | $ | 373,547 | $ | 314,781 | $ | 302,523 | $ | 289,471 | $ | 245,414 | $ | 201,510 | $ | 27,357 | ||||||||||||||||||||
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Ratio of cumulative gap to total interest-earning assets |
19.14 | % | 18.03 | % | 15.19 | % | 14.60 | % | 13.97 | % | 11.84 | % | 9.73 | % | 1.32 | % | ||||||||||||||||||||
Ratio of interest sensitive assets to interest sensitive liabilities |
410.57 | % | 80.48 | % | 56.54 | % | 83.75 | % | 79.62 | % | 52.21 | % | 86.71 | % | 84.20 | % |
Liquidity
Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. Management measures the liquidity position by giving consideration to both on-balance sheet and off-balance sheet sources of and demands for funds on a daily and weekly basis.
Management seeks to maintain a stable net liquidity position while optimizing operating results, as reflected in net interest income, the net yield on earning assets, and the cost of interest-bearing liabilities in particular. ALCO meets regularly to review the current and projected net liquidity positions and to review actions taken by management to achieve this liquidity objective. While the desired level of liquidity will vary depending on a number of factors, it is the primary goal of Fidelity to maintain a sufficient level of liquidity in both normal operating conditions and in periods of market or industry stress.
Sources of liquidity include cash and cash equivalents, net of Federal requirements to maintain reserves against deposit liabilities; investment securities eligible for sale or pledging to secure borrowings from dealers and customers pursuant to securities sold under agreements to repurchase (repurchase agreements); loan repayments; loan sales; deposits and certain interest-sensitive deposits; brokered deposits; a collateralized contingent line of credit at the FRB Discount Window; a collateralized line of credit from the FHLB; and, borrowings under unsecured overnight Federal funds lines available from correspondent banks. The principal demands for liquidity are new loans, anticipated fundings under credit commitments to customers, and deposit withdrawals.
The Company has limited liquidity, and it relies primarily on interest and dividends from subsidiaries equity, subordinated debt, and trust preferred securities, interest income, management fees, and dividends from the Bank as sources of liquidity. Interest and dividends from subsidiaries ordinarily provide a source of liquidity to a bank holding company. The Bank pays interest to Fidelity on the Banks subordinated debt and its short-term investments in the Bank and cash dividends on its preferred stock and common stock. Under the regulations of the GDBF, bank dividends may not exceed 50% of the prior years net earnings without approval from the GDBF. If dividends received from the Bank were reduced or eliminated, our liquidity would be adversely affected. The Banks net liquid asset ratio, defined as Federal funds sold, investments maturing in 30 days, unpledged securities, available unsecured Federal funds lines of credit, FHLB borrowing capacity and available brokered certificates of deposit divided by total assets increased from 16.1% at December 31, 2010, to 21.0% at December 31, 2011. The increase is due to a higher level of free securities due to growth in the investment portfolio.
38
In addition to cash and cash equivalents and the availability of brokered deposits, as of December 31, 2011, we had the following sources of available unused liquidity:
December 31, 2011 | ||||
(In thousands) | ||||
Unpledged securities |
$ | 90,000 | ||
FHLB advances |
8,000 | |||
FRB lines |
285,000 | |||
Unsecured Federal funds lines |
62,000 | |||
Additional FRB line based on eligible but unpledged collateral |
357,000 | |||
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Total sources of available unused liquidity |
$ | 802,000 | ||
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Net cash flows from operating activities primarily result from net income adjusted for the following noncash items: the provision for loan losses, depreciation, amortization, and the lower of cost or market adjustments, if any. Net cash flows provided by operating activities in 2011 were positively impacted by proceeds from sales of loans of $1.524 billion and negatively impacted primarily by $1.419 billion in loans originated for resale. Net cash flows used in investing activities were negatively impacted by $213.7 million of cash outflows for purchases of investment securities available-for-sale and $276.0 million related to the increase in the loan portfolio. In addition, the net cash flows used in investing activities were positively impacted by net cash inflows from maturities and calls of investment securities of $86.0 million, and proceeds from the sale of investment securities available-for-sale of $32.8 million. Net cash flows provided by financing activities were positively impacted by increases in transactional accounts of $174.6 million, and an increase of $83.7 million in time deposits.
