UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number 000-22374

 

Fidelity Southern Corporation

(Exact name of registrant as specified in its charter)

 

 

Registrant’s 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 o 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 o 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 o

 

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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o     Accelerated filer x     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o 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, 2006 (based on the average bid and ask price of the Common Stock as quoted on the NASDAQ National Market System on June 30, 2006), was $107,121,606.

 

At March 12, 2007, there were 9,301,155 shares of Common Stock outstanding, without stated par value.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Annual Report to Shareholders for fiscal year ended December 31, 2006, are incorporated by reference into Part II. Portions of the registrant’s definitive Proxy Statement for the 2007 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

TABLE OF CONTENTS

		Pages
PART I
Item 1. Business			3
Item 1A. Risk Factors			15
Item 1B. Unresolved Staff Comments			22
Item 2. Properties			22
Item 3. Legal Proceedings			23
Item 4. Submission of Matters to a Vote of Security Holders			23
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities			23
Item 6. Selected Financial Data			25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			53
Item 8. Financial Statements and Supplementary Data			54
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			89
Item 9A. Controls and Procedures			89
Item 9B. Other Information			91
PART III
Item 10. Directors and Executive Officers of Registrant			91
Item 11. Executive Compensation			91
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			91
Item 13. Certain Relationships and Related Transactions			91
Item 14. Principal Accountant Fees and Services			91
PART IV
Item 15. Exhibits, Financial Statement Schedules			92
EX-10.(I) DIRECTOR COMPENSATION ARRANGEMENTS
EX-13 ANNUAL REPORT TO SHAREHOLDERS
EX-21 SUBSIDIARIES OF FIDELITY SOUTHERN CORPORATION
EX-23 CONSENT OF ERNST & YOUNG LLP
EX-24 POWERS OF ATTORNEY
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

PART I

Item 1. Business

General

     Fidelity Southern Corporation (“FSC” or “Fidelity”) is a registered 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 first 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 a consumer credit related insurance product. FSC also owns four 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, 2006, we had total assets of $1,649 million, total loans of $1,389 million, total deposits of $1,387 million, and shareholders’ equity of $95 million.

Forward-Looking Statements

     This report on Form 10-K may include 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 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:

(i)		changes in the interest rate environment, which may reduce margins;
(ii)		non-achievement of expected growth;
(iii)		less favorable than anticipated changes in the national and local business environment and securities markets;
(iv)		adverse changes in regulatory requirements affecting us;
(v)		greater competitive pressures among financial institutions in our market;
(vi)		changes in fiscal, monetary, regulatory, and tax policies;
(vii)		changes in political, legislative, and economic conditions;
(viii)		inflation;
(ix)		greater loan losses than historic levels; and

(x)

failure to achieve the revenue increases expected to result from our recent investments in our transaction deposit and lending businesses.

     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.”

Market Area, Products and Services

     The Bank provides an array of financial products and services for business and retail customers primarily through 21 branches in Fulton, Dekalb, Cobb, Clayton, Gwinnett and Rockdale counties in Georgia and the Internet at www.lionbank.com. The Bank’s customers are primarily individuals and small and medium sized businesses located in Georgia. In addition, residential construction and mortgage lending are also conducted through the Bank’s Jacksonville, Florida, loan production office. Indirect automobile lending (the purchase of consumer automobile installment sales contracts from automobile dealers) and Small Business Administration (“SBA”) lending are conducted primarily throughout the Southeast.

     The Bank is primarily engaged in attracting deposits from individuals and businesses and using these deposits and borrowed funds to originate construction and residential real estate loans, commercial loans, commercial loans secured by real estate, SBA loans, direct and indirect automobile loans, residential mortgage and home equity loans, and secured and unsecured installment loans. Internet banking, including on-line bill pay, and Internet cash management services are available to individuals and businesses, respectively. The Bank also provides international trade services. Trust services, credit card loans, 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 grown our assets, deposits, and profits internally by building on our lending products, expanding our deposit products delivery capabilities, opening new branches, and hiring experienced bankers with existing customer relationships in our market.

  Deposits

     The Bank offers a full range of depository accounts and services to both individuals and businesses. As of December 31, 2006, deposits totaled approximately $1,387 million, consisting of (dollars in millions):

Noninterest-bearing demand deposits		$	154
Interest-bearing demand deposits and money market accounts			287
Savings deposits			182
Time deposits ($100,000 or more)			277
Time deposits, including brokered deposits (less than $100,000)			487
Total		$	1,387

     In late 2005, the Bank hired a marketing firm to oversee our efforts to increase the number and volume of our personal and business demand deposit accounts. The program was launched on January 27, 2006, with the goals of building relationships with existing customers, adding new customers, increasing transaction accounts, and helping manage our rising cost of funds. Based on the success of this program during 2006, the Bank intends to continue this marketing program during 2007.

  Lending

     The Bank’s primary lending activities include construction loans, SBA sponsored loans, commercial loans to small and medium sized businesses, consumer loans (primarily indirect automobile loans), and real estate loans. Secured construction loans to homebuilders and developers and residential mortgages are primarily made in the Atlanta, Georgia, and Jacksonville, Florida, metropolitan areas. The loans are generally secured by first and second real estate mortgages. 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 Southeast, are primarily made through the Bank’s SBA loan production office in Conyers, Georgia. The Bank offers direct installment loans to consumers on both a secured and unsecured basis.

     As of December 31, 2006, the Bank had total loans outstanding, including loans held-for-sale, consisting of (dollars in millions):

Commercial, financial and agricultural		$	124	(1)
Real estate – mortgage–commercial			177	(2)
Real estate – construction			306
Real estate – mortgage–residential			92
Consumer installment loans			690	(3)
Total		$	1,389

     The loan categories in the above schedule are based on certain regulatory definitions and classifications. Certain of the following discussions are in part based on the Bank defined loan portfolios and may not conform to the above classifications.

  Consumer Lending

     The Bank’s 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.

   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 sold with servicing retained. At December 31, 2006, we were servicing $268 million in loans we had sold, primarily to other financial institutions.

     During 2006, the Bank produced $516 million of indirect automobile loans, while profitably selling $123 million to third parties with servicing retained. The balances in indirect automobile loans held-for-sale fluctuate from month to month as pools of loans are developed for sale and due to normal monthly principal payments.

  Real Estate Mortgage Lending

     At December 31, 2006, the Bank’s real estate mortgage loans consisted of $177 million in commercial real estate mortgage loans, $45 million in residential mortgage loans, and $47 million in home equity loans and lines of credit.

     The Bank’s 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. In addition, loans are occasionally purchased from independent mortgage companies located in the Southeast. The Bank operates our residential mortgage banking business from four locations in the Atlanta metropolitan area and a loan production office in Jacksonville, Florida. 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 in 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 2006, we originated approximately $18 million in loans, while selling $19 million to third parties. The Bank primarily sells originated residential mortgage loans and processes brokered loans, servicing released, to investors. The Bank does not service mortgage loans for third parties.

  Commercial Real Estate Lending

     The Bank engages in commercial real estate lending through direct originations. The Bank’s commercial real estate portfolio loans are made to small and medium sized businesses to provide 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.

   Real Estate Construction Lending

     The Bank originates real estate construction loans that consist primarily of one-to-four family residential construction and development loans made to builders, developers, and retail mortgage customers. 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 engineering organizations 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 customer’s 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 operates our real estate construction loans through our Atlanta, Georgia, and Jacksonville, Florida, loan production offices.

  Commercial and Industrial Lending

     The Bank originates commercial and industrial loans, which include certain SBA loans that are generally secured by property such as inventory, equipment and finished goods. 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 structure of the collateral varies from loan to loan depending on the financial strength of the borrower, the amount and terms of the loan, and the collateral available to be pledged.

  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, 2006, we owned investment securities totaling $142 million. Investment securities may include obligations of the U.S. Treasury, agencies of the U.S. Government, including mortgage backed securities, and Bank Qualified municipal bonds.

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 review committees and written guidelines for lending activities. In particular, the Officers’ Credit Committee reviews all lending relationships with a total exposure exceeding $250,000. In addition, the Officers’ Credit Committee must approve all commercial loan relationships up to $5 million and all residential construction loan relationships up to $10 million. The Loan and Discount Committee must approve all commercial loan relationships of $5 million and above and all residential construction loan relationships of $10 million and above.

     The Bank’s written guidelines for lending activities require, among other things, that:

	•		secured loans, except indirect loans which are generally secured by the vehicle purchased, be made only to persons and companies which are well-established and have net worth, collateral, and cash flow to support the loan;
	•		real estate loans be secured by real property located primarily in Georgia or Florida;
	•		unsecured loans be made to persons who maintain depository relationships with the Bank and have significant financial strength;
	•		loan renewal requests be reviewed in the same manner as an application for a new loan; and
	•		working capital loans be repaid out of conversion of assets or current earnings of the commercial borrower and that such loans be secured by the assets of the commercial borrower.

     Residential construction loans are made through the use of officer guidance lines, which are approved, when appropriate, by the Bank’s 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 for speculative starts or for pre-sold residential property to specific purchasers.

     Inter-agency guidelines adopted by Federal banking regulators require that financial institutions establish real estate lending policies. The guidelines also establish certain maximum allowable real estate loan-to-value standards. The Bank has adopted policies and standards, which are in compliance with Federal and state regulatory requirements.

   Loan Review and Nonperforming Assets

     The Bank’s Credit Review Department reviews the Bank’s 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. The results of the reviews are presented to the Bank’s 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 management’s evaluation of the loan portfolio, including loan portfolio concentrations, current economic conditions, the economic outlook, past loan loss experience, adequacy of underlying collateral, and such factors which, in management’s judgment, deserve consideration in estimating 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.

   Asset/Liability Management

     The Company’s Asset/Liability Committee (“ALCO”) manages on an overall basis the mix of and terms related to the Company’s assets and liabilities. ALCO attempts to manage asset growth, liquidity, and capital in order to maximize income and reduce interest rate risk. ALCO directs our overall acquisition and allocation of funds and reviews and sets rates on deposits, loans, and fees.

   Investment Portfolio Policy

     The Company’s investment portfolio policy is designed to maximize income consistent with liquidity, collateral needs, asset quality, regulatory constraints, and asset/liability objectives. The policy is reviewed at least annually by the Boards of Directors of the Company 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.

Supervision and Regulation

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

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

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

	•		lending, exchanging, transferring, investing for others or safeguarding money or securities;
	•		insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto;
	•		providing financial, investment, or economic advisory services, including advising an investment company;
	•		issuing or selling instruments representing 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.

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

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

     The Company 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 the Company 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 the Company and the Bank. The Florida Office of Financial Regulation (“FOFR”) does not examine or directly regulate out-of-state holding companies for loan production offices.

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

     The Bank is regularly examined by the 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 Bank’s Florida loan production office 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. A bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled institution.

   Payment of Dividends

     We are 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 the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FDIC has issued a policy statement providing that insured banks should generally only pay dividends out of current operating earnings. In addition to the formal statutes and regulations, regulatory authorities consider the adequacy of each of the Bank’s total capital in relation to its assets, deposits and other such items. Capital adequacy considerations could further limit the availability of dividends to the Bank. At December 31, 2006, net assets available from the Bank to pay dividends without prior approval from regulatory authorities totaled approximately $6.0 million. For 2006, our declared cash dividend payout to common stockholders was $3.0 million.

  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 bank’s capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for the risk.

     In addition, Section 38 of the Federal Deposit Insurance Act implemented the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “1991 Act”). The “prompt corrective action” provisions set forth five regulatory zones in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank’s financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s capital leverage ratio reaches 2%. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.

     The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, 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.

     To continue to conduct its business as currently conducted, the Company and the Bank will need to maintain capital well above the minimum levels. As of December 31, 2006 and 2005, the most recent notifications from the FDIC categorized the Bank as “well capitalized” under current regulations.

  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. Institutions with $1 billion or more in total assets are required to report on their internal control over financial reporting and compliance with designated laws and regulations.

   Commercial Real Estate

     In December, 2006 the federal banking agencies, including the FDIC, issued a final guidance on concentrations in commercial real estate lending, noting that recent 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 requiring elevated examiner scrutiny. The Bank has a concentration in commercial real estate loans in excess of those defined levels. Management believes that our credit processes and procedures meet the risk management standards dictated by this guidance, but it is not yet possible to determine the impact this guidance may have on examiner attitudes with respect to the Bank’s real estate concentrations, which attitudes could effectively limit increases in the Bank’s loan portfolios and require additional credit administration and management costs associated with the portfolios.

  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 there under. Generally, these requirements limit these transactions to a percentage of the bank’s capital and require all of them to be on terms at least as favorable to the bank as transactions with non-affiliates. In addition, a bank may not lend to any affiliate engaged in non-banking activities not permissible for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The FDIC is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a bank. The regulations also set forth various reporting requirements relating to transactions with affiliates.

   Financial Privacy

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

  Anti-Money Laundering Initiatives and the USA Patriot Act

     A major focus of governmental policy on financial institutions in recent years has been aimed at combating terrorist financing. This has generally been accomplished by amending existing anti-money laundering laws and regulations. The USA Patriot Act of 2001 (the “USA Patriot Act”) has imposed significant new compliance and due diligence obligations, creating new crimes and penalties. The United States Treasury Department has 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.

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 and Rockdale counties, Georgia, the Bank’s 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, 2006, we had 374 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 Company’s executive officers, their ages, their positions with the Company at March 8, 2007, and the period during which they have served as executive officers, are as follows:

Name		Age				Since				Position
James B. Miller, Jr.			66				1979			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. Chairman of LionMark Insurance Company, a wholly owned subsidiary, since November 2004.
H. Palmer Proctor, Jr.			39				1996			President of Fidelity since April 2006; Senior Vice President of Fidelity from January 2006 through April 2006; Vice President of Fidelity from 1996 through 2005; President of Fidelity Bank since October 2004 and Senior Vice President of Fidelity Bank from 1996 through September 2004. Secretary/Treasurer of LionMark Insurance Company, a wholly owned subsidiary, since November 2004.
B. Rodrick Marlow			64				1997			Principal Accounting Officer of Fidelity and Chief Financial Officer of Fidelity and Fidelity Bank since June 2006; Controller of Fidelity and Fidelity Bank from 1997 through May 2006.
David Buchanan			49				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 SEC’s 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 site (http://www.lionbank.com) our Annual Report to Shareholders, our Annual Report on Form 10-K, and Quarterly Reports on Form 10-Q, 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.

     We also provide a copy of our Annual Report on Form 10-K, and our Annual Report to Shareholders, via mail, at no cost, upon receipt of a written request to the following address:

Investor Relations
Fidelity Southern Corporation
P. O. Box 105075
Atlanta, Georgia 30348

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

  We could encounter difficulties in maintaining our growth.

     Over the last two years our assets have increased $425 million, or 34.8%, from $1,224 million at December 31, 2004, to $1,649 million at December 31, 2006, primarily due to increases in real estate, construction, commercial and consumer loans. We expect to continue to experience growth in the amount of our assets, the level of our deposits and the scale of our operations. Achieving our growth targets requires us to attract customers that currently bank at other financial institutions in our markets, thereby increasing our share of the market. Our ability to successfully grow will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas, and our ability to manage our growth. While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance that growth opportunities will be available or that we will successfully manage our growth. If we do not manage our growth effectively, we may not be able to achieve our business plan, and our business and prospects could be harmed.

Our construction and land development loans are subject to unique risks that could adversely affect earnings.

     Our construction and land development loan portfolio was $306 million at December 31, 2006, comprising 22.0% of total loans. Construction and land development loans are often riskier than home equity loans or residential mortgage loans to individuals. In the event of a general economic slowdown, they would represent higher risk due to slower sales and reduced cash flow that could impact the borrowers’ ability to repay on a timely basis. In addition, although 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, there has been recent regulatory focus on construction, development and other commercial real estate lending. Recent changes in the federal policies applicable to construction, development or other 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.

  Our recent results may not be indicative of our future operating results.

     We have achieved significant growth in earnings per share in recent years. For example, net income per share from continuing operations (diluted) grew from $.36 for the year ended December 31, 2002, to $1.12 for the year ended December 31, 2006. Our strong performance during this time period was, in part, the result of resolving regulatory issues, reducing our risk profile, improving asset quality, and managing expenses while growing earning assets. In the future, we will not have all of these earnings improvement opportunities and we may not have the benefit of a favorable interest rate environment or a strong residential mortgage market. In addition, the expenses incurred to hire additional lenders, expand the branch network, and increase lower cost deposits through a direct mail advertising program may not generate the anticipated level of increases in net income. Various factors, such as economic conditions, regulatory and legislative considerations, and competition may also impede or restrict our ability to increase earnings at a similar rate.