Contractual Obligations and Other Commitments
The following schedule provides a summary of our financial commitments to make future payments, primarily to fund loan and other credit obligations, long-term debt, and rental commitments primarily for the lease of branch facilities, the operations center, the SBA lending office, and the commercial lending, construction lending, and executive offices as of December 31, 2011. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. Loan commitments, lines of credit, and letters of credit are presented at contractual amounts; however, since many of these commitments are revolving commitments as discussed below and many are expected to expire unused or partially used, the total amount of these commitments does not necessarily reflect future cash requirements.
Commitment Maturity or Payment Due by Period | ||||||||||||||||||||
Commitments or Long-term Borrowings |
1 Year or Less |
More Than 1 Year but Less Than 3 Years |
3 Years or More but Less Than 5 Years |
5 Years or More |
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(In thousands) | ||||||||||||||||||||
Home equity line |
$ | 41,835 | $ | 3,494 | $ | 5,859 | $ | 11,625 | $ | 20,857 | ||||||||||
Construction |
30,960 | 30,960 | | | | |||||||||||||||
Acquisition and development |
2,251 | 2,251 | | | | |||||||||||||||
Commercial |
78,392 | 51,444 | 11,927 | 14,756 | 265 | |||||||||||||||
SBA |
11,190 | 603 | 310 | | 10,277 | |||||||||||||||
Mortgage |
116,733 | 116,733 | | | | |||||||||||||||
Letters of Credit |
4,136 | 3,862 | 249 | 25 | | |||||||||||||||
Lines of Credit |
1,538 | 327 | 78 | | 1,133 | |||||||||||||||
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Total financial commitments(1) |
287,035 | 209,674 | 18,423 | 26,406 | 32,532 | |||||||||||||||
Subordinated debt(2) |
67,527 | | | | 67,527 | |||||||||||||||
Long-term borrowings(3) |
52,500 | | 52,500 | | | |||||||||||||||
Rental commitments(4) |
14,676 | 2,717 | 2,520 | 2,649 | 6,790 | |||||||||||||||
Purchase obligations(5) |
4,369 | 1,455 | 1,292 | 1,622 | | |||||||||||||||
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Total commitments and long-term borrowings |
$ | 426,107 | $ | 213,846 | $ | 74,735 | $ | 30,677 | $ | 106,849 | ||||||||||
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(1) | Financial commitments include both secured and unsecured obligations to fund. Certain residential construction and acquisition and development commitments relate to revolving commitments whereby payments are received as individual homes or parcels are sold; therefore, the outstanding balances at any one-time will be less than the total commitment. Construction loan commitments in excess of one year have provisions to convert to term loans at the end of the construction period. |
(2) | Subordinated debt is comprised of five trust preferred security issuances. We have no obligations related to the trust preferred security holders other than to remit periodic interest payments and to remit principal and interest due at maturity. Each trust preferred security provides us the opportunity to prepay the securities at specified dates from inception, the fixed rate issues with declining premiums based on the time outstanding or at par after designated periods for all issues. |
(3) | All long-term borrowings are collateralized with investment grade securities or with pledged real estate loans. |
(4) | Leases and other rental agreements typically have renewal options either at predetermined rates or market rates on renewal. |
(5) | Purchase obligations include significant contractual obligations under legally enforceable contracts with contract terms that are both fixed and determinable with initial terms greater than one year. The majority of these amounts are primarily for services, including core processing systems and telecommunications maintenance. |
39
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers, and to reduce our own exposure to fluctuations in interest rates. These financial instruments, which include commitments to extend credit and letters of credit, involve to varying degrees elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. The contract or notional amounts of these instruments reflect the extent of involvement we have in particular classes of financial instruments.
Our exposure to credit loss, in the event of nonperformance by customers for commitments to extend credit and letters of credit, is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for recorded loans. Loan commitments and other off-balance sheet exposures are evaluated by the Credit Review department quarterly and reserves are provided for risk as deemed appropriate.
Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the agreement. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Thus, we will deny funding a commitment if the borrowers financial condition deteriorates during the commitment period, such that the customer no longer meets the pre-established conditions of lending. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. We evaluate each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on managements credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby and import letters of credit are commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans or lines of credit to customers. We hold collateral supporting those commitments as deemed necessary.