   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. 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 flat rate environment, could materially adversely affect our net interest spread, asset quality, origination volume and overall profitability.

     Interest rates have until recently been at historically low levels. However, from June 2004 through June 2006, the Federal Reserve increased its target for the Federal funds rate 17 times, from 1.00% to 5.25%. While these short-term market interest rates (which we use as a guide to price our deposits) have increased during this period, longer-term market interest rates (which we use as a guide to price our longer-term loans) have not. This “flattening” of the market yield curve has had a negative impact on our interest rate spread and net interest margin to date. If short-term interest rates begin to rise again, and if rates on our deposits and borrowings continue to reprice upwards faster than the rates on our long-term loans and investments, we would experience further compression of our interest rate spread and net interest margin, which would have a negative impact on our profitability. Income could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

     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.

A significant portion of the Bank’s loan portfolio is secured by real estate loans in the Atlanta, Georgia, metropolitan area and in eastern and northern Florida markets, and a 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. Our real estate mortgage and construction loans, which accounted for 41.4% of our total loan portfolio as of December 31, 2006, are similarly concentrated. 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 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. 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. The residential real estate markets in Atlanta and Jacksonville are currently experiencing a slowdown in sales and some pricing declines.

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 Bank’s 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.

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, and Rockdale 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 inflation, recession, 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.

We are subject to consumer and debtor protection laws.

     We are subject to numerous Federal and state consumer protection laws that impose requirements related to offering and extending credit. Federal and state governmental authorities may enact new laws and amend existing laws to regulate further the consumer credit industry or to reduce finance charges or other fees or charges that can be applicable to consumer loan accounts. Such laws, as well as any new regulations or rulings that may be adopted, may adversely affect our ability to collect on account balances or maintain existing levels of fees and charges with respect to the accounts. Any failure by us to comply with such legal requirements also could adversely affect our ability to collect the full amount of the account balances. Changes in Federal and state bankruptcy and debtor relief laws could adversely affect our results of operations and financial condition if such changes result in, among other things, additional administrative expenses and accounts being written off as uncollectible.

We are subject to extensive governmental regulation.

     As discussed previously, we are subject to extensive supervision and regulation by Federal and state governmental agencies, including the FRB, the GDBF and the FDIC. 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.

We are subject to environmental liability risk associated with lending activities.

     A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

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 may 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 or have announced plans 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. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes, and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. 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.

     Our ability to compete successfully depends on a number of factors, including, among other things:

	•		the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets;
	•		the ability to expand our market position;
	•		the scope, relevance and pricing of products and services offered to meet customer needs and demands;
	•		the rate at which we introduce new products and services relative to our competitors;
	•		customer satisfaction with our level of service; and
	•		industry and general economic trends.

     Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

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 management’s evaluation of the loan portfolio, including loan portfolio concentrations, current economic conditions, the economic outlook, past loan loss experience, adequacy of underlying collateral, and such other factors which, in management’s judgment, deserve consideration in estimating loan losses. Loans are charged off when, in the opinion of management, such loans are deemed to be uncollectible. Subsequent recoveries are added to the allowance.

     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, both within and outside our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review the Bank’s 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, capital, and may have a material adverse effect on our financial condition and results of operations. See “Allowance for Loan Losses” in Item 7 – “Management’s 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.

Our continued pace of 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 continued 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 you of our 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.

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. We are planning two new branches that we intend to open during the second or third

quarter of 2007. There are additional branch locations under consideration. 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 any of our new branches. Finally, we have no assurance that our new branches will be successful, even after they have been established.

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.

New lines of business or new products and services may subject us to additional risks.

     From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services 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. We currently have employment agreements and non-compete agreements with certain of our senior officers.

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.

We may be unable to keep pace with technological change.

     The financial services industry is continually undergoing rapid technological change, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business, financial condition, and results of operations.

We are subject to claims and litigation.

     From time to time, customers and others make claims and take legal action pertaining to the Company’s performance of our responsibilities. Whether customer claims and legal action related to the Company’s 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 you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

	•		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;
	•		news reports relating to trends, concerns and other issues in the financial services industry;
	•		perceptions in the marketplace regarding the Company and/or our competitors;
	•		new technology used, or services offered, by competitors;
	•		significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or our competitors;
	•		failure to integrate acquisitions or realize anticipated benefits from acquisitions;
	•		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 NASDAQ, 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.

An investment in our common stock is not an insured deposit.

     Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Report. As a result, if you acquire our common stock, you may lose some or all of your investment.

Risks Associated with our Industry

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 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 non-performing 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.

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.

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 operations are principally conducted from 65,897 square feet of leased space located at 3 Corporate Square, Atlanta, Georgia. The Bank has 21 branch offices located in Fulton, Dekalb, Cobb, Clayton, Gwinnett, and Rockdale Counties, Georgia, of which 14 are owned and seven are leased. The Company leases a residential construction, residential loan, and indirect automobile loan production office in Jacksonville, Florida, a SBA loan production office in Conyers, 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, 2006, 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. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders during the fourth quarter of 2006.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

      Our market information and number of shareholders of record is incorporated by reference to the information that is contained under the caption “Market Price – Common Stock” in our Annual Report to Shareholders.

Dividends

     We have declared and paid the following dividends per common share in the past two fiscal years:

		Dividend
		2006				2005
Fourth Quarter			.08			$	.07
Third Quarter			.08				.07
Second Quarter			.08				.07
First Quarter			.08				.07

     See Note 12 to the consolidated financial statements in Item 8 for a discussion of the restrictions on our ability to pay dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

     The following table presents information as of December 31, 2006, 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 Option Plans and the 401(k) tax qualified savings plan.

Number of Securities Remaining

Number of Securities

Available for Future Issuance

to be Issued upon

Weighted Average

Under Equity Compensation

Exercise of

Exercise Price of

Plans (Excluding Securities

Plan Category

Outstanding Options

Outstanding Options

Reflected in Column A)

Equity Compensation Plans Approved by Shareholders(1)

51,405

$

14.30

818,840

Equity Compensation Plans Not Approved by Shareholders(2)

N/A

N/A

N/A

Total

51,405

$

14.30

818,840

Shareholder Return Performance Graph

     The following graph compares the percentage change in the cumulative five-year shareholder return on Fidelity’s 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, 2001, and all dividends were reinvested.

		Period Ending December 31,
Index		2001				2002				2003				2004				2005				2006
Fidelity Southern Corporation		$	100.00			$	139.20			$	188.87			$	274.57			$	262.96			$	278.16
NASDAQ Composite			100.00				68.76				103.67				113.16				115.57				127.58
SNL NASDAQ Bank Index			100.00				102.85				132.76				152.16				147.52				165.62

Item 6. Selected Financial Data

     The following table contains selected consolidated financial data. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes included in this report.