Loans
During 2011, total loans outstanding, which included loans held-for-sale, increased $144.5 million or 9.0% to $1.758 billion when compared to 2010. The Banks total loan production increased to $2.492 billion in 2011, compared to $2.209 billion in 2010. The increase in loans was the result of a $141.0 million or 19.7% increase in consumer installment loans, consisting primarily of indirect automobile loans, to $857.2 million because of the improving economy in the Banks market area. Total commercial loans, including SBA loans, increased $70.8 million or 14.8% to $549.3 million in 2011, compared to 2010 with the growth primarily in the commercial real estate segment of the portfolio as part of the Banks effort to serve credit worthy customers in our local footprint. Construction loans decreased $17.5 million or 15.2% to $97.7 million. Contributing to the decline were continued construction loan charge-offs, foreclosures and payoffs, which more than offset loan production. In the fourth quarter of 2011, Fidelity acquired Decatur First Bank in an FDIC-assisted transaction. This resulted in an increase of $77.5 million in loans at December 31, 2011.
Loans held-for-sale decreased $76.0 million or 36.2% to $133.8 million primarily due to a $64.1 million decrease in mortgage loans held-for-sale to $90.9 million due to increased sales to FNMA and more efficient processing. The balance of the decrease in loans held-for-sale was in SBA loans which decreased $11.9 million to $12.9 million. The fluctuations in the held-for-sale balances are due to loan production levels and demands of loan investors.
40
Loans, by Category
December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans: |
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Commercial loans |
$ | 549,340 | $ | 478,502 | $ | 406,308 | $ | 348,012 | $ | 306,441 | ||||||||||
Construction loans |
97,710 | 115,224 | 154,785 | 245,153 | 282,056 | |||||||||||||||
Consumer loans |
857,175 | 716,185 | 597,782 | 679,330 | 706,188 | |||||||||||||||
Mortgage loans |
119,646 | 93,461 | 130,984 | 115,527 | 93,673 | |||||||||||||||
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Loans |
1,623,871 | 1,403,372 | 1,289,859 | 1,388,022 | 1,388,358 | |||||||||||||||
Allowance for loan losses |
(27,956 | ) | (28,082 | ) | (30,072 | ) | (33,691 | ) | (16,557 | ) | ||||||||||
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Loans, net of allowance |
$ | 1,595,915 | $ | 1,375,290 | $ | 1,259,787 | $ | 1,354,331 | $ | 1,371,801 | ||||||||||
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Total Loans: |
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Loans |
$ | 1,623,871 | $ | 1,403,372 | $ | 1,289,859 | $ | 1,388,022 | $ | 1,388,358 | ||||||||||
Loans Held-for-Sale: |
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Residential mortgage |
90,907 | 155,029 | 80,869 | 967 | 1,412 | |||||||||||||||
Indirect |
30,000 | 30,000 | 30,000 | 15,000 | 38,000 | |||||||||||||||
SBA |
12,942 | 24,869 | 20,362 | 39,873 | 24,243 | |||||||||||||||
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133,849 | 209,898 | 131,231 | 55,840 | 63,655 | ||||||||||||||||
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$ | 1,757,720 | $ | 1,613,270 | $ | 1,421,090 | $ | 1,443,862 | $ | 1,452,013 | |||||||||||
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Loan Maturity and Interest Rate Sensitivity
December 31, 2011 | ||||||||||||||||
Within One Year |
One Through Five Years |
Over Five Years |
Total | |||||||||||||
(In thousands) | ||||||||||||||||
Loan Maturity: |
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Commercial |
$ | 229,342 | $ | 171,191 | $ | 148,807 | $ | 549,340 | ||||||||
Construction |
94,952 | 2,758 | | 97,710 | ||||||||||||
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Total |
$ | 324,294 | $ | 173,949 | $ | 148,807 | $ | 647,050 | ||||||||
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Interest Rate Sensitivity: |
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Selected loans with: |
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Predetermined interest rates: |
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Commercial |
$ | 88,239 | $ | 92,401 | $ | 24,927 | $ | 205,567 | ||||||||
Construction |
12,033 | 1,986 | | 14,019 | ||||||||||||
Floating or adjustable interest rates: |
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Commercial |
141,103 | 78,790 | 123,880 | 343,773 | ||||||||||||
Construction |
82,919 | 772 | | 83,691 | ||||||||||||
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Total |
$ | 324,294 | $ | 173,949 | $ | 148,807 | $ | 647,050 | ||||||||
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Construction Loans
Total construction loan advances remained fairly stable increasing from $22.6 million for the year ended December 31, 2010, to $24.7 million for the year ended December 31, 2011. Payoffs and transfers to ORE decreased from $89.3 million for the year ended December 31, 2010, to $81.9 million for the year ended December 31, 2011.
Credit Quality
Credit quality risk in the loan portfolio provides our highest degree of risk. We manage and control risk in the loan portfolio through adherence to standards established by the Board of Directors and senior management, combined with a commitment to producing quality assets, monitoring loan performance, developing profitable relationships, and meeting the strategic loan quality and growth targets. Our credit policies establish underwriting standards, place limits on exposures, which include concentrations and commitments, and set other limits or standards as deemed necessary and prudent. Also included in the policy, primarily determined by the amount and type of loan, are various approval levels, ranging from the branch or department level to those that are more centralized. We maintain a diversified portfolio intended to spread risk and reduce exposure to economic downturns, which may occur in different segments of the economy or in particular industries. Industry and loan type diversification is reviewed at least quarterly.
41
Management has taken numerous steps to reduce credit risk in the loan portfolio and to strengthen the credit risk management team and processes. A special assets group was organized in 2008 to evaluate potential nonperforming loans, to properly value nonperforming assets, and to facilitate the timely disposition of these assets while minimizing losses to the Company. In addition, all credit policies have been reviewed and revised as necessary, and experienced managers are in place and have strengthened all lending areas and Credit Administration. Because of loan growth, particularly in our consumer indirect lending portfolio, and an increase in net charge-offs, the provision for loan losses for the year ended December 31, 2011, increased to $20.3 million compared to a $17.1 million for the year ended December 31, 2010. Net charge-offs in 2011 increased to $20.5 million compared to $19.1 million during 2010, largely due to an increase in real estate construction charge-offs. Construction loan net charge-offs increased from $11.3 million for the year ended December 31, 2010, to $13.5 million in 2011. This increase is a function of the continued slow housing market in the Atlanta metropolitan area.
The performance of the consumer indirect lending portfolio of loans which at December 31, 2011, made up 48.8% of the total loan portfolio, has also shown improvement in 2011. Indirect loans 60-89 days delinquent decreased 52.1% from December 31, 2010, to December 31, 2011. Nonaccrual indirect loan balances decreased 29.8% from December 31, 2010, to December 31, 2011.
The Credit Review Department (Credit Review) regularly reports to senior management and the Loan and Discount Committee of the Board regarding the credit quality of the loan portfolio, as well as trends in the portfolio and the adequacy of the allowance for loan losses. Credit Review monitors loan concentrations, production, loan growth, as well as loan quality, and independent from the lending departments, reviews risk ratings and tests credits approved for adherence to our lending standards. Finally, Credit Review also performs ongoing, independent reviews of the risk management process and adequacy of loan documentation. The results of its reviews are reported to the Loan and Discount Committee of the Board. The consumer collection function is centralized and automated to ensure timely collection of accounts and consistent management of risks associated with delinquent accounts.
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, troubled debt restructured loans, repossessions, and other real estate. Nonaccrual loans are loans on which the interest accruals have been discontinued when it appears that future collection of principal or interest according to the contractual terms may be doubtful. Troubled debt restructured loans are those loans whose terms have been modified, because of economic or legal reasons related to the debtors financial difficulties and provide a concession to the borrower such as, a reduction in principal, change in terms, or modification of interest rates to below market levels. The Bank had $23.6 million in troubled debt restructured loans at December 31, 2011, of which $10.6 million were accruing loans and $13.0 million are on nonaccrual and included in nonperforming assets below. Repossessions include vehicles and other personal property that have been repossessed as a result of payment defaults on indirect automobile loans and commercial loans.