		SELECTED FINANCIAL DATA
		Years Ended December 31,
		2006				2005				2004				2003(1)				2002(1)
						(Dollars in thousands except per share data)
Interest income		$	97,804			$	74,016			$	59,609			$	56,718			$	57,784
Interest expense			54,275				34,684				23,961				23,838				27,539
Net interest income			43,529				39,332				35,648				32,880				30,245
Provision for loan losses			3,600				2,900				4,800				4,750				6,668
Noninterest income, including securities gains			15,699				14,339				14,641				13,756				19,623
Securities gains, net			—				32				384				331				300
Noninterest expense			40,568				35,001				34,070				36,791				38,648
Income from continuing operations			10,374				10,326				7,632				3,753				3,179
Income from discontinued operations			—				—				—				78				8,216
Net income			10,374				10,326				7,632				3,831				11,395
Dividends declared – common			2,964				2,567				1,799				1,774				1,767
Per Share Data:
Income from continuing operations:
Basic earnings		$	1.12			$	1.13			$	.85			$	.42			$	.36
Diluted earnings			1.12				1.12				.84				.42				.36
Net income:
Basic earnings			1.12				1.13				.85				.43				1.29
Diluted earnings			1.12				1.12				.84				.43				1.28
Book value			10.19				9.39				8.64				8.01				7.99
Dividends declared			.32				.28				.20				.20				.20
Dividend payout ratio			28.57	%			24.86	%			23.56	%			47.27	%			55.57	%
Average common shares outstanding			9,268,132				9,176,771				9,003,626				8,865,059				8,832,309
Profitability Ratios:
Return on average assets			.70	%			.79	%			.66	%			.36	%			.34	%
Return on average shareholders’ equity			11.67				12.59				10.29				5.29				5.10
Net interest margin			3.10				3.17				3.22				3.35				3.43
Efficiency ratio			68.49				65.21				67.75				78.89				77.50
Asset Quality Ratios:
Net charge-offs to average loans			.19	%			.23	%			.29	%			.54	%			.38	%
Allowance to period-end loans			1.05				1.15				1.27				1.25				1.25
Nonperforming assets to total loans and repossessions			.40				.25				.29				.49				.92
Allowance to nonperforming loans and repossessions			2.52	x			4.50	x			5.53	x			3.14	x			2.03	x
Liquidity Ratios:
Total loans to total deposits			100.18	%			100.51	%			97.93	%			93.81	%			87.12	%
Loans to total deposits			95.98				97.79				94.57				89.61				83.21
Average total loans to average earning assets			88.36				86.58				82.85				84.26				85.78
Capital Ratios:
Leverage			8.07	%			8.64	%			8.74	%			9.03	%			8.42	%
Risk-based capital Tier 1			8.54				9.60				9.88				10.33				10.38
Total			10.37				11.97				11.91				12.74				12.55
Average equity to average assets			5.99				6.29				6.38				6.86				6.16
Balance Sheet Data (At End of Period):
Assets		$	1,649,179			$	1,405,703			$	1,223,717			$	1,091,919			$	1,065,727
Earning assets			1,562,736				1,342,335				1,170,535				1,043,543				1,003,950
Total loans			1,389,024				1,129,777				995,289				833,029				789,402
Total deposits			1,386,541				1,124,013				1,016,377				887,979				906,095
Long-term debt			83,908				94,908				70,598				80,925				61,008
Shareholders’ equity			94,647				86,739				78,809				71,126				70,774
Daily Average:
Assets, net of discontinued operations		$	1,483,384			$	1,304,090			$	1,162,651			$	1,034,527			$	937,452
Earning assets			1,415,105				1,247,480				1,114,141				986,485				882,947
Total loans			1,250,386				1,080,025				923,103				831,243				757,430
Total deposits			1,223,428				1,072,695				969,815				865,182				845,619
Long-term debt			94,111				81,817				80,205				46,906				61,360
Shareholders’ equity			88,866				82,002				74,137				70,967				62,317

Item 7. Management’s 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.

Business Overview

     FSC is a bank holding company headquartered in Atlanta, Georgia, and is the parent company of its wholly owned subsidiaries, Fidelity Bank (“the Bank”), LionMark Insurance Company (“LIC”), and four subsidiaries formed to issue trust preferred securities. With over $1.6 billion in assets, the Bank provides an array of personal and electronic financial services including traditional deposit, lending, mortgage, and international trade services to our commercial and retail customers. Internet banking, including on-line bill pay, and Internet cash management services are available to individuals and businesses, respectively. We offer remote item capture deposit services to our commercial customers. Brokerage, credit card, trust, and merchant processing services and products are provided through partnering arrangements with third parties. The Bank currently conducts full-service banking and residential mortgage lending businesses through 21 locations in the metropolitan Atlanta area and an Internet branch at www.lionbank.com. The Bank conducts indirect automobile lending (the purchase of consumer automobile installment sales contracts from automobile dealers) throughout the Southeast. Residential mortgage lending and residential construction lending are conducted through certain of the Bank’s Atlanta offices and from a loan production office in Jacksonville, Florida. SBA lending is conducted throughout the Southeast.

     LIC provides a credit related insurance product to the Bank’s indirect automobile customers through our Atlanta, Georgia, office.

     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. Results of operations are also affected by the provision for loan losses; noninterest income, such as service charges on deposit accounts and fees on other services, income from indirect 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. Beginning in 2004 and continuing until June 2006, the Federal government’s monetary and fiscal policy was marked by a steady pattern of increases to short-term interest rates. Our lending activities are also significantly influenced by the local economic environments in Atlanta, Georgia, and Jacksonville, Florida, including the demand for and supply of commercial and residential properties, competition among lenders, interest rate conditions, and prevailing rates for competing investments and deposit products in these primary market areas.

     Our focus is on building 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.” Fidelity Bank is Atlanta’s Community Bank. We are about building relationships with a locally oriented, community based focus. The Bank provides a broad array of sophisticated products delivered with quality personal service.

     The Bank’s franchise spans six counties in the metropolitan Atlanta market. Atlanta’s economy appears to be generally sound and growing based on economic trends, and we are optimistic regarding growth and profitability opportunities for 2007, although we anticipate some moderation in our rate of loan growth during early 2007, primarily related to a slowdown in residential real estate construction activity.

     Strategic initiatives completed over the past few years were designed to position ourselves to focus on the core banking business while expanding product offerings, reducing product delivery risk, reducing product credit risk, growing noninterest income, improving profitability, and strengthening capital.

     Although managing the net interest margin was a challenge in 2006, we continued to have well balanced substantial loan and deposit growth. In addition, during 2006, we grew shareholder value by growing the core bank and maintaining profits, while focusing on the future by implementing and continuing certain initiatives that are anticipated to contribute to our longer-term value through increasing the Bank’s transaction deposit base and increasing noninterest income. We define our core banking business as that of providing quality financial products, services, and delivery systems at the community banking level to both consumers and small to medium sized businesses.

     We continued our initiative to grow shareholder value by increasing personal and business transaction accounts to expand current customer relationships, add new customers, and increase the number and volume of lower cost transaction account deposits. In 2006, we strengthened our retail banking staff, opened two new branches in Sugarloaf and Conyers and continued market studies to identify several other potential branch sites. We have plans for two more branches in the second or third quarter of 2007. Our Totally Free business and personal checking account program was launched in January 2006, with a full array of new, simplified deposit products. In part, as a result of this initiative, transaction accounts increased 27% at December 31, 2006 compared to December 31, 2005 and the average balance of transaction accounts increased by approximately 9% for the same period.

     Also, the accelerated hiring of lenders, particularly in SBA, commercial, and indirect automobile lending, continued throughout 2006. The expansion of these areas is now in balance with revenues and profits projected for 2007, although as strategic opportunities present themselves, they will be carefully weighed in regard to current resource allocation versus longer-term shareholder value.

     Our focus for 2007 is on balancing growth, expenses, and capital with improved earnings.

Critical Accounting Policies

     Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles and conform to general practices within the financial services industry. Our financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies, or conditions significantly different from certain assumptions, could result in material changes in our consolidated financial position or consolidated results of operations. The more critical accounting and reporting policies include those related to the allowance for loan losses, the capitalization of excess servicing assets and their amortization, loan related revenue recognition, and income taxes. 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 significant accounting policies that are highly dependent on estimates, assumptions, and judgments.

     Allowance for Loan Losses

     The allowance for loan losses is established and maintained through provisions charged to operations. Such provisions are based on management’s evaluation of the loan portfolio, including loan portfolio concentrations, current economic conditions, the economic outlook, past loan loss experience, adequacy of underlying collateral, and such other factors which, in management’s judgment, deserve consideration in estimating loan losses. Loans are charged off when, in the opinion of management, such loans are deemed to be uncollectible. Subsequent recoveries are added to the allowance.

     A formal review of the allowance for loan losses is prepared at least quarterly to assess the probable credit risk inherent in the loan portfolio, including concentrations, and to determine the adequacy of the allowance for loan losses. For purposes of the quarterly management review, the consumer 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 current trends in charge-off rates for each loan type, adjusted for changes in these pools, which includes current information on the payment performance of each loan type. The level of allowance required for each loan type is determined in part based upon historical charge-off experience. Every commercial, commercial real estate, SBA, and construction loan is assigned a risk rating using established credit policy guidelines. A loss allocation factor is determined for each significant loan category based on historical charge-off experience, current trends, the economic outlook, and other factors. 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 allocation for loan losses required to be specifically assigned to these loans. The amounts so determined are then added to or subtracted from the previously allocated allowance by category to determine the required allowance for commercial, commercial real estate, SBA, residential real estate, consumer, and construction loans.