Nonperforming Assets
December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Nonaccrual loans-legacy |
$ | 60,413 | $ | 76,545 | $ | 69,743 | $ | 98,151 | $ | 14,371 | ||||||||||
Nonaccrual loansFDIC-assisted transactions |
6,272 | | | | | |||||||||||||||
Repossessions |
1,423 | 1,119 | 1,393 | 2,016 | 2,512 | |||||||||||||||
Other real estatelegacy |
21,058 | 20,525 | 21,780 | 15,063 | 7,308 | |||||||||||||||
Other real estateFDIC-assisted transaction |
9,468 | | | | | |||||||||||||||
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Total nonperforming assets |
$ | 98,634 | $ | 98,189 | $ | 92,916 | $ | 115,230 | $ | 24,191 | ||||||||||
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Loans past due 90 days or more and still accruing |
$ | 116 | $ | | $ | | $ | | $ | 23 | ||||||||||
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Ratio of loans past due 90 days or more and still accruing to total loans |
0.01 | % | | % | | % | | % | | % | ||||||||||
Ratio of nonperforming assets to total loans, repossessions and ORE |
5.51 | 6.01 | 6.43 | 7.89 | 1.65 | |||||||||||||||
The increase in nonperforming assets from December 31, 2010, to December 31, 2011, was a result of an increase in ORE. ORE increased primarily due to the FDIC-assisted acquisition of Decatur First Bank in the fourth quarter of 2011. At December 31, 2011, the ORE which is related to Decatur First Bank totaled $9.5 million. Management believes it has been proactive in charging down and charging off these nonperforming assets as appropriate. Managements assessment of the overall loan portfolio is that loan quality and performance have stabilized. Management is being aggressive in evaluating credit relationships and proactive in addressing problems.
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When a loan is classified as nonaccrual, to the extent collection is in question, previously accrued interest is reversed and interest income is reduced by the interest accrued in the current year. If any portion of the accrued interest was accrued in a previous period, accrued interest is reduced and a charge for that amount is made to the allowance for loan losses. For 2011, the gross amount of interest income that would have been recorded on nonaccrual loans, if all such loans had been accruing interest at the original contract rate, was approximately $3.6 million compared to $4.4 million and $3.4 million during 2010 and 2009, respectively. For additional information on nonaccrual loans see Critical Accounting PoliciesAllowance for Loan Losses.
Allowance for Loan Losses
As discussed in Critical Accounting PoliciesAllowance for Loan Losses, the allowance for loan losses is established and maintained through provisions charged to operations. Such provisions are based on managements evaluation of the loan portfolio including current economic conditions, loan portfolio concentrations, the economic outlook, past loan loss experience, adequacy of underlying collateral, and such other factors which, in managements judgment, deserve consideration in estimating loan losses. Loans are charged off when, in the opinion of management, such loans are deemed to be uncollectible. Subsequently, recoveries are added to the allowance.
For all loan categories, historical loan loss experience, adjusted for changes in the risk characteristics of each loan category, current trends, and other factors, is used to determine the level of allowance required. Additional amounts are allocated based on the possible losses of individual impaired loans and the effect of economic conditions on both individual loans and loan categories. Since the allocation is based on estimates and subjective judgment, it is not necessarily indicative of the specific amounts of losses that may ultimately occur.
In determining the allocated allowance, all portfolios are treated as homogenous pools. The allowance for loan losses for the homogenous pools is allocated to loan types based on historical net charge-off rates adjusted for any current changes in these trends. Within the commercial, commercial real estate, and business banking portfolios, every nonperforming loan and loans having greater than normal risk characteristics are not treated as homogenous pools and are individually reviewed for a specific allocation. The specific allowance for these individually reviewed loans is based on a specific loan impairment analysis.
In determining the appropriate level for the allowance, management ensures that the overall allowance appropriately reflects a margin for the imprecision inherent in most estimates of the range of probable credit losses. This additional allowance, if any, is reflected in the unallocated portion of the allowance.
At December 31, 2011, the allowance for loan losses was $28.0 million, or 1.72% of loans compared to $28.1 million, or 2.00% of loans at December 31, 2010. Excluding the Decatur First loan portfolio, the allowance for loan losses as a percentage of loans would be 1.81%. Net charge-offs as a percent of average loans outstanding was 1.38% in 2011 compared to 1.44% for 2010.