Capitalized Servicing Assets and Liabilities

     Indirect automobile loan pools and certain SBA loans are sold with servicing retained. When the contractually specific servicing fees on loans sold servicing retained exceed the estimated costs to service those loans, a capitalized servicing asset is recognized. When the estimated costs to service loans exceed the contractually specific servicing fees on loans sold servicing retained, a capitalized servicing liability is recognized. Servicing assets and servicing liabilities are amortized over the expected lives of the serviced loans utilizing the interest method. Management makes certain estimates and assumptions related to costs to service varying types of loans and pools of loans, the projected lives of loans and pools of loans sold servicing retained, and discount factors used in calculating the present values of servicing fees projected to be received.

     No less frequently than quarterly, management reviews the status of all loans and pools of loans sold with related capitalized servicing assets to determine if there is any impairment to those assets due to such factors as earlier than estimated repayments or significant prepayments. Any impairment identified in these assets will result in reductions in their carrying values and a corresponding reduction in operating revenues.

Loan Related Revenue Recognition

     Loans are reported at principal amounts outstanding net of deferred fees and costs. Interest income and ancillary fees from loans are a primary source of revenue. Interest income is recognized in a manner that results

in a level yield on principal amounts outstanding. Rate related loan fee income, loan origination, and commitment fees, and certain direct origination costs are deferred and amortized as an adjustment of the yield over the contractual lives of the related loans, taking into consideration assumed prepayments. The accrual of interest is discontinued when, in management’s judgment, it is determined that the collectibility of interest or principal is doubtful.

     For commercial, SBA, construction, and real estate loans, the accrual of interest is discontinued and the loan categorized as nonaccrual when, in management’s opinion, due to deterioration in the financial position or operations of the borrower, the full repayment of principal and interest is not expected, or principal or interest has been in default for a period of 90 days or more, unless the obligation is both well secured and in the process of collection. Commercial, SBA, construction, and real estate secured loans may be returned to accrual status when management expects to collect all principal and interest and the loan has been brought current. Interest received on well collateralized nonaccrual loans is recognized on the cash basis. If the commercial, SBA, construction or real estate secured loan is not well collateralized, payments are applied to reduce principal.

     Consumer loans are placed on nonaccrual upon becoming 90 days past due or sooner if, in the opinion of management, the full repayment of principal and interest is not expected. On consumer loans, any payment received on a loan on which the accrual of interest has been suspended is applied to reduce principal.

     When a well collateralized commercial, SBA, construction, or real estate secured loan is placed on nonaccrual, accrued interest is not reversed and future payments of interest are recognized as interest income when received. For other loans, 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 consolidated Federal income tax returns, as well as tax returns in several states. Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under the liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are recovered or settled. Deferred tax assets are reviewed annually to assess the probability of realization of benefits in future periods or whether valuation allowances are appropriate. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The calculation of the income tax provision is complex and requires the use of judgments and estimates in its determination.

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 Credit Review 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 borrower’s 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 customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s 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.

Financial Overview

     Since our inception, we have pursued managed profitable growth, primarily through internal expansion built on providing quality financial services in selected market areas. During 2006, we experienced significant and well-balanced loan and deposit growth. All loan production areas, except mortgage lending, achieved substantial production as a result of strong demand. The loan portfolio is well diversified among consumer, business, and real estate, and credit quality remains strong. The hiring of lenders, particularly for SBA and indirect automobile lending, continued throughout 2006 and we believe these areas are now in line with our 2007 currently projected revenues and profits.

     Our hiring, marketing and branch expansion initiatives implemented near the end of 2005 and continuing into 2006 have been successful as reflected in our strong loan and deposit growth, improving deposit mix and improvement in both net interest income and noninterest income.

     Net income for 2006 was $10.4 million compared to the $10.3 million earned in 2005. Net income per diluted share was $1.12 for 2006 and 2005. Key factors impacting our financial condition and results of operations for 2006 are summarized below:

	•		Total assets increased $243 million or 17.3% to $1,649 million at the end of 2006 compared to $1,406 million at year end 2005. This increase was primarily due to the 22.9% increase in total loans, partially offset by decreases in Federal funds sold and investment securities.
	•		Transaction accounts increased 27% through our deposit acquisition program.
	•		Net interest income increased $4.2 million or 10.7% over 2005 to $43.5 million as the growth in volume exceeded the negative impact of a declining net interest margin and resulted in greater net interest income. The net interest margin declined seven basis points in 2006 to 3.10% from 3.17% in 2005 resulting from a 116 basis point increase in the cost of funds outpacing the 98 basis point increase in the yield on earning assets.

•

The provision for loan losses for 2006 was $3.6 million compared to $2.9 million in 2005. The increase in the provision was primarily due to increases in outstanding loan balances. Net charge-offs for 2006 were .19% of average loans outstanding compared to .23% for 2005. The allowance for loan losses was 1.05% of outstanding loans and provided a coverage ratio of 304% of nonperforming loans.

     The year ended December 31, 2006, was a year in which we experienced significant growth in loans, deposits, and in quality earning assets. We have positioned ourselves for balancing growth, expenses, and capital with earnings.

Results of Operations

2006

Compared to 2005

     Net Income

          Our net income for the year ended December 31, 2006, was $10.4 million or $1.12 basic and fully diluted earnings per share, respectively. Net income for the year ended December 31, 2005, was $10.3 million or $1.13 basic and $1.12 fully diluted earnings per share.

          The $48,000 increase in net income in 2006 compared to 2005 was largely attributable to increases in net interest income and noninterest income, offset in large part by the planned advertising and promotion costs associated with our transaction acquisition program which began in January 2006 and other increases in costs primarily driven by our Strategic Plan, which included accelerating our focus on strengthening our sales force and culture to increase both quality loan production and transaction deposit growth. Net interest income increased during 2006 compared to 2005 as the growth in volume exceeded the negative impact of a declining net interest margin and resulted in greater net interest income. The average balance of interest-earning assets increased $168 million, resulting in an increase in interest income, offset in part by a seven basis point decline in the net interest margin. Noninterest income increased by $1.4 million or 9.5% to $15.7 million in 2006 compared to 2005 primarily due to the expansion of the SBA lending business, generating an increase in revenues from those lending activities of $1.6 million, offset in part by declines in revenues from mortgage banking activities. Noninterest expense increased $5.6 million or 15.9% in 2006 compared to 2005 primarily due to increases in salaries and employee benefits, advertising and promotion expenses and other operating expenses.

     Net Interest Income/Margin

          Taxable-equivalent net interest income was $43.8 million in 2006 compared to $39.5 million in 2005, an increase of $4.3 million or 11.0%. Average interest-earning assets increased in 2006 to $1,415 million, a 13.4% increase when compared to 2005. Average interest-bearing liabilities increased to $1,256 million, a 14.5% increase. The net interest rate margin decreased by seven basis points to 3.10% in 2006 when compared to 2005.

          Interest income increased $23.8 million or 32.1% to $97.8 million during 2006 compared with 2005 as a result of the net growth of $168 million or 13.4% in average interest-earning assets and a 98 basis point increase in the yield on interest-earning assets. Average interest-earning assets in 2006 grew in all loan categories, as average loan balances grew $170 million. Offsetting this growth was a $1 million decrease in average investment securities balances, as principal payments on mortgage backed securities were utilized to fund higher yielding loan growth. The 104 basis point increase in the yield on interest-earning assets resulted primarily from increases in market rates of interest.

     Interest expense in 2006 increased $19.6 million or 56.5% to $54.3 million as a result of a $159 million or 14.5% growth in average interest-bearing liability balances, coupled with a 116 basis point increase in the cost of interest-bearing liabilities due to increasing prevailing interest rates, and aggressive competition for funds from other financial institutions as the Bank grew deposits to fund significant loan growth. Average total interest-bearing deposits increased $140 million or 14.7% to $1,095 million during 2006 compared to 2005, while average borrowings increased $19.1 million or 13.5% to $161 million. The increase in average total interest-bearing deposits was primarily due to advertised premium yield programs initiated to provide funding for loan growth, including special deposit programs offered as part of the grand openings of the new Sugarloaf and Conyers branches and a direct mail advertising program to increase transaction account balances and increase the total balances of multiple relationship customers.

Average Balances, Interest and Yields

		For the Years Ended December 31,
		2006												2005												2004
		Average				Income/				Yield/				Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate				Balance				Expense				Rate
														(Dollars in thousands)
ASSETS
Interest-Earning Assets:
Loans, net of unearned income(1)(2)
Taxable		$	1,239,437			$	88,884				7.17	%		$	1,073,127			$	65,778				6.13	%		$	915,360			$	50,479				5.51	%
Tax-exempt(3)			10,949				871				7.95				6,898				484				7.02				7,743				553				7.15
Total loans			1,250,386				89,755				7.18				1,080,025				66,262				6.14				923,103				51,032				5.53
Investment securities – taxable			155,955				7,893				5.03				156,917				7,557				4.82				180,045				8,636				4.85
Interest-bearing deposits			1,484				74				5.00				1,033				32				3.12				1,268				15				1.20
Federal funds sold			7,280				360				4.94				9,505				315				3.31				9,725				115				1.18
Total interest-earning assets			1,415,105				98,082				6.93				1,247,480				74,166				5.95				1,114,141				59,798				5.38
Noninterest-Earnings Assets:
Cash and due from banks			22,411												21,775												21,251
Allowance for loan losses			(13,133	)											(12,913	)											(11,116	)
Premises and equipment			15,516												13,539												13,389
Other real estate owned			80												528												457
Other assets			43,405												33,681												24,529
Total assets		$	1,483,384											$	1,304,090											$	1,162,651
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-Bearing Liabilities:
Demand deposits		$	234,871				6,561				2.79			$	225,138				4,044				1.80			$	223,827				3,169				1.42
Savings deposits			177,505				7,328				4.13				153,700				4,575				2.98				118,566				2,069				1.75
Time deposits			683,074				31,462				4.61				576,326				19,329				3.35				515,499				13,559				2.63
Total interest-bearing deposits			1,095,450				45,351				4.14				955,164				27,948				2.93				857,892				18,797				2.19
Federal funds purchased			12,171				637				5.23				6,340				223				3.51				4,327				79				1.80
Securities sold under agreements to repurchase			28,954				928				3.21				28,695				716				2.50				17,844				191				1.07
Other short-term borrowings			25,337				1,058				4.17				24,648				654				2.65				10,931				399				3.65
Subordinated debt			46,908				4,378				9.33				44,790				3,814				8.52				36,598				3,084				8.34
Long-term debt			47,203				1,923				4.07				37,027				1,329				3.59				43,607				1,411				3.24
Total interest-bearing liabilities			1,256,023				54,275				4.32				1,096,664				34,684				3.16				971,199				23,961				2.47
Noninterest-Bearing Liabilities and Shareholders’ Equity:
Demand deposits			127,978												117,531												111,923
Other liabilities			10,517												7,893												5,392
Shareholders’ equity			88,866												82,002												74,137
Total liabilities and shareholders’ equity		$	1,483,384											$	1,304,090											$	1,162,651
Net interest income/spread						$	43,807				2.61							$	39,482				2.79							$	35,837				2.91
Net interest rate margin											3.10												3.17												3.22

Rate/Volume Analysis

		2006 Compared to 2005												2005 Compared to 2004
		Variance Attributed to (1)												Variance Attributed to (1)
		Volume				Rate				Net Change				Volume				Rate				Net Change
										(Dollars in thousands)
Net Loans:
Taxable		$	11,023			$	12,083			$	23,106			$	9,259			$	6,040			$	15,299
Tax-exempt(2)			316				71				387				(59	)			(10	)			(69	)
Investment securities – taxable			(40	)			376				336				(1,094	)			15				(1,079	)
Federal funds sold			(87	)			132				45				(3	)			203				200
Interest-bearing deposits			18				24				42				(3	)			20				17
Total interest-earning assets		$	11,230			$	12,686			$	23,916			$	8,100			$	6,268			$	14,368
Interest-Bearing Deposits:
Demand		$	183			$	2,334			$	2,517			$	19			$	856			$	875
Savings			789				1,964				2,753				745				1,761				2,506
Time			4,012				8,121				12,133				1,731				4,039				5,770
Total interest-bearing deposits			4,984				12,419				17,403				2,495				6,656				9,151
Federal funds purchased			270				144				414				48				96				144
Securities sold under agreements to repurchase			7				205				212				165				360				525
Other short-term borrowings			19				385				404				391				(136	)			255
Subordinated debt			186				378				564				667				63				730
Long-term debt			399				195				594				(209	)			127				(82	)
Total interest-bearing liabilities		$	5,865			$	13,726			$	19,591			$	3,557			$	7,166			$	10,723

  Provision for Loan Losses

     Management’s 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 $3.6 million in 2006, $2.9 million in 2005 and $4.8 million in 2004. Net charge-offs were $2.3 million in 2006 compared to $2.4 million in 2005 and $2.5 million in 2004. The ratio of net charge-offs to average loans outstanding was .19% in 2006 compared to .23% in 2005 and .29% in 2004. The increase in the provision in 2006 compared to 2005 was primarily due to loan portfolio growth.

     The allowance for loan losses as a percentage of loans outstanding at the end of 2006, 2005, and 2004 was 1.05%, 1.15% and 1.27%, respectively.

     For additional information on asset quality, refer to the discussions regarding loans, credit quality, nonperforming assets, and the allowance for loan losses.

Analysis of the Allowance for Loan Losses

		December 31,
		2006				2005				2004				2003				2002
		(Dollars in thousands)
Balance at beginning of year		$	12,643			$	12,174			$	9,920			$	9,404			$	5,405
Charge-offs:
Commercial, financial and agricultural			1				385				384				1,398				340
SBA			67				—				—				—				—
Real estate-construction			—				—				—				—				2
Real estate-mortgage			5				160				454				305				63
Consumer installment			3,616				2,890				2,770				3,145				2,782
Total charge-offs			3,689				3,435				3,608				4,848				3,187
Recoveries:
Commercial, financial and agricultural			505				284				456				82				4
SBA			145				—				—				—				—
Real estate-construction			—				—				—				—				—
Real estate-mortgage			7				41				66				41				3
Consumer installment			733				679				540				491				511
Total recoveries			1,390				1,004				1,062				614				518
Net charge-offs			2,299				2,431				2,546				4,234				2,669
Provision for loan losses			3,600				2,900				4,800				4,750				6,668
Balance at end of year		$	13,944			$	12,643			$	12,174			$	9,920			$	9,404
Allowance for loan losses as a percentage of loans			1.05	%			1.15	%			1.27	%			1.25	%			1.25	%
Ratio of net charge-offs during period to average loans outstanding, net			.19				.23				.29				.54				.38

     The 2006 recoveries noted in the above table primarily relate to loans charged off in years before 2006.

   Noninterest Income

     Noninterest income for 2006 was $15.7 million compared to $14.3 million in 2005, a 9.5% increase. This increase was primarily due to a $1.6 million increase in fee income from the expanded SBA lending business, offset in part by a $570,000 decline in revenue from mortgage banking activities.

     Service charges on deposit accounts increased $148,000 or 3.6% and other fees and charges increased $150,000 or 10.1%, primarily due to the growth in transaction accounts resulting from our deposit acquisition program. These revenues are expected to continue to increase during 2007.

     Income from SBA lending activities for 2006, which includes both gains from the sale of SBA loans including the capitalization of servicing rights and from servicing and ancillary fees on loans sold with servicing retained, totaled $2.1 million compared to $559,000 for 2005, primarily due to a significant expansion of the SBA lending business as a result of the hiring of seasoned lenders, and the increase in SBA loan production.

     Income from indirect lending activities for 2006, which includes gains from the sale of indirect automobile loans, servicing income and ancillary loan fees, increased $141,000 or 3.5% to $4.1 million compared to $4.0 million for 2005. This small increase was due to increased servicing fee income and ancillary loan fees, largely offset by a decline in gains on sales due to a reduced volume of loans sold and the adverse effect of rising interest rates. Indirect automobile loans serviced for others totaled $268 million and $260 million at December 31, 2006 and 2005, respectively, an increase of $8 million or 3.1%. In 2006, indirect automobile loan production was $516 million and increased $63 million or 13.9% when compared to 2005 production due in part to the hiring of several seasoned indirect automobile loan buyers in Tennessee and Florida during 2006. There were sales of $123 million of indirect automobile loans in 2006 compared to sales

of $135 million in 2005. Management is negotiating with several parties interested in purchasing indirect automobile loans and believes the volume of indirect automobile loan sales will increase in 2007. Income from indirect automobile lending activities is an important source of noninterest revenue and is heavily driven by movements in interest rates, competitive pricing, and current loan production, which varies with significant changes in automobile sales and manufacturers’ marketing packages in our markets, which are predominantly Georgia, Florida and Tennessee.