The table below presents the allocated loan loss reserves by loan type as of December 31, 2011 and 2010.
December 31, | Increase (Decrease) |
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2011 | 2010 | |||||||||||
(In thousands) | ||||||||||||
Commercial |
$ | 9,183 | $ | 7,532 | $ | 1,651 | ||||||
Construction |
8,262 | 9,286 | (1,024 | ) | ||||||||
Consumer |
6,040 | 7,598 | (1,558 | ) | ||||||||
Mortgage |
2,535 | 2,570 | (35 | ) | ||||||||
Unallocated |
1,936 | 1,096 | 840 | |||||||||
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$ | 27,956 | $ | 28,082 | $ | (126 | ) | ||||||
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The allocated allowance for real estate construction loans decreased $1.0 million to $8.3 million at December 31, 2011, when compared to 2010, primarily due to reduced loans outstanding. Total construction loans decreased $19.4 million during 2011, to $95.8 million compared to $115.2 million at the end of 2010. The allowance allocated to indirect automobile loans decreased $1.6 million or 20.5% to $6.0 million from $7.6 million at the end of 2010. The decrease is primarily the result of positive trends in asset quality indicators somewhat offset by an increase in loans outstanding. The allowance allocated to commercial loans increased $1.7 million during 2011, to $9.2 million compared to $7.5 million at the end of 2010. The increase is primarily related to an increase in loan outstandings and historical charge-offs.
The unallocated allowance increased $840,000 to $1.9 million at December 31, 2011, compared to year-end 2010 based on managements assessment of losses inherent in the loan portfolio and not reflected in specific allocations. See Provisions for Loan Losses.
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The Bank does not originate or portfolio any option ARM loans where borrowers have the ability to make payments which do not cover the interest due plus principal amortization. In addition, the Bank does not portfolio high loan-to-value ratio mortgages, interest only residential mortgage loans, subprime loans or loans with initial teaser rates. There are no significant geographic concentrations of loans within our markets.
Allocation of the Allowance for Loan Losses
December 31, 2011 | December 31, 2010 | December 31, 2009 | ||||||||||||||||||||||
Allowance | %* | Allowance | %* | Allowance | %* | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial(1) |
$ | 9,183 | 33.83 | % | $ | 7,532 | 34.10 | % | $ | 4,608 | 31.50 | % | ||||||||||||
Real estateconstruction |
8,262 | 6.02 | 9,286 | 8.21 | 11,822 | 12.00 | ||||||||||||||||||
Real estatemortgageresidential |
2,535 | 7.37 | 2,570 | 6.66 | 1,346 | 10.15 | ||||||||||||||||||
Consumer installment |
6,040 | 52.78 | 7,598 | 51.03 | 10,994 | 46.35 | ||||||||||||||||||
Unallocated |
1,936 | | 1,096 | | 1,302 | | ||||||||||||||||||
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Total |
$ | 27,956 | 100.00 | % | $ | 28,082 | 100.00 | % | $ | 30,072 | 100.00 | % | ||||||||||||
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December 31, 2008 | December 31, 2007 | |||||||||||||||
Allowance | %* | Allowance | %* | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial(1) |
$ | 5,587 | 25.07 | % | $ | 4,228 | 22.07 | % | ||||||||
Real estateconstruction |
11,042 | 17.66 | 2,776 | 20.32 | ||||||||||||
Real estatemortgageresidential |
599 | 8.32 | 562 | 6.75 | ||||||||||||
Consumer installment |
15,364 | 48.95 | 8,196 | 50.86 | ||||||||||||
Unallocated |
1,099 | | 795 | | ||||||||||||
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Total |
$ | 33,691 | 100.00 | % | $ | 16,557 | 100.00 | % | ||||||||
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* | Percentage of respective loan type to loans. |
(1) | Includes allowance allocated for real estatemortgagecommercial loans and SBA loans. |
Investment Securities
The levels of short-term investments reflect our strategy of maximizing portfolio yields within overall asset and liability management parameters while providing for pledging and liquidity needs. Investment securities other than the investment in FHLB stock, on an amortized cost basis totaled $264 million and $175 million at December 31, 2011, and 2010, respectively. The increase of $89 million in investments at December 31, 2011, compared to December 31, 2010, was attributable to managements decision to better position the portfolio for future changes in interest rates and execute cash flow and capital risk rating strategies.
In 2011, the Company made several investment purchases and sales in an effort to position the portfolio should overall interest rates rise, to provide for liquidity needs as the loan portfolio began to grow, and to improve the risk based capital requirement profile of the investment portfolio. The Company sold five mortgage backed securities with an amortized cost basis of $32 million. The Company purchased $79 million in GNMA mortgage backed securities and $93 million in FHLB callable debt. In addition, the Bank purchased the investment portfolio from Decatur First Bank in an FDIC-assisted transaction, which totaled $42 million at December 31, 2011, and consisted primarily of agency mortgage-backed securities.
Decreasing the size of the investment portfolio were principal paydowns on mortgage-backed securities of $29 million, and $64 million in calls on FHLB and FNMA securities.
The estimated weighted average life of the securities portfolio was 4.07 years at December 31, 2011, compared to 6.0 years at December 31, 2010. At December 31, 2011, approximately $255 million based on the amortized cost of investment securities were classified as available-for-sale, compared to $161 million based on the amortized cost at December 31, 2010. The net unrealized gain on these securities available-for-sale at December 31, 2011, was $6.0 million before taxes, compared to a net unrealized gain of $738,000 before taxes at December 31, 2010.
At December 31, 2011 and 2010, we classified all but $6.0 million and $14.1 million, respectively, of our investment securities as available-for-sale. We maintain a relatively high percentage of our investment portfolio as available-for-sale for possible liquidity needs related primarily to loan production, while held-to-maturity securities are primarily utilized for pledging as collateral for public deposits and other borrowings.
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Distribution of Investment Securities
December 31, | ||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
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(In thousands) | ||||||||||||||||||||||||
U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ | 62,197 | $ | 62,700 | $ | 26,135 | $ | 26,336 | $ | 63,674 | $ | 63,119 | ||||||||||||
Municipal securities |
19,124 | 19,714 | 11,705 | 11,330 | 11,706 | 11,407 | ||||||||||||||||||
Mortgage backed securities-agency |
182,900 | 179,005 | 137,010 | 138,738 | 80,966 | 82,333 | ||||||||||||||||||
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Total |
$ | 264,311 | $ | 261,419 | $ | 174,850 | $ | 176,404 | $ | 156,346 | $ | 156,859 | ||||||||||||
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The following table depicts the maturity distribution of investment securities and average yields as of December 31, 2011 and 2010. All amounts are categorized by their expected repricing date. The expected maturities may differ from the contractual maturities of mortgage backed securities because the mortgage holder of the underlying mortgage loans has the right to prepay their mortgage loans without prepayment penalties. The expected maturities may differ from the contractual maturities of callable agencies and municipal securities because the issuer has the right to redeem the callable security at predetermined prices at specified times prior to maturity.