     Revenue from mortgage banking activities in 2006 totaled $676,000 compared to $1.2 million in 2005, a decline of $570,000 or 45.7% due in part to a general decline in the mortgage origination business. The slowdown in the housing sector was a significant economic event in 2006. Nationally, as well as in our markets, housing sales decreased from 2005.

  Noninterest Expense

     Noninterest expense during 2006 increased $5.6 million or 15.9% to $40.6 million when compared to 2005, due primarily to increases in salaries and employee benefits, advertising and promotional and other operating expenses as we expanded our market presence through new locations, expanded advertising and hired additional proven lenders and retail bankers to accelerate growth. Other expense categories increased moderately, primarily due to expansion and growth.

     Salaries and employee benefits increased $3.1 million or 16.4% to $22.3 million in 2006 compared to 2005 due in large part to the addition of seasoned loan production and branch operations staff, significantly expanding the SBA lending department and the opening of the Sugarloaf and Conyers branches during 2006. In addition, we increased the number of indirect automobile lenders and, to some extent, support personnel. The number of full-time equivalent employees at December 31, 2006, was 374 compared to 356 full-time equivalent employees at December 31, 2005. We expect this trend of increasing salaries and employee benefits expenses to continue, but on a more moderate basis, as we intend to continue to expand our market footprint by opening additional branches in the Atlanta metropolitan market and grow the core bank.

     Advertising and promotion expenses increased $1.1 million or 432.8% to $1.3 million in 2006 when compared to 2005. During January 2006, the Bank initiated a deposit acquisition program designed primarily to significantly increase both personal and business interest-bearing and noninterest-bearing transaction accounts and balances. This program continued throughout 2006 and it has generated significant numbers of new accounts and new relationships and substantially increased deposit balances. During 2007 we intend to continue this program and expect advertising and promotion expenses to be comparable to 2006.

     Other operating expenses increased $858,000 or 20.4% to $5.1 million in 2006 when compared to 2005. The increase was primarily due to business development, hiring costs, bank security costs, costs related to growing volumes of accounts and related transaction activity, and amortization expense related to the investment in Georgia low income housing tax credits, for which there was no comparable expense in 2005.

  Provision for Income Taxes

     The provision for income taxes for 2006, 2005, and 2004 was $4.7 million, $5.4 million, and $3.8 million, respectively, with effective tax rates of 31.1%, 34.5%, and 33.2%, respectively. The decline in the effective tax rate during 2006 was in part the result of the purchase of Georgia low income housing tax credits.

2005 Compared to 2004

  Net Income

     Net income for the year ended December 31, 2005, was $10.3 million or $1.13 and $1.12 basic and fully diluted earnings per share, respectively. Net income for the year ended December 31, 2004, was $7.6 million or $.85 and $.84 basic and fully diluted earnings per share, respectively.

     The $2.7 million or 35.3% increase in net income in 2005 compared to 2004 was largely attributable to a $3.7 million or 10.3% increase in net interest income and a significant decline of $1.9 million or 39.6% in the provision for loan losses, offset in part by a $1.0 million or 2.7% increase in noninterest expenses. Net interest income increased during 2005 compared to 2004 as the average balance of interest-earning assets increased $133 million, offset in part by a five basis point decline in the net interest margin. The provision for loan losses during 2005 was significantly less than that for 2004 as most measures of asset quality improved significantly, including reduced net charge-offs during 2005 compared to 2004. Noninterest income declined slightly in 2005 compared to 2004 due primarily to decreases in mortgage banking activities, indirect lending activities, SBA lending activities, service charges on deposit accounts, and reduced securities gains, offset in part by increases in other fees and charges, brokerage activities and increases in the cash surrender value of bank owned life insurance. Noninterest expense increased somewhat in 2005 compared to 2004 primarily due to increases in salaries and employee benefits and professional and other services, offset in part by declines in most other categories of noninterest expense.

   Net Interest Income/Margin

     Taxable-equivalent net interest income was $39.5 million in 2005 compared to $35.8 million in 2004, an increase of $3.6 million or 10.2%. The $14.4 million or 24.2% increase in interest income for 2005 compared to 2004 was attributable to the net growth of $133 million or 12.0% in average interest-earning assets and a 57 basis point increase in the yield on interest-earning assets. The growth in average interest-earning assets in 2005 was driven primarily by growth in all loan categories except loans held-for-sale, as average loan balances grew $157 million, offset in part by a decrease in average investment securities balances, which declined $23 million, as principal payments on mortgage backed securities were utilized to fund higher yielding loan growth. The increase in the yield on interest-earning assets was due to increases in yields on all loan portfolios and the decrease in average balances in lower yielding investment securities. A 61 basis point increase in yields on average loan balances was in large part attributable to a steadily increasing short-term interest rate environment during the second half of 2004 and throughout 2005.

     The $10.7 million or 44.8% increase in interest expense was attributable to a $125 million growth in average interest-bearing liability balances, exacerbated by a 69 basis point increase in the cost of interest-bearing liabilities due to increasing market rates of interest and increasing competition for deposits. Average total interest-bearing deposits increased $97 million or 11.3% to $955 million during 2005 compared to 2004, while average borrowings increased $28 million or 24.9% to $142 million. The increase in average total interest-bearing deposits was due in part to an advertised program to attract time deposits and savings accounts during the first half of 2005.

     Average interest-earning assets increased in 2005 to $1,247 million, a 12.0% increase when compared to 2004. Average interest-bearing liabilities increased to $1,097 million, a 12.9% increase. The net interest rate margin decreased by five basis points to 3.17% in 2005 when compared to 2004.

  Noninterest Income

     Noninterest income for 2005 was $14.3 million compared to $14.6 million in 2004, a 2.1% decrease. Decreases in revenues from service charges on deposit accounts, mortgage banking activities, indirect automobile lending activities, SBA lending activities, and gains on sale of securities were offset in part by

increases in revenues from other fees and charges, brokerage activities, bank owned life insurance, and other revenues.

     In 2005, indirect automobile loan production was $453 million and increased $5 million or 1.2% when compared to 2004 production. Also, sales of indirect automobile loans in 2005 approximated $135 million or a decrease of 8.9% when compared to sales of $148 million in 2004. Indirect automobile loans serviced for others totaled $260 million at December 31, 2005, compared to $233 million serviced at the end of 2004, an increase of 11.9%. Income from indirect automobile lending activities is heavily driven by current loan production and will vary with significant changes in automobile sales and manufacturers’ marketing packages in our markets, which were predominately Georgia and Florida. During the late fall of 2005, Florida was hit with several hurricanes, and automobile manufacturers aggressively promoted sales by offering rebates and lowering loan rates through their captive finance companies. Each of these negatively impacted our fourth quarter loan production compared to prior quarters, although fourth quarter 2005 loan production exceeded that for the same period in 2004. As a result of decreased indirect automobile loans sold with servicing retained and less gain on sales as production was sold into a rising interest rate market, offset in part by higher revenues from an increased balance of indirect automobile loans serviced providing servicing and ancillary fees, revenue from indirect loan activities for 2005 totaled $4.0 million compared to $4.3 million in 2004, a decrease of $326,000 or 7.5%.

     Service charges on deposit accounts declined approximately $395,000 or 8.9% to $4.1 million in 2005 compared to $4.5 million in 2004, primarily due to continuing competitive pressures to reduce fees and charges, because of an improving economy and modified customer behaviors, resulting in fewer insufficient funds charges and other charges, and higher market rates of interest, resulting in greater earnings credits offsetting activity changes on certain business checking accounts.

     Other fees and charges increased $358,000 or 31.5% to $1.5 million as revenues from debit card activities and credit card activities increased. Credit card activities for our customers are provided with branded credit cards issued through an agency relationship.

     Revenue from mortgage banking activities in 2005 totaled $1.2 million compared to $1.9 million in 2004, a decline of $671,000 or 35.0% due to a decline in the volume of residential mortgage loans originated and sold in 2005.

     Revenue from brokerage activities increased 39.0% to $949,000 for the year ended December 31, 2005, compared to $683,000 for 2004 primarily because of increased volume due to improving stock markets and the hiring of additional brokers.

     Revenue from SBA lending activities for 2005 totaled $559,000 compared to $768,000 for 2004, primarily due to decreased SBA loan production and sales, although revenues from this activity increased in the fourth quarter of 2005 as a result of expanding that department substantially late in the third quarter of 2005 through the addition of several productive and seasoned SBA lenders.

     Revenue from bank owned life insurance totaled $946,000 in 2005 and was $367,000 or 63.4% greater than in 2004 due in large part to $10 million in additional bank owned life insurance purchased in the first half of 2005.

     Other revenues increased to $1.1 million in 2005 and were $660,000 or 164.6% greater than other revenues for 2004. This increased revenue was provided primarily by insurance commissions from our insurance agency subsidiary established in 2005 and by a gain of $241,000 from the sale of assets representing additional collateral obtained in 2001 from a loan relationship workout.

  Noninterest Expense

     Noninterest expense during 2005 increased $931,000 or 2.7% to $35.0 million when compared to 2004, due primarily to increases in salaries and employee benefits and professional and other services, offset in part by minimal increases or modest declines in most other expense categories.

     Salaries and employee benefits increased $1.3 million or 7.2% to $19.2 million in 2005 compared to 2004 due in large part to the increase in staff as we expanded SBA lending activities and the branch sales and management team during the second half of 2005, exacerbated by increases in operations and support staff, annual salary increases, and increases in employee benefit costs. The number of full-time equivalent employees at December 31, 2005, was 356 compared to 335 full-time equivalent employees at December 31, 2004.

     Professional and other services expenses increased $508,000 or 21.7% to $2.8 million in 2005 compared to 2004 due to increases in legal fees, consulting and contract services expenses and in audit and accounting fees primarily associated with Sarbanes Oxley compliance.

     Other insurance expenses decreased $408,000 or 52.3% to $372,000 in 2005 when compared to 2004 due to a significant decline in the April 2005 through March 2006 renewal cost as a result of competitive pricing and followed the decline in the prior year annual renewal cost as a result of our improved risk profile resulting from the divestiture of certain lines of business in 2002 and the resolution of regulatory issues in 2003.

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 carefully structuring the 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, review our product offerings and pricing, including rates, fees and charges, monitor our funding needs and sources, and assess our current and projected liquidity.

Market Risk

     Our primary market risk exposures are interest rate risk and credit risk and, to a lesser extent, 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 organization’s 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 institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organization’s 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.

     The Federal Reserve, together with the FDIC and other regulatory agencies, adopted a Joint Agency Policy Statement on Interest Rate Risk, effective June 26, 1996. The policy statement, focusing primarily on the impact of changes in economic value or net present value (equity at risk) as a result of interest rate changes, provides guidance to examiners and bankers on sound practices for managing interest rate risk, which provides a basis for ongoing evaluation of the adequacy of interest rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest rate risk.

     Interest rate sensitivity analysis 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 basis point increase or decrease in market interest rates (equity at risk).

     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, 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.

     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, 2006 and 2005 (dollars in thousands):

Rate Shock Analysis

		December 31, 2006								December 31, 2005
		+200 Basis				-200 Basis				+200 Basis				-200 Basis
Market Rates of Interest		Points				Points				Points				Points
Change in net present value		$	(2,547	)		$	(1,699	)		$	(7,744	)		$	2,881
Change as a percent of total assets			(.15	)%			(.10	)%			(.55	)%			.20	%
Change as a percent of regulatory equity			(1.63	)%			(1.09	)%			(5.28	)%			1.97	%
Percent change in net interest income			.63	%			(1.37	)%			2.03	%			(3.02	)%
Percent change in net income			1.38	%			(3.00	)%			3.77	%			(5.62	)%

     The rate shock analysis at December 31, 2006, indicated that the effects of an immediate and sustained increase or decrease of 200 basis points in market rates of interest would fall well within policy parameters and approved tolerances for equity at risk, net interest income and net income.

     We have historically been asset sensitive to six months; however, we have been liability sensitive from six months to one year, largely mitigating the potential negative impact on net interest income and net income over a full year from a sudden and sustained decrease in interest rates. Likewise, historically the potential positive impact on net interest income and net income of a sudden and sustained increase in interest rates is reduced over a one-year period as a result of our liability sensitivity in the six-month to one-year time frame.

     As discussed, the negative impact of an immediate and sustained 200 basis point increase in market rates of interest on the net present value (equity at risk) was well within established tolerances at December 31, 2006, and was significantly less than that at December 31, 2005, primarily because of the reduced sensitivity in our transactional deposits. Also, the negative impact of an immediate and sustained 200 basis point decrease in market rates of interest on net interest income and net income was well within established tolerances and reflected a decrease in interest rate sensitivity at December 31, 2006, compared to year-end 2005. We follow FDIC guidelines for non-maturity deposits such as interest-bearing transaction and savings accounts in the interest rate sensitivity (gap) analysis; therefore, this analysis does not reflect the full impact of rapidly rising or falling market rates of interest on these accounts compared to the results of the rate shock analysis presented.

     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. 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 instrument’s 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, 2006, indicated a cumulative net interest sensitivity liability gap of 11.56% when projecting out one year. In the near term, defined as 90 days, there was a cumulative net interest sensitivity asset gap of 9.64% at December 31, 2006. When projecting forward six months, there was a net interest sensitivity liability gap of 1.84%. 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 one year slightly exceeds the 10% threshold established for this measure primarily due to the flat yield curve and management’s expectation of flat to falling interest rates throughout 2007. We have positioned our average time deposit maturities in the six month to one year range based on the above, resulting in an increase in our liability sensitivity and positioning ourselves to take advantage of flat to falling interest rates. The interest rate shock analysis is generally considered to be a better indicator of interest rate risk and it reflects this increase in liability sensitivity.

     The following table illustrates our interest rate sensitivity gap at December 31, 2006, as well as the cumulative position at December 31, 2006 (dollars in thousands):

Interest Rate Sensitivity Analysis (1)

		Repricing Within
		0-30				31-60				61-90				91-120				121-150				151-180				181-365				Over One
		Days				Days				Days				Days				Days				Days				Days				Year				Total
Interest-Earning Assets:
Investment securities available - for-sale		$	1,908			$	1,908			$	1,909			$	1,909			$	1,908			$	1,909			$	10,708			$	86,637			$	108,796
Investment securities held-to-maturity			466				466				465				465				465				465				2,783				27,607				33,182
Investment in FHLB stock			—				—				—				—				—				—				—				4,834				4,834
Loans			519,309				37,633				27,928				29,579				29,673				28,236				167,557				490,841				1,330,756
Loans held-for-sale			4,321				47,000				6,947				—				—				—				—				—				58,268
Federal funds sold			26,316				—				—				—				—				—				—				—				26,316
Due from banks – interest-earning			584				—				—				—				—				—				—				—				584
Total interest-earning assets			552,904				87,007				37,249				31,953				32,046				30,610				181,048				609,919				1,562,736
Interest-Bearing Liabilities:
Demand deposit accounts			9,264				7,720				6,948				6,793				6,639				6,484				38,598				71,946				154,392
Savings and NOW accounts			146,183				2,439				2,439				2,439				2,439				2,439				14,634				117,074				290,086
Money market accounts			57,892				10,735				9,841				9,662				9,483				9,304				26,839				45,168				178,924
Time deposits >$100,000			32,502				19,751				35,383				32,410				17,030				25,787				90,994				22,679				276,536
Time deposits <$100,000			42,418				28,984				28,012				50,220				36,865				55,897				150,874				93,333				486,603
Long-term debt			—				—				25,000				—				—				—				—				58,908				83,908
Short-term borrowings			61,061				—				—				—				—				—				11,000				—				72,061
Total interest-bearing liabilities			349,320				69,629				107,623				101,524				72,456				99,911				332,939				409,108				1,542,510
Interest sensitivity gap		$	203,584			$	17,378			$	(70,374	)		$	(69,571	)		$	(40,410	)		$	(69,301	)		$	(151,891	)		$	200,811			$	20,226
Cumulative gap at 12/31/06		$	203,584			$	220,962			$	150,588			$	81,017			$	40,607			$	(28,694	)		$	(180,585	)		$	20,226
Ratio of cumulative gap to total interest-earning assets at 12/31/06			13.03	%			14.14	%			9.64	%			5.18	%			2.60	%			(1.84	)%			(11.56	)%			1.29	%
Ratio of interest sensitive assets to interest sensitive liabilities at 12/31/06			158.28	%			124.96	%			34.61	%			31.47	%			44.23	%			30.64	%			54.38	%			149.09	%