Maturity Distribution of Investment Securities and Average Yields(1)
December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
Amortized Cost |
Fair Value |
Average Yield(1) |
Amortized Cost |
Fair Value |
Average Yield(1) |
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(Dollars in thousands) | ||||||||||||||||||||||||
Available-for-Sale: |
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U.S. Treasury securities and obligations of U.S. Government corporations and agencies: |
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Due in less than one year |
$ | 21,000 | $ | 21,058 | 2.10 | % | $ | 10,000 | $ | 10,039 | 1.80 | % | ||||||||||||
Due after one year through five years |
37,975 | 38,292 | 1.93 | 16,135 | 16,297 | 2.32 | ||||||||||||||||||
Due five years through ten years |
1,002 | 1,036 | 3.06 | | | |||||||||||||||||||
Due after ten years |
2,220 | 2,313 | 3.21 | | | |||||||||||||||||||
Municipal securities(2) |
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Due in less than one year |
750 | 753 | 6.61 | | | |||||||||||||||||||
Due after one year through five years |
11,013 | 11,302 | 5.41 | 5,592 | 5,482 | 6.01 | ||||||||||||||||||
Due five years through ten years |
5,849 | 6,080 | 6.29 | 6,113 | 5,848 | 6.16 | ||||||||||||||||||
Due after ten years |
1,512 | 1,580 | 6.99 | | | | ||||||||||||||||||
Mortgage backed securities |
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Due in less than one year |
22 | 22 | 1.14 | | | |||||||||||||||||||
Due after one year through five years |
166,085 | 170,829 | 2.76 | 118,958 | 119,962 | 3.44 | ||||||||||||||||||
Due five years through ten years |
8,007 | 8,154 | 3.32 | 3,942 | 3,850 | 3.83 | ||||||||||||||||||
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$ | 255,435 | $ | 261,419 | $ | 160,740 | $ | 161,478 | |||||||||||||||||
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Held-to-Maturity: |
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Mortgage backed securities |
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Due in less than one year |
$ | | $ | | | % | $ | 1,770 | $ | 1,785 | 4.09 | % | ||||||||||||
Due after one year through five years |
8,876 | 9,662 | 4.90 | 12,340 | 13,141 | 4.97 | ||||||||||||||||||
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$ | 8,876 | $ | 9,662 | $ | 14,110 | $ | 14,926 | |||||||||||||||||
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(1) | Weighted average yields are calculated on the basis of the carrying value of the security. |
(2) | Interest income includes the effects of taxable equivalent adjustments of $279,000 in 2011 and $242,000 in 2010. |
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Deposits
Total deposits increased $258.3 million or 16.0% during 2011 to $1.872 billion at December 31, 2011, from $1.613 billion at December 31, 2010, due to an increase in interest-bearing demand deposits of $99.4 million or 23.2% to $527.0 million, an increase in noninterest bearing demand deposits of $84.0 million or 45.2% to $269.6 million and an increase in time deposits $100,000 and over of $82.8 million or 33.6% to $329.2 million. Savings deposits decreased $8.8 million or 2.2% to $389.2 million. The Bank acquired Decatur First Bank in an FDIC-assisted transaction in the fourth quarter of 2011, and at December 31, 2011, had $18.5 million in noninterest-bearing demand deposits, $58.7 million in interest-bearing deposits, $2.2 million in savings, $26.1 million in time deposits $100,000 and over, and $29.1 million in other time deposits resulting from that acquisition. As interest rates stabilized at historically low levels in 2011, many customers fearing locking in low certificate of deposit rates, put their money into money market accounts which pay competitive rates but allow the depositor the flexibility to access the funds when necessary. The increase in noninterest-bearing demand deposits was in part due to an increase in the number of transaction accounts as the result of continued benefits from the transaction account acquisition initiative continued in 2011, and in part due to unlimited deposit insurance coverage available through December 31, 2012, for noninterest-bearing transaction accounts through implementation of the Dodd-Frank Act. Management priced time deposits $100,000 and over very competitively in 2011 to encourage customers to extend maturities allowing the Bank to take advantage of the historically low deposit interest rates.
Average interest-bearing deposits during 2011 increased $106.0 million or 7.6% over 2010 average balances to $1.499 billion. The average balance of savings deposits decreased $7.7 million to $407.9 million, while the average balance of interest-bearing demand deposits increased $94.6 million to $439.2 million, and the average balance of time deposits increased $19.0 million to $652.3 million. Core deposits, obtained from a broad range of customers, and our largest source of funding, consist of all interest-bearing and noninterest-bearing deposits except time deposits over $100,000 and brokered deposits. Brokered deposits decreased from $62.5 million at December 31, 2010, to $19.2 million at December 31, 2011, and are included in other time deposit balances in the consolidated balance sheets. As core deposits grew during 2011, higher cost maturing brokered certificates of deposit were allowed to mature without being replaced. The average balance of interest-bearing core deposits was $1.163 billion and $1.070 billion during 2011 and 2010, respectively.
Noninterest-bearing deposits are comprised of certain business accounts, including correspondent bank accounts and escrow deposits, as well as individual accounts. Average noninterest-bearing demand deposits totaling $219.4 million represented 15.9% of average core deposits in 2011 compared to an average balance of $169.1 million or 13.7% in 2010. The average amount of, and average rate paid on, deposits by category for the periods shown are presented in the following table:
Selected Statistical Information for Deposits